We are pleased to present the third edition of The Tax Controversy Chronicle - Grant Thornton Bharat’s quarterly publication that spotlights key judicial developments across direct tax, indirect tax, FEMA, and transfer pricing.
This publication presents a curated selection of landmark judgements, concise case insights, and a watchlist of key pending matters that are expected to shape the future of tax jurisprudence. Our objective is to empower stakeholders to proactively manage risks, anticipate litigation outcomes, streamline tax controversy management, and stay ahead in India’s dynamic tax and regulatory landscape.
Key highlights:
In this edition, we analyse several significant tax rulings, the summary of which is as follows:
- Direct tax - The Supreme Court has held that the receipt of shares of an amalgamated company in substitution of shares held as stock in trade may give rise to taxable business income, where such receipt results in a real, present, and commercially realisable profit. While amalgamation is tax-neutral only in respect of capital assets, no such exemption applies to business assets. Taxability depends on a factual determination of whether the original stock in trade ceased to exist and the substituted shares possess definite valuation and immediate marketability.
- Indirect tax - Under Customs law, the Supreme Court has held that functional participation in the operation of a machine is essential for an item to qualify as a “part”, and that mere supporting or structural elements fall outside this scope. Accordingly, the end-use or post-import integration is irrelevant unless the tariff heading is expressly use-based. In parallel, under the GST law, the Madras High Court has clarified that the ISD credit is to be distributed only when the ITC becomes legally available under Section 16(2), and not merely upon the receipt of the invoice.
- Foreign Exchange Management Act - The Appellate Tribunal has clarified the scope of Section 6(4) of the FEMA. The protection is available only when a returning resident can show that the foreign assets were lawfully acquired while a non-resident or inherited from a non-resident. If a person cannot prove a legitimate source, Section 6(4) will not shield transfers made after becoming a resident. In such cases, Section 3(a) read with Section 4 of the FEMA applies, and any subsequent cooperation affects only the quantum of the penalty, not the existence of the contravention.
- Transfer pricing - The Delhi Bench of the ITAT examined the most appropriate transfer pricing methodology for benchmarking transactions arising from large infrastructure projects executed through JVs. The decision provides important clarity on the treatment of pass-through JV arrangements and reiterates the importance of the CUP method in back-to-back transaction structures.
Learn more about how our Tax, Regulatory & Finance Consulting services can help you
