India: Consideration received by Mauritius shareholder could not be recharacterized as income from other sources subject to tax in India under Mauritius treaty (tribunal decision); other direct and indirect tax developments

The Income-tax Appellate Tribunal (Mumbai Bench) held that the tax authority could not recharacterize a portion of the consideration received by a Mauritius shareholder in exchange for its shares as income from other sources subject to tax in India under the India-Mauritius income tax treaty.

The tax authority argued that the value of the Mauritius shareholder’s shares was artificially inflated and that a portion of the consideration for the shares was actually consideration paid for a long-term commitment made by an affiliate of the Mauritius shareholder to continue procuring services from the sold company.

The taxpayer contended that the services purchase commitment was a genuine business transaction and noted that its affiliate had been a major customer of the sold company for several years before the sale and the purchase commitment merely provided commercial assurance to the sold company’s purchaser. The taxpayer also highlighted that all shareholders sold their shares at the same agreed price.

The tribunal held that there was no evidence to establish that the transaction was a sham and found that the tax authority’s attempt to recharacterize only the taxpayer’s consideration while accepting the same price for the Indian shareholders was inconsistent and unsupported by any statutory provision. The tribunal also held that the statute does not empower the tax authority to bifurcate the agreed sale consideration of shares between independent parties based on conjectures regarding valuation.

The case is: Fifth Third Mauritius Holdings Ltd. v. ACIT (ITA No. 2010/Mum/2025)

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

• Bangalore Tribunal holds payments routed through U.S. branch not subject to withholding tax: The Bangalore Bench of the Income Tax Appellate Tribunal held that payments made to United States-based subcontractors for software services through a foreign branch were not taxable as fees for included services because the “make available” condition under the India-United States income tax treaty was not met.
• Delhi Tribunal holds specialized professional services taxable as technical services: The Delhi Bench of the Income Tax Appellate Tribunal held that while software subscription receipts did not constitute royalty or fees for included services (FIS) because there was no transfer of technology, receipts for specialized, customer-specific professional services were taxable as fees for technical services (FTS) or FIS.
• Mumbai Tribunal holds commercial support services not taxable as royalty or technical fees: The Mumbai Bench of the Income Tax Appellate Tribunal held that service fees received by a Netherlands tax resident for providing centralized commercial support services to its Indian affiliate were not taxable in India as royalty or FTS under the India-Netherlands income tax treaty because the services were commercial in nature and did not involve the transfer of intellectual property (IP) rights or make available any technical knowledge or expertise.
• Karnataka High Court holds business advances for land procurement not taxable as other income: The Karnataka High Court held that business advances received by an individual taxpayer for procuring land, which remained outstanding for eight years, were not taxable as income from other sources when there was neither a negotiation for the transfer of a capital asset nor an actual forfeiture.
• Mumbai Tribunal holds dividend stripping provisions inapplicable absent compliance with statutory conditions: The Mumbai Bench of the Income Tax Appellate Tribunal held that dividend stripping provisions under section 94(7) of the Income-tax Act, 1961, could not be invoked because the statutory timing conditions for the acquisition and sale of mutual fund units were not cumulatively satisfied.
• CBDT notifies withholding tax exemption on specified payments to IFSC units: The Central Board of Direct Taxes (CBDT) issued two notifications, dated July 3, 2026, and July 10, 2026, providing relief from withholding tax on specified payments made to eligible units located in an International Financial Services Centre (IFSC). These payments include ship lease rentals, interest on external commercial borrowings, professional fees, and dividend income, which became effective on April 1, 2026, subject to the payee furnishing a statement-cum-declaration to the payer.
• India-Sri Lanka income tax treaty amended to incorporate anti-abuse provisions: The Ministry of Finance issued a notification on July 16, 2026, to give effect to the protocol amending the India-Sri Lanka income tax treaty. The protocol, which became effective on June 19, 2026, and applies in India to income derived on or after April 1, 2027, incorporates anti-abuse provisions, including a revised preamble and the introduction of a principal purpose test (PPT) to align the treaty with multilateral standards.
• Karnataka High Court holds minimum average balance not liable to service tax: The Karnataka High Court held that the maintenance of a minimum average balance by bank customers is merely a contractual condition and does not constitute non-monetary consideration liable to service tax under the Finance Act, 1994.
• Kerala High Court holds local unit entitled to input tax credit on reverse charge payments: The Kerala High Court held that a taxpayer’s local unit was entitled to input tax credit (ITC) under the reverse charge mechanism when it paid the consideration to a foreign parent and issued a self-invoice, despite the parent's invoice being addressed to another corporate office. The court held that the local unit qualified as the recipient of the services and that the distribution of ITC without registering as an input service distributor was permissible under the unamended statutory provisions.
• CESTAT holds un-invoiced shareholder allocations not liable to service tax under reverse charge: The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that un-invoiced shareholder and stewardship allocations received by an Indian subsidiary from its U.S. parent company were not liable to service tax under the reverse charge mechanism. The tribunal held that service tax is a contractual levy and these allocations were not linked to the rendition of any service or any agreed consideration.