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Domestic and Direct Tax Updates

published on 30 April 2025 I reading time approx. 5 minutes

Notifications and Circulars

1. Central Board of Direct Taxes (‘CBDT’) issues circular providing guidance for application of the Principal Purpose Test (‘PPT’) under India’s Double Taxation Avoidance Agreement (‘DTAA’):

On 1 October 2019, India implemented the Multilateral Convention (‘MLI’) to address Base Erosion and Profit Shifting (‘BEPS’). It introduced the PPT, which allows denial of DTAA benefits, if obtaining such benefits is one of the main purposes of a transaction. CBDT has issued a circular to provide guidance and clarity on the application of the PPT, emphasizing that it should be evaluated independently for each case based on its specific facts.

A. Applicability of PPT provision

PPT provisions to be applied prospectively
For DTAAs amended bilaterally – The PPT provisions will apply from the date of enforcement of the DTAA or the amending protocol incorporating the PPT, as the case may be
For DTAAs amended through MLI:

• For taxes withheld at source: The PPT applies to taxable events that occur in or after the previous year beginning after the latest date*

• For other taxes: The PPT applies from the previous year starting six months after the latest date*

Latest date means the latest of the two relevant dates:-

• The date on which the MLI was enforced for India (1 October 2019); or

• The date on which the MLI was enforced for the DTAA partner country.

B. Interaction of PPT with Treaty-Specific Bilateral Commitments

In certain DTAAs (with Cyprus, Mauritius and Singapore), where specific grandfathering provisions are in place, PPT does not apply, ensuring the original DTAA benefits remain intact.

C. Sources of Guidance

When assessing the applicability of PPT provisions, tax authorities may refer to:

BEPS Action Plan 6 Final Report; and
Commentary to Articles 1 and 29 of the UN Model Tax Convention (updated 2021), subject to India’s reservations.

2. CBDT amends Rule 114DA directing Non-Residents (‘NRs’) having Indian Liaison Office (‘LO’) to furnish annual statement within 8 months:

Every Non-Resident having liaison office in India is required to submit a statement in Form No. 49C to the Jurisdictional Assessing Officer for each Financial Year (‘FY’). The time limit for submitting such statement has been specified in Rule 114DA of the Income Tax Rules 1962 (‘Rules’). The due date for submission of Form No. 49C has been amended to 8 months from the end of FY, from the earlier due date of sixty days from the end of FY. Further, the CBDT has also revised the particulars of Form No. 49C.

Domestic Tax Rulings

1. Bangalore Income Tax Appellate Tribunal (‘ITAT’) holds automated adjustments done to the income tax return without any notice to taxpayer as illegal:

As a matter of procedure, the Centralized Processing Centre of Income Tax Department (‘CPC’) conducts automated processing of income tax returns filed by the taxpayers and issues automated intimation under section 143(1) of the Income Tax Act 1961 (‘ITA’). In cases where any adjustments prescribed under section 143(1)(a) of the ITA are required to be done to the income of the taxpayer prior to finalizing the intimation under section 143(1), CPC is required to issue proposed adjustment notice under section 143(1)(a) to the taxpayer, providing an opportunity of furnishing appropriate explanations and documentary evidence to the taxpayer. Further, there are only certain prescribed adjustments which can be done under section 143(1)(a) of ITA, which are not in the nature of conducting any detailed scrutiny.

In the instant case before the Bangalore ITAT, the taxpayer was not provided such an opportunity by the CPC under section 143(1)(a), and directly intimation under section 143(1) was issued to the taxpayer making the following adjustments:

Adjustments in respect of Income Computation & Disclosure Standards (‘ICDS’) – Agreeing with the taxpayer, the ITAT held these adjustments had already been accounted for under ICDS-I and ICDS-VI, relating to accounting policies and foreign exchange rate changes. ITAT thus ruled that such adjustments are not allowed at the intimation stage without valid reasoning.
Adjustment for denial of deduction claimed under section 80JJAA of ITA - The ITAT held that this deduction could not be denied simply because the company had previously opted for the concessional tax regime under section 115BAA of ITA. It clarified that section 115BAA of ITA does not disqualify deductions under 80JJAA of ITA.

The ITAT emphasized that adjustments under section 143(1) of ITA require giving prior notice to the taxpayer and cannot involve detailed scrutiny. Since no notice was given, the ITAT ruled the Revenue’s actions were illegal and dismissed its appeal, affirming that such matters should be addressed in proper assessments or reassessments.

2. Bombay High Court (‘HC’) directs immediate release of delayed income tax refunds:

There have been several instances in the past as well as in the ongoing scenario, wherein even after clear eligibility of the taxpayer to receive the due income tax refunds from the income tax department, such income tax refunds are not processed and credited to the taxpayers’ bank accounts in a timely and efficient manner, with prolonged delays sometimes running into months and even years. As the income tax department is also liable to pay interest on the delay in payment of income tax refunds, it leads to additional interest burden on the government’s treasury. Many a times, technical system-related glitches are cited as reasons for inability to efficiently process the due income tax refunds of the taxpayers.

In a recent hearing, the Court addressed the prolonged delay in issuing income tax refunds to a taxpayer, despite clear entitlement for multiple Assessment Years ranging from 2004-05 to 2023-24. While the income tax department acknowledged that refunds were due to the taxpayer, procedural issues were cited as the reason for non-payment of such eligible income tax refunds. The Court termed the delay as unusual and unacceptable, stressing that once refunds are admitted, they must be promptly credited. It directed the income tax department to process and release the refunds without further delay and to inform the taxpayer within four days if any action is required on their part.

Highlighting the growing interest burden on the government’s treasury due to such delays, the Court warned that continued inaction could lead to further scrutiny, including a requirement for the Commissioner concerned to file an affidavit. The Court also permitted the taxpayer’s representative to receive departmental communications and allowed manual payment of refunds, if necessary. The decision holds significance as it is issued by the senior judicial appellate forum (High Court) and addresses a recurring issue commonly faced by the taxpayers, including resident and non-resident taxpayers alike. The decision is expected to bring some authoritative guidance and value to the inordinate delays caused by the income tax department in processing the income tax refunds, merely citing procedural system-related technical glitches. Taxpayers facing such issues can take advantage of this decision and try to push for faster processing of their pending income tax refunds in similar situations, especially in the jurisdiction of Maharashtra.

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