Introduction
We are pleased to present the latest edition of Tax Street – our newsletter that covers all the key developments and updates in the realm of taxation in India and across the globe for the month of August 2025.
- The 'Focus Point' elaborates upon the sectors that are sure to benefit from the India–UK Trade Pact.
- Under the 'From the Judiciary' section, we provide in brief, the key rulings on important cases, and our take on the same.
- Our 'Tax Talk' provides key updates on the important tax-related news from India and across the globe.
- Under 'Compliance Calendar', we list down the important due dates with regard to direct tax, transfer pricing and indirect tax in the month.
We hope you find our newsletter useful and we look forward to your feedback.
Focus Point
Sector Spotlight: Who Wins Big in the India–UK Trade Pact
The India–UK Comprehensive Economic and Trade Agreement (CETA) is more than just a trade pact, it is a game-changer for Indian exporters. With steep tariff cuts, improved market access, and facilitation in services and mobility, the deal is set to unlock targeted growth in highpotential sectors. Industries where every percentage point of duty can make or break a deal, from textiles and leather to engineering goods and processed foods, this deal could tilt the playing field in favor and stand to gain a competitive edge in the UK market. When exports rise because of a trade deal, two indirect-tax realities immediately follow. First, exporters will generate higher unutilized input tax credits (ITC) at the domestic stage and will rely more on IGST refunds and zero-rated procedures to recover that cash. Second, schemes such as Remission of Duties and Taxes on Exported Products (RoDTEP)/Rebate of State and Central Taxes and Levies (RoSCTL) become more valuable because they refund non-creditable duties and levies which directly improve exporters' cash flows and unit economics. The sectoral winners which could capitalize on the India– UK CETA are mapped herein below:
Highest gaining sectors
Textiles, Apparel and Fashion (Highest Visible Gain)
Textiles and apparel are labor-intensive, price-sensitive, and face significant tariff competition in developed markets. Even small duty reductions can change buying decisions and open new large contracts for volume suppliers. Over the years, the UK market has already seen imports in sizeable quantities of textiles from India. With the CETA, many clothing categories are set to face lower UK import duties, thus improving margin competitiveness. Industry groups and trade bodies have specifically flagged textiles as a principal beneficiary.
The UK factsheet records growing bilateral trade and highlights fashion as a headline sector. We can expect export order books for both mass apparel and premium heritage categories (handloom, artisanal work) to expand in the next 12–36 months window, thus encouraging more partnerships between Indian apparel manufacturers and UK brands.
Gems and Jewelry (Value Play + Origin Rules)
Gems and jewelry are high-value, low-weight goods where duty changes materially alter landed cost and competitiveness. London has long been one of the world's largest jewelry and diamond trading hubs. Tariff relief or preferential treatment under Rules of Origin (ROO) will encourage Indian cutters, polishers and branded jewelry houses to step up exports.
Pharmaceuticals and Fine Chemicals (Margin + Regulatory Access)
India is a global supplier of generic medicines and APIs. The UK's demand for affordable generics and its sophisticated healthcare procurement systems make pharmaceuticals a natural CETA beneficiary, particularly where regulatory alignment and mutual recognition can speed market entry. Such CETA concessions combined with services mobility (professional movement of doctors) can help contract research and clinical trial services tied to pharma exporters.
Engineering Goods and Automobiles (Scale + Structural Change)
Engineering goods from capital machinery to automotive components are India's largest merchandise export sector by value. The CETA's tariff reductions (and, in some cases, quota arrangements) can make Indian components and certain Indian-built cars (like Tata, Mahindra & Mahindra, and Maruti-Suzuki) more competitive in the UK market. The agreement's reported cut in automobile duties (with quota modalities) could incentivize new export models.
Engineering goods typically account for a large single-digit to double-digit share of India's goods exports.
Leather and Footwear (Labor-Intensive, ROO Friendly)
Leather and footwear are classic winners from trade deals because tariff savings directly feed retail pricing. India is a global player in leather goods and can scale exports to the UK fashion market, particularly for mid-market branded footwear. Trade bodies already expect gains for this cluster.
Marine Products, Agro-food and Processed Foods (Niche + High Demand)
British consumers exhibit a sustained demand for specialty food items and processed food products. Under the CETA, the progressive reduction or elimination of applicable customs tariffs, coupled with the potential streamlining and mutual recognition of Sanitary and Phytosanitary (SPS) measures, is expected to significantly enhance market access for Indian exporters. In particular, exporters engaged in the supply of seafood, spices, ready-toeat packaged foods, and other specialty agricultural commodities are likely to derive substantial commercial benefit. Furthermore, as numerous agricultural tariff lines already fall within the ambit of the RoDTEP scheme, the continued budgetary allocation by the Government of India towards RoDTEP (currently valid till 30 September 2025) serves as a policy signal of sustained fiscal support to this sector, thereby further improving the competitiveness of Indian exports in the UK market.
Electronics and IT services (Services Angle + Embedded Goods)
While trade in goods is expected to capture the primary headlines, the export of services continues to represent India's comparative advantage in bilateral commerce. The CETA incorporates binding commitments on crossborder trade in services, including provisions aimed at facilitating the temporary movement of natural persons (Mode 4 supply), mutual recognition of professional qualifications, and enhanced market access for service providers. These measures have the potential to materially augment India's exports in the Information Technology (IT), Business Process Outsourcing (BPO), and Knowledge Process Outsourcing (KPO) sectors to the UK, while also enabling Indian professionals to access short-term work opportunities in the UK market with reduced procedural barriers.
A Possible Global Supply Chain Redesign
One major opportunity arising due to this CETA is routing of UK origin goods via India to take advantage of preferential access for onward export or regional distribution. Businesses can evaluate the feasibility of setting up or partnering with low-cost contract manufacturing hubs in India, for goods meant for exports to the UK market subject to the ROO thresholds.
Checklist For Turning the CETA into a Competitive Advantage
- IGST Refunds and Cash Flow: Higher export volumes will naturally push up IGST refund claims, and if refunds are delayed, short-term working capital pressures could arise. Businesses should tighten refund processes by reconciling export invoices with ICEGATE filings on a regular basis and eliminating any documentation gaps that could trigger scrutiny. For sectors with long project cycles such as heavy equipment or capital goods, IGST refund timelines should be factored into cash-flow projections so that funding gaps do not derail execution.
- Export Incentives (RoDTEP/RoSCTL): Labor-intensive product lines continue to be eligible for RoDTEP or RoSCTL benefits, which means exporters should map each SKU to its corresponding RoDTEP rate and to the CETA's tariff concessions. This mapping will allow companies to quantify the per-unit after-tax price advantage and feed that directly into pricing strategies for both tenders and existing customer contracts, ensuring that benefits are not lost in margin compression.
- ROO Compliance: To qualify for preferential tariffs under the trade pact, products must meet substantial processing or value-addition thresholds. Companies should review and align supplier agreements to include clear origin clauses, maintain documentation to prove value addition (particularly for subcontracted production), and where necessary, seek advance rulings to remove ambiguity in origin or classification. Accurate classification is not just a customs duty requirement it will also be critical for claiming export incentives.
- Supply Chain and Contract Structuring: Exporters should revisit place-of-supply rules, GST implications for contract manufacturing or subcontracting, and invoicing terms to ensure that tax treatment is optimized. Bonded warehouses, FTWZs, or light processing hubs may be used strategically to meet ROO requirements while maintaining cost efficiency. In the case of services exports, contract terms should be reviewed to address GST place-of-supply, reverse charge applicability, and potential UK VAT obligations so that after-tax competitiveness is preserved.
- Operational and Regulatory Delays: For sectors such as marine products and processed foods, SPS compliance and export documentation can create bottlenecks that delay shipments and refund claims. These timelines should be budgeted into operational plans, and wherever possible, compliance documentation should be prepared and cleared in advance to avoid demurrage and missed delivery schedules.
- Tax Modelling: Companies should re-price contracts after factoring in the combined impact of RoDTEP incentives, IGST refunds, and the revised UK duty structures. This will provide customers with accurate landed cost calculations and allow exporters to capture early pricing advantages, rather than letting competitors undercut them once the market adjusts to the new tariff environment.
The India–UK CETA sets up a multi-sector opportunity: textiles, gems and jewelry, pharmaceuticals, engineering goods, leather, marine products and services each have specific, quantifiable upside. But the advantage goes not to the sector but to companies that translate tariff relief into real pricing, operational changes, and rigorous compliance. From an indirect-tax viewpoint, the twin levers of IGST refunds and RoDTEP will be the primary mechanisms that convert export volumes into better cash flows. Companies that prepare early by mapping HS codes, availing advance rulings, and redesigning supply chains where needed will definitely capture the lion's share of incremental gains.
From the Judiciary
Direct Tax
Whether the secondment of employees to an Indian subsidiary constitutes a Permanent Establishment (PE) for the foreign company in India?
Mitsui Mining and Smelting Company Limited [TS-1028-ITAT2025(DEL)]
Facts
The assessee was a non-resident company incorporated/ established in Japan. It was engaged in the business of manufacturing and sale of functional engineered materials and electronic materials. It had a subsidiary named MKCI in India, engaged in the business of manufacturing Catalytic convertors and selling catalytic convertors in India. These convertors were used in automobile industries. The assessee used to provide certain precious metal/chemicals as Offshore sales to its India subsidiary.
The assessee received certain receipts from the Indian subsidiary as reimbursement of remuneration of seconded employees. These employees were getting part of their salary in India and part of their salaries in Japan via present assessee.
After analyzing the agreements of seconded employees between assessee and the India subsidiary, the Assessing Officer (AO) held that the employees of the assessee were exercising complete control over the physical premises of the Indian subsidiary and also carrying out sales operations in India and, hence, the assessee was having Permanent Establishment (PE) in India under Article 5 of India-Japan Treaty. The Dispute Resolution Panel (DRP) upheld the view of the AO.
Held
Tribunal held that AO and DRP misunderstood the Secondment Agreement. The agreement clearly says that:
- The seconded employees would work as part of the MKCI and help with its business in India.
- The seconded employees would be full-time employees of MKCI, working under its control, direction, and supervision.
- These employees would work in their personal capacity, not on behalf of the foreign company (MMS).
- The foreign company is not responsible for any losses caused by these employees while working at MKCI.
- The foreign company has no rights over MKCI's assets and employees.
This means that there was no employer-employee relationship between the foreign company (assessee) and the seconded employees.
According to Article 5 of the India-Japan Tax Treaty, a PE exists only if a foreign company has a fixed place of business in India and conducts business through it. Since these conditions are not met, the tribunal upheld the view of assessee.
Our Comments
This case highlights that a foreign company does not create a Permanent Establishment in India through seconded employees if those employees are fully controlled and employed by the Indian subsidiary.
Whether the Principal Purpose Test (PPT) provisions under the Multilateral Instrument (MLI) can be invoked to deny benefits under the India–Ireland DTAA in the absence of a specific notification under Section 90(1) of the Income-tax Act?
Sky High Appeal XLIII Leasing Company Limited [TS-1085- ITAT-2025(Mum)]
Facts
The assessee, an Ireland-based company, was engaged in the global business of aircraft leasing and had entered into dry operating lease agreements with IndiGo, a leading Indian airline. In its return of income, the assessee declared nil taxable income in India, asserting that (i) lease rentals received were not "royalty" under Article 12(3)(a) of the India-Ireland DTAA, which specifically excludes payments for the use of aircraft; (ii) in the absence of a PE in India under Article 5, the income constituted business profits taxable only in Ireland under Article 7; and (iii) alternatively, the income was exempt under Article 8(1) of the DTAA as it was derived from the operation of aircraft in international traffic.
The DRP upheld the AO's key findings, highlighting that the use of an Irish SPV, lacking operational infrastructure or employees, did not establish a genuine presence in Ireland. The DRP also observed that the lease arrangements bore hallmarks of finance leases, based on risk allocation, noncancellable terms, sub-leasing rights, and the alignment with the aircraft's economic life. It will lead to addition of tax at the rate of 10% on gross receipts.
Held
The Mumbai ITAT ruled in favor of Sky-High Appeal XLIII Leasing Company, an Ireland-based aircraft lessor, holding that lease rentals earned from IndiGo under dry operating lease arrangements were not taxable in India under the India-Ireland DTAA. This decision represents a significant setback for the Revenue, which had sought to deny treaty benefits by invoking the PPT under the MLI.
The Tribunal categorically rejected the Revenue's reliance on Articles 6 and 7 of the MLI, which house the PPT provisions, citing the Supreme Court's ruling in Nestlé SA. The ITAT held that no treaty modification via MLI can be enforced under Indian law unless separately notified under Section 90(1) of the Income-tax Act. Although both the India-Ireland DTAA and the MLI were notified independently, the Tribunal noted that the specific impact of the MLI on the India-Ireland DTAA had not been separately notified — a legal requirement per Nestlé.
The Tribunal dismissed the Revenue's argument that the DTAA, being a 'Covered Tax Agreement', automatically incorporated the PPT provisions. It clarified that the socalled 'synthesized text' of the treaty (which includes MLI modifications) was merely explanatory, carried no legal force, and had not been notified in the Official Gazette. Therefore, the MLI provisions could not be treated as self-executing, and their application against the assessee was legally unsustainable. The ITAT emphasized that while the MLI is intended to enhance efficiency in implementing BEPS-related treaty measures, domestic legal requirements, particularly a Section 90(1) notification, cannot be bypassed. As such, the Revenue's invocation of the PPT under the MLI failed on jurisdictional grounds.
Even assuming arguendo that the MLI applied, the ITAT found no abuse of the treaty. The assessee held a valid Irish Tax Residency Certificate (TRC), had substantial commercial presence in Ireland, and operated under a genuine business model supported by Ireland's globally recognized aircraft leasing infrastructure. The Tribunal ruled that mere tax advantage or SPV structure does not imply treaty shopping or artificial avoidance, particularly when supported by commercial rationale.
The ITAT further rejected the existence of a PE in India under Article 5 of the DTAA. It ruled that the mere physical presence of the aircraft in India did not amount to a fixed place PE, and there were no personnel or business operations carried out by the assessee in India.
Lastly, the Tribunal upheld the applicability of Article 8(1) of the DTAA, ruling that lease income from aircraft deployed on both domestic and international routes by IndiGo qualifies as income from the operation of aircraft in international traffic, and is therefore taxable only in the state of residence (Ireland).
Our Comments
This ruling highlights the importance of strict statutory compliance for treaty modifications under Indian tax law, especially concerning the applicability of the MLI and PPT provisions. It underscores that treaty benefits cannot be denied without a valid Section 90(1) notification and reaffirms that genuine commercial substance in cross-border structures must be respected, not merely disregarded on perceived tax motives.
ITAT: Quashes GAAR proceedings; Can't question timing of stock market transactions by investor
Anvida Bandi TS-1110-HC-2025(TEL)
Facts
The petitioner, a long-term investor, earned long-term capital gains in FY 2019–20 but incurred a INR 176.5 million short-term capital loss trading HCL Technologies shares. The tax authorities invoked General Anti-Avoidance Rules (GAAR), deemed the loss booking an Impermissible Avoidance Arrangement (IAA), and disallowed set-off of the short-term loss against long-term gains under Section 144BA(6). The petitioner challenged this order through a writ petition.
Assessee's Argument
The trades were genuine, conducted through a recognized stock exchange via her sole DEMAT account, with no knowledge of counterparties or pre-arranged arrangements. The transactions were part of a continuous investment portfolio, not isolated events. The Revenue failed to show any tax-avoidance motive or dealings with related parties, and there was no evidence linking the acquisition and disposal of shares to a tax-avoidance scheme. Mere timing of transactions without lack of commercial substance or contrivance does not satisfy GAAR's requirements under Section 96.
Respondent's Argument
The authorities contended that the HCL share trades were executed with the primary purpose of manufacturing a loss to offset substantial long-term capital gains, thereby invoking GAAR. They viewed the entire sequence of transactions as a scheme lacking any bona fide commercial purpose, qualifying it as an IAA under GAAR. Consequently, the GAAR invocation was formalized through a valid order issued under Section 144BA(6).
ITATs Decision
The Department failed to establish any collusive or structured arrangement in the HCL share trades, which were genuine and conducted at arm's length. Lacking evidence of a dominant tax avoidance motive and a tainted element, GAAR invocation was unsustainable. Consequently, the order under Section 144BA(6) was set aside, and the writ petition was allowed without costs.
Our Comments
This ruling sets a precedent that protects genuine investors from arbitrary GAAR proceedings. It underscores the importance of substance over form and cautions tax authorities against overreach in interpreting tax avoidance. For M&A and investment professionals, it serves as a reminder to maintain robust documentation and ensure transparency in trading practices, but also offers reassurance that legitimate transactions will not be penalized merely for their timing.
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