Tax Street – January 2026

Maharashtra's Strategic Blueprint for Industrial Growth

The Government of Maharashtra unveiled an ambitious roadmap through the Maharashtra Industries, Investment & Services Policy 2025, aimed at supporting the State's aspiration to become a trillion-dollar economy and a trusted global investment hub. The policy focuses on smart manufacturing, large scale employment generation, sustainability, self-reliance, inclusive growth, and a predictable, investor friendly business environment.

The policy positions Maharashtra as a "Global Business Destination" (GBD) with a targeted investment inflow of USD 850 billion. This comprises USD 500 from the manufacturing sector and USD 350 billion from the services sector. In addition, the policy targets USD 150 billion in manufacturing exports during the policy period.

Beyond investment targets, the policy introduces structural and institutional reforms.

Institutional Reforms and Policy Framework

A key structural reform under the policy is the establishment of "Invest Maharashtra", a seamless investment facilitation platform integrating investable projects across all sectors of the State's economy. This initiative, along with the creation of dedicated Commissionerates for Industries, MSMEs, and Services, is intended to strengthen institutional capacity and support the vision of Viksit Maharashtra 2047.

The policy will remain in force for five years from the date of notification, i.e., 31 December 2025, or until a subsequent policy is notified, whichever is earlier.

This policy will also serve as a strategic tool for Maharashtra's global investment outreach, including its participation in the World Economic Forum 2026, highlighting the State's ability to translate ambition into measurable outcomes through scale, speed, and policy certainty. Maharashtra continues to attract significant foreign direct investment, with a strong focus on emerging sectors while simultaneously strengthening traditional manufacturing industries.

Institutional Reforms and Policy Framework

While the Industrial Policy of 2019 played a pivotal role in maintaining Maharashtra's leadership in industrial investment, the 2025 Policy introduces distinct and differentiated incentives for manufacturing and select service sector units, reflecting the changing structure of the economy.

The policy applies to

• 16 priorities and thrust manufacturing sectors, including Advanced Materials, Aerospace & Defense, and Chemicals & Petrochemicals, etc.
• 13 priority service sectors such as Information Technology & Information Technology enabled Services (ITeS), Tourism & Hospitality, and Legal services, etc.

To promote balanced regional development, the policy adopts an area-wise classification framework, categorizing districts and regions based on parameters such as industrial development, infrastructure availability, investment inflows, and employment generation.

Under this framework

• Higher fiscal incentives are extended to less developed and backward areas classified under Group D & D+.
• Developed and urban areas receive calibrated incentives, primarily focused on employment linked benefits and service sector support

This differentiated approach enables the State to attract investment across all regions, while consciously directing manufacturing led growth towards underdeveloped areas.

Eligibility and Investment Thresholds

Eligibility under the policy is linked to new investments made during the policy period.

For manufacturing units, eligibility is determined based on eligible fixed capital investment, which includes expenditure on

• Land (within prescribed limits)
• Building
• Plant and machinery
• Other related capital assets

For service sector units, eligibility is primarily linked to operational investment and employment generation, rather than capital-intensive fixed assets

In cases of expansion or diversification, only the incremental investment over the existing base is considered, subject to prescribed conditions. Further, incentives are computed only up to the maximum permissible eligible investment, which acts as a ceiling for incentive calculation without restricting the actual quantum of investment.

Fiscal Incentives under the Policy

The policy offers a comprehensive basket of fiscal incentives, including

In addition to fiscal incentives, the policy introduces several enabling initiatives

Given the above, from an investment perspective the below factors are critical

• Location selection is critical, as incentives are closely linked to area classification.
• While entities may invest beyond the prescribed eligible investment ceiling, incentives are restricted to the notified limits.
• Existing entities proposing expansion or diversification must ensure incremental investment and additional employment generation to qualify for benefits under the policy.

The Maharashtra Policy marks a decisive shift towards an integrated, future ready economic framework. By combining manufacturing strength with services led growth, regional equity, and strong institutional support, the policy positions Maharashtra to sustain its leadership in investment attraction while progressing steadily towards its trillion-dollar economy ambition.

Direct Tax

M&A Tax Update

ITAT - Non-Resident Claim, Disallows Residence-Based Tax Planning

Binny Bansal¹ [TS-18-ITAT-2026(Bang)

Facts

Mr. Binny Bansal, Flipkart Co founder, moved to Singapore for employment in February 2019. In FY 2019-20, he sold shares of Flipkart Pvt. Ltd. (Singapore) and claimed non-resident status under the Income Tax Act and capital gains exemption under the India–Singapore DTAA. The tax authorities treated him as an Indian resident and taxed the gains in India.

Assesses Argument

• He was a person "being outside India" and merely visiting India; hence, eligible for the 182-day relaxation under Explanation 1(b) to section 6(1)(c);
• Alternatively, benefit under Explanation 1(a) applied as he left India for employment outside India;
• His permanent home, family life, employment, banking, and daily affairs were in Singapore;
• Economic ties in India were largely passive legacy investments acquired while resident and constrained by FEMA;
• Even if dual residency existed, treaty tie-breaker rules favored Singapore.

Tribunal's Findings

• Mr. Bansal satisfied the 60-day + 365-day test under section 6(1)(c) and was a resident under the Act.
• The relaxation under Explanation 1(b) ("being outside India") applies only to existing non-residents visiting India, and not to individuals who recently migrated abroad.
• Explanation 1(a) (year of departure) is available only in the year an individual leaves India and cannot not be invoked for FY 2019-20.
• Under Article 4 of the DTAA, even assuming dual residency, the center of vital interests remained in India, given the assesses substantial India-centric investments, business interests, and economic exposure.
• Treaty protection under Article 13 was therefore denied, and capital gains were taxable in India.

Our Comments

The ruling underscores that physical relocation alone does not determine tax residency; a demonstrable shift in personal, economic, and investment nexus is essential. By adopting a substance-over-form approach, the ITAT has set a cautionary precedent for globally mobile Indian founders and investors, especially in years involving significant capital transactions. Founders and HNIs must carefully reassess mobility strategies, especially in years involving liquidity events. Robust documentation and clean factual timelines are critical.

M&A/International Tax Update

Supreme Court Judgment in the Tiger Global Case - A Shift Towards Substance-Based Taxation

Tiger Global International² II Holdings [TS-38-SC-2026]

The Supreme Court of India, in its recent judgment in the Tiger Global case, has delivered a significant ruling on the availability of tax treaty benefits and the application of anti-avoidance provisions in cross-border investments.

Facts

Tiger Global, a foreign investment fund, realized substantial capital gains from the sale of its Flipkart stake to Walmart in 2018. The investment was routed through Mauritius-based entities. Relying on the India–Mauritius Double Taxation Avoidance Agreement (DTAA), Tiger Global claimed exemption from capital gains tax in India on the basis that it was a tax resident of Mauritius and held valid Tax Residency Certificates (TRCs).

Assesses Contentions

Tiger Global argued that, under the DTAA, capital gains arising from the sale of shares were taxable only in Mauritius, not in India. It contended that possession of valid TRCs was sufficient to establish its eligibility for treaty benefits. The assesse further claimed that the investment structure was lawful and that the tax authorities could not deny treaty protection merely by questioning the commercial motive behind the arrangement.

Supreme Court's Findings

The Supreme Court rejected the assesses arguments and held that treaty benefits are not automatic. The Court emphasized that tax authorities are entitled to examine the substance of the arrangement rather than its legal form. It ruled that entities created primarily to obtain tax advantages, without real commercial substance or decision-making presence, can be treated as impermissible avoidance arrangements under the General Anti-Avoidance Rules (GAAR). The Court further clarified that holding a TRC is not conclusive proof of genuine tax residency, and "grandfathering" benefits would apply only to bona fide structures.

Accordingly, the Supreme Court reversed the Delhi High Court's judgment and upheld the Revenue's power to deny treaty relief.

Our Comments

This judgment reinforces India's shift towards substance-over-form taxation. It sends a strong message that tax treaties cannot be misused for aggressive tax planning and that real economic presence is crucial to claim treaty benefits. The ruling is likely to have wide implications for foreign investors using intermediary jurisdictions and underscores the increasing importance of commercial substance in cross-border investments involving Indian assets.

International Tax

Whether a Permanent Establishment (PE) is entitled to claim deduction of expenses incurred for earning taxable income, even if such expenses are reimbursed to the Head Office?

FCS Computer Systems SPte. Ltd [TS-24-ITAT-2026(DEL)]

Facts

The FCS Computer Systems S Pte. Ltd (Assesse), a tax resident of Singapore. It provides hospitality software solutions and related services to hotels worldwide. To cater to the Indian market, the Assesse established a Branch Office (BO) in India with approval of the Reserve Bank of India, which constituted a PE under Article 5 of the India-Singapore DTAA.

The Indian BO earned income from the sale of software products and ancillary services, including software maintenance. During the relevant assessment year, the BO a claimed deduction of INR 16.9 Million, representing the cost of procurement of software and the reimbursement of expenses incurred by the Head Office on a cost to cost basis, without any markup. The Assessing Officer (AO) disallowed the said expenses, thereby increasing the taxable income.

AO's Arguments

• The expenses claimed were incurred by the Head Office (HO), and payments made by the BO amounted to transactions with the same legal entity.
• Since the payments were reimbursements, the principle of mutuality applied, and hence such expenses could not be allowed.
• The BO, being a PE, was not entitled to claim a deduction for procurement costs and reimbursed expenses charged by the HO.

Assesses Arguments

• The BO/PE is to be treated as a separate and independent taxable entity under Article 7 of the India–Singapore DTAA.
• The expenses represented the actual costs incurred for the business of the PE, including procurement of software and operational support, and were mandatorily incurred to earn income in India.
• Similar deductions had been consistently allowed by the Revenue in earlier assessment years (AYs 2012-13 to 2021-22).
• Assesse relied on the decision of the Hon'ble Supreme Court in Hyatt International Southwest Asia Ltd and the Special Bench ruling in Mashreq Bank PSC.

Held

The Delhi ITAT (ITAT) held that the disallowance of procurement costs and reimbursed expenses was unsustainable, and the issue was decided in favor of the Assesse on the basis of the following reasons

• A PE is required to be treated as a distinct and separate enterprise for the purpose of profit attribution under Article 7 of the DTAA.
• All expenses incurred for the business of the PE, whether incurred in India or outside India, are allowable deductions while computing PE profits.
• The costs claimed were integral to the distribution business of the Indian BO and were incurred on a cost-to-cost basis without markup.
• The Revenue, having accepted the same treatment in earlier years, could not take a divergent view in the absence of any change in facts.

Accordingly, the ITAT allowed the deduction of INR 16.9 Million and allowed the Assesses appeal

Our Comments

The case highlights that PE is separate entity and legitimate expenses incurred for earning taxable income cannot be disallowed when they are paid to the Head Office on a cost-to-cost basis.

Whether mere remote or virtual rendering of services, without any physical presence of employees or personnel in India, can trigger the existence of a service permanent establishment under Article 5(2)(k) of the India-UK DTAA for withholding tax purposes?

Ernst And Young LLP [TS-34-HC-2026(DEL)]

Facts

Ernst and Young LLP (the petitioner) filed a writ petition before the Delhi High Court challenging an order and certificate dated 17.09.2025 issued under Section 195(2) of the Income Tax Act, 1961.

The petitioner had sought a Nil Withholding Certificate for prospective payments aggregating to INR 17.5 Billion proposed to be made to its UK group entity, Ernst & Young (EMEIA) Services Limited (EMEIA), for the period up to 31.03.2026.

The Assessing Officer (AO) rejected the application and directed withholding tax at 5.25%, holding that the payments constituted business income taxable in India, on the ground that EMEIA had a Virtual Service Permanent Establishment (PE) in India under Article 5(2)(k) of the India-UK DTAA.

AO's Arguments

• The writ petition was not maintainable due to availability of an alternative statutory remedy under Section 264 of the Act.
• Proceedings under Section 195(2) are protective and prima facie, and judicial review should be limited.
• Article 5(2)(k) of the India-UK DTAA does not require physical presence, but merely furnishing of services "through employees or other personnel within the contracting state."
• Since the petitioner and EMEIA were associated enterprises, the 30-day threshold under Article 5(2)(k)(ii) applied and stood satisfied.
• Even if the Court disagreed with the Assessing Officer, the matter should be remanded for fresh consideration rather than granting direct relief.

Assesses Arguments

• The sole basis for denying the Nil Withholding Certificate was the alleged existence of a virtual service PE, which is not recognized under the India-UK DTAA.
• The issue stood conclusively covered in favor of the assesse by the Delhi High Court's decision in Commissioner of Income Tax v. Clifford Chance Pte. Ltd., where a similar provision under the India-Singapore DTAA was interpreted.
• Article 5(2)(k) of the India-UK DTAA is pari materia with Article 5(6) of the India-Singapore DTAA, which requires physical presence of employees in India for constitution of a service PE.
• Since EMEIA had no employees physically present in India, no service PE could be said to exist.
• The Assessing Officer had already examined all relevant agreements and documents; hence, remand was unnecessary and the Court should directly direct issuance of a Nil Withholding Certificate.

Held

The Delhi High Court passed the order in favor of the assesse by setting aside the impugned certificate and order dated 17.09.2025 and remanded the matter to the Assessing Officer to pass a fresh order in accordance with law, keeping in view the principles laid down in Clifford Chance, on the basis of the following reasons

• Both the India-UK DTAA and the India-Singapore DTAA contemplate rendition of services in India by employees of the non-resident enterprise, and the relevant provisions are pari materia
• The expression "within the Contracting State" used in Article 5(2)(k) carries a clear territorial connotation, which necessarily requires physical presence of employees or personnel in India.
• In the absence of personnel physically performing services in India, there can be no furnishing of services within India, and consequently, no service PE can be said to exist.
• The concept of a "virtual service PE" is neither recognized under the DTAA nor under the Domestic Act, and cannot be read into the treaty by judicial interpretation.
• The Revenue's contention that Article 5(2)(k) does not mandate physical presence was found to be untenable in view of the binding precedent laid down by the Delhi High Court in Clifford Chance.
• Tax treaties, having been negotiated bilaterally, must be interpreted strictly, and courts cannot import concepts that are conspicuously absent from the treaty text.

Our Comments

This judgment highlights that a service permanent establishment under Article 5(2)(k) of the India–UK DTAA requires physical presence of employees or personnel in India. It clarifies that remote or virtual rendition of services, by itself, cannot create a "virtual service PE", as such a concept is neither recognized in the DTAA nor under the Domestic Act. The Court reiterates that tax treaties must be interpreted strictly, and taxing rights cannot be expanded by reading in concepts absent from the treaty text.

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