Tax 360

We are pleased to share the first edition of our quarterly direct tax publication, Tax 360.

On the international tax front, this quarter saw important developments, including the Delhi High Court’s ruling that reimbursements under deputation arrangements are taxable as fees for included services, and the Delhi Tribunal’s decision that pure reimbursements are not taxable. In the M&A context, the Mumbai Tribunal’s ruling denying the carry-forward and set-off of accumulated losses of approximately INR 2.4 billion will be closely reviewed when structuring demerger and hive-off transactions.

The Income Tax Act, 2025 replaced the Income Tax Act, 1961 from 01 April 2026. Several interpretational and implementation related issues are expected to arise. To support effective implementation, the CBDT has issued detailed FAQs addressing various transitional matters.

We hope you find Tax 360 insightful and look forward to receiving your feedback and suggestions.

Glossary

FROM THE BENCH

A. International Tax and Transfer Pricing

International Tax

ITAT Delhi: Taxability of UK law firm’s receipts must be examined under each partner's tax treaty

Herbert Smith Freehills, a UK tax-transparent partnership law firm provided legal services to Indian clients while operating primarily from outside India with intermittent India visits by its lawyers. For AY 2015-16, it claimed exemption under the India–UK tax treaty for the UK-resident partners’ share (82.121%), claimed non-taxability of the non-UK partners’ shares under the India–Australia, India–France, India–Belgium, India–China and India–Japan tax treaties, and offered the Germany partners’ share (3.627%) to tax under the India–Germany tax treaty. The claims for AYs 2018-19 and 2021-22 were identical. The AO accepted the exemption for the UK partners’ share and the taxability of the Germany partners’ share, but treated the shares attributable to the Australia, France, Belgium, China and Japan partners (14.253% of receipts) as FTS under Section 9(1)(vii) of the Old Act. The ITAT Delhi held in Herbert Smith Freehills LLP v. Commissioner of Income-tax (Appeals)-43¹ that the taxability of Indian receipts attributable to non-UK partners had to be determined partner-wise under applicable tax treaties since treaty entitlement depended on each partner's country of residence. Further, the professional/ legal services did not constitute FTS under Section 9(1)(vii) of the Old Act. Thus, the issue was restored to the AO to examine tax liability of non-UK resident partners of the firm under their respective tax treaties.

Delhi HC: Cost—to-cost reimbursement of salary to seconded employees as FIS / FTS

The Delhi HC ruled in Commissioner of Income-tax (International Taxation)-1 v. Ernst and Young U.S. LLP² that, inter-alia, where the taxpayer, EY US LLP, seconded its personnel to the Indian EY entities and received reimbursement of salary on a cost-to-cost basis, this would qualify as FIS under the India-USA tax treaty or FTS under Section 9(1)(vii) of the Old Act. The court observed that EY US LLP maintained lien over secondees, as well as had control over their employment benefits and termination rights. Thus, the seconded employees were always employed by EY US LLP. Further, given that the said assignment involved the seconded employees imparting know-how and technical knowledge to the employees of Indian EY entities, the services qualified as FIS/ FTS and reimbursements were taxable in India.

ITAT Delhi: No withholding tax requirement on cost-to-cost reimbursements to the parent entity

The Delhi Tribunal in the case of Horiba India Private Limited v NFAC³ ruled that reimbursements to the Japanese parent entity of salary expenses for the seconded employees would not be liable to tax in India. Thus, the taxpayer need not withhold tax at source, and no disallowance could be made for the same under Section 40(a)(i) of the Old Act. In this case, the seconded employees were inducted in sales, accounting department with no specialised technical skills. Upon reconciliation of the amounts reimbursed to the parent entity with Form 16 issued to the expats, it was inferred that the seconded employees were not providing technical services on behalf of related entity. Further, cost-to-cost reimbursement of expenses towards IT cost and common software facilities were held to be not in the nature of FTS under the India-Japan tax treaty due to the lack of any technical service being provided to the taxpayer, and no withholding tax was required on the same. Thus, no disallowance was warranted. Similarly, there was no requirement of deducting withholding tax and consequently making disallowance for the same under Section 40(a)(i) on cost-to-cost reimbursement of travelling expenses which had no markup or profit element involved.

ITAT Kolkata: Denial of FTC due to delayed filing of Form 67 is unwarranted

The ITAT Kolkata, in Sunny Kumar Jaiswal v. Centralised Processing Centre, Bengaluru⁴ , held that FTC cannot be denied to a taxpayer on belated filing of Form 67 (to claim FTC) where the taxpayer was an employee of a software company in India who was deputed in Denmark. It was further observed that filing of Form 67 was not mandatory but a directory requirement. The CPC had in these facts issued an intimation under Section 143(1) accepting revised return but had disallowed FTC in full solely for non-compliance with timing requirement for Form 67. Tribunal directed the AO to allow credit of foreign tax to the taxpayer.

ITAT Mumbai: PPT of MLI cannot be invoked under the India-Ireland tax treaty and lease rentals for aircrafts were taxable in the country of residence of recipient

ITAT Mumbai in Sky High XXXIV Leasing Company Ltd. v. ACIT International Taxation⁵ ruled that lease rentals received by the Irish aircraft lessors from Indian airlines were not taxable in India under the India–Ireland tax treaty. The Tribunal rejected the Revenue’s contention that the receipts should be characterised as royalty, interest, or business income (due to Fixed Place PE) taxable in India. ITAT Mumbai also examined the applicability of the MLI and its principal Purpose. It observed that although the MLI modifies covered tax agreements, its provisions cannot be invoked in India unless they are incorporated into domestic law through a notification issued under Section 90(1) of the Old Act. In the absence of such a notification, the Revenue could not rely on the Principal Purpose Test (“PPT”) to deny the benefits of the India–Ireland tax treaty.

Transfer Pricing

ITAT Delhi: TPO not justified to make adjustment on interest for delayed realisation of receivables in light of APA

In Horiba India (P.) (Ltd.) v. Assessment Unit, National Faceless Assessment Centre, Income-tax Department,⁶ the ITAT Delhi was presented with, inter-alia, the issue where the taxpayer who had entered into an APA, had certain international transactions for FY 2019-20 and the TPO proposed transfer pricing adjustments on account of interest or delayed realisation of invoices. The DRP upheld this adjustment. Upon the taxpayer’s appeal, the ITAT observed that the taxpayer’s APA did not stipulate a particular date when considering the prevailing LIBOR for purpose of calculating the effective interest rate for the purpose of interest. Therefore, it was held that the TPO had acted unreasonably in concluding that the 6 months’ USD LIBOR rate (available in public domain) which was taken by taxpayer in good faith to calculate the interest, was incorrect. The addition on account of transfer pricing adjustments was thus held to be incorrect.

ITAT Chennai: Forex loss from ECBs and capital expenditure must be excluded from TNMM analysis while computing PLI and ALP

In Poclain Hydraulics (P.) Ltd. v. Deputy Commissioner of Income -tax,⁷ the ITAT Chennai has held, inter-alia, that the forex loss which arose from external commercial borrowings and capital expenditure must be treated as non-operating and therefore, is to be excluded from Transitional Net Marginal Method (“TNMM”) analysis (i.e., the chosen most applicable method in the case) while computing Profit Level Indicator (“PLI”) and Arm’s Length Price (“ALP”). The taxpayer had engaged in international transactions and applied TNMM as the most applicable method. The TPO recomputed the taxpayer’s PLI by treating foreign exchange gain/ loss as operating and proposed an upward transfer pricing adjustment which was confirmed by DRP and in AO’s final assessment order. The ITAT held that where the fluctuation arises from External Commercial Borrowings, term loans, share capital, investments or other financing and capital account transactions, the resultant gain or loss is attributable to treasury and funding functions and cannot be regarded as reflective of operational profitability. The bench also referred to OECD Transfer Pricing Guidelines and the Revenue’s acceptance of the treatment of forex loss as non-operating in taxpayer’s own case in other prior assessment years to arrive at the decision.

ITAT Mumbai: No TP adjustment warranted if the FAR profile remained unchanged and the mark-up variation fell within ±5 per cent tolerance band of agreed APA for previous years

The ITAT Mumbai, in Watson Pharma (P.) Ltd. v. Deputy Commissioner of Income-tax,⁸ deleted the transfer pricing adjustment made by the AO and TPO, and held that the international transactions (contract manufacturing and contract R&D) were at arm’s length if the benchmarking margins were within the permissible tolerance band of ±5 per cent of the APA margins (of previous years) and the Revenue accepted that the FAR profile of the taxpayer remained unchanged. Further, it was observed that the terms agreed under the APA, nevertheless, carry considerable persuasive value, particularly when the Revenue itself accepts that the FAR profile of the taxpayer continues to remain unchanged.

ITAT Mumbai: Removes comparables selected by AO/ TPO whose business activities were not available in public domain or whose business was functionally different

In Essar Ports Ltd. v. Deputy Commissioner of Income-tax, Central,⁹ the ITAT Mumbai excluded such comparables added by the AO / TPO which pertained to businesses different from the business of the taxpayer who provided management / support services to its associated enterprise, and the complete business details of the selected comparable entities were not available online. AO / TPO directed to recompute the transfer pricing adjustment.

B. Corporate Tax

ITAT Mumbai: Accumulated business losses and unabsorbed depreciation cannot be carried forward in demerger when shares are issued by the parent company

The Mumbai Tribunal in Sterling Holiday Resorts Ltd. v. Deputy Commissioner of Income-tax¹⁰ held that tax benefits available on a demerger cannot be claimed unless the transaction strictly complies with the statutory requirements under the Old Act. The Tribunal denied the carry-forward and set-off of accumulated business losses and unabsorbed depreciation of nearly INR 2.4 billion claimed under Section 72A(4) of the Old Act. The dispute arose because the Revenue contended that the demerger did not satisfy the definition of a “resulting company” under Section 2(41A), as shares were issued by the holding company, Thomas Cook (India) Limited, instead of the company receiving the undertaking. The taxpayer argued that the reference to a wholly owned subsidiary in Section 2(41A) permitted such a structure. However, the Tribunal adopted a strict literal interpretation and held that only the company receiving the undertaking could issue the shares. Since the conditions prescribed under Sections 2(19AA) and 2(41A), the demerger did not qualify for the tax benefits, and the carry-forward of losses under Section 72A(4) was consequently denied.

ITAT Delhi: Broken period interest embedded in sale consideration of NCDs continues to retain its character as ‘interest’ and cannot be charged under the head Capital Gains

The Delhi Tribunal in Macquarie SBI Infrastructure Investments Pte Ltd v. ACIT¹¹ held that the broken period interest received by a Singapore-based taxpayer on sale of NCDs on cum-interest basis shall be taxable separately as ‘interest’ only and would not constitute part of sale consideration while computing capital gains. The Tribunal further noted that the nature of receipt i.e., interest, would not stand altered merely because the same was paid by the purchaser of NCDs and not by the issuer company. As a sequitur, the Tribunal denied taxpayer’s claim of exemption, with respect to such broken period interest, as short-term capital gains under Article 13(5) of the India-Singapore tax treaty.

ITAT Hyderabad: Use of Google AdWords for rendering online advertising services does not constitute FTS

The Hyderabad Tribunal in the case of DCIT v Head Digital Works Private Limited,¹² held that payments made for online advertising services through Google AdWords platform would not be liable for tax withholding under section 194J of the Old Act. The Tribunal observed that payments made for such advertising services cannot be equated with FTS as defined under Explanation 2 to Section 9(1)(vii) of the Old Act merely because the same were rendered via a sophisticated algorithm system. In essence, the Tribunal held that, the taxpayer was using an automated facility to purchase advertising space. Accordingly, the Tribunal held that such payments will be liable for tax withholding at the rate of 2% under section 194C of the Old Act which specifically covers contracts for advertising. The Tribunal’s view was further strengthened by (i) CBDT’s Circular No.714 dated 03.08.1995 which affirmed the applicability of section 194C on payments made for advertisements in print or electronic media; and (ii) Finance Act, 2020 which reduced the rate of tax withholding on FTS from 10% to 2% under section 194J of the Act.

ITAT Mumbai: Concessionaire’s rights including the right to collect annuity is an intangible asset eligible for depreciation

The Mumbai Tribunal in the case of Jorbat Shillong Expressway v DCIT,¹³ held that the concessionaire’s (taxpayer’s) right to collect toll or to receive annuity during a concession period in respect of a toll road constructed on Design, Build, Finance, Operate and Transfer or Build, Operate and Transfer model qualifies as an ‘intangible asset’ under Section 32(1)(ii) of the Old Act for which depreciation can be claimed at the specified rate. It was observed that the Revenue had incorrectly assumed that the taxpayer had claimed depreciation on the toll road which it neither owned nor used for its business. The Tribunal noted that while the toll road was owned by NHAI, the commercial right of receiving annuity and operating the toll road for 20 years remained with the taxpayer for which depreciation could be claimed. Further, the Tribunal also noted that as per CBDT Circular No. 9/2014, amortisation of expenditure is allowed over the concession period. Thus, as a sequitur, the taxpayer/ concessionaire will get the deduction either by way of deprecation or through amortisation and there can only be a timing difference between the two. Finally, the Tribunal observed that the issue remained otherwise Revenue neutral and directed the AO to allow taxpayer’s claim of depreciation.

ITAT Mumbai: Deeming fiction under Section 50 is limited to capital gains computation

The Mumbai Tribunal in the case of Reliance Infrastructure v ACIT¹⁴ observed that the deeming fiction under Section 50 of the Old Act cannot be extended to alter the ‘long-term’ nature of the underlying capital asset. The Tribunal held that the deeming provision needs to be construed strictly and its operation has to be confined for the intended purpose only i.e., to provide for a special computational mechanism for capital gains arising on transfer of depreciable assets. Accordingly, the said deeming fiction cannot be imported into other provisions of the Act where the legislature has not expressly intended its operation. As a sequitur, the Tribunal ruled that a depreciable asset would continue to retain its character of long-term capital asset, if it qualifies so, for the purposes of set-off provisions and the taxpayer would remain eligible to adjust its long-term capital losses against gains on transfer of such asset.

REGULATORY WATCH

A. Notifications and Circulars

CG: MoU signed between India and Japan

The CG through Notification dated 02 April 2026,¹⁵ has notified the MoU entered into between India and Japan for the implementation of Article 26A of the India - Japan tax treaty. The Article relates to assistance in the collection of taxes for the countries and operationalizes mutual assistance in tax collection and cross-border tax recovery mechanisms.

CG: Nil withholding tax on lease to a person / unit being an IFSC Unit

The CG through Notification(s)¹⁶ dated 03 July 2026, has specified that no withholding tax under Section 393(1) of ITA, 2025 shall be deducted on payments towards lease rent or supplemental lease rent to a unit located in the International Financial Services Centre for the lease of (i) Aircrafts & (ii) Ships, subject to the conditions specified therein. This relaxation shall be available for 20 consecutive tax years declared by the lessor in the prescribed documents.

CBDT: Clarification on safe harbour rules for sale of rough diamonds

The CBDT through Circular No. 5/2026 dated 12 May 2026,¹⁷ has issued clarifications on safe harbour rules applicable to non-resident taxpayer engaged in the sale of raw diamonds in notified special zones with reference to section 9 of the Act. The Circular addresses various concerns including the definition, eligibility criteria, tax rate applicable, availability of treaty benefits etc. The CBDT has further clarified that the benefit shall be available for the entire FY 2024-25 and taxpayers claiming such benefit cannot claim deductions in addition to the safe harbour.

B. Other Updates

CBDT: Specified forms and procedures for correction in PAN

Through an Order dated 1 April 2026,¹⁸ CBDT in exercise of powers contained under rule 158(12) of the Income-tax Rules, 2026 has specified PAN correction forms for different categories of persons.

CBDT: Guidance on invoking provisions relating to unexplained income in assessments

Through a Letter dated 29 May 2026¹⁹ , CBDT has issued guidance to assessing officers on the correct application of provisions relating to unexplained income and receipts. The guidance emphasizes (i) conducting adequate enquiries, (ii) ascertaining the true nature and source of unascertained amounts (iii) ensuing accurate reporting in the income tax business application system to avoid computation errors and incorrect carry-forward of losses. Through this guidance, the CBDT seeks to promote a uniform and legally sound approach in assessments, minimize Revenue leakages arising from incorrect application of tax provisions, and strengthen consistency in the taxation of unexplained income.

CBDT: FAQs on transition provisions under the ITA, 2025

On 06 July 2026, the CBDT has issued clarificatory FAQs²⁰ on Section 536 of ITA, 2025, which contains the repeals and savings provisions and preserves the operation of the Old Act for proceedings, penalties, and other actions initiated before 1 April 2026. The FAQs provide guidance on several transitional issues, including the validity and continuation of summons and notices, search and seizure proceedings, directors’ liabilities, pending applications, and other ongoing matters under the Old Act, thereby offering greater clarity on the treatment of cases spanning the transition to the new tax regime.

CBDT: Guidance for selection of cases for compulsory scrutiny for tax year 2026-27

Through a Letter dated 04 June 2026,²¹ CBDT has issued guidelines for the compulsory selection of tax returns for complete scrutiny during tax year 2026-27. The guidelines prescribe six categories of cases for mandatory scrutiny, including those involving surveys, search and seizure or requisition proceedings, reassessment cases, entities claiming exemptions despite cancellation, recurring additions, and cases flagged based on specific information. The instructions also outline the procedural framework for selection, transfer of cases, and jurisdictional responsibilities while reiterating that notices under Section 143(2) of the Old Act for returns filed in FY 2025-26 were required to be served by 30 June 2026.

Footnotes

1. [2026] 187 taxmann.com 916 (Delhi - Trib.).

2. [2026] 187 taxmann.com 711 (Delhi).

3. ITA No. 3383/Del/2024.

4. [2026] 187 taxmann.com 644 (Kolkata - Trib.).

5. [2026] 186 taxmann.com 231 (Mumbai - Trib.).

6. [2026] 187 taxmann.com 872 (Delhi - Trib.).

7. [2026] 187 taxmann.com 826 (Chennai - Trib

8. [2026] 188 taxmann.com 310 (Mumbai - Trib.).

9. [2026] 187 taxmann.com 549 (Mumbai - Trib.).

10. ITA No. 843/Mum/2024.

11. ITA No. 2667/Del/2023.

12. ITA No. 279/Hyd/2025.

13. ITA Nos. 1204/MUM/2026 and others.

14. ITA No.5969/Mum/2025.

15. Notification 56/2026.

16. CBD, Notification 74/2026; Notification 75/2026.

17. CIRCULAR NO. 5/2026 [F. NO. 370142/17/2026-TPL], DATED 12-05-2026.

18. ORDER NO. F. NO. ADG(S)-1/PAN/M/3699/2026-AD-DD SYSTEMS 1-5 DELHI, DATED 01-04-2026.

19. LETTER F. NO. F.NO.225/26/2026-IT A.II, DATED 29-05-2026.

20. OFFICE MEMORANDUM F. NO. 370149/107/2026 –TPL, DATED 06-07-2026.

21. LETTER F.NO.225/56/2026/ITA-II.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.