When Silence Is Not an Asset: The Supreme Court’s Blueprint for Tax-Efficient Startup Exits

By CA Surekha S Ahuja 

When Silence Is Not an Asset

The Supreme Court’s Blueprint for Tax-Efficient Startup Exits

In every exit, the buyer pays for what exists and pays again to ensure nothing disrupts it. That second payment is not ownership. It is reassurance.

Startup exits are rarely about assets alone. They are about people, timing, credibility, and continuity. Founders carry institutional memory, market influence, and competitive capacity long after they exit the shareholding. For acquirers, the real risk is not what they buy, but what might follow after the exit.

The Supreme Court’s decision in Sharp Business System v. Commissioner of Income-tax (2025) recognises this commercial reality and aligns tax law with how modern businesses function. The judgment provides long-awaited clarity on the tax treatment of non-compete fees and, more importantly, offers a practical blueprint for exit structuring by startups.

What the Supreme Court Has Clarified

The Supreme Court has held that a non-compete fee paid to restrain competition, where no asset, intellectual property, or proprietary right is acquired, constitutes revenue expenditure allowable under Section 37(1) of the Income-tax Act, irrespective of the duration of the restraint.

In doing so, the Court has decisively rejected the notion that the mere presence of an enduring benefit automatically places an expenditure in the capital field. The focus, instead, is on the nature and function of the payment.

Why Silence Cannot Be Treated as Capital

A capital asset must be capable of ownership, transfer, or independent exploitation. A non-compete obligation satisfies none of these conditions.

Silence cannot be sold, licensed, or assigned. It does not exist independently of the individual who gives the undertaking. Once the restrictive period ends, nothing survives that can be characterised as an asset.

The Supreme Court correctly observed that a non-compete payment does not add to the profit-earning apparatus of the business. It merely protects the manner in which profits are earned. This distinction lies at the heart of the ruling.

The Commercial Function of Non-Compete Fees in Startup Exits

In the startup ecosystem, non-compete arrangements typically serve limited and specific purposes.

They provide a transition window for the buyer to stabilise operations.
They protect customer relationships and investor confidence.
They prevent immediate market disruption during a sensitive post-exit phase.

None of these outcomes involve the acquisition of new capabilities or expansion of business structure. They are defensive, not acquisitive. The Supreme Court’s reasoning acknowledges that such payments operate squarely in the revenue field.

Tax Planning Implications for Startup Exits

The judgment enables tax-efficient exit planning, provided transactions are structured with clarity and discipline.

Where a non-compete payment is genuinely made to ensure business continuity and is not linked to the transfer of intellectual property, brand value, technology, or customer rights, the expenditure should be treated as revenue in nature. This allows immediate deduction under Section 37(1) in the year of payment.

However, the benefit of this ruling is not automatic. It depends on whether the documentation and transaction structure reflect the true commercial intent.

Common Errors That Lead to Avoidable Disputes

Despite judicial clarity, disputes will arise where execution is flawed.

Problems typically occur when non-compete consideration is merged with acquisition price, when agreements use language suggestive of ownership or exclusivity, or when there is no contemporaneous explanation of the commercial necessity for the payment.

In such cases, it is not the law that fails, but the articulation of the transaction.

Guidance for Startup Boards and Founders

Boards should treat non-compete payments as transition and risk-mitigation costs rather than acquisition costs. This perspective aligns governance decisions with judicial reasoning and significantly reduces future tax exposure.

For founders, the judgment reinforces an important distinction. Agreeing not to compete is not the sale of what was built. It is a commitment regarding future conduct. Recognising this helps founders negotiate exits cleanly and helps buyers structure payments with confidence.

Conclusion

The Supreme Court’s decision in Sharp Business System is not merely a ruling on deductibility. It is a recognition of how businesses actually transition and how risk is managed in modern commercial arrangements.

Protecting a business from disruption is not the same as acquiring a business advantage. Silence is not property. Restraint is not ownership.

For startups, this judgment offers clarity, certainty, and a framework for cleaner exits, better tax planning, and reduced litigation. It rewards honest structuring and penalises artificial characterisation.

The most successful exits are not those that maximise valuation alone. They are the ones that leave behind certainty.

Non-Compete Fees After Sharp Business System (SC)

 By CA Surekha S Ahuja

The Definitive Decision-Making, Tax-Planning & Risk-Avoidance Framework

Sharp Business System v. Commissioner of Income-tax
[2025] 181 taxmann.com 657 (Supreme Court)

Why This Judgment Changes Tax Planning Forever

The Supreme Court has not merely allowed a deduction.
It has re-engineered the analytical framework for determining whether an expenditure is capital or revenue.

The Court has shifted the inquiry from
“How long does the benefit last?”
to
“What role does the payment play in the business?”

This distinction is critical for future planning, not just past litigation.

 What the Supreme Court Actually Decided (Substantive Ratio)

The Core Holding

A non-compete fee:

• Is paid to restrain competition

• Protects or facilitates the carrying on of business

• Does not create or add to the profit-earning apparatus

• Does not result in ownership or acquisition of any asset

Therefore:

Such payment is revenue expenditure allowable under Section 37(1),
irrespective of the duration of benefit.

The Supreme Court’s Master Test (Unwritten but Clear)

From the reasoning of the Court, the following master test emerges:

If an expenditure improves the conditions under which a business operates, without altering the structure of the business itself, it belongs to the revenue field.

Non-compete fees fall squarely within this test.

Strategic Judicial Tests for Future Decision-Making

These are the tests the Department will apply—and which you must pre-emptively satisfy.

Business Structure Test (Most Critical)

Ask:
Did the payment change the business itself or merely the business environment?

Impact	Tax Character
Change in assets, IP, ownership	Capital
Change in competitive landscape	Revenue

Non-compete fees only change the landscape, not the structure.

Asset Creation Test

Question:
Did the payment result in something that can be owned, transferred, or exploited independently?

If the answer to all is NO:

• Cannot be sold

• Cannot be transferred

• Cannot be licensed

• Cannot be monetised independently

→ No capital asset exists.

This demolishes capitalisation attempts.

3. Profit-Earning Apparatus vs Process Test

The Court draws a sharp line between:

• Apparatus → the machinery of earning profits (capital)

• Process → the manner of earning profits (revenue)

Non-compete fees operate entirely in the process zone.

Enduring Benefit Re-calibrated Test

Post-Sharp Rule:

Enduring benefit is relevant only if it lies in the capital field.

Thus:

• Enduring operational advantage → Revenue

• Enduring structural advantage → Capital

This is the single most powerful clarification of the judgment.

5. Substitution Test (Litigation-Proof)

Ask:
Does this payment substitute or replace an asset?

• Replacement of asset → Capital

• Prevention of competition → Revenue

Non-compete prevents rivalry; it does not substitute capital.

Scenario-Based Applicability (Decision Matrix)

Scenario 1: Stand-Alone Non-Compete Agreement

Tax Outcome: Revenue expenditure

Reason:
Pure commercial protection; no acquisition.

Scenario 2: Acquisition + Non-Compete (Promoter Level)

Key Question:
Is the non-compete:

• Integral to acquisition price? → Capital risk

• Independent restraint to ensure smooth operations? → Revenue

Best Practice:

• Separate valuation

• Separate agreements

• Clear allocation

Scenario 3: Non-Compete with IP or Brand Transfer

Correct Approach:

• Capitalise IP/brand

• Deduct non-compete

Risk if not split:
Entire payment may be disputed.

Scenario 4: Settlement or Exit-Based Non-Compete

Strongest revenue case.

Judicial Support:
Payments to buy peace or exit competition facilitate trade.

Scenario 5: Long-Term or Permanent Restraints

Key Insight from SC:
Duration is irrelevant if business structure remains untouched.

Still revenue.

How to Use This Judgment as a Tax-Planning Tool

1. Timing Advantage

• Claim 100% deduction in year of payment

• Avoid depreciation uncertainty

• Improve cash flows

2. Transaction Structuring

• Separate non-compete from acquisition price

• Avoid composite lump-sum consideration

• Support with commercial rationale

3. Documentation Strategy

Agreements should highlight:

• Business continuity

• Operational efficiency

• Risk mitigation

• Absence of asset transfer

Avoid:

• Language suggesting ownership or exclusivity

• Bundling with IP without allocation

Points for Consideration to Avoid Future Defaults & Disallowances

Documentation Red Flags to Avoid

• Calling non-compete a “right”

• Linking it to market dominance

• Treating it as transferable

• Absence of commercial justification

Accounting & Tax Alignment

• Expense in P&L (not capitalise)

• Disclose rationale in tax audit report if material

• Maintain valuation support where amounts are large

Assessment Defense Readiness

Keep ready:

• Business necessity note

• Board approval

• Competitive risk analysis

• Independent valuation (if high value)

If the payment makes the business safer to run but does not make it bigger to own, it is revenue expenditure.

This single rule captures the entire judgment.

Why Sharp Business System Will Shape Future Litigation

This ruling will now be cited for:

• Non-compete fees

• Settlement payments

• Market exit payments

• Restrictive covenants

• Capital vs revenue disputes

It restores coherence, predictability, and commercial logic to tax law.

Final Professional View

The Supreme Court has recognised a fundamental business truth:

Paying to reduce competition is not an investment—it is operational survival.

Used wisely, this judgment becomes:

• A planning instrument

• A litigation shield

• A structuring guide

Not merely a precedent.

High Refund Claimants Are Receiving Emails from the Income-tax Department

By CA Surekha S Ahuja 

What It Really Means, Why It Happens, and the Right Way to Respond (AY 2025–26)

If your income-tax refund is unusually high compared to TDS, this email is not a notice — it is a signal.

Over the past few weeks, a large number of taxpayers have received emails from the Income-tax Department stating that their AY 2025–26 Income-tax Return has been kept on hold because a significant portion of TDS has been claimed as refund.

The email is polite, advisory in tone, yet firm in message.
It has raised a common concern among taxpayers:

“Is my refund blocked? Is scrutiny coming? Do I need to revise my return?”

This post answers all such questions clearly and decisively.

First and Most Important: This Email Is NOT a Notice

Let us remove the biggest fear upfront.

The communication sent to high refund claimants:

• Is not a notice under section 143(2)

• Is not a query under section 142(1)

• Does not initiate scrutiny, penalty, or prosecution

• Does not mandate any immediate reply

The Department itself clarifies that:

“This communication is intended to alert you… It is not a Notice.”

It is an automated advisory alert issued under the Risk Management Framework before processing the refund.

Why Are High Refund Claims Being Flagged?

The stated reason in the email is:

“A significant proportion of TDS deducted on Gross Total Income has been claimed as refund.”

In simple terms, your case is flagged because:

• TDS deducted is comparatively high, while

• Final tax payable after deductions/exemptions is low or nil

This situation commonly arises in perfectly genuine cases, such as:

• Excess TDS deducted by employer

• High TDS on FD or NRO interest

• Salary income with deductions not reflected in Form 16

• Capital gains with loss set-off

• Tax regime mismatch between employer and taxpayer

A high refund does not mean a wrong return.
It only means the system wants to verify before releasing money.

The Sentence That Matters — and Its True Meaning

The email contains a crucial line:

“If you don’t act now, it may be construed as a deliberate choice. That may mean your case may be selected for detailed investigation.”

This is not a threat.
It is a clear allocation of responsibility.

The Department is effectively saying:

• Review your return now

• Correct any mistake voluntarily

• If you choose not to revise, be prepared to substantiate later

This is the last non-adversarial stage before the case may move from processing to assessment.

Why Even Fully Compliant Taxpayers Receive These Emails

From practical assessment experience, such alerts are triggered due to:

• Very high refund percentage vis-à-vis total TDS

• Mismatch between ITR and:

  • Form 16

  • Form 26AS

  • AIS / TIS

• Large deductions not mirrored in employer data

• Pattern-based or clustered high-refund claims

Importantly, many accurate and compliant returns are flagged simply because they are unusual, not incorrect.

What High Refund Claimants Should Do Now

Step 1: Re-check the Return Carefully

Reconcile:

• Income reported vs Form 16 / AIS

• TDS claimed vs Form 26AS and AIS

• Deductions claimed vs actual proofs

• Correct tax regime selection

Pay special attention where refund arises due to:

• Loss set-off

• Large Chapter VI-A deductions

• High TDS on interest income

Step 2: If Any Error Is Found — Revise the Return

If you identify:

• Excess TDS claimed

• Incorrect deduction

• Wrong income reporting

• Regime mismatch

 File a Revised Return under section 139(5).

Last date for AY 2025–26: 31 December 2025

A revised return replaces the original return completely and significantly reduces scrutiny risk.

Step 3: If the Return Is Fully Correct — You May Wait, But Be Prepared

If:

• Income is fully disclosed

• TDS credits are accurate

• Deductions are genuine and documented

Then:

• Revision is not compulsory

• Refund may still be released after internal verification (though with possible delay)

However:

• Keep all documents ready

• Preserve reconciliation workings

• Respond to AIS mismatches, if any

Preparedness today prevents prolonged litigation tomorrow.

What Happens If You Miss 31 December 2025?

From 1 January 2026, correction is possible only through an Updated Return (ITR-U):

• Can only increase tax liability

• Refund enhancement is not allowed

• Additional tax of 25% or 50% applies

Hence, revising before 31 December is always safer and cheaper.

Key Takeaways for High Refund Claimants

• This email is not punitive

• It is a preventive alert

• It offers a final self-correction window

• High refund years attract closer system attention

• Timely review and documentation are the best defense

If you are a high refund claimant, this email is not a problem — it is an opportunity.

An opportunity to:

• Review calmly

• Correct voluntarily if needed

• Protect your refund

• Avoid unnecessary scrutiny

Revise if wrong.
Wait if right.
But decide before 31 December 2025.

CBDT’s NUDGE on Deductions & Exemptions

By CA Surekha S Ahuja 

Not a Notice. Not Routine. A Final Compliance Signal.”

Data may not accuse. But it rarely alerts without cause.

After intensifying scrutiny on foreign assets and offshore income, the Income-tax Department has now formally shifted focus to domestic deduction and exemption claims through a CBDT press release dated 23 December 2025.

This communication, issued under the NUDGE (Non-Intrusive Usage of Data to Guide and Enable) framework, is not a statutory notice.
But professionally, it must be read as a pre-enforcement compliance alert.

What Has Triggered This NUDGE

The Department has openly acknowledged that advanced risk analytics have already identified specific returns—particularly for AY 2025–26, with spill-over analytics for earlier years.

The risk markers include:

• Ineligible or excessive deduction / exemption claims

• Bogus or doubtful donations, including to Registered Unrecognised Political Parties (RUPPs)

• Invalid or mismatched PANs of donees

• Errors in computation limits or conditions

This is not random outreach.
It is return-specific, data-validated shortlisting.

Why This Communication Matters

Historically, advisories were generic.
This one is targeted, quantified and outcome-driven.

CBDT itself has disclosed that:

• Over 21 lakh returns for AYs 2021–22 to 2024–25 have already been revised

• More than ₹2,500 crore in additional tax has been voluntarily paid

• Over 15 lakh revisions have already occurred for AY 2025–26

This is no longer policy experimentation.
It is institutionalised compliance enforcement through voluntary correction.

The Legal Importance of 31 December 2025

Just as with foreign asset disclosures, 31 December 2025 is a hard statutory boundary.

Up to 31 December 2025

• Revised return permissible

• No additional tax

• Lower litigation and penalty exposure

• Strong presumption of bonafide correction

From 1 January 2026

• Only Updated Return (Section 139(8A)) possible

• Mandatory additional levy

• Weaker defence against penalty allegations

• Higher scrutiny probability

The message is unambiguous:

Correct now, while law still presumes good faith.

Scope Is Multi-Year — Not Limited to AY 2025–26

Although the press release references AY 2025–26, CBDT has clearly stated that:

• Analytics cover AY 2021–22 to AY 2024–25

• Past behaviour is being evaluated for consistency

• Patterns, not isolated claims, are now decisive

A single incorrect deduction today may reopen credibility for multiple years.

An Important Safeguard — Often Misread

CBDT has expressly clarified:

Taxpayers whose deduction or exemption claims are genuine and correctly made in accordance with law are not required to take any action.

This is significant—but conditional.

In today’s regime:

• A genuine claim without documentation is vulnerable

• Silence without preparedness is no longer safe

Professional Advisory — What Taxpayers Should Do Now

This is not the time for:

• Blanket revisions

• Panic withdrawals of valid deductions

• Mechanical compliance

This is the time for:

• Section-wise eligibility re-validation

• Verification of donee status, PAN and approval

• Limit and computation review

• AIS / TIS reconciliation

• Strategic decision on whether revision is legally necessary or professionally avoidable

Precision matters more than speed.

Consequences of Inaction

If discrepancies are later established:

• Disallowance becomes automatic

• Interest under sections 234B / 234C follows

• Penalty exposure under Section 270A becomes defensible

• Donation cases may invite intent-based allegations

The NUDGE phase is the lowest-cost exit from this enforcement cycle.

The Larger Compliance Message

Read together with the Department’s parallel action on foreign assets, the message is clear:

Data identifies first.
Voluntary compliance follows.
Law enforces only if required.

Those who respond now will likely never hear back.
Those who ignore it may enter formal assessment territory with limited defences.

This is not about fear.
It is about foresight.

Income-tax Notices for Foreign Assets: Complete Legal Guide to Revised ITR, Belated ITR and ITR-U (AY 2021-22 to 2025-26)

 By CA Surekha S Ahuja

Your Last Legal Window to Correct Past Returns – AY 2025–26 and Earlier Years 

“Data can trigger notices. Only timely compliance can neutralise consequences.”

With the Income-tax Department intensifying data-driven scrutiny under FATCA, CRS, AIS and international exchange mechanisms, a large number of taxpayers are now receiving alerts and notices for non-disclosure or incorrect disclosure of foreign assets and foreign income.

If you are a resident (or RNOR in earlier years) who has:

• Held a foreign bank account

• Invested in foreign shares / ETFs

• Received ESOPs, RSUs or foreign pension

• Held crypto or digital assets outside India

• Earned foreign interest, dividends or capital gains

This is your final legal opportunity to correct past filings before penal and prosecution provisions get triggered.

The Compliance Choices Available Today (At a Glance)

There are three distinct statutory routes, each governed by different sections and deadlines:

Situation	Applicable Section	Form	Last Date
Revise a timely filed return for AY 2025–26	Section 139(5)	Original ITR	31 December 2025
File a belated return for AY 2025–26 (missed original due date)	Section 139(4)	Original ITR	31 December 2025
Correct / disclose foreign income or assets for past years	Section 139(8A)	ITR-U	FY-wise (up to 5 years)

AY 2025–26 (FY 2024–25): Immediate Action Required

Who should act before 31 December 2025

• You filed ITR but missed foreign asset disclosure (Schedule FA)

• You declared income but missed foreign interest/dividend

• You used wrong residential status affecting FA disclosure

• You did not file ITR at all for FY 2024–25

Available Options

• Revised Return – Section 139(5)
  (If original return already filed)

• Belated Return – Section 139(4)
  (If no return filed yet)

 After 31 December 2025, neither revision nor belated filing is possible for AY 2025–26.

Past Years (AY 2021–22 to AY 2024–25): ITR-U Is the Only Route

Once the belated return window closes, the only legally permissible method to correct past non-disclosures is Updated Return (ITR-U) under Section 139(8A).

FY-Wise Legal Deadlines

Financial Year	AY	Belated ITR	ITR-U Deadline
FY 2020–21	AY 2021–22	Closed	31 March 2026
FY 2021–22	AY 2022–23	Closed	31 March 2027
FY 2022–23	AY 2023–24	Closed	31 March 2028
FY 2023–24	AY 2024–25	Closed after Dec 2025	31 March 2029
FY 2024–25	AY 2025–26	Open till 31 Dec 2025	31 March 2030

As on today, foreign asset holders can:

• File belated ITR for FY 2024–25 (till 31.12.2025)

• File ITR-U for FY 2020–21 to FY 2023–24

What Is ITR-U (Section 139(8A)) – Legal Scope Explained

ITR-U is not a voluntary scheme. It is a statutory correction window.

Who can file

• Any assessee (individual, firm, company)

• To disclose previously unreported income

• To correct foreign asset/income non-disclosure

• Even if return was earlier filed (or not filed)

Who cannot file

• If assessment / reassessment already completed for that year

• If return would result in:

  • Refund

  • Reduction of tax liability

  • Carry forward of loss

• If prosecution already initiated

Additional Tax Cost under ITR-U (Non-Negotiable)

ITR-U carries an additional levy, over and above normal tax and interest.

Levy Structure

Time from End of AY	Additional Levy
Within 12 months	25%
12–24 months	50%
24–48 months	60%

How Tax Is Computed

(Tax on total income
+ Interest u/s 234A / 234B / 234C)
× Applicable Additional Levy

Example (FY 2020–21 – Filed by March 2026)

• Undisclosed foreign income: ₹1,00,000

• Base tax + interest: ₹35,800

• Applicable levy: 60%

• Additional tax: ₹21,480

• Total payable: ₹57,280

Slab rates applicable are those of the original financial year, not current slabs.

Comparison: Belated Return vs ITR-U

Particulars	Belated ITR	ITR-U
Section	139(4)	139(8A)
Time window	Limited	Up to 5 years
Additional levy	No	Yes (25%–60%)
Late fee u/s 234F	₹1,000–₹5,000	Not applicable
Refund allowed	Yes	No
Loss carry forward	Allowed	Not allowed

Why Immediate Action Is Critical for Foreign Asset Holders

Failure to correct now can expose you to:

• Section 50, Black Money Act – penalty up to 3× tax

• Section 271AAC / 270A – misreporting penalty

• Prosecution risk under BMA

• Reopening under Section 148 based on foreign data

• Compounded interest and denial of immunity

ITR-U is the last statutory shield before enforcement provisions apply.

Revenue Split vs TNMM in Transfer Pricing

Choosing the Most Appropriate Method under Section 92C – A Strategic Assessment Guide (Delhi ITAT – 2025 TaxPub(DT) 6050)

“Arm’s length begins with pricing logic — not with margins discovered later.”

Choosing the Most Appropriate Method under Section 92C – An Assessment-Grade & Policy-Ready Professional Guide

*“In transfer pricing, adjustments are rarely born from numbers.

They are born from incorrect method selection.”*

In the vast majority of transfer pricing cases, adjustments do not originate because margins are low or comparables are imperfect.

They originate far earlier — at the moment TNMM is mechanically adopted, without first asking the legally mandated question:

Is CUP feasible for this transaction?

This phenomenon is most visible in freight forwarding, logistics coordination, and intermediary service models, where business reality operates on pre-agreed pricing formulas, not on residual profit expectations.

The recurring controversy is therefore fundamental, not technical:

Can a revenue split represent a valid CUP, or must the transaction inevitably collapse into TNMM merely because margin benchmarking is easier?

Reasoned Reality

TNMM is frequently preferred because it:

• Requires minimal understanding of transaction mechanics

• Aggregates outcomes instead of analysing pricing behaviour

• Provides statistical comfort to the authority

However, ease of application is not a criterion recognised by Section 92C.

Professional Caution

Once TNMM is prematurely adopted:

• Transaction-level pricing logic is irretrievably lost

• Intermediary economics are mischaracterised as entrepreneurial

• The taxpayer is forced into a margin defence — a structurally weak position

Why the Delhi ITAT Decision Matters (2025 TaxPub(DT) 6050)

The Delhi ITAT ruling does not create taxpayer preference.
It restores statutory discipline.

It reiterates that:

• Method selection is a legal exercise, not an administrative one

• TNMM is not a default or “safe” method

• CUP cannot be rejected without demonstrating why it fails

This post is therefore not commentary.
It is a professional operating manual for:

• Method selection at TP policy stage

• Assessment-stage defence

• Documentation architecture

• Litigation risk containment

Statutory Framework — Section 92C as Enacted, Not as Conveniently Applied

Section 92C mandates that ALP be determined using the most appropriate method, considering:

• Nature of the international transaction

• Class of associated enterprise

• FAR profile

• Availability and reliability of data

Reasoned Interpretation

The statute does not prioritise methods based on:

• Officer familiarity

• Ease of benchmarking

• Litigation convenience

Professional Caution

There exists no statutory hierarchy making TNMM the default.

Under Rule 10B(1)(a):

• CUP is the first method where price can be directly determined

• TNMM is permissible only after CUP is shown to be unworkable

TNMM is a method of last resort — not administrative convenience.

Foundational Principle Reaffirmed by Courts

Price precedes profit. Always.

Arm’s length analysis tests:

• Whether independent parties would agree to the same price or pricing formula

It does not test:

• Whether the resultant margin appears reasonable or comfortable

Reasoned Logic

Profit is an outcome.
Testing outcomes instead of pricing behaviour reverses the statutory design.

Professional Caution

When margin comfort becomes the test:

• Thin-margin intermediaries become structurally vulnerable

• Commercial behaviour is replaced by statistical averages

Where pricing mirrors market behaviour, ALP is satisfied — even if margins fluctuate.

Revenue Split: CUP or Profit Split? — The Decisive Characterisation Test

Revenue authorities frequently misclassify revenue split models as Profit Split Method (PSM).

This is not a nomenclature issue.
It is methodologically fatal.

Revenue Split qualifies as CUP when:

• The split is embedded contractually

• It governs invoice-level billing

• It operates before profit determination

• It reflects how independent agents are remunerated

Revenue Split becomes PSM only when:

• Applied after profit computation

• Allocates residual entrepreneurial returns

• Depends on subjective contribution analysis

Judicial Clarity

👉 Delhi ITAT (2025 TaxPub(DT) 6050) confirms:
What governs pricing governs method characterisation.

Professional Caution

Mischaracterisation typically arises where:

• Agreements are loosely drafted

• Pricing logic is not contemporaneously documented

• Invoices fail to reflect the pricing mechanism

Non-Negotiable Thumb Rules (Settled Law)

The following principles are now crystallised:

• CUP overrides TNMM where pricing logic is demonstrable

• Revenue split is not PSM if it governs pricing

• Industry practice must be proven, not asserted

• Past acceptance is persuasive, not binding

• Rule 46A invocation mandates adjudication on merits

• TNMM requires demonstrated failure of CUP

Professional Warning

Ignoring even one of these principles:

• Silently shifts the burden to the taxpayer

• Makes adjustment nearly inevitable

Strategic Method Selection — The Practitioner’s Reality Test

Revenue Split (CUP) is appropriate where:

• Origin and destination entities are functionally symmetric

• Both are asset-light intermediaries

• Pricing is pre-agreed and formula-driven

• Pass-through costs are clearly excluded

• Documentation exists at transaction level

TNMM is strategically safer where:

• One entity bears entrepreneurial risk

• Functions are asymmetric

• Split is selectively applied

• Pricing mechanics cannot be evidenced contemporaneously

Professional Insight

Method selection is not ideological.
It is about risk containment and credibility.

Strategic maturity lies in choosing the right battle — and sometimes, the right retreat.

How CUP Must Be Presented in TP Documentation

CUP must never be presented defensively.

Documentation should demonstrate:

• Why CUP naturally fits the industry

• How pricing is determined ex ante

• Why TNMM distorts intermediary economics

• How independent parties would price identically

Professional Reminder

Courts evaluate commercial behaviour, not spreadsheet comfort.

Documentation That Actually Withstands Scrutiny

Core (Mandatory)

• Inter-company agreements specifying revenue split

• Invoices reflecting identical pricing mechanics

• Cost sheets segregating pass-through costs

• FAR analysis establishing symmetry

High-Impact Support

• SOPs / internal emails explaining pricing logic

• Industry publications

• Prior year accepted TP orders

• Third-party confirmations

Instant Weakness Indicators

• Post-facto rationalisation

• Unexplained changes in split ratios

• Split applied only to AEs

• Absence of invoice-level proof

TPO-Ready Argument Note 

Procedural Shield — Rule 46A

Where:

• Additional evidence is called for by CIT(A), or

• Matter is remanded for comments

Rejection without adjudication on merits is per se invalid.

This procedural ground alone has reversed numerous adverse orders.

Consistency — Correct Framing

❌ Accepted earlier, therefore binding
✔ Identical facts examined earlier; deviation requires justification

Courts protect reasoned consistency, not entitlement.

Assessment-Room Reality Check

Revenue Objection	Correct Counter
Revenue split is PSM	It governs pricing → CUP
No comparables	Internal CUP exists
Margins are low	ALP tests price
Industry practice unproven	Agreements + invoices
TNMM is safer	Safety is not law

One-Line Practitioner Rule

A revenue split survives scrutiny not because it is popular, but because it is commercially inevitable, provable, and consistently applied.

TP Policy Insert for Logistics & Freight Groups

Policy Objective

To ensure arm’s length pricing for intra-group freight forwarding and logistics services by adopting pricing mechanisms that reflect commercial reality and statutory intent under Section 92C.

Policy Principle

Group entities engaged as logistics intermediaries shall be remunerated based on pre-agreed pricing formulas, not residual profit outcomes.

Approved Pricing Method

• Primary Method: CUP based on revenue split where:

  • Entities are functionally symmetric

  • Services are asset-light

  • Pricing governs billing stage

• Fallback Method: TNMM only where CUP is demonstrably unworkable

Pricing Architecture

• Revenue base defined net of pass-through costs

• Revenue split ratio pre-agreed and contractually embedded

• Pricing applied consistently across periods

Documentation Standards

• Inter-company agreements to expressly define pricing formula

• Invoices to mirror pricing mechanics

• FAR analysis to be updated annually

• Deviations to be documented contemporaneously with justification

Governance & Review

• Annual method validation under Rule 10B

• Any change in pricing mechanism to be approved by Group Tax Head

• TNMM adoption requires documented CUP failure analysis

Risk Control Statement

TNMM shall not be adopted merely for benchmarking convenience where transaction-level pricing is demonstrable.

Final Professional Note

The Delhi ITAT decision in 2025 TaxPub(DT) 6050 does not tilt the balance.

It restores discipline.

Those who:

• Understand their business

• Document pricing contemporaneously

• Choose methods strategically

Will find this ruling a powerful ally.

Those who rely on margin comfort will not.

TDS Under Section 194J Does Not Decide Your Income Nature: Section 44AD vs 44ADA Explained With Judicial Support

By CA Surekha S Ahuja

If Form 26AS could decide your tax liability, courts would be irrelevant.
Fortunately, law still prevails over algorithms. 

A growing number of taxpayers are receiving CPC adjustments and scrutiny notices merely because their Form 26AS reflects TDS under Section 194J. The assumption is automated, mechanical, and deeply flawed:

“If TDS is under 194J, income must be professional. Apply Section 44ADA at 50%.”

This article explains—using clear statutory interpretation and binding ITAT rulings—why TDS under Section 194J does not determine the nature of income, and why eligible business assessees can lawfully opt for Section 44AD, even where tax is deducted under 194J.

This is not planning.
This is settled law.

Why Section 194J Cannot Decide Whether Income Is Business or Professional

What Section 194J Really Is (and What It Is Not)

Section 194J is a tax deduction at source provision, enacted to protect revenue by placing responsibility on the payer. It is intentionally broad and conservative.

Critically:

• Section 194J is not a charging section

• It does not classify income

• It does not override Sections 28, 44AD, or 44ADA

Courts have consistently held that TDS provisions are machinery provisions, not determinants of income character.

• “TDS under wrong section”

• “Does 194J mean professional income”

• “Form 26AS mismatch income nature”

Section 44AD vs Section 44ADA – The Legal Difference That CPC Ignores

When Section 44AD Applies

Section 44AD applies where the assessee:

• Carries on business

• Meets turnover limits

• Is not engaged in a profession specified under Section 44AA(1)

There is no statutory requirement that:

• TDS must be under 194C or 194H

• 194J disqualifies 44AD

Why Section 44ADA Is Not Automatic

Section 44ADA applies only if the assessee is engaged in a profession listed in Section 44AA(1).

That list is exhaustive, not illustrative.

If the assessee does not legally fall within Section 44AA(1), Section 44ADA cannot be forced, regardless of the TDS section used by the payer.

High-Intent SEO Keywords

• “44AD vs 44ADA difference”

• “Can I opt 44AD if TDS under 194J”

• “CPC applied 44ADA wrongly”

Judicial Position: Substance Over TDS Form 

Indian courts have repeatedly ruled that:

• Income is taxed based on real activity

• Payer’s TDS choice cannot bind the assessee

• CPC cannot recharacterise income under Section 143(1)

Vishnu Dattatraya Ponkshe vs CPC (ITAT Mumbai)

The Tribunal categorically held that:

• Section 44ADA applies only to professions under Section 44AA(1)

• Educational qualification and statutory recognition are relevant

• TDS under Section 194J is irrelevant for presumptive eligibility

The CPC adjustment applying Section 44ADA was deleted in full.

Arthur Bernard Sebastine Pais vs DCIT (ITAT Bangalore)

The Tribunal ruled that:

• Section 194J has a wide payer-centric sweep

• Section 44ADA has a narrow statutory gate

• CPC exceeded jurisdiction by substituting 44AD with 44ADA

This ruling is now routinely relied upon in CPC rectification appeals.

SEO Case-Law Keywords

• “ITAT on 44AD and 194J”

• “CPC 143(1) wrong presumptive taxation”

• “ITAT ruling 44ADA not applicable”

Recruitment, Manpower & Facilitation Services – Business Income by Law

Recruitment and manpower services involve:

• Candidate sourcing

• Screening and coordination

• Operational execution

They:

• Do not require professional qualification

• Are not notified under Section 44AA(1)

• Are business activities in substance

Even if corporates deduct TDS under Section 194J for compliance safety, the assessee remains eligible for Section 44AD.

Wrong TDS Section Does Not Harm the Assessee

Courts have consistently held that:

• TDS credit must be allowed as per Form 26AS

• Payer’s mistake cannot prejudice the deductee

• Income need not be reclassified due to TDS error

SEO Keywords

• “Wrong TDS section credit”

• “TDS under wrong head treatment”

• “Form 26AS error income tax”

Why CPC Adjustments Fail in Appeal

CPC can correct:

• Arithmetical errors

• Apparent inconsistencies

CPC cannot:

• Decide business vs profession

• Apply Section 44ADA by inference

• Override judicial interpretation

Such adjustments are routinely struck down by CIT(A) and ITAT.

How to Defend Section 44AD When TDS Is Under 194J

A legally strong defence includes:

• Service agreements showing execution-based work

• Proof of absence of Section 44AA(1) qualifications

• Correct business code in ITR

• Turnover eligibility under Section 44AD

• Binding ITAT precedents

Rectification under Section 154 is the first step. Appellate success rates are high where facts are properly documented.

Section 194J does not decide whether income is professional.

Section 44ADA does not apply by default.
Section 44AD remains available where the activity is business in substance.

This position is now judicially settled.

Automated CPC assumptions may continue—but they do not survive appellate scrutiny.

If Form 26AS could decide tax liability, courts would be redundant.
Thankfully, law still governs taxation—not algorithms.

TDS under Section 194J does not automatically make income professional. Learn when Section 44AD applies instead of 44ADA, with ITAT rulings, legal interpretation & CPC defence.