Tax Street – June 2025

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 June 2025.

• The 'Focus Point' elaborates upon recent amendment of the India-Oman Double Taxation Treaty.
• 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

India-Oman Double Taxation Treaty Amended: Effective FY 2026–27

A protocol amending the Agreement between the Republic of India and the Sultanate of Oman for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, was signed at Muscat on the 27 January 2025.

The protocol has entered into force on the 28 May 2025, being the date of receipt of the later of the notifications regarding the completion of the procedures required by the respective laws of the Contracting States for entry into force of the said Protocol.

The provision of the amendment shall have effect in India for income derived in any fiscal year beginning on or after the first day of April following the date on which the protocol enters into force. Therefore, the protocol will be applied in India from FY 2026-27.

Following are the key amendments under the protocol:

• Preamble: A third para has been inserted in the preamble of the agreement in lines with the preamble of MLI for prevention of tax evasion. The relevant extract of the preamble are as follows:
  
  "....Intending to eliminate double taxation with respect to the taxes covered by this Agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third States);..."
  
  
• Covered taxes under Oman has replaced "Company Income-tax" and "Profit Tax on Commercial and Industrial Establishments" to "the income tax."
• Competent Authority and Tax Year (Definition):
  • In case of Oman, the competent authority is replaced from the Ministry of National Economy and India-Oman Double Taxation Treaty Amended: Effective FY 2026–27 Supervisor of Ministry of Finance or his authorized representative to the Chairman of Tax Authority or their authorized representative.
  • The reference of tax year has been changed from the Company Tax law to Income Tax.
• Dual residency in case of non-corporates: Under the old agreement, the tie breaker for dual residency was determination of the Place of Effective Management (POEM). Under the protocol, the tie breaker for dual residency shall be decided under Mutual Agreement Procedure (MAP) by competent authorities. They will consider factors like where it is effectively managed or incorporated and such other relevant factors. If no agreement is reached, the company won't get any tax benefits from the treaty unless both countries specifically agree to give them.
• MAP has been introduced for determining Arm's Length Price (ALP) between two Associated Enterprises (AEs) under India and Oman.
• The rate of royalties and technical fees has been reduced from 15% to 10%.
• Under Para 4 of Article 25 of the old agreement, tax credit was available for the taxes which would have been payable even on the exempted income. This benefit is now removed.
• Non-Discrimination: A new Article 25A has been inserted to restrict non-discrimination in the tax treatment of the non-resident persons. Following is the brief scope of the matters covered in the Article are as under:
  • No discrimination in the tax treatment against the nationals of the other state.
  • No discrimination in the tax treatment against the PE of the other state.
  • Conditions for availing deduction on account of payment of interest, royalty and FTS shall apply as if the payment is made to a resident.
  • Enterprises owned or controlled by residents of the other state shall not be treated differently than enterprises owned or controlled by domestic residents
• Mutual Agreement Procedure (MAP): Article 26 of MAP of the old agreement is totally replaced by a new article in the protocol. This article provides a MAP mechanism under a Double Taxation Avoidance Agreement (DTAA), allowing a person who believes they are being taxed in a way that violates the treaty to seek relief. They can present their case to the competent authority of the country where they reside or where they are a national if Article 25A applies within three years of being notified of the issue. The competent authorities of the two Contracting States will then attempt to resolve the matter through mutual agreement to avoid taxation contrary to the treaty. These authorities may also work together to clarify ambiguities or resolve disputes regarding the treaty's interpretation or application, even in cases not explicitly covered. Any resulting agreement will apply regardless of time limits in domestic laws, and direct communication between the authorities is permitted to facilitate resolution.
• Exchange of Information: Article 27 of Exchange of Information of the old agreement is totally replaced by a new article in the protocol. This article mandates both Contracting States to exchange tax-related information that is foreseeably relevant for enforcing the DTAA or domestic tax laws. The exchanged information must be kept confidential and used only by tax authorities or relevant agencies. A State must gather and share requested data even if it doesn't need it for its own tax purposes. However, it is not required to violate its laws, disclose trade secrets, or obtain information it cannot normally access. Importantly, it cannot refuse to share data solely because it is held by a bank or fiduciary.
• Assistance in Collection of Tax: A new article of 27A has been introduced for Assistance in Collection of Taxes. This article allows both Contracting States to assist each other in collecting taxes, treating foreign tax claims like their own for enforcement. Legal disputes over such claims must be handled only in the requesting State. Assistance can be denied if it violates local laws, public policy, or imposes excessive administrative burden.
• Principal Purpose Test: A new Article of 27B has been introduced in lines with MLI where benefit under the Tax Treaty shall not be available if it is reasonable to conclude that obtaining the said tax benefit was one of the principal purposes of the arrangement or transaction.

From the Judicaiary

Direct Tax

ITAT Mumbai: Taxability on conversion of private company into an Limited Liability Partnership (LLP)

ISC Specialty Chemicals LLP [ITA NO 457/Mum/2025]

Facts

The assessee, ISC Specialty Chemicals Private Limited, was converted into an LLP pursuant to Section 56 of the Limited Liability Partnership Act, 2008. Upon conversion, all assets and liabilities were transferred to the LLP. In the course of assessment proceedings an addition of INR 145.8 million was made by the officer alleging violation of conditions of Section 47(xiiib), as the book value of assets exceeded INR 50 million. The Assessing Officer (AO) invoked Section 47A(4) to treat the transaction as a taxable transfer under Section 45, attracting capital gains tax. On appeal, the CIT(A) upheld the AO's order. Assessee filed an appeal before ITAT on below grounds:

• The transfer was undertaken as a going concern, with no individual valuation assigned to the assets and liabilities; all items were transferred at book value.
• Accordingly, the book value constituted both the cost of acquisition and the full value of consideration, resulting in Nil capital gains.
• Since no exemption under Section 47(xiiib) was claimed, the invocation of Section 47A(4) (which deals with withdrawal of exemption) was erroneous and inapplicable.

Held

The ITAT, acknowledged that the assessee did not satisfy the cumulative conditions under Section 47(xiiib). Thus, the transaction constituted a transfer under Section 45. However, relying on established judicial precedentsincluding decisions of the Supreme Court and Bombay High Court - the Tribunal ruled that the 'full value of consideration' under Section 48 should be based on actual consideration received (i.e., book value) and not the market value.

Since the book value of assets equaled their cost of acquisition, no capital gain arose under the computation mechanism of Section 48. The Tribunal held that even if the exemption u/s 47(xiiib) was not available, the conversion at book value did not result in any taxable capital gains.

Our Comments

This ruling underscores that capital gains tax can only arise if there is a positive difference between the full value of consideration and the cost of acquisition, and mere failure to comply with Section 47(xiiib) does not automatically trigger taxable gains if there is no actual gain under Section 48.

ITAT Mumbai: Transfer of Tenancy rights taxable under capital gains, not as other income u/s 56(2)(x) (b)(B)

Vasant Nagorao Barabde [TS-642-ITAT-2025(Mum)]

Facts

The assessee received a residential property having stamp duty value of INR 28.89 million in exchange for the tenancy rights. As per the agreement, the assessee was the primary tenant, followed by the name of his daughter as the secondary tenant.

AO made an addition of INR 28.89 million under Section 56(2)(x)(b)(B) alleging receipt of immovable property without adequate consideration. Assessee filed an appeal before ITAT on below grounds:

• Tenancy rights were solely held by his daughter even though the agreement mentioned both their names. Therefore, on transfer of such rights, any capital gain arising from such transfer should be assessed in her hands alone.
• Furthermore, even if the AO dismissed the above claim and capital gain was taxed in assessee's hands, he contended that since the entire gains were reinvested in a new property which was allotted by the builder, the said transaction would still attract nil tax after claiming exemption u/s 54F.

Held

• The ITAT ruled that receiving a new flat in a redevelopment project constitutes extinguishment of rights, not receipt of property for inadequate consideration. Therefore, such transactions are not taxable under Section 56(2)(x)(b)(B) as income from other sources. Instead, they may attract capital gains tax, with potential exemptions under Section 54F
• ITAT allowed the assessee's appeal, directing the deletion of the addition made under Section 56(2)(x)(b) (B) and granting the Section 54F exemption, resulting in no taxable capital gain from the transaction.

Our Comments

This decision sets a valuable precedent in clarifying the tax treatment of redevelopment transactions. It ensures that capital gains arising from such transactions are assessed appropriately and not misclassified under the head 'other sources.' It also affirms the importance of judicial discretion in granting exemptions to uphold the substantive rights of taxpayers.

To view the full article click here.