CESTAT distinguishes SC ruling in NOS and holds expats deputation transaction as not liable to service tax

 This Tax Alert summarizes a recent ruling of Customs, Excise and Service Tax Appellate Tribunal, Hyderabad (CESTAT)  on applicability of service tax on deputation of employees by foreign company to an Indian entity.

Assessee, an Indian entity, entered into employment agreements with certain expatriate employees deputed from a foreign entity. It paid a portion of the salary, covering statutory social security contributions in the home country and other emoluments, to the foreign entity, which in turn remitted the amount into the employees’ foreign bank accounts.

CESTAT held that such payments were not exigible to service tax on the following grounds:

Relief for Private Discretionary Trusts: Kolkata ITAT Rules that Surcharge is not automatic for income below ₹50 Lakh

 Recently, the Kolkata Bench of the ITAT has ruled that surcharge is not leviable on a private discretionary trust taxed at the maximum marginal rate (‘MMR’) where the total income is below ₹50 lakhs. The Tribunal held that the definition of “maximum marginal rate” under section 2(29C) of the Income-tax Act, 1962 requires reference to the Finance Act rates, and surcharge becomes applicable only when the prescribed income threshold is exceeded.

In the present case, the assessee, a private discretionary trust, filed its return declaring total income of ₹4,56,900 and computed tax without surcharge. Subsequently, while processing the return and rectification, the AO levied surcharge at 37%, raising additional demand. The Commissioner of Income Tax (Appeals) upheld the levy, holding that the maximum marginal rate includes surcharge. Aggrieved, the assessee preferred an appeal before the ITAT, contending that surcharge is leviable only when income crosses the statutory threshold specified under the Finance Act.

Upon hearing the matter, the ITAT observed that private discretionary trusts are generally taxed at the maximum marginal rate; however, such rate must be determined with reference to the Finance Act provisions. The Tribunal relied on the Special Bench ruling in Araadhya Jain Trust vs. ITO, wherein it was clarified that surcharge cannot be automatically applied at the highest rate and must instead be computed based on the applicable income slabs specified in the First Schedule to the Finance Act. Since the assessee’s income in all relevant years was below ₹50 lakhs, the statutory threshold for levy of surcharge was not met. The Tribunal further noted that interpreting MMR to always include surcharge at the highest rate would render the surcharge provisions redundant and lead to an absurd interpretation. Accordingly, the Tribunal directed that tax be computed at 30% plus applicable cess, without surcharge, and allowed the assessee’s appeal.

Write-off of loan to overseas WOS denied – treated as colourable device

 In the present case, the assessee, engaged in the business of manufacturing and trading garments, had set up a wholly owned subsidiary (WOS) in Jordan as a special purpose vehicle (SPV) to acquire another entity in the same line of business. The assessee advanced loans aggregating to approximately INR 83 crore over multiple years to the WOS. During the relevant year, following losses in the overseas business and eventual sale of the underlying investment, the assessee wrote off INR 53.24 crore of such loans and claimed it as a deduction.

New TDS Framework For International Payments

 There are certain changes in India's tax rules for TDS on payments made to non-residents. The Income Tax Act, 2025 ('ITA 2025') replaces the Income Tax Act, 1961, introducing new forms and enhanced compliance obligations for all cross-border remittances. We have prepared a detailed Note on the subject which is enclosed for your reference.

Kerala HC holds bank’s eligibility of 50% ITC cannot be denied where IT depreciation is claimed w.r.t balance ineligible ITC

 This Tax Alert summarizes a recent ruling of the Kerala High Court (HC) ^[1] on the eligibility of banking companies opting for Section 17(4) of the Central Goods and Services Tax Act, 2017 (CGST Act) to avail 50% of input tax credit (ITC), where depreciation has been claimed under the Income tax Act, 1961 (IT Act) on the remaining portion corresponding to the foregone ITC.

ITAT Ruling in Oracle Case Clarifies Taxability of Cross-Border Software Revenue

 Introduction

In the world of cross-border taxation, the structure of a contract often matters more than the nature of the transaction itself. A recent ruling by the Income Tax Appellate Tribunal (ITAT) involving Oracle India serves as a powerful reminder of this principle. What began as a straightforward software support arrangement between an Indian subsidiary and its foreign parent escalated into a significant tax dispute, with the revenue authorities alleging royalty income and the existence of a Permanent Establishment (PE). The Tribunal’s decision provides crucial clarity on when revenue from software deals crosses the line into royalty taxation—and when it does not.

Interest on borrowings for overseas acquisition allowed as business expenditure as it expanded assessee’s steel business: Hon'ble Mumbai ITAT

 Introduction

In a landmark ruling that provides significant clarity on the tax treatment of borrowings for overseas acquisitions, the Mumbai Income Tax Appellate Tribunal (ITAT) has ruled in favour of Tata Steel. The Tribunal allowed a deduction of ₹518 Crore in interest paid on funds borrowed to acquire the UK-based steel giant, Corus. This decision reinforces the principle that borrowings for strategic global expansion—even if resulting in a controlling interest—are for "business purposes" and not merely for "investment purposes."

Payment of Corporate Guarantee Given to Subsidiary – Allowable as Business Expenditure u/s 37(1)

Introduction

In a significant ruling that provides comfort to parent companies supporting their overseas subsidiaries, the Income Tax Appellate Tribunal (ITAT) has held that payments made towards the invocation of a corporate guarantee are allowable as revenue expenditure under Section 37(1) of the Income Tax Act, 1961. The decision, arising from the case of Escorts Limited, reinforces the principle that expenditure incurred to protect global business interests and brand reputation, even if arising from a default by a step-down subsidiary, is guided by commercial expediency and is thus deductible.

Artificial Goodwill from Intra-Group Amalgamation ineligible for depreciation

 In a recent ruling, the Pune ITAT held that goodwill created pursuant to an internal restructuring, in the absence of genuine commercial benefits, constitutes a colourable device and cannot be treated as a genuine commercial asset eligible for depreciation.

Corpus Distribution from Offshore Discretionary Trusts Taxable

 Ahmedabad Tribunal Special Bench has ruled that corpus distributed on dissolution of an offshore discretionary trust to resident Indian beneficiaries constitutes taxable income under the gift tax provisions.

The Taxpayers were resident individuals and sole surviving beneficiaries of an offshore discretionary trust settled by a non-resident settlor and managed by non-resident trustees. On dissolution, the trustees distributed the accumulated corpus equally between the two Taxpayers. Notably, the trust income had never been distributed to the beneficiaries since its inception and undistributed income was instead added to the capital fund of the trust pursuant to its deed. The Taxpayers had no prior knowledge of the trust and no relationship with the settlor or trustees. The Indian tax authorities treated the receipt as taxable under gift tax provisions.

The Tribunal held the following, thereby confirming that the corpus distribution from an offshore trust is taxable under gift tax provisions: