Indian Tax Rulings: Precision for Global Businesses

India’s International Tax Regime: Strategic Insights from Judicial Rulings on Treaty Benefits, Fees for Technical Services, and Digital Taxation

July 2025

I. Introduction: The Dynamic Indian Tax Landscape

India’s international tax framework, governed by the Income Tax Act, 1961, and an extensive network of Double Taxation Avoidance Agreements (DTAAs), shapes compliance strategies for multinational corporations, private equity funds, and cross-border investors. Recent landmark judicial pronouncements, including the Supreme Court’s decisions in Assistant Commissioner of Income Tax v. Nestle SA (2023 SCC OnLine SC 1432) and Principal Commissioner of Income Tax v. GVK Industries Ltd. (2015 SCC OnLine SC 191), alongside the Bombay High Court’s ruling in Mastek Ltd. v. Principal Commissioner of Income Tax (2024 SCC OnLine Bom 876), provide nuanced clarity, albeit with critical conditions and nuanced interpretations, on treaty benefits, Fees for Technical Services (FTS), and transfer pricing methodologies. These rulings, coupled with India’s unilateral measures such as the Significant Economic Presence (SEP) rules and the Equalisation Levy, reflect India’s commitment to aligning with Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) objectives while safeguarding domestic revenue. This article delivers strategic insights on withholding tax positions, managed digital and service-related exposures, and preparedness for BEPS 2.0 implementation in a dynamic tax environment.

II. Treaty Benefits and the Most Favoured Nation Clause: Strategic Precision Required

The Most Favoured Nation (MFN) clause in Double Taxation Avoidance Agreements offers a mechanism to reduce withholding tax rates on dividends, interest, royalties, and Fees for Technical Services, but its application demands precision. In Assistant Commissioner of Income Tax v. Nestle SA (2023 SCC OnLine SC 1432), the Supreme Court delivered a nuanced judgment on MFN clauses. While it rejected the Central Board of Direct Taxes (CBDT)'s restrictive Circular No. 333/1982, as clarified by Circular No. 3/2022 for Switzerland, the Court made a crucial distinction: it held that a specific notification under Section 90(1) of the Income Tax Act, 1961, is mandatory to give legal effect to an MFN clause that alters existing treaty benefits. This key finding overruled prior High Court pronouncements (e.g., Steria India Ltd. v. Commissioner of Income Tax (2016 SCC OnLine Del 3823) which had held that treaty protocols, being integral parts of the DTAA, do not require separate notification for MFN clause purposes. Nestle SA emphasized that Section 90(1), rooted in Article 253 of the Constitution, serves as a domestic legal safeguard, ensuring treaty alterations align with India’s constitutional framework and the Vienna Convention on the Law of Treaties, 1969. The reciprocal nature of Double Taxation Avoidance Agreement benefits, the Court implicitly noted, is enforceable only through strict Section 90(1) compliance, underscoring India’s sovereignty in treaty implementation.

The Court’s interpretation of “is a member” in Most Favoured Nation clauses, such as in the India-Switzerland Double Taxation Avoidance Agreement, imposes a temporal condition: the third country must be an Organisation for Economic Co-operation and Development member at the time of signing its Double Taxation Avoidance Agreement with India, not when benefits are sought or upon later Organisation for Economic Co-operation and Development membership. This creates distinct outcomes. For the India-Netherlands Double Taxation Avoidance Agreement, notified in 1988 with the Netherlands as an Organisation for Economic Co-operation and Development member, Most Favoured Nation benefits (e.g., 10 percent dividend tax via the India-Colombia Double Taxation Avoidance Agreement) are unavailable for treaties with countries like Colombia or Lithuania, which were not Organisation for Economic Co-operation and Development members at signing. Similarly, for the India-France Double Taxation Avoidance Agreement, the application of the strict 'is a member' test and the mandatory Section 90(1) notification would necessitate a rigorous analysis, precluding automatic MFN benefits unless these conditions are strictly met.

These nuances reveal complexities and potential contradictions across treaties, as seen in Concentrix Services Netherlands B.V. v. Income Tax Officer (2021 SCC OnLine Del 3376), where Most Favoured Nation eligibility hinged on “same or similar activities” or Limitation of Benefits (LoB) clauses. Multinational corporations must conduct granular treaty-by-treaty analysis, verifying Section 90(1) notifications, Organisation for Economic Co-operation and Development membership timing, and specific clause language. Structuring investments through jurisdictions like the Netherlands, securing robust Tax Residency Certificates, and ensuring compliance with Limitation of Benefits requirements are essential to optimize tax outcomes while mitigating scrutiny from Indian tax authorities, and ensure the prerequisite notification under Section 90(1) has been issued for the specific MFN benefit being claimed.

III. Fees for Technical Services: Source-Based Taxation without Presence

Section 9(1)(vii) of the Income Tax Act, 1961, taxes Fees for Technical Services paid to non-residents if deemed to accrue in India, regardless of physical presence. In Principal Commissioner of Income Tax v. GVK Industries Ltd. (2015 SCC OnLine SC 191), the Supreme Court confirmed that “success fees” for services involving specialized managerial or consultancy knowledge fell within this broad scope, taxable in India whether delivered remotely or as lump-sum payments. This interpretation, reinforced by Commissioner of Income Tax v. Kotak Securities Ltd. (2016 SCC OnLine SC 113), emphasizes the expansive nature of technical expertise under domestic law.

However, Double Taxation Avoidance Agreements with countries like the United States and the United Kingdom include a “make available” test, limiting Fees for Technical Services to services transferring technical knowledge or skills for independent application. Without invoking treaty protections, Section 9(1)(vii) prevails, imposing Tax Deducted at Source (TDS) obligations on Indian payers, with non-compliance risking penalties under Section 201. Multinational corporations and Indian entities must meticulously evaluate service contracts to distinguish Fees for Technical Services from business profits or royalties. Where “make available” clauses apply, precise contract drafting and detailed documentation of service scope are critical to mitigate tax exposure and avoid reclassification risks.

IV. Transfer Pricing and the Advertising, Marketing, and Promotion Conundrum

Advertising, Marketing, and Promotion (AMP) expenses incurred by Indian subsidiaries of multinational corporations, particularly in fast-moving consumer goods and pharmaceutical sectors, face intense transfer pricing scrutiny. The Bombay High Court’s ruling in Mastek Ltd. v. Principal Commissioner of Income Tax (2024 SCC OnLine Bom 876) reiterated the consistent judicial position of various High Courts (e.g., Principal Commissioner of Income Tax v. Samsung India Electronics Ltd. (2023 SCC OnLine Del 5914)) in categorically rejecting the Bright Line Test (BLT) as a valid method for determining whether AMP expenses constituted an international transaction under Section 92B.

The Court emphasized that AMP functions alone do not create marketing intangibles for the benefit of the foreign associated enterprise unless supported by a robust Functional Analysis, Asset, and Risk (FAR) profile. This aligns with earlier rulings in Maruti Suzuki India Ltd. v. Commissioner of Income Tax (2018 SCC OnLine SC 2084) and LG Electronics India Pvt. Ltd. v. Commissioner of Income Tax (2018 SCC OnLine SC 347).

Multinational groups must adopt accepted transfer pricing methods, such as the Transactional Net Margin Method (TNMM) or Comparable Uncontrolled Price (CUP) method, supported by comprehensive Functional Analysis, Asset, and Risk documentation to demonstrate arm’s length pricing. Beyond Advertising, Marketing, and Promotion, intra-group services and royalty versus Fees for Technical Services characterization pose similar challenges, requiring rigorous analysis to prevent reclassification disputes. Leveraging Advance Pricing Agreements (APAs) under Section 92CC and adhering to Organisation for Economic Co-operation and Development Base Erosion and Profit Shifting Action 13 documentation standards are vital for achieving compliance and certainty.

V. Digital Taxation: Significant Economic Presence, Equalisation Levy, and Permanent Establishment Risks

India asserts broad taxing rights over digital businesses through both treaty and domestic mechanisms. The Bombay High Court’s ruling in Assistant Commissioner of Income Tax v. e-Funds International Inc. (2023 SCC OnLine Bom 1923) clarified that a Service Permanent Establishment (PE) arises when non-resident employees exceed duration thresholds, such as 90 days under the India-United States Double Taxation Avoidance Agreement, prioritizing effective presence over contractual terms. This builds on GE India Technology Centre (P.) Ltd. v. Commissioner of Income Tax (2010 SCC OnLine SC 614), which addressed Fees for Included Services and Permanent Establishment interactions.

The Significant Economic Presence test, introduced under Section 9(1)(i), Explanation 2A in 2018, taxes non-residents with Indian revenue exceeding INR 2 crore or user bases over 300,000, regardless of physical presence. The Equalisation Levy, imposing 6 percent on digital advertising and 2 percent on e-commerce supplies by non-residents, operates outside Double Taxation Avoidance Agreements but exempts covered income from income tax under the Finance Act, 2020, mitigating double taxation risks. These levies fall outside DTAAs and are explicitly excluded from the income tax base of the non-resident under the Finance Act, 2020, though they raise potential double taxation concerns (which may not always be mitigated by foreign tax credits in the recipient's jurisdiction). Multinational corporations with significant Indian digital footprints must restructure operations, potentially through local subsidiaries or limited-risk distributors, to minimize Permanent Establishment exposure. Aligning with Organisation for Economic Co-operation and Development Base Erosion and Profit Shifting Action 7 for profit attribution clarity and seeking pre-transaction tax advice are essential for compliance.

VI. Looking Ahead: Base Erosion and Profit Shifting 2.0 and Strategic Readiness

India’s alignment with Base Erosion and Profit Shifting 2.0 reshapes global tax dynamics. Pillar One reallocates taxing rights over residual profits (Amount A) and standardizes remuneration for marketing and distribution activities (Amount B), while Pillar Two imposes a 15 percent global minimum tax through the Income Inclusion Rule (IIR) and Under Taxed Profits Rule (UTPR). For multinational corporations based in the United Arab Emirates investing in India, these developments necessitate cash tax modeling and reassessment of holding structures. India’s unilateral measures, including Significant Economic Presence and Equalisation Levy, may complicate the interaction with eventual BEPS 2.0 implementation and treaty-based rights. Boards must closely monitor forthcoming domestic legislative changes to implement BEPS 2.0 and plan carefully to prevent overlapping claims and ensure access to foreign tax credits.

The Central Board of Direct Taxes employs artificial intelligence-driven audits, as evidenced in 2024–2025 compliance initiatives, to detect anomalies in transfer pricing and Fees for Technical Services filings, demanding robust substance-over-form documentation. Dispute resolution mechanisms, including Mutual Agreement Procedures (MAP) under Article 25 of Double Taxation Avoidance Agreements, Advance Pricing Agreements under Section 92CC, and the Dispute Resolution Panel (DRP) under Section 144C, provide certainty amid litigation risks. Corporate boards must integrate international tax strategies into enterprise risk frameworks, balancing India’s investment-friendly policies with its revenue maximization objectives.

VII. Conclusion: Building Tax Resilience in a Complex Landscape

Judicial clarity on Most Favoured Nation clauses, conditional as it is, Fees for Technical Services, transfer pricing standards, and digital taxation positions India as a complex yet strategic tax jurisdiction. Taxpayers must navigate these developments with precision. The Nestle SA ruling enables reduced withholding rates, conditional on precise compliance, while GVK Industries and Mastek Ltd. underscore rigorous Tax Deducted at Source and transfer pricing adherence. Digital businesses face Significant Economic Presence and Permanent Establishment risks, necessitating structural realignment, and Base Erosion and Profit Shifting 2.0 heralds a global tax reset.

Proactive governance, supported by expert structuring advice, comprehensive documentation, and effective dispute resolution, is critical for multinational corporations to sustain value in India’s evolving tax landscape, aligning with Organisation for Economic Co-operation and Development Base Erosion and Profit Shifting objectives.