Share Premium, Start-ups and Section 68:

By CA Surekha S Ahuja

Evidence, Enquiry and the Limits of Assessing Officer Discretion

ITO v. Indic Wisdom (P.) Ltd.

(2025) 181 taxmann.com 23 (ITAT Mumbai) 

The jurisprudence surrounding share capital and share premium has reached a stage where the law is settled, but its application remains unsettled. Additions under section 68 continue to be made not for want of evidence, but for want of enquiry.

The Mumbai Bench of the ITAT, in ITO v. Indic Wisdom (P.) Ltd. (2025), delivers a measured and legally disciplined ruling, restoring the statutory boundaries between section 68 and section 56(2)(viib), particularly in the context of DPIIT-recognised start-ups.

This decision is not expansive; it is corrective.

Legislative Architecture: Understanding the Two Provisions

Section 68 — A Rule of Evidence, Not Valuation

Section 68 operates where:

• a credit appears in the books, and

• the assessee fails to satisfactorily explain its nature and source.

Judicially, the explanation is tested on three immutable parameters:

1. Identity of the creditor

2. Creditworthiness of the creditor

3. Genuineness of the transaction

These are conditions precedent, not postulates of convenience.

Once prima facie evidence on these three limbs is produced, the section exhausts itself unless the Assessing Officer brings contrary material on record.

Section 56(2)(viib) — A Targeted Charging Mechanism

Section 56(2)(viib) is:

• valuation-specific,

• rule-driven (Rule 11UA), and

• legislatively excluded for DPIIT-recognised start-ups.

Its inquiry is not into source, but into price in excess of FMV.

CBDT Circular dated 10.10.2023, issued under section 119, makes this exclusion binding and non-discretionary.

Factual Matrix in Brief

The assessee, a DPIIT-recognised start-up engaged in manufacturing natural products, issued equity shares at a premium during AY 2022-23.

The assessment was framed under section 143(3) read with section 144B, wherein:

• section 56(2)(viib) was effectively bypassed,

• yet the entire share premium was added under section 68.

The addition was sustained despite:

• valuation under Rule 11UA,

• banking channel receipts,

• statutory filings, and

• identification details of subscribers.

Core Legal Determinations by the Tribunal

Section 56(2)(viib) Immunity — Affirmed but Contained

The Tribunal categorically held:

• DPIIT recognition grants immunity from section 56(2)(viib),

• in terms of DPIIT notification dated 19.02.2019 and CBDT Circular dated 10.10.2023.

However, the Tribunal clarified that:

• such immunity does not, by itself, bar enquiry under section 68.

This preserves conceptual separation between charging and evidentiary provisions.

Discharge of Initial Onus under Section 68

The Tribunal recorded that the assessee had furnished:

• names and PANs of subscribers,

• bank statements evidencing fund flow,

• valuation report under Rule 11UA,

• Form PAS-3 and allied statutory filings,

• explanations for NRI subscribers.

These documents constituted adequate prima facie proof of identity, creditworthiness, and genuineness.

The statutory burden under section 68 thus stood discharged.

Assessing Officer’s Failure to Conduct Enquiry

Despite multiple opportunities afforded by the Commissioner (Appeals):

• no remand report was filed,

• no independent verification was undertaken,

• no adverse material was produced.

The Tribunal held that:

Section 68 does not permit substitution of enquiry with conjecture.

Allegations of fund layering or low returned income, without investigation, remain suspicion — not evidence.

Valuation Cannot Be Reintroduced Through Section 68

The Tribunal implicitly reaffirmed that:

• dissatisfaction with share valuation,

• especially where section 56(2)(viib) is legislatively inapplicable,

• cannot be routed through section 68.

Section 68 is not a backdoor valuation provision.

Binding Legal Propositions Emanating

1. Section 68 is evidentiary and conditional, not presumptive.

2. Once the assessee furnishes primary evidence, the onus shifts conclusively.

3. Absence of enquiry by the Assessing Officer vitiates the addition.

4. DPIIT protection under section 56(2)(viib) cannot be diluted indirectly.

5. CBDT circulars issued under section 119 are mandatory in application.

Litigation Significance

This ruling strengthens a crucial litigation position:

Section 68 cannot be used to correct what the statute consciously chose not to tax under section 56(2)(viib).

For start-ups, investors, and tax professionals, the decision reinforces that:

• commercial valuation is not to be judged through suspicion, and

• statutory exemptions cannot be neutralised by evidentiary shortcuts.

Conclusion

The Tribunal’s ruling in Indic Wisdom (P.) Ltd. is a quiet but firm assertion of legal discipline.

Where evidence exists and enquiry is absent,
section 68 collapses under its own conditions.

This decision restores section 68 to its intended evidentiary role — nothing more, nothing less.

GST on Rent Paid to Unregistered Landlords

 By CA Surekha Ahuja

Why RCM Becomes a Cost at 5% and a Credit at 12% / 18%

Accommodation businesses across India increasingly operate from residential buildings taken on rent from unregistered individuals, converting them into hotels, hostels, PGs, guest houses and service apartments.

While outward GST at 5% on room tariff appears simple and attractive, the GST paid under reverse charge on rent often emerges as a silent margin killer.

This article explains the current position under GST law, the interplay of Sections 9, 16 and 17, the relevant rate and RCM notifications, and finally, the lawful tax-planning levers available to such businesses.

Substance Over Structure: Why This Is Not “Residential Renting”

GST law looks at use, not architectural design.

Even if the property is residential in nature, once it is used for:

• short-term or transient stays,

• tariff-based accommodation,

• hotel, hostel, PG or guest-house operations,

• bundled services such as pantry, housekeeping or managed lodging,

the supply ceases to be “renting of residential dwelling for use as residence.”

Accordingly:

• the exemption under Notification 12/2017-CT (Rate) does not apply, and

• the rent becomes a taxable supply, ordinarily liable to GST at 18%.

This position has been consistently reinforced through CBIC clarifications and sectoral understanding.

Section takeaway:

A residential building used commercially is taxed commercially.

Why Reverse Charge Applies on Such Rent

Under Section 9(3) of the CGST Act, the Government may notify supplies on which GST is payable by the recipient.

Renting of immovable property by an unregistered person to a registered person has been notified under this provision through:

• Notification 13/2017-CT (Rate), and

• the later introduction of Entry 5AB, covering renting of any immovable property by unregistered persons to registered (non-composition) recipients.

Result:
Where a registered accommodation operator takes premises on rent from an unregistered landlord, GST @18% must be paid under RCM, irrespective of:

• the room tariff charged, or

• whether outward supplies are taxed at 5%, 12% or 18%.

RCM here is structural, not optional.

The Core Question: Is ITC of RCM Rent Available?

The answer depends entirely on the outward tax regime chosen.

A. Where Outward Accommodation Is Taxed at 5% Without ITC

Accommodation services taxed at 5% are subject to a decisive condition in the rate notification:

“Provided that credit of input tax charged on goods and services used in supplying the service has not been taken.”

This condition has overriding effect.

Even though:

• Section 16 generally allows ITC of tax paid under reverse charge, and

• rent is clearly used in the course or furtherance of business,

the concessional rate itself contractually blocks ITC.

Consequences

• GST paid under RCM on rent cannot be availed as ITC

• ITC on pantry, housekeeping, security, repairs, etc. is also blocked

• RCM becomes a pure cost, not a credit

Section takeaway:

At 5%, GST simplicity comes at the cost of credit denial.

B. Where Outward Accommodation Is Taxed at 12% or 18% With ITC

Once the concessional 5% option is not adopted:

• the “no-ITC” condition disappears,

• RCM tax on rent qualifies as input service, and

• ITC becomes available, subject to Sections 16 and 17.

There is no block under Section 17(5) for such rent when premises are used for taxable accommodation.

Here, RCM shifts from cash leakage to recoverable credit.

Section takeaway:

The same RCM tax behaves very differently under a regular rate regime.

Ancillary Services: No Separate Immunity

Ancillary services such as:

• pantry and catering,

• housekeeping,

• security,

• maintenance and facility management,

do not enjoy independent ITC treatment.

Their credit eligibility flows entirely from the outward accommodation rate:

• 5% regime → no ITC on any inputs or services

• 12% / 18% regime → ITC allowed, with proportionate reversal under Section 17 if required

Mandatory Compliance Under RCM

Where rent is paid to an unregistered landlord, statutory compliance is non-negotiable:

• Self-invoice under Section 31(3)(f)

• Payment voucher under Rule 52

• GST payment in cash

• Reporting in GSTR-3B

A lease agreement or rent receipt does not substitute self-invoicing.

Lawful Tax-Saving and Structuring Strategies

GST does not prohibit planning — it penalises ignorance.

The following strategies are lawful, defensible and audit-safe.

Periodic Review of 5% vs 12% Option

Remaining at 5% merely because it “looks cheaper” is often sub-optimal.

Where:

• rentals are high,

• operating inputs are significant, and

• business is stable rather than transient,

12% with ITC may yield a lower effective tax burden.

There is no statutory bar on switching options prospectively.

Segmentation of Distinct Business Lines

Where factually supported, separation of:

• accommodation,

• conference or training facilities,

• cafeteria services,

• events or banquet operations,

allows:

• accommodation at 5% (no ITC), and

• ancillary services at 18% with ITC,

with proportionate credit under Section 17.

Artificial splitting without operational independence should be avoided.

Contract Clarity With Landlords

Well-drafted agreements clearly distinguishing:

• rent,

• utilities,

• maintenance or reimbursements,

reduce valuation disputes under Section 15 and support correct tax treatment.

This is commercial clarity, not tax avoidance.

Cost Management Where ITC Is Blocked

Even under the 5% regime:

• vendor selection,

• GST-inclusive pricing,

• service consolidation,

can materially reduce embedded tax costs.

Preventive Compliance: The Cheapest Saving

Wrongful ITC claims under the 5% regime attract exposure under Section 73.

Best practices include:

• separate non-creditable ledgers,

• disabling auto-ITC capture for RCM rent,

• monthly pre-GSTR-3B reviews.

Final Position

• RCM on rent is unavoidable when property is used for commercial accommodation

• ITC depends entirely on the outward rate chosen

• At 5%, RCM is a sunk cost

• At 12% / 18%, RCM becomes a recoverable credit

In One Line

RCM always applies. ITC applies only if you consciously allow it.

GST efficiency in accommodation businesses is therefore a matter of design, not accident.

PAS-6 Compliance Guide (Dec 2025) A Fully Interpreted, Professional Standard Note

By CA Surekha S. Ahuja

PAS-6 has evolved from a perceived routine return into one of the most disclosure-sensitive compliance instruments under the Companies Act, 2013. With the extension of mandatory dematerialisation from unlisted public companies to private companies, PAS-6 now functions as a half-yearly audit of a company’s capital integrity, validated through depository data.

The risk in PAS-6 does not arise from filing delays alone. It arises from what the form inevitably reveals—legacy physical share certificates, incomplete promoter dematerialisation, ISIN gaps, unresolved corporate actions, and mismatches between depository records and statutory registers. This makes PAS-6 a high-exposure compliance area for companies and a high-liability certification area for professionals.

This note explains the law, legislative intent, applicability under Rule 9A and Rule 9B, filing requirements, compliance conditions, penalties, and transition obligations, in one integrated analysis.

Statutory Foundation and Legislative Intent

The obligation to hold securities in dematerialised form originates from Section 29 of the Companies Act, 2013.

Section 29(1)(a) mandates dematerialisation where securities are offered to the public. Recognising the need to extend ownership transparency beyond public issues, the legislature introduced Section 29(1A), empowering the Central Government to prescribe additional classes of companies whose securities must be held only in dematerialised form.

Exercising this power, the Ministry of Corporate Affairs notified:

• Rule 9A of the Companies (Prospectus and Allotment of Securities) Rules, 2014, applicable to unlisted public companies; and
• Rule 9B, extending the same dematerialisation discipline to private companies, other than those expressly exempted.

The legislative intent under both rules is uniform and unambiguous—transparent ownership, clean capital structures, and complete traceability of every share from issue to transfer. PAS-6 is the statutory mechanism through which this intent is periodically verified.

Applicability — Who Is Required to File PAS-6

PAS-6 is applicable to every company that is statutorily required to dematerialise its securities under Rule 9A or Rule 9B.

Under Rule 9A, PAS-6 applies to all unlisted public companies, including private companies that are deemed public by virtue of being subsidiaries of public companies under Section 2(71).

Under Rule 9B, PAS-6 applies to private companies, other than those specifically exempted. This includes closely held companies, family-owned companies, investment and holding companies, and dormant private companies, unless they fall within an exempt category.

PAS-6 does not apply to listed companies, as they are governed by SEBI’s share capital reconciliation framework. Nidhi companies, Section 8 companies, OPCs, LLPs and non-corporate entities are also outside the regime.

There is no turnover, paid-up capital, shareholder count or activity threshold under either Rule 9A or Rule 9B. If a company falls within scope, compliance is mandatory irrespective of size or operations.

Nature of Compliance and Filing Frequency

PAS-6 is a mandatory half-yearly return for all companies covered under Rule 9A or Rule 9B.

For the half-year ending 30 September, PAS-6 must be filed on or before 29 November.
For the half-year ending 31 March, PAS-6 must be filed on or before 30 May.

The obligation to file PAS-6 exists even where there is no change in share capital or ownership during the period. Inactivity does not create exemption.

Mandatory Preconditions Before Filing PAS-6

Before PAS-6 can be prepared or filed, certain statutory conditions must be satisfied.

First, every class of security must have a valid ISIN. Without ISIN, PAS-6 cannot be generated on the MCA portal. Importantly, delay in filing is counted from the statutory due date even if the ISIN is under process.

Second, under Rule 9A(4) and Rule 9B(4), promoters, directors and key managerial personnel are mandatorily required to hold all securities only in dematerialised form. Even one physical share certificate results in statutory non-compliance and is expressly disclosed in PAS-6.

Third, the records of NSDL and CDSL, the Registrar and Transfer Agent, and the company’s register of members must reconcile fully. Any pending or partially implemented corporate action—such as bonus, rights issue, conversion, buyback or transmission—appears as a mismatch in PAS-6.

What PAS-6 Discloses

PAS-6 is not a procedural filing; it is a capital integrity reconciliation statement. It reports, on an ISIN-wise basis, the company’s issued and paid-up capital, dematerialised holdings with NSDL and CDSL, physical holdings still outstanding, demat and remat requests and their status, dematerialisation compliance of promoters, directors and KMP, and all corporate actions undertaken during the half-year.

The form must be digitally signed by the company and certified by a Practising Company Secretary, making accuracy and reconciliation legally critical.

Penalty and Adjudication Exposure

Neither Rule 9A nor Rule 9B prescribes a specific penalty. Consequently, Section 450 of the Companies Act, 2013 (General Penalty) applies.

Under Section 450, the company and every officer in default are liable to a base penalty of ₹10,000, with an additional ₹1,000 per day for a continuing default. There is no statutory maximum cap, and adjudication orders increasingly impose penalties until compliance is achieved.

Delays in filing, incomplete dematerialisation, ISIN non-availability and reconciliation mismatches are all treated as continuing defaults.

Interpretational and Practical Clarifications

If even one promoter holds shares in physical form, the company is in default, and PAS-6 will disclose it without discretion. Promoters do not have the flexibility available to non-promoter shareholders.

If a private company becomes covered under Rule 9B, the obligation to dematerialise securities and file PAS-6 arises immediately, not prospectively.

Non-promoter shareholders who refuse to dematerialise cannot transfer shares or subscribe to new securities, but this does not excuse promoter-level non-compliance.

Corporate actions approved but not reflected in depository records result in reconciliation mismatches and must be supported by proper explanations and documentation.

PAS-6 under Rule 9A and Rule 9B is no longer a routine statutory return. It is a half-yearly, depository-validated audit of ownership integrity. For companies, a clean PAS-6 reflects governance discipline and investor readiness. For professionals, it is a high-liability certification area requiring strict legal interpretation, reconciliation discipline and complete documentation.

In the post-Rule 9B regime, capital hygiene is continuously examined, digitally traceable and legally enforceable.

GST Guide 2025–26: Hotels, Hostels, PGs, Night Shelters, Commercial Rentals, RCM & Composition

By CA Surekha Ahuja

This comprehensive guide consolidates GST rates, exemptions, composition eligibility, RCM rules, illustrations, and practical tax planning for Hotels, Hostels, PGs, Budget Lodges, Night Shelters, Commercial Rentals, and Per-Day Backpackers.

GST RATES & EXEMPTIONS (2025–26)

Accommodation / Service	Tariff / Duration	GST Rate	Exemption	Notes
Hotels / Guest Houses / Daily Hostels / Lodges	< ₹7,500/day	5%	❌ None	Standard commercial accommodation (new slab w.e.f. 22-Sep-2025)
Hotels / Guest Houses / Daily Hostels / Lodges	≥ ₹7,500/day	18%	❌ None	Premium commercial accommodation
Residential PG / Hostel	≥30 days / monthly	Exempt	✔ Yes	Long-stay residential; falls under residential exemption
Charitable Night Shelters / NGOs	Any (≤ ₹1,000/day)	Exempt	✔ Yes	Budget shelters run by trust/NGO only
Restaurant / Tea / Snacks inside hotel/hostel	Billed separately	5% / 12% / 1% composition	❌	Depends on type of supply; 1% if composition eligible
Commercial property rent (office/guest house)	Any	18%	❌ None	Tenant pays RCM if landlord is unregistered

Note: The <₹1,000/day exemption for commercial accommodation was withdrawn effective 18-Jul-2022 except for charitable accommodation. (CBIC Notification No. 05/2022‑CT(R))

RCM ON COMMERCIAL RENT

Scenario	Effective Date	RCM Applicability	Notes / References
Commercial property rented by unregistered landlord → registered tenant	10-Oct-2024	✅ Regular taxpayer pays 18% RCM	ITC claimable; Notification No. 09/2024‑CT(R)
Composition taxpayer renting commercial property	16-Jan-2025	❌ Exempt	No GST liability; Notification No. 07/2025‑CT(R)
Interim period 10-Oct-2024 → 15-Jan-2025	CBIC Circular 245/02/2025	Regularized as-is-where-is	GST paid accepted; non-payment → no penalty
Residential property rental for residence	N/A	❌ Not applicable	Exempt; no RCM

COMPOSITION SCHEME — ELIGIBILITY & THRESHOLDS

A) Legal Basis

• Section 10 of CGST Act, 2017; Rules 3–5 of CGST Rules, 2017.
• Turnover limit: ₹75 lakh (general states), ₹50 lakh (special category states).
• Composition taxpayers cannot collect GST, cannot claim ITC, must issue Bill of Supply. (CBIC FAQ)

B) Accommodation & Ancillary Services

Supply	Composition Eligible?	Notes
Hotels / Guest Houses / Daily Hostels	❌	Main accommodation (SAC 9963) not eligible
Short-stay PG / Hostel (<30 days / day-wise tariff)	❌	Taxable commercial accommodation
PG / Hostel (>30 days residential)	✔ Only for taxable ancillary services	Accommodation exempt; food/laundry/WiFi/amenities may be included under 1% composition (turnover ≤2 cr)
Charitable Night Shelters	✔ Optional	Only taxable ancillary services; main accommodation exempt
Commercial Renting (office/guest house)	❌	Not eligible for composition

Important: Ancillary services must be billed separately to qualify for composition.

PER-DAY BACKPACKERS / HOSTEL WITH ANCILLARY SERVICES

Classification:

• Daily bed / room → Commercial accommodation, taxable

• Tea / snacks / small meals → Ancillary services, can be billed separately

• Duration <30 days → treated as hotel/hostel service; residential exemption not applicable

GST Rates for Ancillary Services:

Component	Tariff / Billing	GST Rate	Notes
Room / Bed per night	Any	5% (<₹7,500) / 18% (≥₹7,500)	Short-term accommodation
Tea / Snacks / Small Meals	Billed separately	5% (restaurant) or 1% composition	Only if composition eligible
Laundry / WiFi / Amenities	Billed separately	18% or 1% composition	If operator opts for composition for taxable services

RCM IMPLICATIONS (PROPERTY RENT)

Landlord Type	Operator Status	RCM Applicability
Unregistered landlord	Regular taxpayer	✅ Pay 18% RCM, ITC claimable
Unregistered landlord	Composition taxpayer	❌ Exempt (from 16-Jan-2025)
Residential property (>30 days stay)	Any	❌ Not applicable

ILLUSTRATIONS

Scenario	GST / Composition Outcome
Hotel Room ₹1,200/day	5% GST; composition ❌
Hostel ₹800/day (<30 days)	5% GST; composition ❌
PG ₹10,000/month (>30 days)	Accommodation exempt; food/laundry taxable → composition 1%
Night Shelter ₹200/day (NGO)	Exempt; composition optional for ancillary services
Commercial Guest House Rent ₹90,000/month	Tenant pays 18% RCM if regular taxpayer; composition exempt after 16-Jan-2025
Per-day backpacker example	Bed ₹400 → 5% = ₹20; Tea/snack ₹50 → 5% = ₹2.5 or 1% composition = 0.5; Laundry/WiFi ₹50 → 18% = 9 or 1% composition = 1

TAX-PLANNING STRATEGIES

1. Separate Billing:

   • Room = 5%/18% GST (cannot opt for composition)

   • Ancillary services = 1% composition if eligible

2. Long-Stay Residential Packages:

   • Monthly PG >30 days → accommodation exempt

   • Ancillary services → composition 1% if turnover ≤2 cr

3. RCM Management:

   • Composition taxpayers exempt from RCM after 16-Jan-2025

   • Regular taxpayers must pay RCM; ITC claimable

4. Turnover Management:

   • Keep taxable ancillary turnover ≤2 cr to remain eligible for composition

5. Documentation:

   • Separate accommodation & services invoices

   • Maintain duration of stay

   • Self-invoice for RCM if applicable

FINAL DECISION TABLE — ACCOMMODATION, RCM & COMPOSITION

Stay Type / Service	Duration / Tariff	GST Rate	RCM	Composition Eligibility
Hotels / Guest House	Any daily	5–18%	❌	❌
Hostel / PG	<30 days / per day	5–18%	❌	❌
PG / Hostel	≥30 days / monthly	Exempt	❌	✔ Only for ancillary services
Night Shelters (Charitable)	Any	Exempt	❌	Optional for ancillary services
Commercial Rent	Any	18%	✅ Regular taxpayers; ❌ Composition	❌ Not eligible

KEY TAKEAWAYS

• <₹1,000/day exemption withdrawn; only charitable accommodation remains exempt.

• Composition taxpayers cannot opt for main accommodation, only taxable ancillary services (food, laundry, WiFi).

• Composition relief from RCM on commercial rent is applicable post 16-Jan-2025.

• Daily accommodation / hotels / short-stay PGs cannot opt for composition.

• PGs/hostels >30 days → accommodation exempt; composition 1% possible on taxable ancillary services.

• Segregation of accommodation and ancillary services is critical for GST planning and compliance.

• Maintain invoices, stay duration, and turnover records to remain eligible for composition and RCM relief.

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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