Permanent Establishment (PE) in India — Comprehensive Guidance Note for Global Businesses

By CA Surekha S Ahuja

Permanent Establishment (PE) is the key gateway for taxing non-resident business profits in India under Section 5(2), Section 9(1)(i) of the Income-tax Act and Articles 5 & 7 of DTAAs. Misinterpretation exposes non-resident enterprises to tax, TDS obligations, transfer pricing scrutiny, penalties, and litigation.

This guidance note merges law, judicial interpretation, PE types, profit attribution rules, practical compliance measures, and risk mitigation frameworks for global businesses.

Universal PE Test

A PE exists only when all three pillars are satisfied:

• Permanence: Continuous presence in India; not transient.

• Place of Business: A location “at the disposal” of the foreign enterprise.

• Business Activity: Core business functions carried out through that place.

Supreme Court & HC Clarifications:

• Formula One (SC): Disposal + control + permanence = PE.

• E-Funds (SC): Outsourcing or auxiliary functions do not create PE.

• UAE Exchange (SC): Preparatory/auxiliary activities ≠ PE.

• Morgan Stanley (SC): Employee deputation may create Service PE, but ALP remuneration may neutralise attribution.

Types of PE, Judicial Support & Practical Compliance

Fixed Place PE

Definition: Physical place at disposal of foreign enterprise carrying out core business.
Judicial Support: Formula One (SC), E-Funds (SC), UAE Exchange (SC)
Planning & Compliance:

• Limit Indian presence to auxiliary functions

• No contract rights over premises

• Keep servers, IP, and revenue-generating activities offshore

Service PE

Definition: Triggered when employees render services in India beyond DTAA thresholds.
Typical Thresholds: OECD: 183 days, India-US: 90 days, India-UK: 90 days, India-Singapore: 30 days/project
Judicial Support: Centrica India Offshore (Del HC), Morgan Stanley (SC)
Planning & Compliance:

• Track onsite employee presence

• Split onsite/offshore services

• Maintain ALP remuneration

• Strategic decisions offshore

Agency PE

Definition: Indian agent habitually concludes contracts, plays principal role, or works exclusively for NR.
Judicial Support: LG Korea (Del HC), Galileo (Del HC), Amadeus (Del HC)
Planning & Compliance:

• Independent agents with multiple clients

• Marketing support only; no binding authority

• HQ approvals for contracts

Dependent Agent PE (DAPE)

Definition: Agent economically or operationally dependent on NR.
Judicial Support: Sony Mobile, E-Funds, India-US DTAA commentary
Planning & Compliance:

• Multiple principals

• Avoid stock maintenance in India

• Document independent economic existence

Construction/Installation/Assembly PE

Definition: Construction, installation, or assembly exceeding DTAA thresholds (6–12 months).
Judicial Support: Hyosung (Del HC), Norsk Hydro (AAR), Samsung Heavy Industries (Del HC)
Planning & Compliance:

• Separate offshore supply/services

• Maintain Gantt charts, site logs, project diaries

• Controlled presence of engineers

Subsidiary PE

Definition: Subsidiary may constitute PE if it acts as a “virtual projection” of NR.
Judicial Support: E-Funds (SC), Rolls Royce (Del HC)
Planning & Compliance:

• Independent governance & decision-making

• ALP pricing & functional separation

Liaison Office PE

Principle: PE arises only if LO exceeds preparatory/auxiliary activities.
Judicial Support: UAE Exchange (SC), airline/shipping cases
Safe Activities: Research, communication, promotion
Risk Activities: Contract negotiation, revenue collection, invoicing

Digital PE / Significant Economic Presence (SEP)

Definition: Digital interactions with Indian users; threshold not yet notified.
Judicial Support: E-Funds (SC), Right Florists (ITAT)
Planning & Compliance:

• Servers offshore

• Evidence of algorithmic control abroad

• Equalisation levy compliance

Server PE

Definition: Server in India under foreign control performing core business functions.
Judicial Support: OECD commentary, E-Funds (SC)
Planning & Compliance:

• Third-party hosting offshore

• Document cloud ownership and access control

Profit Attribution (Article 7 / FAR Approach)

Formula:
Profits attributable to PE = Global Profits × (FAR of Indian functions / Global FAR) − ALP remuneration to Indian affiliate

Judicial Support:

• Morgan Stanley (SC): ALP remuneration neutralises further attribution

• Set Satellite (Bom HC): Scientific attribution required

• E-Funds (SC): No PE → no attribution

Documentation Required: FAR analysis, master & local files, project logs, service deployment records.

PE Risk Mitigation Framework

Contractual Design:

• Offshore negotiation and conclusion

• “Approval by HQ mandatory” clauses

• No authority for Indian entity to bind NR

Operational Controls:

• Core IP, servers, revenue offshore

• Limit Indian roles to auxiliary/preparatory

Employee Mobility Controls:

• Track all foreign employee day counts

• Automated alerts for threshold breaches (60/90/120/180 days)

Subsidiary Governance:

• Independent board, ALP pricing, functional separation

Liaison Office Safeguards:

• Auxiliary activities only

• Avoid revenue generation

Digital & Server Controls:

• Offshore server ownership & control

• System architecture diagrams & access logs

Visual Summary — All PE Types

PE Type	Trigger	Judicial Support	Planning Tips
Fixed Place PE	Physical location at disposal	Formula One, E-Funds, UAE Exchange	Limit presence, offshore servers
Service PE	Employees present > DTAA threshold	Centrica India Offshore, Morgan Stanley	Track days, offshore delivery, ALP remuneration
Agency PE	Agent concludes contracts	LG Korea, Galileo, Amadeus	Independent agent, HQ approvals
Dependent Agent PE	Agent economically dependent	Sony Mobile, E-Funds	Multiple principals, no stock maintenance
Construction/Installation PE	Projects exceed threshold	Hyosung, Norsk Hydro, Samsung Heavy Industries	Split contracts, logs, controlled presence
Subsidiary PE	Acts as virtual projection of NR	E-Funds, Rolls Royce	Functional independence, ALP pricing
Liaison Office PE	Only exceeds auxiliary/preparatory	UAE Exchange	Limit to research/marketing, no revenue
Digital/SEP PE	Digital presence / users	E-Funds, Right Florists	Offshore servers, algorithm control
Server PE	Server under NR control	OECD Commentary, E-Funds	Offshore hosting, access logs

Key Takeaways for Global Businesses

• PE exists only if the foreign enterprise truly conducts business in India.

• Auxiliary/preparatory functions, offshore control, ALP remuneration, and robust documentation defend a No PE position.

• Courts consistently emphasise territoriality, disposal, functional control, and factual thresholds.

• Modern digital business models may require treaty updates; until then, judicially aligned compliance is the safest route.

This note represents the most refined, judicially integrated, and practitioner-grade guidance on PE in India, combining law, interpretation, attribution, planning, and compliance.

Landmark ITAT Ruling on Section 54F: Joint Ownership Does Not Bar Capital Gains Exemption

Case: Kusum Sahgal (Through LR) v. ACIT, ITA No. 341/Del/2025 (Order dated 8 November 2025)

By CA Surekha S Ahuja

The Delhi ITAT has delivered a landmark ruling clarifying one of the most contentious aspects of capital gains taxation under the Income Tax Act—the scope of ownership for claiming exemption under Section 54F. The tribunal held that joint or fractional ownership of a residential property does not automatically disentitle an assessee from claiming Section 54F relief, marking a significant shift toward a purposive, assessee-friendly interpretation.

Section 54F: Statutory Framework and Ownership Issue

Section 54F provides exemption from long-term capital gains tax when an individual or HUF transfers any capital asset (other than a residential house) and reinvests the net proceeds in a residential property.

Disqualifying Proviso: Exemption is denied if the assessee “owns more than one residential house” on the date of transfer or acquires another residential house within the prescribed period.

Interpretational Challenge: The Act does not define ownership. Courts and authorities were divided over whether joint or fractional ownership triggers the disqualifying proviso.

Case Facts: Kusum Sahgal

• Capital Asset Transfer: Ms. Kusum Sahgal sold 21,50,000 shares in Quality Needles Pvt. Ltd., realizing long-term capital gains of ₹21.28 crore (AY 2016-17).

• Reinvestment: Residential unit in The Camellias, DLF.

• AO’s Position: Denied Section 54F exemption, citing her 50% joint ownership in a Noida property with her husband as ownership of more than one residential house.

• Other Assets:

  • Commercial flat (non-residential)

  • Mehrauli agricultural land (possession without residential rights)

Critical Observation: The Noida property was jointly owned, not exclusively.

Judicial Conflict Prior to the ITAT Ruling

Court	Position	Principle
Karnataka HC – CIT v. M.J. Siwani	Fractional/joint ownership bars exemption	Even small shares count as ownership
Madras HC	Only exclusive ownership bars exemption	Co-ownership ≠ multiple houses
SC – Vegetable Products Ltd.	Ambiguities in tax provisions resolved in assessee’s favor	Doctrine applied to Section 54F disputes
SC – Dilip Kumar & Co.	Disqualifying conditions construed in assessee’s favor	Supports assessee-friendly interpretation
SC – Seth Banarasi Dass Gupta	Fractional ownership ≠ full ownership	Confirms co-ownership does not equal multiple houses

ITAT Delhi Reasoning

1. Purposive Interpretation Over Literalism

Section 54F aims to encourage investment in residential properties. Treating fractional ownership as multiple ownership undermines this legislative purpose.

2. Exclusive Ownership vs. Joint/Fractional Ownership

• Exclusive Ownership: Full, undivided rights over a property.

• Joint/Fractional Ownership: Shared interest; does not count as owning multiple houses.

3. Proviso Threshold

A 50% share in a jointly-held property does not amount to owning “more than one residential house.”

4. Individual/HUF Capacity

Ownership assessment is in the assessee’s capacity, not merely the presence of any interest in a property.

5. Harmonization of Conflicting Precedents

The ITAT adopted the assessee-favorable interpretation from the Madras HC, overriding the restrictive Karnataka HC approach, guided by Supreme Court doctrines.

Key Holdings

1. Joint ownership does not bar Section 54F exemption.

2. Fractional ownership ≠ multiple residential houses.

3. Exclusive ownership is required to invoke the disqualifying proviso.

4. Divergent High Court precedents are harmonized using a purposive, assessee-friendly interpretation.

Practical Scenarios

Scenario	Facts	Ruling
Single exclusive property + joint property	Owns one property exclusively + 50% joint property	Proviso not triggered
Multiple exclusive properties	Owns 2+ properties solely	Proviso applies
Multiple joint ownerships	25% each in 4 properties	Proviso likely not triggered (subject to litigation)
Agricultural + residential	Possession of agricultural land + residential property	Agricultural land excluded

Tax Planning and Compliance Tips

For Assessees:

• Disclose all properties, clearly distinguishing joint/fractional vs. exclusive ownership.

• Maintain title deeds, co-ownership agreements, and partition documents.

• Joint investments with spouses/family members do not jeopardize Section 54F exemption.

• Avoid acquiring multiple exclusive residential houses if seeking exemption.

For Tax Professionals:

• Re-examine prior Section 54F rejections based solely on joint ownership.

• Prepare appellate submissions leveraging Kusum Sahgal and Supreme Court doctrines.

• Document the nature and extent of ownership meticulously.

For Revenue Authorities:

• Avoid denying Section 54F solely on fractional/joint ownership.

• Apply purposive interpretation to reduce litigation and align with ITAT guidance.

Strategic Takeaways

1. Families and married couples can jointly acquire residential properties without fear of losing Section 54F exemption.

2. Exclusive ownership of multiple properties is the only scenario triggering the disqualifying proviso.

3. Fractional ownership across multiple properties does not disqualify the assessee.

4. Proper documentation and disclosure can maximize exemptions and reduce assessment disputes.

Conclusion

The Delhi ITAT in Kusum Sahgal has set a precedent for a purposive, assessee-friendly interpretation of Section 54F. By clearly distinguishing exclusive vs. joint/fractional ownership, the tribunal has:

• Strengthened assessee rights,

• Reduced ambiguity in Section 54F applications,

• Provided a clear roadmap for tax planning in residential property investments.

Practical advice: Joint property acquisition within a family or with a spouse is safe under Section 54F, as long as no multiple exclusive residential houses are held.

Citations:

• Kusum Sahgal (Through LR) v. ACIT, ITA No. 341/Del/2025

• CIT v. M.J. Siwani, 366 ITR 356 (Karnataka HC)

• Seth Banarasi Dass Gupta v. CIT, 166 ITR 783 (SC)

• CIT v. Vegetable Products Ltd., 88 ITR 192 (SC)

• Dilip Kumar & Co. v. CIT, Constitution Bench

THE DEFINITIVE TAX GUIDE FOR AMAZON SHARES SOLD BY RESIDENTS & NON-RESIDENTS (NOT LISTED IN INDIA)

A Complete Law, Interpretation, ESOP–RSU Treatment & Capital Gains Framework for AY 2025–26 & AY 2026–27

By CA Surekha S Ahuja

WHY AMAZON SHARES ARE “UNLISTED SECURITIES” FOR INDIAN TAX PURPOSES

Even though Amazon is listed on NASDAQ, for Indian tax law the shares are unlisted securities because listing must be on a recognised stock exchange in India (Section 2(47A), read with Rule 2(f) of SCRR).

This classification applies irrespective of how the shares were acquired:

• ESOP Exercise

• RSU Vesting

• Direct Purchase through broker

• Employee Stock Purchase Plan (ESPP)

• Transfer from another person

All lead to the same capital gains treatment on eventual sale.

WHY RESIDENCY STATUS CONTROLS THE TAXATION OUTCOME

Resident (ROR): Taxable on Global Income

(Section 5(1)(c))
→ Gains from Amazon share sale are fully taxable in India.

RNOR / Non-Resident: Only Indian-sourced income taxable

(Section 5(2) + Section 9(1))
→ Sale of foreign shares without Indian nexus is NOT taxable in India.

DTAA (India–USA) Article 13

Assigns capital gains taxation exclusively to country of residence, unless property-linked companies are involved.
→ Again, no Indian tax for NRIs/RNOR.

HOLDING PERIOD FOR LTCG — SAME FOR ESOPs, RSUs & DIRECT SHARES

Under Section 2(29A):

For unlisted shares (Indian or foreign), LTCG arises when held > 24 months.

Acquisition Method	Cost Basis Date	Holding Period Starts From
ESOP	Exercise date	Date of allotment on exercise
RSU	Vesting date	Date shares are transferred to employee
ESPP	Purchase date	Date shares are recorded in account
Direct Purchase	Purchase date	Date of trade/settlement

This distinction is critical because ESOP/RSU vesting is NOT the purchase date.

HOW ESOPs & RSUs CREATE TWO LEVELS OF TAX FOR RESIDENTS

A. Level 1 – Salary Tax on Allotment

Applicable only to Residents and RNOR
(Section 17(2)(vi), Rule 3(8))

At the time of ESOP exercise or RSU vesting:

Perquisite = FMV on exercise/vesting – Exercise Price (if any)
Taxed as salary at slab rates.

For NRIs

If they were non-resident at the time of vesting/exercise, and services were rendered abroad:
→ No Indian salary taxation.

B. Level 2 – Capital Gains on Sale

Same computation for ESOP/RSU/direct:

Sale Price (INR) – Indexed Cost (INR)

Important:

The FMV taxed as salary becomes the Cost of Acquisition for capital gains purposes
(Section 49(2AA) & CBDT Circular No. 9/2007).

Thus, ESOP/RSU taxation does not change LTCG mechanics — only the cost is different.

CAPITAL GAINS TAXATION ON SALE — RESIDENT VS NON-RESIDENT

Resident (ROR): Section 112(1)(a)

• LTCG rate: 20% with indexation

• Surcharge: Capped at 15%

• Cess: 4%

• STCG (≤ 24 months): Slab rate (0–30%), surcharge up to 37%

Indexation available irrespective of whether shares originated from:

• ESOP

• RSU

• ESPP

• Direct purchase

• Gift/inheritance

RNOR / Non-Resident: NO CAPITAL GAINS TAX IN INDIA

Item	Taxable in India?	Reason
ESOP vested abroad	❌ No	Services rendered abroad; no accrual in India
RSU vested abroad	❌ No	Not linked to India-sourced employment
Sale of Amazon shares	❌ No	Foreign source; DTAA Article 13

Non-residents have zero India tax at both levels (salary + capital gains), provided the vesting/exercise relates to non-India service periods.

COST BASIS RULES — ESOPs & RSUs INTEGRATED

Acquisition Route	Cost for Capital Gains
ESOP	FMV on exercise day (Rule 3(8))
RSU	FMV on vesting day
ESPP	Actual purchase price + brokerage
Direct purchase	Actual purchase price
Gift	Previous owner's cost (Section 49(1))
Inheritance	Previous owner's cost

Indexation applies on the above cost.

FOREIGN CURRENCY TREATMENT — CRITICAL NUANCED DIFFERENCE

Residents

• Must convert purchase cost to INR using RBI rate on acquisition

• Convert sale proceeds using RBI rate on sale date

• Indexation smooths inflation & INR depreciation impact

Non-Residents

• If capital gains not taxable — no conversion required

• No indexation concept

• No Schedule FA reporting if not Resident

REPORTING REQUIREMENTS FOR RESIDENTS (MANDATORY)

ITR-2

• Schedule CG

• Schedule FA (Foreign Assets)

• Schedule FSI & TR (if foreign tax credit claimed)

• Income from ESOP/RSU in Schedule Salary

Audit / Valuation Notes to Maintain

• Exercise/Vesting documentation

• FMV valuation statement (Form 12BA disclosure by employer)

• Brokerage, transaction statements

COMPLETE DIFFERENTIATION MATRIX — INCLUDING ESOP/RSU EFFECT

Category	Resident (ROR)	RNOR	Non-Resident
Salary tax on ESOP/RSU vesting	Yes	Only for India-linked services	No
Tax on sale of Amazon shares	Yes	No	No
LTCG rate	20% with indexation	Nil	Nil
STCG rate	Slab	Nil	Nil
Surcharge	Capped 15% for LTCG	Nil	Nil
Cost for CG	FMV (ESOP/RSU) or actual cost	Not relevant	Not relevant
FA Reporting	Yes	No	No

MASTER SUMMARY — THE CORRECT LAW POSITION IN ONE SENTENCE

For Residents, Amazon ESOP/RSU/direct shares are taxed twice (salary at vesting/exercise + 20% indexed LTCG on sale); for Non-Residents and RNORs, Amazon share sale is not taxable in India and ESOP/RSU salary component is taxed only to the extent linked to India services.

THE DUAL-INDEPENDENCE AUDITOR MODEL

By CA Surekha S Ahuja

A 3-PILLAR RII FRAMEWORK FOR RISK, INTEGRITY & INTELLIGENCE

The Ultimate Governance Architecture for Indian Enterprises, Family Businesses & Mid-Corporates

Modern enterprises face simultaneous risks from compliance failures, operational leakages, market volatility, and strategic blind spots.
A single auditor — however capable — cannot offer multi-dimensional assurance across all these areas.

The issue is not rotation.
The solution is dimension-wise independence.

The Dual-Independence Auditor Model™, structured through the Three-Pillar RII Framework, places two independent professionals in clearly defined, non-overlapping roles that collectively deliver:

• Risk Protection

• Integrity Assurance

• Strategic Intelligence

This model does not create rivalry.
It creates role clarity, complementary expertise, and reinforced governance strength.

THE 3-PILLAR RII FRAMEWORK

A Unified Structure for Total Enterprise Assurance

PILLAR 1 — RISK

Statutory Compliance • Regulatory Alignment • Financial Integrity

(Guardianship of Legal & Financial Risk)

Mandate:
To ensure the organisation’s financial statements, tax positions, regulatory filings, and governance systems can withstand scrutiny from regulators, lenders, investors, and statutory bodies.

Core Responsibilities:

• Statutory audit of financial statements

• Income-tax, TDS, GST, and cross-border tax compliance

• IFC, CARO, Ind-AS/IFRS alignment

• Verification of related-party transactions

• Regulatory exposure mapping

• Treasury controls & fund utilisation

• Documentation and board-governance compliance

Outcome:
A regulator-ready, legally clean, and financially accurate organisation that avoids penalties, litigation, and credibility risks.
This pillar protects the enterprise from external risk.

PILLAR 2 — INTEGRITY

Employee Behavioural Controls • Operational Truth • Fraud Prevention

(Guardianship of Internal Integrity)

Mandate:
To detect and prevent the human-side risks of business — manipulation, collusion, misreporting, and behavioural loopholes.

Core Responsibilities:

• Surprise checks on cash, stock, branches, warehouses

• Behavioural audit of high-risk employees

• Vendor integrity and procurement pattern review

• Payroll & reimbursement scrutiny

• Detection of expense manipulation

• Identification of sales inflation and channel stuffing

• Ground-verification of management reporting

• Early warning analytics for fraud patterns

Outcome:
A culture where employees cannot predict who will check what, resulting in:

• 40–70% reduction in fraud attempts

• disciplined behaviour

• controlled leakages

• authentic operational reporting

This pillar protects the enterprise from internal risk.

PILLAR 3 — INTELLIGENCE

Decision Support • Competitive Benchmarking • Market Sustainability

(Guardianship of Long-Term Competitiveness)

This is the most differentiated pillar — something traditional audit systems do not provide.

Mandate:
To offer independent strategic intelligence that strengthens pricing, investments, expansion choices, product decisions, and enterprise valuation.

Core Responsibilities:

• Comparative analysis with competitors in the same market

• Independent enterprise valuation insights

• Margin and cost benchmarking

• Market sustainability and risk analysis

• Working capital cycle comparison

• Product-line profitability mapping

• Scenario modelling for growth and risk

• Signals on market threats and customer behaviour shifts

Outcome:
A business that takes decisions based on grounded intelligence, not assumptions.
This pillar protects the enterprise from strategic risk.

WHY TWO AUDITORS? — ZERO OVERLAP, ZERO RIVALRY, MAXIMUM ASSURANCE

Each auditor works on a different dimension:

Pillar	Primary Auditor	Nature	Deliverable
1. Risk	Auditor A	Compliance	Financial integrity, legal strength
2. Integrity	Auditor B	Behavioural & operational	Fraud prevention, reality checks
3. Intelligence	Auditor A + B	Strategic	Market intelligence, sustainability insights

No duplication.
No conflict.
No rivalry.

What the organisation receives is:

• Three forms of protection

• Three layers of assurance

• Three engines of decision intelligence

A single auditor cannot deliver all three.
Rotation does not achieve this.
Dual independence does.

STRATEGIC VALUE FOR PROMOTERS & FAMILY BUSINESSES

1. Continuity + Independence

One auditor may stay long-term (family office, planning, wealth strategies).
The second brings fresh, fully independent perspective.

2. Stronger Employee Controls

Dual oversight removes predictability, reducing manipulation risks.

3. Higher Valuation & Investor Trust

Investors reward enterprises with structured checks on compliance, integrity, and competitiveness.

4. Sharper Decision-Making

Promoters gain:

• clearer margins

• clearer market comparisons

• clearer financials

• clearer operational truth

5. A Future-Proof Enterprise

Most business failures arise from:

• compliance lapses

• internal fraud

• wrong strategic decisions

This model mitigates all three simultaneously.

THE FINAL WORD

The Dual-Independence Model is Not an Audit Structure — It is a Governance Revolution

Two independent auditors integrated through the RII Framework (Risk–Integrity–Intelligence) give the organisation:

• multi-perspective assurance

• multi-dimensional intelligence

• multi-layer protection

This is the most cost-effective, high-impact, and future-ready governance architecture for any progressive Indian enterprise or family business.

It protects the promoter.
It protects the business.
It protects the legacy.

This is the model forward-thinking organisations must adopt —

before a red flag becomes a crisis, and before a crisis becomes irreversible. 

ITC Cannot Be Denied When Supplier Was Registered and Tax Was Paid at the Time of Supply — Allahabad High Court Reaffirms Core GST Credit Principles

M/s Saniya Traders v. Addl. Commissioner Grade-2 (Allahabad High Court, 03.12.2025)

By CA Surekha S. Ahuja | 08 December 2025

The controversy around denial of Input Tax Credit (ITC) on the basis of alleged fake invoicing, retrospective cancellation, or supplier-side defaults continues to dominate GST litigation. The latest decision of the Allahabad High Court in Saniya Traders decisively reinforces a principle that is central to GST’s architecture:

A bona fide purchaser, dealing with a registered supplier who has reported the supply and paid GST, cannot be denied ITC merely on the basis of later departmental suspicion or retrospective cancellation.

This ruling provides a clear framework for distinguishing legitimate transactions from presumption-driven assessments and strengthens the legal position of compliant taxpayers.

Transaction Profile: All Statutory Conditions for ITC Satisfied

On 28 June 2021, Saniya Traders purchased scrap batteries from Mohan Enterprises (Bihar). The transaction was compliant on every statutory parameter:

• Supplier was actively registered on the date of supply.

• A valid tax invoice and e-way bill accompanied the supply.

• The transaction was declared in supplier’s GSTR-1.

• Corresponding GST was paid in GSTR-3B.

• Payment of consideration + GST was made through banking channels.

• Entry was auto-populated in GSTR-2A, confirming tax deposit.

No dispute existed on documentation, payment, identity of parties, or reporting obligations.

Yet, based on later intelligence alleging non-movement of goods by the supplier and others, authorities issued a Section 74 SCN, reversed ITC, and imposed interest and penalty.

Importantly, no allegation of fraud or collusion was ever made against Saniya Traders.

Legal Issues Considered

The High Court focused on three core issues:

(1) Whether ITC can be denied when the supplier was registered and had paid GST at the time of supply?

(2) Whether retrospective cancellation of supplier’s registration invalidates ITC already earned?

(3) Whether Section 74 can be invoked against a purchaser without any allegation of fraud or wilful misstatement?

Court’s Findings: A Clear and Authoritative Reaffirmation

Supplier’s Valid Registration + Tax Paid = ITC Cannot Be Denied

The Court held that once the supplier:

• was registered,

• issued a valid invoice,

• reported the supply in GSTR-1,

• paid tax through GSTR-3B, and

• the transaction appeared in GSTR-2A,

then Section 16(2) is fully satisfied.

The Court stressed that credit accrues based on facts existing at the time of the transaction, not on post-facto developments or departmental reinterpretations.

Retrospective Cancellation Cannot Undo Vested ITC

Relying on:

• Supreme Court: Shakti Kiran India Pvt. Ltd.,

• Allahabad HC: Solvi Enterprises,

• Allahabad HC: Khurja Scrap Trading Co.,

the Court held:

Retrospective cancellation cannot be weaponised to invalidate past, lawful transactions conducted during the period of valid registration.

The Department cannot rewrite the legal status of a completed transaction.

Section 74 Cannot Apply Without Evidence of Fraud or Suppression

The Court highlighted that:

• There was no evidence of fraud by the recipient.

• There was no allegation of collusion.

• All payments were via banking channels.

• Documents were untouched and unquestioned.

Thus, the jurisdictional precondition for invoking Section 74 did not exist.
The Department’s action was called arbitrary, perverse, and legally unsustainable.

Distinction from Ecom Bill Coffee Trading

The Department relied on Ecom Bill Coffee Trading Pvt. Ltd. to deny ITC.

The Court rejected this reliance because:

• In that case, supplier had not paid tax.

• There was no return reporting.

• Documentation was not corroborated.

In contrast, Saniya Traders involved full compliance, tax payment, and system-validated reporting.
Therefore, Ecom Bill had no application.

Final Decision

The High Court:

• Quashed the original order (20.12.2022)

• Quashed the appellate order (05.02.2024)

• Set aside the tax, interest, and penalty

The writ petition was allowed in full.

Why This Judgment Matters - A Broader Analytical Perspective

ITC is a Statutory Right, Not a Conditional Concession

The Court’s reasoning echoes established jurisprudence (Dai Ichi Karkaria, Eicher Motors):
once statutory conditions are met, credit becomes a vested right.

GST Does Not Impose Supplier-Due-Diligence Burdens on Purchasers

Purchasers are not expected to:

• inspect supplier premises,

• audit their inward supply chain, or

• verify upstream purchases.

GST relies on:

• registration validity,

• invoice,

• e-way bill,

• return filing,

• banking-channel payment,

• 2A/2B entries.

Anything beyond this shifts the revenue’s responsibility onto the taxpayer—something the Court firmly rejected.

Intelligence Inputs Cannot Replace Evidence

The judgment is part of an expanding judicial trend:

• presumptions are not proof,

• template SCNs do not establish facts,

• mismatch reports are not conclusive,

• and transaction validity cannot be denied without direct evidence.

Retrospective Cancellation Must Be Sparingly Used

Courts are consistently holding that retrospective cancellation:

• cannot extinguish past genuine transactions,

• cannot justify belated departmental action,

• and cannot be used to penalise compliant dealers.

Practical Guidance for Industry, Professionals & Officers

For Businesses

• Maintain a transaction-date compliance file.

• Preserve invoice, e-way bill, payment proofs, and return summaries.

• Archive GSTR-2A/2B reports for each month.

For Tax Advisors

• Stress transaction-date registration as the legal anchor.

• Use Saniya Traders along with Shakti Kiran, Solvi Enterprises, and Khurja Scrap Trading to defend ITC.

• Challenge Section 74 where mens rea is absent.

For the Department

• Verify supplier’s tax payment before issuing SCNs.

• Reserve Section 74 for cases involving clear fraud or collusion.

• Avoid reliance on retrospective cancellation for completed transactions.

Closing Insight

The High Court’s message is unequivocal:

Where the supplier was registered, tax was paid, and the purchaser acted with full compliance, ITC cannot be denied—irrespective of later departmental suspicion or retrospective action.

Saniya Traders strengthens the integrity of the GST credit chain and restores fairness for bona fide taxpayers—exactly what the GST law intended.

THE ULTIMATE GUIDE TO SURCHARGE PLANNING IN PARTNERSHIP FIRMS, LLPs & COMPANIES (AY 2025–26)

By CA Surekha S Ahuja  

How strategic partner remuneration, firm profit allocation & entity choice can reduce surcharge — with 3-partner examples and clear tax outcomes

When business profits cross ₹5 crore… ₹50 crore… and in many cases ₹100+ crore, one question becomes a goldmine of tax optimisation:

“Can we reduce our surcharge by shifting income between the firm and the partners?”

Most firms either pay full 31.2–31.5% tax at the firm level (30% + 10% surcharge + 4% HEC)
OR
push too much income to partners, triggering 39% tax in their hands (new regime highest slab with capped 25% surcharge).

The truth is:

There is a sweet spot — but only if you understand the surcharge trigger points.

This guide explains that sweet spot with simple examples, law references, charts, and a 3-partner model.

First Principles — How the Law Creates Planning Opportunities

A. Firms & LLPs (same taxation)

• Tax rate → 30%

• Surcharge → 10% (flat; no income-based variations)

• Health & education cess → 4%

→ Effective rate: approx. 31.2–31.5% irrespective of profit level
Whether the firm earns 50 lakhs or 500 crores — rate is the same.

B. Partners (Individuals) – New Regime

• Slab rate up to 30%

• Surcharge capped at 25% (Finance Act 2023 for new regime)

• HEC 4%

→ Effective maximum rate: approx. 39%

C. Companies (Private Limited)

• Base rate → 22% (115BAA) or 30% (regular)

• Surcharge varies:

  • 7% if income > ₹1 crore

  • 12% if income > ₹10 crore

• HEC 4%

→ Effective rate under 115BAA roughly 25.17%.

Bottom-line Difference

Entity	Effective Tax Rate	Surcharge Logic
Firm / LLP	31.2–31.5%	Constant 10%
Partner (Individual)	Up to 39%	Capped 25%
Company (115BAA)	25.17%	7% or 12%

This creates a huge planning avenue:
Shift income to the place with the cheaper surcharge.

The Most Important Question

Should Profit Sit in the Firm or Flow to Partners?

The answer depends on:

(A) Partner income already above ₹2 crore?

→ Then remuneration pushes them into surcharge at max rate → 39%.
→ Keeping income in the firm saves tax.

(B) Firm profit extremely high (₹20–₹200 crore)?

→ Firm will always pay only 10% surcharge, whereas partners reach 25% surcharge.

The rule of thumb

If partner’s post-remuneration income exceeds ₹2 crore, avoid giving more salary.
If partner is below ₹1 crore income, remuneration may reduce total tax.

The 3-Partner High-Profit Example (₹50 crore profit)

Before remuneration: ₹50 crore profit

Allowed remuneration (12(a) limits) easily exceeds what we plan to pay, so assume full eligibility.

We test 4 levels of remuneration to see the tax impact.

Scenario 1: No Remuneration Given

Particulars	Amount
Firm Profit	₹50 crore
Tax @ 31.5%	₹15.75 crore
Partner income	Nil
Total Tax Outflow	₹15.75 crore

Scenario 2: Low Remuneration – ₹1 crore each (Total ₹3 crore)

Particulars	Amount
Taxable profit in firm	₹47 crore
Firm tax @31.5%	₹14.80 crore
Partner income	₹1 crore each
Partner tax @30% slab + 25% surcharge	~₹0.39 crore each
Total partner tax	₹1.17 crore
Total Tax Outflow	₹15.97 crore

Tax increased.
Reason: partners pay 39% on their income, more than firm’s 31.5%.

Scenario 3: Medium remuneration – ₹2 crore each (₹6 crore total)

Particulars	Amount
Firm taxable profit	₹44 crore
Firm tax	₹13.86 crore
Partner tax	₹0.78 crore each
Total partner tax	₹2.34 crore
Total Tax Outflow	₹16.20 crore

Worse.

Scenario 4: High remuneration – ₹3 crore each (₹9 crore total)

Particulars	Amount
Firm taxable profit	₹41 crore
Firm tax	₹12.92 crore
Partner tax	₹1.17 crore each
Total partner tax	₹3.51 crore
Total Tax Outflow	₹16.43 crore

Worst of all.

The Surprising Outcome

When firm profits are very high (₹50 crore, ₹100 crore, etc.):

Giving higher remuneration increases total tax because partners cross surcharge thresholds early.

Best choice:

Keep maximum profit in the firm and pay tax at 31.5%.

Why This Happens – The Surcharge Trigger Difference

Income Level	Firm	Partner
₹1 crore	Same tax rate	30% + 15% surcharge
₹2 crore	Same	30% + 25% surcharge
₹5 crore	Same	30% + 25% surcharge
₹50 crore	Same	30% + 25% surcharge

Partners hit the surcharge ceiling early.
Firms never change surcharge at all.

LLP vs Partnership Firm: Any Difference?

Taxation: Same

• Section 184, 185, 40(b) apply equally

• Rate 30% + 10% surcharge + 4% cess

• Remuneration rules identical

Governance Difference (non-tax)

• LLP gives limited liability

• Better for outside investment and PE funding

• Easier compliance than company

• More flexible in profit-sharing

Tax optimisation → Exactly same outcome as partnership firm

Company vs Firm/LLP – When a Company Wins

At very high profit levels, a company under section 115BAA:

• Pays 22% + 10% surcharge + 4% cess = 25.17%

• No partner-level tax

• No remuneration deduction limit restrictions

• Dividends taxed @ 20.8% (after 2020 DDT abolition)

When Company is Better

• If partners have high personal income (>₹2 crore)

• If company profits are consistently above ₹10–20 crore

• If profits are reinvested rather than withdrawn

• If investor entry or ESOP pool is needed

 The Final Planning Matrix

A. For High Profits (₹20–₹200 crore)

Action	Result
Keep profits in firm/LLP	✔ Lowest tax (31.5%)
Avoid heavy remuneration	✔ Prevent 39% partner tax
Shift withdrawals to loans/dividend-like structures	✔ Savings

B. For Medium Profits (₹5–₹20 crore)

| If partners’ other income < ₹1 crore | Moderate remuneration works |
| If partners’ other income already high | Keep income in firm |

C. For Low Profits (<₹5 crore)

Action	Result
Higher remuneration	✔ May reduce tax
Profit retention in firm	✔ Neutral

Who Should Hold the Profit?

If partner total income after remuneration > ₹2 crore

➡ Keep profit in firm
(because partner surcharge hits 25%)

If partner income < ₹1 crore

➡ Remuneration is tax-neutral or beneficial

If partner income 1–2 crore

➡ Plan carefully — small shifts change surcharge drastically

Conclusion – The One Rule That Matters Most

A firm/LLP pays a flat 10% surcharge — partners pay 25%.
When profits are large, keeping income in the firm wins.