India: Tax

The Delhi Tribunal's recent ruling in Paul Wurth Italia has reshaped the application of the force of attraction rule under tax treaties, emphasizing that a permanent establishment's mere existence cannot justify taxation of all source-country profits. This decision marks a critical shift toward requiring demonstrable factual and functional nexus between the PE and disputed income, signaling a more restrained interpretation of this contested principle in international taxation.

A person living outside India gifts shares of a US company to a family member or associate resident in India. No price is paid, no money leaves India, and there may be no commercial deal between them. It looks like a simple private transfer.

The intricacies of cross-border transactions could overwhelm, as the process has to be planned from the perspective of transfer pricing and double taxation. Imagine a business group operating with two associated group companies-one each operating Overseas and in India. While the overseas firm searches prospects, finalizes clients, and secures orders, the Indian arm offers software, technical, and operational support. Despite running separate operations, both companies are owned by the same promoters who own and run both businesses. From a business standpoint, this setup works quite well.

In Fireeye Ireland Ltd v ACIT, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) allowed the benefit of the capital gains tax exemption to an Irish tax resident on sale of shares of a US LLC deriving substantial value from India, a transaction commonly referred to as an ‘indirect transfer’. While allowing such exemption, the ITAT relied on Article 13(6) of the India-Ireland Double Taxation Avoidance Agreement (DTAA) which provides that income arising from the alienation of assets is taxable only in the state of which the seller is a resident.

The Bangalore bench of the Income Tax Appellate Tribunal (‘ITAT’) has held that ESOP expenditure cross-charged by a foreign holding company to its Indian subsidiary is allowable as a deduction under section 37(1) of the Income-tax Act, 1961 ('Act'). The Tribunal reiterated that ESOP discount constitutes employee compensation and gives rise to an ascertained liability during the vesting period and that the possibility of future forfeiture, non-exercise of options, or issuance of a valuation report after the financial year-end does not render the liability contingent or hypothetical.

The Bengaluru Bench of the National Company Law Tribunal has declined to approve a proposed merger involving four real estate companies under the same promoter group. The decision raises important questions about the requirements and standards for corporate amalgamation schemes under the Companies Act, 2013.

The Delhi Tribunal's recent ruling in Paul Wurth Italia has reshaped the application of the force of attraction rule under tax treaties, emphasizing that a permanent establishment's mere existence cannot justify taxation of all source-country profits. This decision marks a critical shift toward requiring demonstrable factual and functional nexus between the PE and disputed income, signaling a more restrained interpretation of this contested principle in international taxation.

The intricacies of cross-border transactions could overwhelm, as the process has to be planned from the perspective of transfer pricing and double taxation. Imagine a business group operating with two associated group companies-one each operating Overseas and in India. While the overseas firm searches prospects, finalizes clients, and secures orders, the Indian arm offers software, technical, and operational support. Despite running separate operations, both companies are owned by the same promoters who own and run both businesses. From a business standpoint, this setup works quite well.

An engineering, procurement and construction contract in India is taxed on the strength of decisions taken before the award: how the scope is divided, which entity signs, where title to equipment passes, and what the employer is told to withhold.

The Delhi Tribunal's recent ruling in Paul Wurth Italia has reshaped the application of the force of attraction rule under tax treaties, emphasizing that a permanent establishment's mere existence cannot justify taxation of all source-country profits. This decision marks a critical shift toward requiring demonstrable factual and functional nexus between the PE and disputed income, signaling a more restrained interpretation of this contested principle in international taxation.

India's 2026 Tax Amendment introduces significant tax benefits for foreign companies engaged in electronics manufacturing through contract manufacturers, extending exemptions until 2041 and adding new provisions for component storage in customs-bonded warehouses. How will these changes reshape India's competitiveness in the global electronics manufacturing services sector and influence investment decisions by original equipment manufacturers?

The article highlights the legal, tax and administrative challenges faced by operational SEZ units transitioning into Domestic Tariff Area units. Key issues include uncertainty during the approval period, inconsistent inventory valuation dates, excessive duties on domestic assets, and full-value taxation of raw materials.