Tax Street – May 2025

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 May 2025.

• The 'Focus Point' elaborates upon GST registration woes for business owners.
• 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.

You can write to us at taxstreet@nexdigm.com. We would be happy to hear your thoughts on what more can we include in our newsletter and incorporate your feedback in our future editions.

Warm regards,
The Nexdigm Team

Focus Point

GST Registration Woes: Complexity Amidst Clarity

Setting up a business in India involves navigating through a maze of registrations and compliance requirements. Each registration entails separate set of procedures and documents, thus creating a fragmented experience for businesses. Among these, registration under the Goods and Services Tax (GST) law is a critical step.

As per the GST provisions, every supplier making taxable supplies of goods and/or services is required to obtain a GST registration, subject to certain threshold limits. Like any other laws in India, the process of registration under the GST law includes submission of an application along with supporting documentary evidence, performance of checks by the respective tax authorities, seeking clarifications/supporting documents from the applicant etc. The GST registration process, while intended to be straightforward, often becomes cumbersome due to:

• Submission of extensive documentation
• Repeated clarifications sought by tax officers
• Inconsistent practices across jurisdictions

In recent years, the Government has faced a surge in cases of fake GST registrations leading to bogus billings and fraudulent Input Tax Credit (ITC) claims. To combat this, measures such as seeking additional details to cross examine the genuineness of registration application, Aadhaar authentication, biometric verification, and nationwide drives against fake registrations have been introduced. While these steps aim to curb fake registrations, they have also inadvertently impacted genuine taxpayers. Delays in registration affect business operations, contract execution, and overall ease of doing business.

Owing to this, various representations were made to the Central Board of Indirect Taxes and Customs (CBIC) regarding difficulties being faced by the applicants in getting the GST registration, mainly on account of varied practices being followed by the officers for verification and nature of clarifications being sought with respect to the information submitted in the application FORM GST REG01. Further, additional documents which are not prescribed in the 'List of Documents' appended to the said form, were sought leading to delay in processing as well as rejection of applications.

Recognizing these challenges, the CBIC issued two key instructions:

Instruction No. 03/2025-GST dated 17 April 2025

The instruction emphasizes that:

• In respect of principal place of business, the officers should call for the documents (as prescribed in FORM GST REG-01) basis the nature of premises viz. owned, rented/leased, shared, or SEZ.
• In relation to constitution of business, no additional document like the UDYAM certificate, MSME certificate, Shop Establishment certificate, Trade license etc. should be sought from the applicant.
• Further, unwarranted presumptive queries which are not related to the documents or information submitted by the applicant – such as questioning the applicant's residential address or business activity feasibility – have been discouraged.
• Further, to the extent possible, the authenticity of the documents furnished as proof of address may be cross verified from the publicly available sources, such as websites of the concerned authorities including land registry, electricity distribution companies, municipalities, and local bodies, etc.
• Where applications are not flagged as 'risky' and the same are found to be complete and without any deficiency, the application should be approved within 7 working days of submission of application.
• In cases where the applicant has undergone Aadhaar authentication and is flagged as 'risky,' or the applicant fails to undergo/does not opt for Aadhaar authentication, or the officer deems it fit to carry out physical verification (with prior approval from senior authorities), the registration shall be granted within 30 days of submission of application after physical verification of the place of business.
• If any document apart from the listed documents is required to be sought, the officer shall seek the same only after approval from the concerned Deputy/ Assistant Commissioner.

Instruction No. 04/2025-GST dated 2 May 2025

The CBIC has set up a redressal mechanism for the applicants having grievance in respect of any query raised in contravention of the aforesaid instructions, regarding grounds of rejection of application etc. The applicant can approach the jurisdictional Zonal Principal Chief Commissioner/Chief Commissioner in this regard. Where the grievance pertains to State jurisdiction, the same shall be forwarded to the concerned State jurisdiction and a copy endorsed to the GST Council Secretariat.

Our Comments

These instructions aim to bring uniformity, reduce taxpayer harassment, and ensure timely processing of genuine applications. However, the ground reality remains challenging. These instructions, though binding on departmental officers, have not fully translated into a consistent practice. Many applicants continue to face unnecessary hurdles during the registration process. Officers are still issuing notices demanding irrelevant or excessive documentation that bears no direct connection to the information provided in the registration application. Moreover, the applicability/relevance of the said instructions to the State jurisdictional officers handling such registration applications is questionable. This not only delays the process but also creates frustration and uncertainty for legitimate businesses.

While the Government has taken commendable steps toward enhancing the ease of doing business, the journey towards achieving a truly seamless and efficient registration system is far from complete. The persistence of outdated practices and discretionary queries suggests that reforms must extend beyond the issuance of Circulars and instructions. There is a pressing need for systemic change - one that is rooted in accountability, transparency, and uniformity in implementation.

To truly transform GST registration into a facilitator of business growth rather than a bureaucratic bottleneck, a collaborative approach is essential. This involves active engagement between taxpayers, tax officers, and technology platforms. Leveraging automation, data analytics, and centralized monitoring can help eliminate inconsistencies and ensure that the registration process is both efficient and equitable. Only then can businesses focus on what truly matters - innovation, expansion, and contributing to the nation's economic development.

From the Judiciary

Direct Tax

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 passthrough 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 nonresident 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

General Organization for Social Insurance [TS-636-ITAT2025(Mum)]

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.

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.

Footnotes

1 Saif II-Se Investments Mauritius Ltd. vs. ACIT, 154 taxmann.com 617 (Delhi-Trib)

2 Azadi Bachao Andolan (2003) 263 ITR 706/132 Taxman 373/184 CTR 450 (SC)

3 GE India Technology Centre (P) Ltd. vs CIT: 327 ITR 456

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