From The Judiciary

Whether a company holding a valid Tax Residency Certificate (TRC) and having obtained regulatory approvals from SEBI, RBI, and FIPB can be denied benefits under Double Taxation Avoidance Agreement (DTAA) on grounds of mere suspicion of treaty shopping?

Gagil FDI Ltd [TS-567-ITAT-2025(DEL)]

Facts

The assessee, a company incorporated in Cyprus, was a wholly-owned subsidiary of GA Global, also based in Cyprus. The assessee, a tax resident of Cyprus, held a TRC issued by Cyprus Revenue Authorities.

The assessee acquired equity shares of National Stock Exchange (NSEIL) from its holding company GA Global. During the relevant assessment year, assessee sold shares of NSEIL in five trenches to unrelated independent thirdparty buyers, and disclosed Long Term Capital Gain on sale of equity shares of NSEIL, and claimed benefit under Article 13 of India-Cyprus DTAA. The assessee had also earned dividend income from NSEIL and offered the same to tax at the rate of 10% as per India-Cyprus DTAA.

The Assessing Officer (AO) after examining the ownership structure of the assessee, list of Directors of the company, beneficiary of capital gain alleged that the actual beneficiary of shares was GA Global. The AO finally concluded that the assessee was merely a shell company established in Cyprus which was using India-Cyprus DTAA as a tool, and denied tax benefits under treaty.

On appeal before the Dispute Resolution Panel (DRP), the AO’s view was upheld, confirming the findings of the AO. Aggrieved, the assessee appealed to Income Tax Appellate Tribunal (ITAT) with following arguments against AO:

• The company is duly incorporated in Cyprus and holds a valid TRC, which establishes its residential status under the DTAA.
• The company was operationally managed from Cyprus,
• The source of investment funds was diversified and not limited to the US
• Before the transfer of NSEIL shares to the assessee, extensive regulatory scrutiny was carried out by SEBI, RBI, and FIPB, which reviewed and approved the transaction and investment structure.

Held

ITAT ruled in favour of the assessee, allowing the capital gains exemption under Article 13 and the tax rate benefit to dividend income under Article 10 of the India-Cyprus DTAA. The decision was based on following points:

• Regulatory Approvals from SEBI, RBI, and FIPB provide credibility to assessee.
• Relying on SAIF II-SE Investments Mauritius Ltd. vs. ACIT¹ and Azadi Bachao Andolan², emphasizing that the TRC is conclusive proof of residence, and treaty benefits cannot be denied merely on suspicion of treaty shopping.
• Satisfied by assessee’s explanations regarding board composition, fund origin, and business operations which concludes that assessee is not a conduit or pass-through entity.

Our Comments

This judgment highlights the significance of TRC and the relevance of regulatory approvals. It reinforces the principle that treaty benefits cannot be withheld merely on the basis of suspected treaty shopping without concrete evidence.

Whether professional services rendered by nonresidents qualify as Independent Personal Services under the DTAA?

Sujan Luxury Hospitality Pvt. Ltd [TS-518-ITAT-2025(DEL)]

Facts

Sujan Luxury Hospitality Pvt. Ltd (assessee), is engaged in hospitality services and made payments to Rosamond Freeman-Attwood, a resident of Sri Lanka for spa consulting services and also to M/s Elephant Pepper Camp Ltd., a company based in Kenya for Marketing survey. The Assessing Officer (AO) disallowed these expenses under Section 40(a)(i) of the Income Tax Act, 1961, on the ground that tax was not deducted at source under Section 195.

According to the AO:

• These payments were in the nature of "Fees for Technical Services" (FTS) under Section 9(1)(vii).
• The assessee failed to obtain a certificate under Section 195(2) to justify non-deduction or lower deduction of TDS.
• No adequate documentation was submitted to demonstrate the nature of services rendered.

CIT(A) passed judgement in favor of AO. The assessee appealed before ITAT with the following points:

• The services did not fall under ‘managerial, technical, or consultancy services,’ and thus, were not taxable in India.
• Under the India-Sri Lanka and India-Kenya DTAAs, there was no separate FTS clause at the relevant time, and the services were covered under Independent Personal Services (IPS), which are not taxable unless the non-resident has a fixed base or exceeds the threshold period of stay in India.
• Rosamond Freeman-Attwood’s stay was below 120 days, and the services by M/s Elephant Pepper Camp Ltd. were rendered entirely outside India. Referring to these, services are not taxable in India and hence there is no need to obtain certificate under Section 195(2).

Held

The ITAT held in favour of the assessee with the following reasoning:

• The payments to the vendors were held to fall under Independent IPS as per Article 14/16 of the respective DTAAs, which include professional services. The Tribunal thus rejected the Assessing Officer’s and CIT(A)’s view that these were ‘Fees for Technical Services’ under Section 9(1)(vii) of the Act.
• Neither service provider had a permanent establishment (PE) or a fixed base in India, nor did their stay exceed the prescribed threshold. Hence, income was not taxable in India.
• Relying on the Supreme Court’s decision in GE India Technology Centre Pvt. Ltd³., obligations of obtaining certificate under Section 195(2) arise only when payment is chargeable to tax in India.
• The assessee submitted adequate documentary evidence, including agreements and declarations, to substantiate the nature and genuineness of the services, addressing the Assessing Officer’s concerns.

Our Comments

This decision highlights that certain specific professional services by non-residents can qualify as Independent Personal Services under DTAA and are not taxable in India without PE or threshold stay, hence no TDS required.

ITAT: Transfer of rights entitlement not akin to share transfer, taxable only in State of Residency.

Facts

The assessee is a tax resident of Saudi Arabia. He had earned capital gains of INR38,171,252 from the sale of rights entitlement (RE) of Bharti Airtel shares in India and had claimed relief under the India–Saudi Arabia DTAA from taxability in India.

Assessee’s Argument:

The assessee argued that:

1. Nature of RE: RE are not equivalent to shares. According to the Companies Act, 2013, a 'share' refers to a share in the share capital of a company and includes stock, whereas 'rights entitlement' is a temporary credit of shares in the demat account.
2. Applicability of Article 13(6): Under Article 13(6) of the India–Saudi Arabia DTAA, gains arising from the alienation of property, other than those specified in the article (such as shares, immovable property, ships, and aircraft), shall be taxed in the resident state. Since RE are not shares, the gains cannot be taxed in India.

Revenue’s Argument:

The Revenue contended that RE are intrinsically linked to the shares held in a company and are akin to shares. Therefore, any gains arising from the transfer of RE are taxable in India under Article 13(4) and Article 13(5) of the India–Saudi Arabia DTAA. Reliance was placed on ruling in case of Vanguard Emerging Markets Stock Index Fund vs. ACIT, where the said position was upheld by the Dispute Resolution Panel (DRP).

Decision by Mumbai ITAT:

The Tribunal held that although RE are embedded in the original shareholding, they hold a separate and distinct right capable of being transferred, independent of the existing shareholding. The ITAT noted that the DRP, while correctly acknowledging that an existing shareholder can subscribe to new shares only by exercising their RE, overlooked this significant aspect and arrived at an incorrect conclusion. Therefore, the capital gains arising from the sale of RE are not taxable in India under the India–Saudi Arabia DTAA.

General Organization for Social Insurance [TS-636- ITAT-2025(Mum)]

Our Comments

This ruling sets an important precedent for similar cases involving financial instruments and DTAA interpretations, and reinforces the principle that tax treaties must be applied according to the true nature of the transaction, not merely its economic linkage.

Whether payments to local agent of foreign supplier towards engineering and technical services are includible in the value of imported goods in terms of Section 14 of Customs Act read with Rule 9(1)(e) of Customs Valuation Rules 1988?

Note: As per Rule 9(1)(e), ’all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable’. shall be added to the price actually paid or payable for the imported goods.

Coal India Limited vs. Commissioner of Customs (Port), Customs House, Kolkata [(2025) 30 Centax 128 (SC)]

Facts

• The appellant, through its subsidiaries, had placed a Purchase Order on M/s Harnischfeger Corporation, USA (foreign supplier), for supply of spare parts for P&H Shovel.
• As per the agreed terms, the appellant and its subsidiaries would make a payment of 8% of Freight On Board (FOB) amount valued on pro-rata basis against each shipment to the foreign supplier’s local distributor/agent, viz. M/s Voltas Ltd., towards maintenance and engineering services, including identification of the requirement of spares to be imported.
• Such payment was over and above the FOB value of imported goods.
• While finalizing the provisional assessments of imported goods, the Customs authorities observed that the services provided by M/s Voltas Ltd. were primarily related to the type and quantum of spare parts required to be supplied by the foreign supplier as well as assisting the appellant during insurance survey at the port after importation of identified spares. Hence, given that the sale had become conditional in view of the conditions posed in quotation by the foreign supplier, the consequential engineering and technical service charges were fully covered by Rule 9(1)(e) of the Customs Valuation Rules.
• Accordingly, the differential duty demand was confirmed against the Appellant, which was upheld in the appellate forums.
• Customs, Excise, And Service Tax Appellate Tribunal (CESTAT), while rejecting the ppellant’s appeal, observed ’If there are no imports, no payments are apparently due to be made to whatever services attributed to M/s Voltas Ltd. In other words, the payments have been made only in connection with the sale of goods, apparently due to reason that M/s Voltas Ltd., is an agent/distributor of the US based supplier.”
• Being aggrieved, the appellant approached the Supreme Court (SC).

Ruling

• Perusing the provisions of Section 14 of the Customs Act, as it stood then, r/w Rule 4 and 9 of the Customs Valuations Rules, SC observed that transaction value of imported goods can be adjusted in accordance with the provisions of Rule 9.
• However, as per Interpretative Note to Rule 4, what would be excluded for computing the assessable value for the purpose of levy of customs duty is any amount paid for post importation activities including any amount paid for post importation technical assistance. In this regard, the Apex Court noted its earlier decision in Commissioner of Customs (Ports), Kolkata vs. J.K. Corporation Ltd. [2007 (208) ELT 485 (SC)] wherein it was observed, ‘the Rules have been framed for the purpose of carrying out the provisions of the Act. The wordings of Sections 14 and 14(1- A) are clear and explicit. The Rules and the Act, therefore, must be construed, having regard to the basic principles of interpretation in mind.’
• The SC also referred to the ratio laid down in the case of Commissioner of Customs vs. Ferodo India (P) Ltd. [(2008) 4 SCC 563].
• It found that in the present case, the services rendered by the Indian agent were not postimportation activities. The services were directly relatable to the import of goods by way of product support service which is covered by Sections 14(1) and 14(1A) of the Customs Act r/w Rule 9(1)(e) of the Customs Valuation Rules.
• Thus, on thorough consideration of all aspects of the matter, SC upheld view taken by all the lower authorities and dismissed the appeal.

Our Comments

The decision underscores the relevance of contractual terms between the foreign supplier and the importer, particularly when a third-party agent is involved to facilitate the transaction. Whether such service is a condition to the sale of imported goods and whether the same can be attributed to post-importation activities, would have to be determined on a case-to-case basis.

However, this decision could lead to multiple scenarios prone to litigation, wherever there is no separate agreement between the third-party agent and the importer for engineering/technical/other support services related to imported products.

ITAT: Mere contractual arrangement, absent significant supporting evidence, insufficient to establish rendering of services.

Hammond Power Solutions Private Limited [TS-201-ITAT-2025(HYD)-TP], Assessment Year 2017-18

Facts

The assessee is a company engaged in the business of manufacturing and sale of electrical distribution and power transformers including maintenance & installation services. The assessee has availed intra group services from its AE in the nature of technical services and stewardship services during FY 2016-17.

The Transfer Pricing Officer (TPO) and then The DRP disregarded the receipt of these services and determined the Arm's Length Price (ALP) as Nil. Aggrieved, the assessee filed an appeal before ITAT.

Taxpayer's contention before the ITAT:

The assessee relied on certain rulings and contended that receipt of services should not be questioned on the ground of commercial expediency and that reimbursement of costs should not be treated as Nil. The assessee submitted the Service Agreement and highlighted that both the services were rendered under valid service agreement. The assessee also submitted some email correspondence, ledgers, details of employees visited to India, and copies of power point presentations in view of provision of services to demonstrate services were actually rendered by the AE.

Revenue's contention before the ITAT:

The Learned Department Representative (Ld. DR) pointed out all the personnel who visited India were of supervisory or managerial rank and that no engineers or technical personnel responsible for actual delivery of services ever visited India. Further, Ld. DR highlighted that some of the mail correspondences as submitted are not contemporaneous. Furthermore, the mail, which was relevant for the year, does not contain any concrete reference to rendering of services. Additionally, the visit of persons to India was for very short periods, which suggests it to be an oversight activity rather than actual delivery of services.

Held by the ITAT:

ITAT noted that agreement merely provides a broad framework for services without outlining specific deliverables, cost allocation methodology, performance benchmarks, or validation mechanisms to assess the actual services being rendered. The absence of these critical aspects raises concerns regarding the Assessee’s ability to substantiate the rendering of services. Further, w.r.t. email correspondence submitted, ITAT agrees with the observations noted by Ld. DR.

Additionally, with respect to the personnels who visited India, ITAT noted that they primarily hold managerial and supervisory roles, and no engineers, technical staff, or project specific professionals identified as having visited India. ITAT further noted that the duration of the visit was also very short, and no documentation of meetings, trainings, or deliverables were filed before the ITAT.

ITAT observed that as pointed out by Ld. DR, absence of cost allocation workings, performance reports, meeting records, or documented deliverables weakens the assessee’s case. While intra-group services cannot be outrightly disregarded, a mere contractual arrangement without any significant supporting evidence is insufficient to establish the rendering of services. The failure to provide contemporaneous and verifiable evidence justifies the approach adopted by the Ld. AO/TPO in determining the ALP of these services as Nil.

Our Comments

It is of utmost importance on the part of the taxpayer to not only have written agreements detailing important aspects of the arrangement but also to maintain the robust and contemporaneous documentation for availing of services. The documentation may include email correspondences, cost allocation workings, performance reports, meeting records, or documented deliverables, details of personnel visits, if any, and evidence of work done by such personnel etc.

ITAT: Holds RPM as MAM over TNMM for international transactions in the nature of trading activity

Bock Compressors India Pvt. Ltd [TS-232-ITAT-2025(Ahd)-TP], Assessment Year 2020-21

Facts

The assessee is engaged in wholesale and retail trade, and retail sale of various products. The transaction during FY 2019-20 includes an international transaction of purchase of goods and a deemed international transaction of sale of goods which the assessee benchmarked using Resale Price Method (RPM).

For AY 2020-21, the TPO enhanced the income of the assessee by INR 45,951,095 and INR 1,001,946 being cumulative adjustment on account of sale of goods and mark up respectively.

The DRP deleted the adjustment of INR 1,001,946 being 5% mark up on the management services appeared from the associated concern of the assessee, the adjustment made by the TPO. Pursuant to which the AO passed the Final Assessment Order making adjustment of INR 45,951,095.

Subsequently, the assessee filed a rectification application, contending that the AO had erroneously considered the adjustment amount as INR 45,951,095 instead of INR 8,330,174.

Taxpayer's contention before the ITAT:

The AO, on a suo-moto basi,s has rectified the assessment order u/s. 154 and as per the binding Section 144C(10), the AO has to follow the direction of the DRP.

Further, the assessee contended that RPM is not accepted as the most appropriate method by the TPO and the same should have been considered since no significant value-added functions have been undertaken by the Assessee under the arrangement of deemed international transaction.

Revenue's contention before the ITAT:

The Ld. DR submitted that the rectification order was passed due to the assessee’s rectification application filed by the assessee on 19 July 2024 and therefore it is not a suo moto rectification intended to ignore the DRP’s directions.. Therefore, the decisions relied upon by the assessee are not applicable in the present scenario.

Held by ITAT:

The assessee himself has filed a rectification application and therefore, AO’s rectification order cannot be considered as suo moto rectification and thereby distinguishes the case laws relied upon by the assessee.

Further, the ITAT observed that the DRP had duly considered the benchmarking approaches adopted by both the assessee and the TPO. It noted that the nature of the transactions undertaken by the assessee - comprising both purchases and sales - were contentious and did not fall within the scope of the RPM method. This was primarily because the assessee had incurred various expenses in India that significantly contributed to the value of the final sales. As a result, the application of gross margin analysis under RPM was deemed inappropriate, since the case did not involve mere re-sale transactions.

ITAT found the DRP’s observations are general in nature and held that RPM is most appropriate method as the assessee has demonstrated before the AO that the sale of goods are at arm’s length price. Further, since transaction of purchase and sale are interlinked and interconnected, that deemed international transaction of sale of goods has to be aggregated for the purpose of benchmarking and upheld the RPM method considering trading nature.

Our Comments

It is worth considering whether a sale of goods transaction can be aggregated with a purchase of goods transaction for benchmarking under RPM in the case of trading activities, even when it constitutes a deemed international transaction.