Export of Services vs Intermediary under GST: A Judicially Settled Guidance Framework for ITC Refund Eligibility

 By CA Surekha S Ahuja

In GST law, Input Tax Credit is not defeated by cross-border group structures; it is defeated only when the Indian entity abandons its role as a supplier and reduces itself to a facilitator.

Introduction: Why This Issue Needed a Guiding Framework

The classification of cross-border services rendered by Indian entities to overseas recipients has become one of the most contentious areas under GST. At stake is not merely taxability, but the very survival of accumulated Input Tax Credit (ITC).

If the service qualifies as an export of services, it is zero-rated under section 16 of the IGST Act, and refund of unutilised ITC becomes a statutory right.
If the same service is branded as an intermediary service, the place of supply shifts to India, GST becomes payable, and ITC refund is denied.

For years, tax authorities have attempted to stretch the intermediary definition—often relying on words such as assist, support, coordinate, or group entity. High Courts have now decisively intervened and drawn a clear, legally enforceable line.

This post distils that line into a guiding framework, anchored in statute, economics, and binding judicial precedent.

Statutory Architecture: Rule vs Exception

Export of Services — Section 2(6), IGST Act

Export of services is a complete code. Once its five conditions are satisfied, the supply:

• Qualifies as export

• Becomes zero-rated under section 16

• Triggers refund entitlement under section 54

Intermediary — Section 2(13), IGST Act

The definition is narrow and exclusionary. Critically, it excludes:

“a person who supplies such services on his own account”

Courts have repeatedly held that this exclusion governs the entire analysis. Intermediary is not the starting point; it is the exception that must be strictly proved.

Judicial Method: How Courts Actually Decide ITC Allowability

Across decisions such as Infodesk India (Gujarat HC), Genpact India (P&H HC), Ernst & Young (Delhi HC) and OHMI Industries (Delhi HC), courts apply a substance-driven test, not a semantic one.

They ask four fundamental questions:

1. Who supplies the service?

2. Who bears the operational and tax risk?

3. Who controls pricing and earns profit?

4. Is any third-party supply being arranged or facilitated?

The answers to these questions determine ITC entitlement.

When ITC Refund Is ALLOWABLE — The Judicially Accepted Conditions

 Services Are Supplied on Own Account

Guiding reasoning:
A person supplying services on own account supplies the main service itself, not a facilitation layer.

Courts have consistently held that once services are performed, owned, and delivered by the Indian entity, the exclusion in section 2(13) applies automatically.

Practical indicators:

• Defined scope of work

• Deliverables owned by the Indian entity

• Performance responsibility lies with the Indian entity

Judicial support:
Ernst & Young and Genpact clearly recognise that backend, professional, and operational services supplied directly are exports when rendered on own account.

Contract Is Principal-to-Principal

Guiding reasoning:
An intermediary relationship cannot exist without three distinct parties. A purely bipartite agreement legally undermines any intermediary allegation.

In Infodesk, the Gujarat High Court categorically held that in the absence of a third-party supply being arranged, intermediary classification is unsustainable.

Practical indicators:

• Agreement only between Indian entity and foreign recipient

• No authority to bind third parties

• No customer contracting on behalf of another

Consideration Includes a Profit Element

Guiding reasoning:
Profit is the economic signature of independence.
Agents earn commission. Principals earn margin.

A cost-plus model with mark-up demonstrates:

• Independent pricing logic

• Entrepreneurial character

• Absence of agency behaviour

Courts have treated profit element as strong economic evidence against intermediary classification.

Indian Entity Bears Operational and Tax Risks

Guiding reasoning:
Risk allocation distinguishes a supplier from a conduit.

Where the Indian entity bears:

• Manpower costs

• Compliance obligations

• Tax exposure

• Delivery risk

it functions as an independent service provider, not as a facilitator.

In Infodesk, contractual clauses placing all costs and taxes on the Indian subsidiary were decisive.

No Third-Party Supply Is Arranged or Facilitated

Guiding reasoning:
Intermediary status arises only when the supplier arranges or facilitates a supply between two others.

Courts have consistently rejected the notion that:

• Internal coordination

• Support functions

• Group-level assistance

amount to facilitation.

Key test:
If no third-party contract comes into existence because of the Indian entity’s role, intermediary classification fails.

Outcome (Authoritative Position)

✔ Supply qualifies as export of services
✔ Zero-rated under section 16
✔ Refund of unutilised ITC under section 54 is a matter of right

When ITC Refund Is NOT ALLOWABLE — The Judicially Recognised Triggers

Supplier Merely Arranges or Facilitates a Supply

Where the Indian entity:

• Brings buyer and seller together

• Enables execution of another’s supply

• Does not itself deliver the main service

courts have upheld intermediary classification.

Remuneration Is Commission-Based

Commission or transaction-linked consideration indicates:

• Lack of pricing autonomy

• Absence of entrepreneurial risk

• Agency character

Courts treat this as a classic intermediary marker.

Risk and Pricing Controlled by Foreign Principal

If the Indian entity:

• Has no pricing discretion

• Bears no performance risk

• Acts entirely on instructions

it lacks the economic substance of a principal supplier.

Indian Entity Acts Merely as a Conduit

Where services flow through the Indian entity without substantive value addition, ITC accumulation cannot be refunded, as the supply is not on own account.

Outcome

✖ Place of supply shifts to India
✖ Supply becomes taxable
✖ Refund of accumulated ITC is legally barred

Why This Distinction Is Substantive, Not Cosmetic

Courts have unequivocally rejected:

• Literal reading of agreement language

• Over-reliance on words like assist or support

• Presumption of intermediary merely due to group structure

Instead, they apply a combined legal–economic–functional test.
Once principal supply is established, ITC refund is not discretionary—it is statutory.

Closure: The Settled Legal Compass

The judicial position is now clear and consistent:

Intermediary is a narrow exception. Export of services is the governing rule.

Where an Indian entity supplies services independently, earns profit, bears risk, and does not arrange third-party supplies, denial of ITC refund is not merely incorrect—it is unsustainable in law.

This post is intended to serve as a guiding reference—for structuring contracts, defending refund claims, and ensuring GST positions are aligned with judicial reality.

In GST, substance decides ITC—and substance now has strong judicial protection.

GSTR-9 & GSTR-9C for FY 2024-25

By CA Surekha S Ahuja

Why Annual GST Returns Have Become Continuity Statements — and How CAPS Now Judges Your Compliance

In the CAPS era, GST annual returns are not checked for totals.
They are tested for consistency, continuity, and credibility across years.

 For many years, GSTR-9 and GSTR-9C were treated as summary compliance forms — annual compilations of what had already been reported in GSTR-1 and GSTR-3B.

That understanding is now outdated.

From FY 2024-25 onwards, the GST system processes annual returns through CAPS (Common Annual Processing System) — an internal GSTN framework that does behaviour-based reconciliation, not form-based validation.

The system no longer asks only:

“Is tax paid?”

It increasingly asks:

• When was ITC claimed?

• Why was it reversed or reclaimed?

• How does this year connect with the previous and next year?

As a result, most GST notices today arise not due to tax short-payment, but due to broken table-to-table and year-to-year linkages.

This article explains how to file GSTR-9 and GSTR-9C for FY 2024-25 in a manner that is:

• CAPS-aligned

• cross-referenced

• litigation-safe

The New Compliance Philosophy: Five Rules That Now Matter Most

Before diving into tables, it is important to internalise five governing principles that now shape annual GST scrutiny:

1. Every ITC must have a time identity
   Whether it belongs to the current year, a prior year, or the next year must be clearly disclosed.

2. Every ITC movement must have a reason
   Claim, reversal, reclaim, or permanent loss — silence is no longer acceptable.

3. Timing differences must be disclosed, not adjusted
   Annual returns reward transparency, not cosmetic netting-off.

4. Cross-year continuity matters more than year-wise symmetry
   A small difference is defensible if logically explained across years.

5. CAPS prefers explanation over perfection
   Unexplained alignment is riskier than explained difference.

GSTR-9 for FY 2024-25: Understanding the Return as a System Narrative

Tables 4 & 5 — Outward Supplies: Where the Story Begins

Tables 4 and 5 establish the nature and taxability of turnover — taxable, exempt, nil-rated, non-GST, exports, and reverse charge supplies.

Why this matters under CAPS:

• Table 4 & 5 must align with GSTR-1

• They must logically flow into Table 9 (Tax Payable)

• They must reconcile with GSTR-9C Table 5

Unexplained differences here often trigger turnover mismatch communications, even where tax is fully paid.

Table 6 — ITC Architecture (The Most Scrutinised Block)

Table 6A — ITC as per GSTR-3B (Auto-Populated)

This is the system’s starting point — the aggregate of ITC claimed through FY 2024-25 GSTR-3B returns.

Table 6A1 — Prior-Year ITC Claimed in FY 2024-25 (New from FY 24-25)

This table captures ITC relating to earlier financial years but claimed during FY 2024-25.

Why this table fundamentally changes ITC reporting:

• It segregates past-year credit from current-year behaviour

• It prevents inflation of FY 2024-25 ITC

• It allows CAPS to track delayed claims cleanly

Table 6A2 — Net ITC of FY 2024-25

Computed as:

Table 6A – Table 6A1

This figure represents the true ITC behaviour of FY 2024-25 and becomes the anchor for GSTR-9C ITC reconciliation.

Tables 6B to 6D — Current-Year ITC Claims

These tables report first-time ITC claims pertaining to FY 2024-25.

Under CAPS, they are cross-verified with:

• GSTR-2B (FY 2024-25)

• Table 8B

• GSTR-9C Table 12

Table 6H — ITC Reclaimed under Rule 37 / 37A

This is one of the highest-scrutiny tables in GSTR-9.

It reports restoration of ITC that was reversed earlier due to non-payment or similar rule-based conditions.

Critical clarity:

• Reclaimed ITC is not fresh ITC

• It must not be reported in Table 6B

• It must never be reported in Table 8C

Incorrect placement here is a common trigger for automated scrutiny.

Table 7 — ITC Reversals (Including New Tables 7A1 & 7A2)

Table 7 reports reversals under:

• Rule 37 / 37A

• Rule 42 / 43

• Section 17(5)

CAPS evaluates whether:

• reversals follow a logical lifecycle, and

• reclaims (if any) reappear in the correct year and table.

Permanent reversals (e.g., Section 17(5)) are treated very differently from temporary reversals.

Table 8 — ITC Reconciliation (CAPS Engine Room)

The system-computed formula is:

Table 8D = 8A – (8B + 8C)

Where:

• 8A is ITC as per GSTR-2B

• 8B is ITC claimed for FY 2024-25

• 8C is missed ITC of FY 2024-25 claimed in the next year

Important nuance (often misunderstood):

• A negative 8D is not illegal

• It is a risk indicator

• What matters is whether the difference is logically explained elsewhere

Reclaimed ITC must never enter Table 8C.

Tables 10–13 — Where Timing Differences Are Explained

These tables disclose when tax or ITC was actually discharged, not whether it was correct.

• Tables 10–11 → outward liability paid in FY 2025-26

• Table 12 → ITC reversed in FY 2025-26

• Table 13 → ITC availed in FY 2025-26

Golden rule:
Tables 12 and 13 are never netted off. They exist to preserve audit trail.

GSTR-9C: Reconciliation, Not Re-Audit

GSTR-9C remains a statutory reconciliation statement, not an audit certification.

Key anchors:

• Turnover reconciliation → GSTR-9 Tables 4 & 5

• Tax paid reconciliation → GSTR-9 Table 9

• ITC reconciliation → GSTR-9 Table 6A2

Differences are expected.
What is required is clear narration, not forced elimination.

Why CAPS Changes Everything

CAPS does not read one return in isolation.

It connects:

• previous year disclosures,

• current year behaviour, and

• next year claims.

From a system perspective, consistency tells a stronger compliance story than perfection.

Conclusion: The New Meaning of “Correct” in GST Annual Returns

For FY 2024-25, GSTR-9 and GSTR-9C are no longer about compiling numbers.
They are about telling a consistent, explainable story across years.

A return that shows:

• where ITC came from,

• why it moved, and

• when it was claimed

is defensible — even with differences.

A return that breaks continuity is vulnerable — even when tax is fully paid.

In the CAPS era of GST, cross-reference is compliance.

 

Cost Records & Cost Audit Applicability – FY 2024‑25 & FY 2025‑26

By CA Surekha S Ahuja

 References:

• Section 148(1), Companies Act, 2013

• Companies (Cost Records & Audit) Rules, 2014 (as amended, GSR 425(E))

• MSMED Act, 2006, Gazette Notification S.O. 1364(E) dated 21.03.2025

• MCA & ICMAI guidance

Legal Basis

Section 148(1), Companies Act, 2013:

“Every company which is required to maintain cost records under this section shall prepare such records in respect of the items of goods or services as may be prescribed in the manner specified in the Companies (Cost Records & Audit) Rules, 2014.”

Rule 3 (Cost Records – Applicability):

• Rule 3(1)(a): Applies to 37 regulated sectors (Table A)

• Rule 3(1)(b): Applies to 7 non-regulated sectors (Table B) if overall turnover ≥ ₹35 cr and company is not Micro or Small

Rule 4 (Cost Audit – Applicability):

• Rule 4(1) – Regulated sectors: Overall turnover ≥ ₹50 cr & product turnover ≥ ₹25 cr, not Micro/Small

• Rule 4(2) – Non-regulated sectors: Overall turnover ≥ ₹100 cr & product turnover ≥ ₹35 cr, not Micro/Small

Rule 4(3) – Exemptions:
Cost audit not required if:

1. Foreign exchange revenue >75% of total turnover

2. Operates exclusively from SEZ

3. Captive consumption of power

4. Micro/Small Enterprise under MSME classification

MSME Classification (Updated for FY 2025‑26)

MSME Type	Plant & Machinery/Equipment	Annual Turnover
Micro	≤ ₹2.5 cr	≤ ₹10 cr
Small	≤ ₹25 cr	≤ ₹100 cr
Medium	≤ ₹125 cr	≤ ₹500 cr

Old limits (FY 2024‑25):

• Micro ≤ ₹1 cr / ₹5 cr

• Small ≤ ₹10 cr / ₹50 cr

• Medium ≤ ₹50 cr / ₹250 cr

Key Interpretation:

• Micro & Small: fully exempt from cost records and cost audit.

• Medium: compliance required if thresholds met.

Sectoral Applicability – Industry-Specific

A. Regulated Sectors (Rule 3, Table A)

Industry	Key Notes
Petroleum Products & Refineries	Licenses regulated by Govt/IOCL
Electricity (Generation/Transmission/Distribution)	Includes public & captive generation
Drugs & Pharmaceuticals	CDSCO/FDA regulated
Fertilisers	Urea/NPK/DAP manufacturing
Sugar & Industrial Alcohol	Licensing regulated
Telecommunication	Licensed telecom operators
Railways	Freight & passenger operations

B. Non‑Regulated Sectors (Rule 3, Table B)

Industry	Key Notes
Cement, Steel, Glass, Ceramics	Manufacturing units
Textiles & Apparel	Excludes handloom Micro/Small units
Paper & Paper Products	Non-licensed domestic production
FMCG / Edible Oils / Food Processing	Non-regulated
Electrical & Electronic Machinery	Manufacturing
Rubber Products / Tyres & Tubes	Non-regulated
Paints & Varnishes	Non-regulated production

Interpretation: Even non-regulated companies must maintain cost records if turnover ≥ ₹35 cr and not Micro/Small.

Turnover Thresholds – Cost Records vs Audit

A. Cost Records (Rule 3)

FY	MSME Type	Turnover Threshold	Records Required?
2024‑25	Micro/Small	≤ ₹50 cr	❌ Exempt
2024‑25	Medium	> ₹50 cr & ≥ ₹35 cr	✅ Yes
2025‑26	Micro/Small	≤ ₹100 cr	❌ Exempt
2025‑26	Medium	> ₹100 cr & ≥ ₹35 cr	✅ Yes

Note: ₹35 cr threshold applies after MSME classification.

B. Cost Audit (Rule 4)

Sector	Overall Turnover	Product Turnover	Notes
Regulated	≥ ₹50 cr	≥ ₹25 cr	Mandatory if not Micro/Small
Non-Regulated	≥ ₹100 cr	≥ ₹35 cr	Mandatory if not Micro/Small

Exemptions – Rule 4(3)

Exemption	Condition
Exports	>75% foreign exchange revenue
SEZ Operations	Company operates exclusively from SEZ
Captive Power	Power generated is fully for internal consumption
MSME Exemption	Micro/Small as per revised MSMED Act

Interpretation: Exemptions override thresholds. Audit is not required even if turnover is high.

Year-Wise Applicability Snapshot

FY	Turnover	MSME Type	Records?	Audit?	Comments
2024‑25	≤ ₹50 cr	Micro/Small	❌ No	❌ No	Fully exempt
2024‑25	50–100 cr	Medium	✅ Yes (≥ ₹35 cr)	⚠️ Conditional	Check Rule 4 thresholds
2024‑25	≥100 cr	Medium	✅ Yes	✅ Yes	Rule 4 thresholds apply
2025‑26	≤ ₹100 cr	Micro/Small	❌ No	❌ No	Fully exempt
2025‑26	>100 cr	Medium	✅ Yes	⚠️ Conditional	Check Rule 4 thresholds & exemptions

Decision Tree – Step-by-Step Compliance

Step 1: MSME Status (Udyam Registration)

• Micro/Small → No records, no audit

• Medium → Go to Step 2

Step 2: Sector Classification

• Regulated → Rule 3(A)/4(1)

• Non-Regulated → Rule 3(B)/4(2)

Step 3: Turnover Thresholds

• Records: ≥ ₹35 cr

• Audit: Rule 4 thresholds (Regulated ≥50/25, Non-Regulated ≥100/35)

Step 4: Check Exemptions

• Exports >75% → Audit exempt

• SEZ → Audit exempt

• Captive Power → Audit exempt

Step 5: Documentation

• Cost Records CRA‑1

• Cost Auditor Appointment CRA‑2

• Filing CRA‑3 / CRA‑4

Step 6: Monitor FY Transitions

• FY 2024‑25 vs FY 2025‑26 → Revised MSME limits reduce compliance automatically

Practical Examples

1. Telecom Co FY 2024‑25, ₹60 cr turnover, 80% domestic

   • Records: Required

   • Audit: Required

2. Textile Co FY 2025‑26, ₹90 cr turnover

   • MSME Small → ✅ Fully exempt

3. Pharma Co FY 2025‑26, ₹450 cr turnover, 80% exports

   • Records: Required

   • Audit: Exempt (>75% export)

4. Infra Co FY 2025‑26, ₹110 cr turnover, non-regulated product ₹40 cr

   • Records: Required

   • Audit: Applies only if product turnover ≥ ₹35 cr

Key Takeaways

• MSME revision significantly reduces compliance burden for FY 2025‑26

• Medium enterprises are primary focus for cost records & audit

• Exports, SEZ, captive power offer statutory exemptions

• Always maintain cost records; audit may be exempt but records are evidence for statutory scrutiny

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Joint Development Agreement (JDA) Taxation in India: Capital Gains vs Business Income – Case Law, NRI Taxation & Guidance

By CA Surekha S Ahuja

“In Joint Development Agreements, taxability follows conduct — not contracts.”

Courts do not tax JDAs by their commercial appeal or revenue potential. They tax them by role, risk, and legal transfer.

Joint Development Agreements (JDAs) have become a preferred real-estate monetisation model in India, allowing landowners to unlock value without funding construction. However, JDAs also attract intense tax scrutiny, particularly on whether receipts should be taxed as capital gains or business income, and on when such income becomes taxable.

Mischaracterisation can result in denial of indexation, higher tax rates, GST exposure, interest, and prolonged litigation. For NRIs, the risk multiplies due to TDS under section 195, DTAA application, and FEMA repatriation rules.

This article provides a case-law–driven, SEO-aligned, and advisory-focused analysis of JDA taxation, explaining:

• capital gains vs business income,

• judicial differentiators,

• tax planning guardrails, and

• compliance obligations for resident and NRI landowners.

JDA Taxation: Capital Gains vs Business Income

Indian courts have consistently held that the nature of income under a JDA depends on the role of the landowner, not on the wording of the agreement or the form of consideration.

Judicially Accepted Determinants

Parameter	Capital Gains Treatment	Business Income Treatment
Role of landowner	Passive contribution of land	Active involvement in development
Nature of land	Capital asset	Stock-in-trade
Consideration	Revenue share / built-up area / cash on transfer	Income from development activity
Timing of tax	On legally effective transfer	On accrual / receipt
Key cases	Mathikere Ramaiah Seetharam (2025), V.S. Construction (2017)	CIT v. Hind Construction Ltd. (2019), Ashoka Buildcon Ltd. (2020)

Insight: Passive landowners under JDAs are normally taxed under capital gains, not business income.

Leading JDA Case Law Explained

DCIT v. Mathikere Ramaiah Seetharam (2025, ITAT Bangalore)

• Land contributed under JDA

• No role in construction or marketing

Held:
Income taxable as Long-Term Capital Gains (LTCG); advances are not business income.

Key Principle:
Revenue sharing alone does not convert capital gains into business income.

V.S. Construction Co. (2017)

• Revenue share agreement

• No development role of landowner

Held:
Capital gains treatment upheld; advances treated as capital receipts.

CIT v. Hind Construction Ltd. (2019)

• Landowner actively involved in execution

Held:
Income taxable as business income.

Differentiator:
Operational involvement and risk assumption.

Ashoka Buildcon Ltd. (2020, Bombay HC)

Held:

• Developer → business income

• Landowner → capital gains

Key Learning:
Different parties to the same JDA can have different tax treatments.

JDA Taxation for NRIs – Special Focus

Issue	NRI-Specific Compliance
TDS (Section 195)	Applicable only on sums chargeable to tax
DTAA relief	Can reduce withholding; PAN mandatory
FEMA compliance	Repatriation subject to RBI norms
Form 15CA/15CB	Mandatory for outward remittance
Timing of tax	Capital gains on transfer, not on advance
GST exposure	Only if income is business income

JDA tax for NRIs requires simultaneous compliance under Income-tax Act and FEMA.

Tax-Saving Strategies (Judicially Sustainable)

• Maintain a strictly passive role as landowner

• Avoid participation in construction, marketing, or financing

• Clearly document advances as adjustable capital receipts

• Time transfer deeds to optimise LTCG computation

• Avail indexation benefits for land held beyond 24 months

• Apply DTAA provisions to reduce TDS for NRIs

• Segregate roles clearly in joint ventures

These strategies are court-tested, not aggressive tax planning.

Common Mistakes Leading to Disallowances

• Treating land as stock-in-trade without formal conversion

• Recognising advances as taxable income prematurely

• Mixing passive and active roles without accounting clarity

• Incorrect or excess TDS deduction under section 195

• FEMA non-compliance during repatriation

• Weak documentation of JDA terms and possession clauses

Most JDA disputes arise from execution lapses, not legal uncertainty.

Practical Case Study (JDA + NRI)

Facts:
An NRI landowner contributes land under a JDA and receives 30% of constructed flats. He has no role in construction.

Tax Outcome:

• Income taxable as LTCG on transfer/sale

• Indexation benefit available

• TDS under section 195 applies only on sale

• DTAA may reduce tax

• Form 15CA/15CB required for repatriation

Contrast:
Active participation would shift taxation to business income, with possible GST exposure.

Conclusion

The taxation of Joint Development Agreements in India is well-settled in law but sensitive in execution.

• Passive landowners enjoy capital gains treatment and indexation benefits.

• Active participants face business income taxation and higher compliance burden.

• NRIs must manage TDS, DTAA relief, and FEMA rules with precision.

Final Takeaway:
Clear role definition, disciplined documentation, and alignment with judicial precedents are the most reliable tools for optimising tax outcomes and avoiding prolonged litigation under JDAs.

 

Where Wages Create More Value Than Profits

By CA Surekha S Ahuja 

Section 80JJAA vs Section 80-IAC — A Definitive Guide for HR, Manpower and Platform-Led Service Businesses

Tax incentives succeed only when they mirror economic reality. Where law chases optics, litigation follows.

The Real Question the Law Is Asking

Sections 80JJAA and 80-IAC are often discussed together, but they are not alternatives in the usual sense.
They are answers to two very different policy questions:

• How do we encourage formal employment?

• How do we encourage innovation-driven, scalable enterprises?

Human resource and manpower businesses sit at the intersection of this debate—sometimes mistakenly believing that startup status alone unlocks profit exemptions.

The law, however, looks past labels and examines how value is actually created.

The Economic Structure of HR and Manpower Businesses

Most HR, staffing and manpower supply enterprises share a common economic DNA:

• Revenue is generated by deploying people

• Costs are dominated by wages and statutory compliances

• Margins are stable but structurally capped

• Growth is linear with headcount

In practical terms, net profits rarely exceed 20–30% of total wage cost.

This single fact explains why employment-linked incentives frequently outperform profit-linked exemptions in this sector.

Section 80JJAA — Built for Employment-Driven Models

Section 80JJAA grants an additional deduction of 30% of “additional employee cost” for three consecutive assessment years, over and above the normal salary deduction.

Its architecture is intentional:

• It applies to any tax-audited business, irrespective of sector

• It rewards incremental, compliant hiring

• It aligns with labour-intensive models where wages dominate costs

Employees must satisfy conditions relating to emolument limits, minimum working days and PF coverage, while the employer must meet audit, filing and certification requirements.

Equally important is the legal boundary often overlooked in planning discussions:

The deduction is confined strictly to income chargeable under “Profits and Gains of Business or Profession.”

Capital gains, income from other sources and incidental receipts do not enter the equation.
This limitation ensures that Section 80JJAA remains an operational incentive, not a shelter.

Section 80-IAC — A Precision Tool for Innovation-Led Enterprises

Section 80-IAC offers a 100% deduction of eligible business profits for three selected years out of ten—but only to a narrowly defined class of startups.

Eligibility demands:

• Incorporation as a Pvt Ltd or LLP

• DPIIT recognition

• IMB approval

• A demonstrable innovation or scalable business model

• Turnover discipline and independence from reconstructed businesses

The deduction applies only to profits of the eligible business.
Capital gains, other sources and unrelated income remain fully taxable.

For conventional manpower and HR service providers, the innovation threshold is rarely satisfied. Operational efficiency or internal software use does not amount to innovation in the statutory sense.

Profit vs Wages — The Decisive Comparison

In a wage-heavy business, exempting profits often produces a smaller absolute tax benefit than enhancing the deductibility of wages.

A simple commercial truth emerges:

• Where profits are modest, profit exemptions underperform

• Where wages are substantial and growing, wage-linked deductions compound meaningfully

This is why, for most HR and manpower businesses, Section 80JJAA is not merely easier to claim—it is economically superior.

Urban Company and Platform-Led Models — Law Treats Them Differently

Urban Company exemplifies a platform-led, technology-first service model:

• Value is created through algorithms, standardisation and data

• Growth scales across cities without proportional payroll expansion

• Employment impact occurs at an ecosystem level rather than on payroll alone

Such models fit naturally within the language of Section 80-IAC—innovation, scalability and wealth creation.

A traditional manpower agency, by contrast, grows only by adding people to its own rolls. Its value lies in execution, compliance and workforce management, not in a proprietary platform.

The distinction is not cosmetic.
It is structural and intentional.

Comparative Perspective at a Glance

Aspect	Section 80JJAA	Section 80-IAC
Policy intent	Promote formal employment	Promote innovation-led startups
Basis of deduction	Additional employee cost	Eligible business profits
Typical HR use case	Staffing, manpower, payroll outsourcing	HR-tech / platform businesses
Dependence on innovation	None	Central requirement
Income covered	Business income only	Business income only
Practical acceptance	High, litigationally supported	Narrow, closely scrutinised
Economic fit for manpower	Strong	Generally weak

On Co-Existence of Both Deductions

The law does not expressly prohibit claiming both deductions, since one is wage-linked and the other profit-linked.

However, this is largely a theoretical construct.

In practice:

• Both deductions apply only to business income

• Both exclude capital gains and other sources

• The business models that meaningfully qualify for Section 80-IAC rarely resemble those that extract maximum value from Section 80JJAA

For most HR and manpower businesses, Section 80JJAA alone already captures the full incentive contemplated by the statute.

Looking Ahead — Up to AY 2026-27 and Beyond

Both provisions continue up to AY 2026-27 under the current framework. Any future Direct Tax Code is expected to preserve the same policy divide:

• Employment incentives for wage-driven enterprises

• Innovation incentives for scalable, platform-led enterprises

The mechanics may evolve, but the philosophy is unlikely to.

The Professional Conclusion

Tax planning works best when it respects economic substance.

Where value is created by people, payroll and compliance, Section 80JJAA is the most robust, sustainable and defensible deduction available under the law.

Where value is created by technology, platforms and scale, Section 80-IAC may apply—but only where innovation is real, provable and independently recognised.

Trying to force one model into the other’s incentive does not optimise tax.
It invites challenge.

CAM Charges, Section 194-I and Section 194-C

By CA Surekha S Ahuja

In TDS law, the most expensive mistakes are not made by non-compliance, but by misclassification. Common Area Maintenance (CAM) charges—an unavoidable feature of modern commercial leasing—have become a frequent trigger for TDS notices, primarily because they are mechanically equated with rent or contractual payments without examining their true legal character.

Recent judicial pronouncements, culminating in Dy. CIT v. Bird Automotive (P) Ltd. (ITAT Delhi, 2025), following the Delhi High Court in CIT (TDS) v. Liberty Retail Revolutions Ltd., have now settled the law. Yet disputes continue, largely because Sections 194-I and 194-C are applied without first satisfying their charging conditions.

This note undertakes a complete statutory and interpretative analysis of both sections, explains where CAM charges fit (and where they do not), and sets out a compliance framework that prevents mismatches, notices and assessee-in-default proceedings.

Section 194-I — Law, Scope and Interpretation

Statutory Language (Essence)

Section 194-I applies where a person responsible for paying to a resident any income by way of rent deducts tax at source at the prescribed rate.

“Rent” is defined as any payment, by whatever name called, for the use of land, building, land appurtenant thereto, machinery, plant or equipment.

Judicial Interpretation of “Rent”

Courts have consistently held that:

• Rent must be consideration for possession, occupation, or right to use immovable property.

• The expression “by whatever name called” does not enlarge the scope of rent beyond its essential character.

• Payments that do not grant or regulate the right of occupation cannot be treated as rent merely because they arise from a lease arrangement.

Why CAM Charges Fail the Section 194-I Test

CAM charges:

• Do not confer possession or right to occupy

• Do not enhance or regulate tenancy rights

• Do not create any interest in property

They represent proportionate sharing of common expenses incurred for:
cleanliness, electricity, water, security, HVAC, lifts, common repairs and upkeep.

In Bird Automotive (P) Ltd., the ITAT categorically held that such payments “cannot, by any stretch of imagination, be construed as payment of rent.”
Once a payment fails to qualify as rent, Section 194-I is excluded at the charging stage itself. Thresholds, rates, defaults and interest provisions become irrelevant.

Section 194-C — Law, Scope and Interpretation

Statutory Language (Essence)

Section 194-C applies where any person responsible for paying a resident any sum for carrying out any work (including supply of labour) in pursuance of a contract, deducts tax at source.

The section is triggered only when:

• There exists a contract, and

• The contract is for carrying out work.

Judicial Interpretation of “Work”

Courts have clarified that:

• “Work” implies execution of an obligation for another person.

• Mere reimbursement or cost sharing does not amount to carrying out work.

• The payer-payee relationship must be that of contractee and contractor, not owner and occupier.

Application of Section 194-C to CAM Charges

CAM charges do not automatically fall under Section 194-C.

Where CAM is:

• Recovered by the landlord as cost sharing for maintaining common areas, and

• The landlord is merely discharging ownership obligations or allocating expenses,

there is no contract for carrying out work for the tenant.
In such cases, Section 194-C does not apply.

Section 194-C becomes relevant only where:

• The tenant (or association of tenants) directly engages service providers, or

• The landlord separately undertakes service contracts as a contractor, not as an owner.

Thus, Section 194-C applies based on contractual substance, not payment labels.

The Crucial Distinction: Responsibility for Maintenance

Maintenance Responsibility with Landlord

Where the lease places responsibility for common area maintenance on the landlord:

• CAM is reimbursement / contribution

• Landlord is not a contractor

• CAM is neither rent (194-I) nor contractual payment (194-C)

• No TDS obligation arises

This is the strongest legally defensible position and is directly supported by judicial precedent.

Maintenance Responsibility with Tenant

Where tenants:

• Directly contract security, housekeeping, facility management, or

• Act through a tenants’ association,

payments may attract Section 194-C, subject to existence of a work contract.
Section 194-I has no application in this model, as payments are unrelated to occupation rights.

Hybrid Models

In mixed arrangements:

• Rent → tested only under Section 194-I

• CAM cost sharing → outside TDS

• Outsourced services → tested independently under Section 194-C

Segregation is mandatory. Aggregation is legally impermissible.

Why Thresholds Do Not Cure Wrong Classification

A recurring compliance fallacy is applying thresholds first. This is legally unsound.

Thresholds:

• Do not create taxability

• Operate only after a payment satisfies the charging description

CAM charges do not become rent because they are large, recurring or linked to lease tenure. Courts have repeatedly held that quantum cannot substitute legal character.

Why Notices and Section 201 Demands Commonly Arise

Most CAM-related demands arise because:

• Rent and CAM are clubbed in lease agreements

• Invoices lack descriptive break-ups

• TDS is deducted “to be safe” under wrong sections

• Authorities apply thresholds mechanically

Courts have consistently disapproved this approach.

Compliance Architecture That Survives Scrutiny

A litigation-proof framework requires:

• Clear lease clauses separating rent and CAM

• CAM defined as cost sharing / reimbursement

• Invoices reflecting actual expense heads

• Consistent accounting and TDS treatment

• Reliance on binding judicial precedents

In TDS matters, documentation determines destiny.

Final Conclusion

Sections 194-I and 194-C are charging provisions, not convenience tools. They apply only when their statutory conditions are met. Common Area Maintenance charges meet neither condition by default.

The law now stands settled:

CAM charges are operational contributions, not consideration for occupation and not automatically contractual payments.

Taxpayers who understand the distinction between rent, work contracts, and cost sharing, and who align their agreements and invoices accordingly, remain fully insulated from mismatches, notices and assessee-in-default exposure.

In TDS law, accuracy is not caution.

It is compliance.