As I write this missive, I realize that the year 2025 has come to an end. The calendar year marked notable events. However, some disasters took place, like a major flight accident and Indigo operations coming to a halt. This year saw many reverse flip transactions taking place and some key demergers taking place. This year is on the brink of coming to an end; a new year is beginning. Before analyzing the judgment of international taxation, let me describe a key economic event.
Saga of Rupee vs. Dollar
The value of one dollar was Rs 86 at the start of 2025. Due to the dollar being volatile now, the dollar has crossed Rs 90. This shows the rupee depreciates a lot, and demand for the dollar is increasing. Currency pegging is happening where dollar demand is at the top.
Now one dollar is at Rs 91. Due to this, India needs to preserve its reserve and import less, as import duty would have increased.
A key tax concern is that in GST the exporters, like service providers, will benefit (like consulting), but the import of services, especially by RCM, would be impacted, as they need to pay more. Refund & credit facility will be tough; complexity is there, and so on.
Let me analyse 4 key judgments. These judgments are a hallmark in international taxation for December 2025. These are based on the Income Tax Act ("Act").
1) CTS vs CIT- Madras High Court TCA 277 to 280 of 2016
Issue: Does the International Private Leased Circuit payment amount to a royalty?
Provisions: The provisions of the Act or DTAA that is beneficial will apply to the assessee. Therefore, payment is made with regard to information technology for a country outside India in the nature of a royalty for which no TDS is needed.
Facts: The Cognizant Solutions Private Limited ("Assessee") had a payment to Sprint USA for International Private Leased Circuits (IPLC) and held that the same does not constitute royalty u/s 9 India-US DTAA (DTAA) and hence is not liable to TDS and does not warrant disallowance u/s 40(a)(i).
Conclusion: Relying on the SC decision in Engineering Analysis, HC holds the payment made by the assessee to Sprint USA would not constitute royalty;
No TDS is to be deducted.
Caution: There may be a chance that the department can go for an appeal.
2) DIT vs. American Express Bank (Civil Appeal No. 4451 of 2016)
Issue: Whether expenditure incurred by a nonresident is allowable under Section 44C of the Act.
Provisions: Section 44C of the Act deals with the restriction of head office expenses to 5% of adjusted total income or actual HO expenditure attributable to the Indian business. This applies to nonresident taxpayers having business connections in India.
Facts: M/s American Express Bank, the respondent-assessee, is a nonresident banking company engaged in the business of providing banking-related services. The respondent filed its income tax return on 01.12.1997 for AY 1997-1998, declaring an income of INR 79,450,711. In the said return, the respondent claimed deductions for the following expenses under Section 37(1) of the Act, 1961:
(i) INR 63,913,217 incurred for solicitation of deposits from Non-Resident Indians; and
(ii) INR 135,087,275 incurred at the head office directly in relation to the Indian branches.
The respondent was being questioned in the notice why the questions should not be subjected to the ceiling in 44C and be disallowed.
Analysis: The Court has confirmed that where the applicable tax treaty permits domestic law limitations, the deduction of such expenses cannot exceed 5% of the adjusted total income of the Indian PE.
Conclusion: SC held in favor of the revenue and restricted the expenditure as per Section 44C, laying down the following principles: Section 44C is a special provision with overriding effect over Sections 28-43A, including Section 37(1).
For Section 44C to apply, the following conditions must be met:
i) The assessee is a non-resident.
ii) Expenditure is incurred outside India.
iii) Expense qualifies as head office expenditure (executive/general administrative nature falling under clauses (a)-(d) of the Explanation).
No distinction between common and exclusive expenses: The term "attributable to" in Section 44C covers both common and exclusive expenditure. Further, SC rejected the assessee's argument on Article 7 of the India-USA DTAA, clarifying that while the DTAA permits deductions for expenses incurred for the Permanent Establishment in India, such deductions are subject to Indian tax law limitations, i.e., the ceiling under Section 44C.
Caution: It's tough for the assessee to challenge the decision.
3) Colorcon Asia Pvt Ltd vs. JCIT (Bombay High Court) Tax Appeal No. 6 of 2024
Issue: Whether a refund for a period earlier than 2020 is permissible for a foreign shareholder, especially when it cannot file the tax return now, except when approved through condonation. Whether compliance to get a refund of the pre-2020 era.
Provisions: Prior to 2020, 10(34) of the Act with respect to dividend distribution tax received was exempt for the shareholder but taxable for the companies. After 2020 it became the opposite. At the end the cardinal principle is that income should be taxed in one person's hands.
Analysis: Colorcon paid a dividend of Rs. 365 crores to Colorcon UK (spread over different AYs) and also paid DDT thereon at the rate specified under Section 115-O of the Act. Whether it would be entitled to restrict the tax rate on dividends distributed or distributable by it to Colorcon Limited, United Kingdom (UK), at 10 percent under Article 11 (Dividends) of the India-UK Tax Treaty ("Tax Treaty").
Conclusion: The Authority has erred in not appreciating that DDT erroneously collected in excess of 10% as provided by the India-UK DTAA is erroneous and contrary to law, and retention of excess tax would be contrary to Article 265 of the Constitution of India.
Caution- the department can go for an appeal. But my view is that the department may not go for an appeal, as the entire dividend distribution tax has undergone a paradigm shift.
4) CIT vs Clifford Chance Pte Ltd (Delhi High Court)- ITA 353/2025
Issue: Whether zero employee visits to a remote service can constitute a permanent establishment ("PE").
Provisions:
Facts: Let us analyze AY 20-21
Employees in India for 120 days total, but only 44 days of actual client work (after subtracting 36 vacation days, 35 business development days, & 5 overlapping "common" days).
Below the treaty's 90-day threshold - no service PE.
AY 2021-22: Zero employee visits to India; all services were provided remotely. The Revenue alleged a service PE. The Court held that the Revenue had relied on OECD reports, arguing that technology removes the need for physical presence. The Court rejected this argument, stating that treaties are not amended by reports. The DTAA requires explicit amendments to recognize virtual PEs.
Conclusion: How the most favored nation clause is interpreted with the term is similarly the term within. The term "within" has a certain territorial connotation, and in the absence of personnel physically performing services in India, there can be no furnishing of services "within" India. While acknowledging Revenue's concerns on the taxability of foreign entities in an increasingly open global virtual economy, HC, however, observes that such a reading of virtual PE would be at variance with the express provisions of the India-Singapore DTAA.
The concept of a virtual service permanent establishment does not find mention anywhere in the DTAA.
While acknowledging Revenue's concerns on the taxability of foreign entities in an increasingly open global virtual economy, HC, however, observes that such a reading of virtual PE would be at variance with the express provisions of the India-Singapore DTAA, HC quips. The concept of a virtual service permanent establishment does not find mention anywhere in the DTAA.
But the Delhi High Court has rendered a judgment in favor of the assessee. Courts, like in the recent Clifford Chance case, have made this very clear: unless people are physically in the country and actually doing client work (not BD/vacations included), there is no service.
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