India: Payments received by U.S. company for web hosting services not royalties subject to withholding tax under U.S. treaty (tribunal decision); other direct and indirect tax developments

The Income-tax Appellate Tribunal (Chennai Bench) held that payments received by a U.S. company from its Indian affiliate for web hosting services provided through its data center located in the United States did not constitute royalties subject to withholding tax in India under the India-U.S. income tax treaty.

The tax authority argued that the servers were equipment used to store data and that the receipts were taxable as royalties for the use of equipment under section 9(1)(vi) of the Income-tax Act, 1961, read with Article 12(3)(b) of the treaty.

The tribunal decided that the web hosting charges could not be characterized as royalties under the treaty because the taxpayer rendered services through standard automated facilities without transferring any possessory rights, control, or dominion over the equipment to the customer. It further held that unilateral amendments to domestic law cannot automatically amend the scope of tax treaty provisions unless the treaty has been amended through bilateral negotiations.

The case is: DCIT v. Zoho Corporation (ITA No. 1841/Chny/2025)

Read a June 2026 report prepared by the KPMG member firm in India, which also includes summaries of the following indirect and indirect tax developments:

• Delhi Tribunal holds broken period interest taxable as interest income rather than capital gains: The Delhi Bench of the Income Tax Appellate Tribunal held that interest received by a Singaporean taxpayer for a broken period of five days from the buyer on the sale of non-convertible debentures (NCDs) was taxable as interest income under “income from other sources.” The tribunal clarified that receiving the interest from the buyer instead of the issuer does not alter the character of the receipt.
• Mumbai Tribunal holds revenue attribution to Indian branch must align with functions and roles performed: The Mumbai Bench of the Income Tax Appellate Tribunal held that a tax officer was not justified in attributing the entire execution revenue of a Hong Kong-based company to its Indian branch. The tribunal found that the revenue attribution must align with the functions and roles performed by the respective branches.
• Mumbai Tribunal holds share valuation based on underlying companies' fair market value invalid under pre-amended rules: The Mumbai Bench of the Income Tax Appellate Tribunal held that valuing shares of a holding company based on the fair market value (FMV) of its underlying investee companies was invalid. The tribunal found that the retrospective application of amended valuation rules was impermissible.
• Chennai Tribunal rejects mechanical application of share valuation rules in liquidation cases: The Chennai Bench of the Income Tax Appellate Tribunal held that the share valuation rules under Rule 11UA of the Income-tax Rules, 1962 cannot be applied mechanically in liquidation cases without inquiring into the real economic value or recoverability of the assets. The tribunal directed the revenue authority to adopt the National Company Law Tribunal (NCLT) determined FMV as the deemed sale consideration.
• CBDT issues guidelines for compulsory selection of returns for complete scrutiny: The Central Board of Direct Taxes (CBDT) on June 4, 2026, issued guidelines on outlining parameters and procedures for the compulsory selection of income-tax returns filed in FY 2025-2026 for complete scrutiny during the tax year 2026-2027.
• Supreme Court holds GST payable on full face value of stakes in online money gaming: The Supreme Court held that online money gaming, fantasy sports, and casinos are liable to pay GST on the full face value of the stakes or bets placed by players rather than only on the platform fees or commission. The court also held that the 2023 statutory amendments are clarificatory in nature and operate retrospectively.
• Karnataka High Court holds healthcare services provided through another hospital exempt from GST: The Karnataka High Court held that healthcare services provided by a clinical establishment through another hospital remain exempt from GST. The court observed that the classification of services must be determined based on their substance and essential character.
• Gauhati High Court holds penalty can be levied on beneficiaries of transactions even before 2021: The Gauhati High Court held that a penalty under section 122(1A) of the Central Goods and Services Tax Act, 2017 can be levied on any person who retains the benefits of a transaction and at whose instance the transaction was conducted. The court held that the penalty provision does not apply retrospectively as long as the show cause notice was issued when the provision was in force.
• RBI issues foreign exchange management regulations on cross-border mergers: The Reserve Bank of India (RBI) on June 2, 2026, notified the Foreign Exchange Management (Cross Border Merger) (Amendment) Regulations, 2026, amending the existing 2018 framework.
• RBI reduces time limit for realization of export proceeds: The RBI on June 5, 2026, issued an amendment reducing the period available for the realization and repatriation of export proceeds from 15 months to nine months.
• RBI liberalizes foreign portfolio investment in government securities: The RBI on June 5, 2026, issued a circular liberalizing foreign portfolio investment (FPI) in government securities by removing short-term, security-wise, and concentration limits. The circular also expanded the fully accessible route to include more long-term bonds and sovereign green bonds.
• Ministry of Finance expands foreign portfolio investment eligible investor base under Schedule III: The Ministry of Finance on June 12, 2026, amended the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 to expand the eligible investor base for FPI under Schedule III to all individual persons resident outside India.