Year: 2025

This article explores the legal framework governing the statements recorded during summon proceedings under the Goods and Services Tax (“GST”) law, with a special focus on its evidentiary value. It further analyses the role such statements play in adjudication and prosecution proceedings. In addition, the Article delves into the legal principles surrounding the retraction of statements, assessing the conditions under which retractions are considered valid and their impact on the overall evidentiary value.

STATEMENTS RECORDED DURING SUMMONS PROCEEDINGS

Under Section 70 of the Central Goods and Services Tax Act, 2017 (“CGST Act”), the proper officer is empowered to summon any person to appear, give evidence, or produce documents or any other thing that may be required in any inquiry. Therefore, issuance of a summons is always in connection with a pending/existing inquiry. The inquiry may be pending against the person summoned or against any other person. However, in the absence of any pending/existing inquiry, the validity/legality of such summons may become a ground for challenge. The power to issue summons is similar to that of a civil court under the provisions of the Code of Civil Procedure, 1908 (“CPC”). Therefore, the proper officer while conducting an inquiry under the provisions of the CGST Act is empowered to exercise all such powers which are vested with a civil court in case of issuance of summons, recording of statements and producing evidence.

Section 70(2) of the CGST Act deems such inquiry to be ‘judicial proceeding’ within the meaning of Sections 229 and 267 of the Bharatiya Nyaya Sanhita, 2023 (“BNS”). As a result, the provisions under these sections become applicable to proceedings under the GST law. Section 229 of BNS stipulates punishment/penalties for making false statements during judicial proceedings; at the same time, Section 267 of BNS affords protection to public servants from insult or obstruction while discharging official duties in judicial proceedings. Accordingly, inquiries under Section 70 of the CGST Act are at par with judicial proceedings within the meaning of Sections 229 and 267 of BNS, and any act of interference or falsehood therein attracts punishment and penal consequences.

A summons is issued to call a person to record their statement, submit documents, or give evidence. This raises an important question: Can a statement be recorded without the issuance of a summons? The answer is no. The CGST Act confers the power to summon and record statements exclusively under Section 70. Nowhere else does the Act provide such an authority. Therefore, if a statement is recorded at an individual’s premises during a search without the prior issuance of a formal summons, such a statement lacks legal validity, is not admissible in law and cannot be relied upon as valid evidence. Reference is made to Paresh Nathalal Chauhan Versus State of Gujarat¹ .

1 2020 (36) G.S.T.L. 498 (Guj.)

REPRESENTATION THROUGH AN AUTHORISED REPRESENTATIVE IN RESPONSE TO SUMMONS

A question that repeatedly and naturally arises is: once a summons is issued, is the person required to appear in person, or can he be represented by an authorised person such as an Advocate, Chartered Accountant, or any other duly authorised representative?

In this context, it is important to note the amendment introduced by the Finance (No. 2) Act, 2024 w.e.f. 1.11.2024, wherein sub-section (1A) was inserted in the Act following the recommendations of the GST Council in its 53^rd meeting held on 22^nd June 2024 in New Delhi. This amendment explicitly allows a person to appear through an authorised representative in response to a summons and also specifically provides for the recording of statements.

IS THERE AN OVERLAP BETWEEN SECTION 70(1A) AND SECTION 116 OF THE CGST ACT?

One may question the necessity of the 2024 amendment permitting appearance through an authorised representative in response to summons, especially considering the existing provision under Section 116 of the CGST Act. However, a closer examination reveals that Section 116 and Section 70(1) operate in entirely different contexts and serve distinct purposes under the Act.

To begin with, Section 116 deals with representation in the context of proceedings under the CGST Act. It allows any person entitled or required to appear before a GST officer, Appellate Authority, or Appellate Tribunal to do so through an authorised representative, except when personal appearance is required for examination on oath or affirmation.

However, Section 70(1) stands on a different footing altogether. It specifically deals with the power of the proper officer to issue summons in an inquiry for the purpose of gathering evidence, recording statements, or producing documents. The issuance of summons under Section 70 is an inquisitorial step, aimed at fact-finding, and is distinct from the adjudicatory or appellate “proceedings” contemplated under Section 116.

It is also pertinent to note that the term “proceedings” is not defined under the CGST Act. Its scope has been interpreted by courts to refer broadly to adjudicatory processes where rights and liabilities are determined. In contrast, “inquiry” under Section 70(1) is a preliminary step, a pre-adjudication phase, to ascertain facts or detect evasion. Therefore, the representation rights under Section 116 cannot be mechanically extended to the inquiry stage under Section 70.

The distinction between ‘proceedings’ and ‘inquiry’ underscores the necessity of the 2024 amendment, which addresses a legislative gap by expressly allowing appearance through an authorised representative even in response to summons. The amended Section 70 of the CGST Act now aligns with Section 108 of the Customs Act, 1962 and Section 14 of the Central Excise Act, 1944, both of which explicitly permit representation through an authorised person in response to summons.

However, it raises a critical question: whether statements made by an authorised representative can be treated as binding on the assessee. This issue carries significant legal implications, particularly when considered in light of the evidentiary value and admissibility of such statements.

The amended provision permits representation either by the person himself or through an authorised representative; however, this is subject to the condition “as the officer may direct,” which means the allowance is not absolute but conditional. If the officer specifically directs personal appearance, the assessee is obligated to appear in person and cannot be represented through an authorised representative in such cases.

ANALYSIS OF BHARATIYA SAKSHYA ADHINIYAM, 2023, FOR ANALYSING THE EVIDENTIARY VALUE OF STATEMENTS

The Bharatiya Sakshya Adhiniyam, 2023 (“BSA”) (formerly the Indian Evidence Act, 1872), provides for general rules and principles of evidence. Therefore, it becomes necessary to examine the relevant provisions of BSA in order to assess the admissibility, relevance, and legal effect of such statements.

The preamble of the BSA reads as “An Act to consolidate and to provide for general rules and principles of evidence for fair trial.” Further, as per Section 1(2) of BSA, the BSA applies to all judicial proceedings in or before any ‘Court’, but not to affidavits presented to any Court or officer. The term ‘Court’ is defined under Section 2(1)(a) of BSA as “Court” includes all Judges and Magistrates, and all persons, except arbitrators, legally authorised to take evidence. The court, in its ambit, includes any person who is legally authorised to take evidence. In the GST Law, evidence is produced at every stage, starting from the inquiry / investigation.

The term evidence, as defined under Section 2(1)(e) of BSA, encompasses both oral and documentary forms. Clause (i) covers all statements, including those given electronically, which the Court permits or requires to be made before it by witnesses concerning matters of fact under inquiry; these are classified as oral evidence. While Section 70 of the CGST Act does not specifically refer to written statements, any oral statement recorded during proceedings would squarely fall within the ambit of clause (i). Clause (ii) further clarifies that evidence also includes all documents, whether physical, electronic, or digital, produced for the Court’s inspection, and these are categorised as documentary evidence. Accordingly, any written statement submitted by an assessee to a GST officer would fall within the purview of documentary evidence. Ultimately, whether a statement is oral or written, both forms fall within the inclusive definition of ‘evidence’.

Sections 15 to 18 of BSA define and explain the term ‘Admission’. An admission is a statement, which can be oral, documentary, or contained in electronic form, that suggests any inference as to a fact in issue or a relevant fact. A statement becomes an admission in the following circumstances:

•  Statement made by a party to the proceedings.
•  Statement made by an agent when expressly or impliedly authorised by the person to make it. Thus, in case of a statement by an agent, the agent must be specifically authorised either explicitly or implicitly. Any statement by an agent without authorisation cannot be considered as an admission. Therefore, the statement given by an authorised representative on behalf of the assessee becomes binding on the assessee.
•  A statement made by a party who is suing or being sued in a representative character is an admission only when such statement has been made while the party held that specific representative character.
•  Statements made by persons who hold a proprietary or pecuniary interest in the subject matter of a proceeding, when made by the person in their character as an interested party and during the continuance of that interest.
•  Statements made by persons from whom the parties to the suit have derived their interest in the subject, when made during the continuance of the interest of the person making it.
•  Statements made by individuals whose position or liability needs to be proven against a party to the suit, when such statement is relevant as against those persons concerning their position or liability, had a suit been brought against them, and when they are made while the person occupied that specific position or was subject to that liability.
•  Statements made by persons to whom a party to the suit has expressly referred for information in reference to a matter in dispute.

Under Section 19 of the BSA, the general rule about admissions is that they can be used as evidence against the person who made them or his representative in interest. However, the law states that the person cannot use his own admission or admission made by his representative except in the following circumstances:

•  When an admission is of such a nature that the person making it was dead, and it is relevant as per Section 26 of BSA.
• This applies when the statement describes the state of mind (like the intention or belief) or the physical condition, and it was made around the time that state or condition existed. Importantly, the actions at that time must also show that the statement was likely true and not false.
•  If the admission is relevant for another reason, not just because it’s an admission.

Section 25 of the BSA states that admissions are not conclusive proof of the matters that have been admitted. This means an admission, on its own, does not definitively settle a fact or conclusively prove a point without further consideration or corroboration by the court. However, Section 25 also specifies that admissions may operate as estoppels. The application of estoppel is a legal principle that prevents a party from asserting a fact contrary to what has been previously stated or established.

Section 27 of the BSA addresses the relevancy of evidence given by a witness in previous judicial proceedings or before persons legally authorised by law, for the purpose of proving the truth of facts stated in a subsequent judicial proceeding or a later stage of the same proceeding. Such evidence becomes relevant under specific circumstances when the witness who originally gave the testimony is unavailable. These circumstances include the witness being dead, unable to be found, incapable of giving evidence, kept out of the way by the adverse party, or if their presence cannot be obtained without an unreasonable amount of delay or expense as deemed by the Court. Crucially, for this previously given evidence to be admissible, certain conditions must be met: the previous proceeding must have been between the same parties or their representatives in interest; the adverse party in the first proceeding must have had the right and opportunity to cross-examine the witness; and the questions in issue were substantially the same in both the first and second proceedings.

In the author’s opinion, the aforementioned provisions of the BSA can be applied within the framework of GST law to determine the admissibility of statements made either against or in favour of the assessee, particularly when such statements are given by the assessee himself or through an authorised representative. Accordingly, reference to these provisions becomes essential.

EVIDENTIARY VALUE AND RELEVANCY OF STATEMENTS RECORDED UNDER THE CGST ACT

To assess the relevancy and legal sanctity of such statements, it is imperative to consider the broader legal framework governing testimonial evidence. Article 20(3) of the Constitution of India provides a fundamental safeguard against self-incrimination, declaring that no person accused of any offence shall be compelled to be a witness against himself.

Evidentiary Value in Adjudication vs. Prosecution

The relevance of any statement recorded by a proper officer during summon proceedings under the CGST Act is governed by Section 136 of the Act, and such a statement attains evidentiary value specifically in the context of prosecution proceedings. In terms of Section 136, a statement, when recorded in response to a summons, becomes relevant for the purpose of prosecution proceedings under two eventualities:

1.  When the person who made the statement is either dead, cannot be located, is incapable of giving evidence, is kept away by the adverse party, or whose attendance cannot be secured without undue delay or expense, which the court deems unreasonable in the circumstances of the case. or
2.  When the person making the statement is examined as a witness before the court, and the court, upon considering the facts and circumstances, is of the opinion that the statement ought to be admitted in the interest of justice.

Thus, unless one of the contingencies contemplated under clause (1) of Section 136 is attracted, a statement recorded during summons proceedings attains evidentiary value only when the person making the statement is examined as a witness, and the court, in the exercise of its judicial discretion, considers it admissible in the interest of justice. In the absence of compliance with either of these conditions, such statements, by themselves, do not become relevant or admissible except in cases of prosecution proceedings.

Thus, persons facing prosecution under the CGST Act must carefully keep Section 136(b) in mind while preparing their defence. This provision clearly stipulates that a statement recorded during an inquiry can be treated as relevant evidence only if the person who made the statement is examined as a witness before the court, and the court, after considering the circumstances of the case, is satisfied that admitting such a statement is necessary in the interest of justice. This acts as a vital safeguard against the uncritical reliance on statements recorded by officers during an investigation. Therefore, accused persons should insist on strict compliance with this requirement and challenge any attempt by the prosecution to rely on such statements without subjecting the maker to cross-examination or without the court’s express satisfaction as to its admissibility. Reference is made to Daulat Samirmal Mehta vs. Union of India²

2 [2021] 55 GSTL 264 (Bombay)[15-02-2021]

The procedure has been interpreted by the Punjab and Haryana High Court in the case of Ambika International vs. Union of India³, as follows:

1.  If the Revenue intends to rely on any statements, it must produce the makers for examination-in-chief before the adjudicating authority.
2.  A copy of the record of examination-in-chief must be made available to the assessee.
3.  After the examination-in-chief and furnishing a copy of the same to the assessee, the assessee is entitled to seek permission to cross-examine the persons whose statements have been relied upon. It is incumbent upon the adjudicating authority to consider and permit such cross-examination.

3 [2016] 71 taxmann.com 53 (Punjab & Haryana)

At this stage, it is pertinent to undertake a comparative analysis of Section 136 of the CGST Act with Section 138B of the Customs Act, 1962 and Section 9D of the Central Excise Act, 1944. While the provisions are largely identical across these legislations, it is noteworthy that subsection (2), which exists under the Customs Act and the Central Excise Act, is absent in the CGST Act. The relevant subsection reads as under:

“(2) The provisions of sub-section (1) shall, so far as may be, apply in relation to any proceeding under this Act, other than a proceeding before a court, as they apply in relation to a proceeding before a court.”

A plain reading of the relevant provisions highlights a marked distinction between the CGST Act and the Customs Act, as well as the Central Excise Act. While the latter statutes expressly provide that the procedure under sub-section (1) shall apply to any proceedings under those Acts in the same manner as it applies to proceedings before a court, Section 136 of the CGST Act limits the relevance of such statements to “any prosecution for an offence under this Act.” The deliberate non-inclusion of a provision identical to sub-section (2) of the Customs and Excise Act while enacting the CGST Act suggests a clear legislative intent to restrict the relevancy and evidentiary value of a statement recorded during inquiry to prosecution proceedings alone, thereby excluding their application in adjudication or other non-prosecution proceedings.

A literal reading of Section 136 reveals that it is applicable to prosecution proceedings. However, the provision does not explicitly restrict its applicability to adjudication proceedings. In the absence of such express exclusion, courts may, where appropriate, interpret its applicability to adjudication proceedings by drawing guidance from analogous provisions in other fiscal statutes.

Be that as it may, the essence of Section 136(b) lies in safeguarding the right of cross-examination of the person whose statement is sought to be relied upon. Even if Section 136 of the CGST Act is held inapplicable to adjudication proceedings, the right to cross-examination remains a constitutional safeguard, being an essential facet of the principles of natural justice. Accordingly, an assessee may legitimately seek cross-examination in adjudication proceedings as well.

CAN ALLEGATIONS BASED SOLELY ON UNCORROBORATED STATEMENTS BE SUSTAINED IN LAW?

It has often been observed that the Revenue relies heavily on statements of various persons while framing allegations against the assessee. In this context, it becomes crucial to examine whether allegations made solely on the basis of such statements, without any corroborative evidence, are legally sustainable.

The Hon’ble High Court, Bombay, in the case of Union of India vs. Kisan Ratan Singh & Others⁴, dealt with the need for independent corroborative evidence. The Court held that a statement recorded under Section 108 of the Customs Act, 1962, though admissible in evidence, cannot be relied upon solely in the absence of independent and reliable corroboration. It is settled law, as held in Ramesh Chandra vs. State of West Bengal⁵, that customs officers are not police officers and such statements are admissible. However, uncorroborated statements under Section 108 cannot be accepted. The underlying rationale advanced in this case was that “Moreover, if I have to simply accept the statement recorded under Section 108 as gospel truth and without any corroboration, I ask myself another question, as to why should anyone then go through a trial. The moment the Customs authorities recorded the statement under section 108, in which the accused has confessed about his involvement in carrying contraband gold, the accused could be straightaway sent to jail without the trial court having recorded any evidence or conducting a trial.”

4 Criminal Appeal No. 621 of 2001

5 (AIR 1980 SC 793)

In light of the above ruling, the answer to the question posed is clear:

The allegations or findings can be sustained only when supported by independent and reliable corroboration. Courts have consistently emphasised that mere reliance on uncorroborated statements, without supporting material evidence, does not satisfy the standards of legal admissibility or evidentiary reliability.

LEGAL FRAMEWORK GOVERNING RETRACTION OF STATEMENTS

As evident from the foregoing discussion, once a statement is recorded, it carries evidentiary value. However, such a statement may be made either voluntarily or involuntarily, or may be recorded under a mistaken belief or understanding. Accordingly, it becomes necessary to examine the remedies available to the assessee in respect of involuntary statements or those recorded under mistake. In legal parlance, retraction refers to the act of withdrawing, recanting, or disclaiming a previously made statement, confession, or admission. This may occur in both criminal and civil proceedings, typically where a party acknowledges having made a statement but subsequently asserts that it was false, inaccurate, or made under coercion, mistake, or misapprehension. In essence, retraction denotes the reversal or withdrawal of a prior representation, offer, or assertion, often with the intent of restoring the position to what it was prior to such statement being made.

Although there is no specific codified law stating that a person may retract a statement, the concept of retraction is well-recognised and embedded in the legal framework, particularly in the realms of Bharatiya Nagarik Suraksha Sanhita, 2023 (“BNSS”) and the Constitution of India.

•  Article 20(3) of the Constitution of India: This Article forms the constitutional cornerstone of the jurisprudence surrounding retracted statements. It guarantees that “no person accused of any offence shall be compelled to be a witness against himself.” It provides a safeguard against self-incrimination, especially in situations where statements are alleged to have been made under compulsion or coercion.
•  Section 183 of BNSS outlines the procedure for recording confessions or statements before a Magistrate and incorporates essential safeguards to ensure voluntariness.
•  In the case of Narayan Bhagwantrao Gosavi Balajiwale vs. Gopal Vinayak Gosavi, (1960) 1 SCR 773, the Hon’ble Supreme Court held that “An admission is the best evidence that an opposing party can rely upon, and though not conclusive, is decisive of the matter, unless successfully withdrawn or proved erroneous.”

WHEN AND HOW SHOULD A RETRACTION BE MADE?

Retraction of a previously recorded statement is a serious and sensitive legal action. Courts have consistently held that a retraction must be made promptly and supported by cogent reasons and evidence. A retraction of a statement may be justified where it is established that the original statement was made under an erroneous understanding of facts or due to a misinterpretation of the applicable legal provisions. Additionally, if it is demonstrated that the statement was obtained through inducement, coercion, or undue pressure, the individual is entitled to withdraw it; however, the burden of proving such coercive circumstances lies on the person making the retraction. In Commissioner of Customs (Imports), Mumbai vs. Ganpati Overseas⁶, the Hon’ble Supreme Court reaffirmed that a statement recorded under Section 108 of the Customs Act is admissible in evidence and can be relied upon, provided it is made fairly and voluntarily. While customs officers are not treated as police officers, any statement recorded under duress cannot form the basis of a finding, and it is the duty of the adjudicating authority to assess its voluntariness in accordance with judicial standards.

MANNER AND FORMAT OF RETRACTION BY AFFIDAVIT

•  Where independent witnesses were present at the time of the original statement, their affidavits may be submitted to substantiate the claim of retraction and enhance its credibility.
•  The retraction must detail the circumstances under which the original statement was made, identify any factual or legal errors, and disclose any coercion or undue influence. A concurrent complaint should be filed in case of coercion. In S. Hidayatullah vs. Commissioner of Customs⁷, the retraction was rejected for lacking timely and credible justification.
•  Timeliness is of utmost importance when it comes to retraction. A retraction should be made at the earliest possible juncture, ideally, immediately after the recording of the statement. Courts have repeatedly held that prompt retraction enhances credibility, whereas delayed retractions are often viewed with suspicion and treated as afterthoughts unless the delay is adequately and convincingly explained. In this regard, reliance is placed on the case of Continental Coffee Ltd. vs. Commissioner of Customs, Chennai⁸. In particular, where the recorded statement is not provided to the person despite requests and is supplied only later as part of the relied-upon documents in a show cause notice, the individual must act without delay upon receipt of the statement. In such circumstances, the date of receipt of the statement becomes the relevant trigger point, and retraction should be made at the earliest from that point onward.
•  In many cases, officials themselves prepare the statement, and the assessee is made to sign it without being given a proper opportunity to read or comprehend its contents. If the statement does not reflect the true version of the assessee, a retraction should be promptly made, citing discrepancies.
•  In the case of the Commissioner of Customs vs. Rajendra Kumar Damani⁹, it was observed that “If the learned tribunal was of the view that the statement recorded under section 108 of the Act was not admissible on account of the retraction, that by itself cannot render the statement as involuntary. It is the duty casts upon the court to examine the correctness of the validity of the retraction, the point of time at which the retraction was made, whether the retraction was consistent and whether it was merely a ruse. These aspects have not been examined by the learned tribunal resulting in perversity.”
•  In the case of Vinod Solanki Versus Union of India¹⁰, it was observed that “A person accused of commission of an offence is not expected to prove to the hilt that confession had been obtained from him by any inducement, threat or promise by a person in authority. The burden is on the prosecution to show that the confession is voluntary in nature and not obtained as an outcome of threat, etc. if the same is to be relied upon solely for the purpose of securing a conviction. With a view to arrive at a finding as regards the voluntary nature of statement or otherwise of a confession which has since been retracted, the Court must bear in mind the attending circumstances which would include the time of retraction, the nature thereof, the manner in which such retraction has been made and other relevant factors. Law does not say that the accused has to prove that retraction of confession made by him was because of threat, coercion, etc. but the requirement is that it may appear to the court as such.”

6 (2023) 11 Centax 101 (S.C.)/2023 (386) E.L.T. 802 (S.C.) [06-10-2023]

7 2006 (202) E.L.T. 330 (Tri. - Chennai)

8 2005 (191) E.L.T. 1091 (Tri. - Chennai)

9 (2024) 19 Centax 224 (Cal.) [15-05-2024]

10 2009 (13) S.T.R. 337 (S.C.) [18-12-2008]

PROPER FORUM FOR RETRACTION

A frequent question is where the retraction should be submitted. The appropriate authority is the one who recorded the original statement, i.e., the investigating officer or proper officer under the relevant statute. Since the issue pertains to evidence that may be used in subsequent proceedings, retraction must form part of the official investigation or adjudication record.

In the case of K.C. Soni and Sons Steels (P) Ltd. vs. Commr. of C. Ex., Chandigarh-I¹¹, the Tribunal observed that “I also find that the retraction has not been addressed to the investigation officer who recorded the statement. The Tribunal, in its judgment K.P. Abdul Majeed vs. CC, Customs – 2014 (299) E.L.T. 108 (Tri.-Bang.) has held that the retraction has to be necessarily addressed to the officer to whom the statement was given. The letter to the Commissioner has to be treated only as a representation or complaint and is not a valid retraction.”

EVIDENTIARY VALUE OF STATEMENT RETRACTED

A retracted statement does not entirely lose its evidentiary value; however, it cannot be relied upon as the sole basis for any finding or conclusion. In such circumstances, corroboration through independent and credible evidence becomes essential to lend weight and reliability to the retracted statement. Reference can be drawn from the case of Asst. Collector of Customs (Pre.), Bombay Versus Ahmed Abdulkarim¹², whereby it was observed as under:

15. What has been held by the Apex Court can summarised as under : (i) There is no prohibition under the Evidence Act to rely upon retracted confession to prove the prosecution case; (ii) Practice and prudence requires that the Court could examine the evidence adduced by the prosecution to find out whether there are any other facts and circumstances to corroborate the retracted confession; (iii) The Court is required to examine whether the confessional statement is voluntary in the sense whether it was obtained by threat, duress or promise; (iv) If the Court is satisfied from the evidence that it was voluntary, then it is required to be examined whether the statement is true; (v) If the Court on examination of the evidence finds that the retracted confession is true, that part of the inculpatory portion could be relied upon to base the conviction; (vi) However, the practice and prudence requires that the Court should seek assurance getting corroboration from other evidence adduced by the prosecution.

Thus, a statement that has been retracted does not entirely lose its evidentiary value, but it cannot be relied upon as the sole basis for any finding or conclusion. It is a matter of practice and prudence that a court should seek assurance by obtaining corroboration from other independent and credible evidence to lend weight and reliability to the retracted statement. Without such robust, independent corroboration, and particularly if allegations of coercion in obtaining the statements are not refuted by authorities, findings resting solely on retracted statements will not stand and may be deemed unsustainable and liable to be set aside.

11   2017 (350) E.L.T. 426 (Tri.-Chan) [13-01-2017]

12  2009 (247) E.L.T. 97 (Bom.) [05-02-2009]

CONCLUSION

In the GST regime, it is often seen that proceedings in high-demand cases are primarily based on statements recorded from certain parties, without substantial corroborative evidence. This raises critical concerns about their evidentiary value. While the statements recorded under GST law are relevant in inquiries, their evidentiary value is not absolute. Sole reliance on uncorroborated statements is legally unsustainable, and retracted statements, though not entirely valueless, necessitate robust independent corroboration. This underscores the critical need for verifiable evidence beyond mere statements to ensure legally sound and fair proceedings in the GST regime.

BCAJ Admin

Corporate family disputes, or “kalesh,” remain one of the most significant risks to Indian business continuity, with nearly 91% of listed entities being family-run. While legendary leaders like Warren Buffett and Ratan Tata have demonstrated the value of timely succession planning, Indian corporate history is rife with examples—Ambanis, Birlas, Bajajs—where lack of clarity in succession has eroded value and shaken investor confidence. Key triggers of disputes include blurred lines between ownership and management, complex family dynamics, opaque governance, and delayed succession planning. Legal frameworks such as SEBI Listing Regulations and provisions of the Companies Act, 2013 mandate succession policies and disclosures, yet enforcement challenges remain. Prolonged disputes often harm minority shareholders, disrupt operations, and tarnish reputations. Mitigation lies in proactive steps—drafting family constitutions, involving the next generation (including daughters), appointing independent directors, adopting mediation, succession planning, and drafting wills—to ensure continuity, tax efficiency, and preservation of shareholder value

Recently, the nonagrian “Oracle of Omaha” announced that he would step down from the CEO position of Berkshire Hathaway by the end of 2025. Acknowledged and worshipped by global investors – Warren Buffet’s wisdom and humility has redefined investing and has inspired generations. He also named his successor who would take over as CEO from the next year.

Back home, the celebrated patriarch of India’s “salt to software” conglomerate directed most of the billion-dollar estate to philanthropy. The will of Ratan Tata¹ provided financial support to long-serving staff, family members and reinforced his commitment to generosity and welfare.

1 No-contest clause – 1 April 2025

Both of them seem to certainly know the importance of a well laid (and timely executed) succession plan. A well-executed succession plan strengthens organisational culture and ensures that
leadership is not left to chance, but rather shaped by deliberate, strategic preparation. This forward-thinking approach is essential for sustainable success and the continued achievement of business objectives.

But family disputes for the succession and inheritance is not uncommon in corporate India. Studies have generally indicated that most families can’t keep their herd together for more than three generations and India is not an exception. The Birla’s and the Bajaj’s split after three generations and the Ambani’s a little earlier – in their second generation². Company’s value gets destroyed when the news of a split catches the markets by surprise. One may remember such an instance, when the younger Ambani sibling stated his ownership
issues at the Annual General Meeting of Reliance Industries in 2005. Not only the stock fell, but it also took the Sensex with it.

Discussions among the promoters of Murugappa Group³ to finalise a new family settlement have regained momentum, signalling intent from the three different factions of the storied Chennai-based group to resolve disagreements over business valuations and facilitate a three-way split.

From emotionally charged political debates during lunch to overly competitive card games during Diwali, there are many reasons family members can find themselves at loggerheads with one another. A particularly serious scenario is when family businesses become the epicentre of a bitter conflict between family members.

2 Family Businesses And Splitting Heirs – 15 October 2010

3 Murugappa Group 3-way split talks are back on track – 12 May 2025

WHY THINGS GO WRONG?

Few reports indicate that nearly 91% of all listed Indian entities can be classified as family-run. The disputes among business families underline the complexities of balancing family wealth and business interests. Family disputes typically arise from a combination of following key factors:

► Blurred distinction between ownership and management

Doctrine of separate legal entity provide that the legal status of an entity is distinct from its owners. For example, the actions of shareholders cannot be attributed to the company and vice versa. However, ownership and governance of family run companies is often dictated by policies and principles of the founding families and reflects the founder’s wishes and vision. The concept of the company being a separate legal entity almost blurs. Corporate governance norms, decision-making processes, and ownership/ management can be overshadowed by family dynamics.

► Family dynamics

Personal relationships within the family, including issues of trust and communication, often exacerbate business conflicts. A family feud can take various forms and shapes. It usually starts as a small difference of opinion between family members on business strategy or priorities or simply ego problems. The emotional ties and historical baggage can make resolution more difficult. For example, a lot of resentment can be traced back to the fact that one segment in the family may have an extravagant lifestyle while the other may be more down to earth.

► Opaque culture fuels conflicts

Conflicts in family businesses are rarely caused by poor business performance; most conflicts arise because the family owners perceive that their needs are not met. Conflicts also surface when situations are unclear or not properly understood. The management of these conflicts becomes the key to survival of both the business and the family. Indeed, the main reason behind the emergence of conflict in family businesses is the lack of understanding and communication between the three family dimensions, namely the family, owners and management.

Understanding and managing family dynamics become extremely important as everyone within the family will have their own strong point of views. The individual views will differ based on personalities but also based on where the individual family member is positioned within the family. Some family members will be active shareholders involved in running of the business while other family members may just be passive shareholders. This divergence in knowledge often gives rise to conflicts.

► Succession issues

Indian promoters generally forget about their mortality and leave this important planning until too late. In many businesses, too little of that work goes into determining who will take over when the founders leave the stage. The handing of the baton to the next generation often fraught with challenges due to lack of a clear succession plan which leads to power struggles, as seen in the Ambani conflict. Conflicts over who controls the family business and how decisions are made can lead to prolonged legal battles. Many family businesses despite displaying solid professionalism fail to properly plan for and complete the transition to the next generation of leaders.

Succession planning becomes even more complicated when family issues such as legacy, birthright, and interpersonal dynamics gets entangled. Even without any explicit disagreement, the divergent goals of the business — to generate profits, exploit market opportunities, reward efficiency, develop organizational capacity, and build shareholder value — can come into direct conflict with the recognised goals of the family.

LEGAL FRAMEWORK

Majority shareholding and voting control generally rest in promoter hands. Amendments to SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI Listing Regulations”) have tried to break the nexus between the promoter and the businesses, but such changes have not borne the desired fruit. SEBI had wanted to split the positions of the Chairman and MD or CEO, including the requirements that the Chairman and MD/CEO must not be related to each other, but due to widespread concerns, this requirement was subsequently made voluntary.

SEBI Listing Regulations has mandated the need for a Succession Planning Policy. This is one of the most significant attempts to ensure that investors do not suffer due to sudden or unplanned gaps in leadership. It is a mandate for Boards of all listed companies to develop an action plan for successful transition of key executives. Under the SEBI Listing Regulations Board of Directors are required to oversee succession planning.

Disclosures to stock exchange are prescribed under SEBI Listing Regulations to cover agreements between promoters or shareholders, whose purpose and effect is to impact the management or control of the listed entity or impose any restriction or create any liability upon the listed entity. This disclosure addressed the prevalence of undisclosed family arrangements within business groups that directly impact the operation and ownership of listed entities. These arrangements, whether formal or informal, can restrict the freedom of listed entities to conduct business or dictate succession plans for key management positions, while remaining hidden from the scrutiny of the business’s board and shareholders. SEBI Listing Regulations mandates the public disclosure of all such covenants, shedding light on any exclusion of family members from ownership or control, or the allocation of specific entities to particular branches of the family. Such transparency is essential to ensure that the governance of listed entities stays free of undue familial influence and manipulation.

Sections 241 and 242 of the Companies Act, 2013 address oppression and mismanagement. Though a plain reading might indicate that familial disputes do not constitute oppression or mismanagement, the recent order of NCLT in Kirloskar Industries vs. Kirloskar Brothers⁴ takes a divergent stance. In this case, the NCLT lifted the corporate veil and acknowledged the influence of the family dispute which created an impasse in the company leading to oppression of its shareholders.

Alternative dispute resolution techniques like mediation have grown in acceptance in India recently. A neutral third party, known as a mediator, assists parties to a disagreement in communicating and negotiating a resolution that will be acceptable to both parties. Mediation is a voluntary process. The procedure aims to resolve conflicts more quickly and affordably than traditional litigation by being less formal and confrontational.

4 NCLT order reinforces allegations of mismanagement – 23 May 2024

MINORITY SHAREHOLDER AT RISK

Things turn ugly when the feuding members starts airing their dirty laundry in public, make allegations about financial mismanagement, levies charges of oppression and mismanagement and tarnish stellar reputations.

One of the fiercest fratricidal disputes took place when the then vice-chairman and managing director of Apollo Tyres, battled for control with his father – the company’s chairman⁵. The Chairman refused to sign the accounts of the company and accused his son at the Annual General Meeting of financial irregularities including overstatement of profits. Eventually, with the battle becoming messier, provoking financial institutions to broker a peace agreement.

An executive director of Godfrey Phillips⁶ accused his mother and company’s chairman of orchestrating an attack to force him to settle the muti-crore inheritance dispute on unfavourable terms. The contested inheritance includes nearly 50% of Godfrey Phillips, and shares in other group companies across various sectors such as cosmetics, retail, and direct selling.

Past incidents have also shown that investors suffer in a prolonged family feud, resulting in languishing share price and erosion of value of minority shareholders. Sadly, these disputes lead to destruction of the family business in terms of reputation and structure as it disintegrates into smaller less effective units. In many cases, assets of the business are frozen until satisfactory resolution of the disputes thereby severely curtailing the exist opportunities to minority shareholders.

5 No company for old men – 18 October 2018

6 Bina Modi, Lalit Bhasin not charged in Samir Modi assault case – 22 April 2025

WHAT SHOULD INDEPENDENT DIRECTORS (IDS) DO?

Investors rely on the objectivity and expertise of IDs for protection of their interests during these disputes. They should continue to execute their responsibility of safeguarding the interest of minority shareholders and other roles and responsibilities prescribed under the Companies Act, 2013 and SEBI Listing Regulations – which become even more critical in ongoing family feuds. IDs must consistently monitor the information affecting the company’s prospect and act in an unbiased manner by providing an objective perspective to the stakeholders. IDs should guide and support the management to ensure seamless operations during the continuance of the dispute. This would help maintaining investor confidence and prevent any adverse impact on the company’s reputation, financial performance and shareholders’ value.

TAX TANGLE

Dividing massive business could lead to a hefty bill from income tax authorities unless it qualifies as a family settlement – which exempts from levy of income taxes. A family settlement is an agreement between family members to avoid future disputes, settle existing disagreements, and ensure a fair division of assets while keeping things peaceful within the family. The Indian law recognises that transfer of shares between family members under a valid family settlement may not attract capital gains tax, a tax levied on profits from selling assets.

It should be noted that the family’s assets are sometimes owned or held in the corporate entities and transfer of the assets by these corporate entities to family members may not get immunity from the capital gain tax. The settlement of these assets needs to be structured to achieve tax efficiency.

WHAT CORPORATE FAMILIES CAN DO TO MINIMISE CONFLICTS?

An orderly transition of management and ownership would help survival and growth of the business under the current structure or after restructuring, preserve mutual harmony, reduce or eliminate income taxes and facilitate retirement for the current leadership generation. For the sake of long-term survival of business it is imperative that family business owners:

► Get the family involved

Finding acceptance of the transition plan amongst the family members ensures smooth and orderly transition. This is perhaps the most complicated exercise and require harmonisation of expectations inside the family before any blueprint is made and then divide the empire. The first step is difficult, but makes a logical sense – because an undivided group has more resources, a bigger balance sheet and hence a bigger impact in the marketplace.

The Bangalore-based infrastructure company GMR⁷ put together a family constitution. The key message was that before handling family wealth, each one of them would have to understand relationships within the group. Spouses were taken on board and were explained how their husbands and sons could be picked for a role inside the organisation. They were told the logic behind these choices. All family members were also advised to bring their living standards within a commonly accepted band.

7 Rao family of GMR group signs 'family constitution' – 23 April 2007

► Identify and develop future leaders

The patriarch must exhibit an innate desire to be make space for the next generation, or indeed find an outsider as a successor, and then take proactive and concrete steps to groom them. Whenever ‘that day’ comes, a lot will depend on choices made years before — and not just about who will take over the top job. It’s a process and would generally takes many years of careful decision-making to set the stage. A company’s current leadership is responsible for working to identify and prepare the next generation long before any nameplates change. The founder may rely on personal, one-on-one interactions to identify and train his or her eventual successors.

► Don’t forget Gen Z (or the daughters)

Indian families should involve the younger members (including Gen Z) of the family right at the start of the discussion of the transition plan. The younger lot like Gen Z are open to novel concepts. The older generation is often caught in situations where respect means saying nothing. Even when they see something they don’t agree with, they say nothing. So the next generation must be involved. They are anyway the people who will have to execute the plan and must be convinced, otherwise it won’t work.

The other major shift that business families are trying to make is to include their daughters as well in the succession and discussion plan. Till now, daughters have been by and large ignored but the Godrej group’s and Abbott’s decision to involve the daughters stand as shining examples.

► Succession planning

Succession planning can mean different things to different people. It can be as simple as naming a family member to take over, or as complex as restructuring the business to align it with long-term objectives. Effective succession planning isn’t only about deciding who will run the business — it’s just as important to determine what kind of business those people will run. Also, the family members should appreciate that equal distribution of family wealth is a myth. Succession plans may not create equal opportunities for all parties. This point cannot be emphasized enough.

Promoters of family businesses should no longer loathe to name a successor(s) early or at any point during their (active) lifetime. They may consider leaving behind a ‘break-glass’ letter addressed to the Board, naming a successor in case of death or incapacity. Promoters can take their Board and/or the Nomination and Remuneration Committee into confidence and discuss this choice(s) with them.

► Write a will

It makes sense to consider drafting a will while still having full capacity instead of putting it off until sickness or advanced old age. A will can always be updated if the circumstances change. No will is iron-clad – but simple measures exist to help ensure that wishes of owner are executed exactly as intended when he is gone. Indian businesses are increasingly taking help of skilled professionals to draft wills. Having a neutral professional opens the door for both generations to understand and work together in harmony, to build a sustainable long-term generational family business, where conflicts are addressed in healthy ways.

CONCLUSION

Handling and avoiding corporate family feuds require clear communication, defined roles, and strong governance structures. Establishing formal policies, such as family constitutions or shareholder agreements, helps set expectations and reduce misunderstandings. Succession planning and conflict resolution protocols also play key roles. Involving neutral third parties, like advisors or mediators, can defuse tensions and guide fair decision-making.
—

BCAJ Admin

The Supreme Court of India¹ (“SC”) has affirmed the ruling of the Delhi High Court² (“Delhi HC”), holding that Hyatt International Southwest Asia Ltd. (“Hyatt International”), a UAE-based company, had a fixed place Permanent Establishment (“PE”) in India under Article 5(1) of the India-UAE Double Taxation Avoidance Agreement (“DTAA”). The SC focused on the substance of the arrangement, concluding that Hyatt International’s pervasive operational control over the Indian hotels, owned by Asian Hotels Limited, India (“AHL”), created a fixed place PE.

•  The SC held that the test for a fixed place PE is not merely physical access but whether the premises are operationally ‘at the disposal’ of a foreign enterprise to conduct its business.
•  The Court endorsed a substance-over-form approach, looking at the combined effect of (i) the Strategic Oversight Services Agreement (“SOSA”) between AHL and Hyatt International; and (ii) the Hotel Operating Services Agreement (“HOSA”) between AHL and Hyatt India Pvt. Ltd. (“Hyatt India”), Hyatt International’s Indian affiliate to determine the true nature of control.
•  Pervasive control through strategic planning, brand standard enforcement, and the discretion to deploy personnel was sufficient to constitute the hotel premises as being ‘at the disposal’ of Hyatt International.

This article discusses the impact of the SC decision and the way forward for multinational companies (“MNCs”) operating in India. It delves into how ‘operational control’ may result in physical presence and outlines the crucial steps MNCs must take to consider the constitution of PE risk under this new precedent.

1 Hyatt International Southwest Asia Ltd. vs. Additional Director of Income Tax - 
judgement dated July 24, 2025 [Civil Appeal No. 9766 OF 2025/ SLP (C) No. 5710 of 2024].

2 Hyatt International Southwest Asia Ltd. vs. Additional Director of Income Tax - 
judgement dated December 22, 2023 [ITA 216/2020].

BACKGROUND

The taxpayer, Hyatt International, was a company incorporated in the UAE and was a tax resident of the UAE. It was engaged in rendering hotel consultancy and advisory services from Dubai to hotels within the Hyatt group, including several located in India. On September 4, 2008, it entered into a long-term (20-year) SOSA with AHL, the owners of Hyatt hotels in India, to provide strategic planning services and ‘Know-How’. Contemporaneously, AHL entered into a separate HOSA with Hyatt India, the Indian affiliate of Hyatt International, to provide day-to-day management and operational assistance for the hotels..

The key clauses of the SOSA were as follows:

• Standards of Operation: The hotel was required to be operated consistently with the standards of international ‘Hyatt Regency’ hotels, referred to as ‘Hyatt Operating Standards’. Hyatt International was responsible for providing strategic plans, policies, procedures, and guidelines to ensure adherence to such ‘Hyatt Operating Standards’
• Control over Strategic Planning: SOSA granted Hyatt International ‘complete control and discretion’ in formulating and establishing the overall general and strategic plan for all aspects of the hotel’s operation, including branding, product development, and day-to-day on-site operations.

It also granted Hyatt International power to formulate (i) purchasing policies with respect to selection of goods, supplies (and suppliers) and materials; (ii) policies on guest admittance, use of hotel for customary purposes, charges for hotel / room services; (iii) furnishing sales, marketing and centralized reservation services; (iv) making available its own and its affiliated companies personnel for the purpose of reviewing all plans and specifications for future alterations of the premises etc.; and (v) handling of the hotel’s operating bank accounts etc.

• Provision of ‘Know-How’: As part of its services, Hyatt International agreed to provide the hotel with its proprietary ‘Know-How’. This included written knowledge, skills, experience, operational information, and associated technologies developed by the Hyatt group worldwide. AHL was restricted from using such ‘Know-How’ exclusively for the operation of the hotel.
•  Personnel and Human Resources:

o Hyatt International, on behalf of and in consultation with AHL, could identify, recruit and assist in appointing any non-local employees of the hotel, including the General Manager, expatriate personnel, key executives and executive committee members. Although AHL had a right to approve the appointment of the General Manager, such approval couldn’t be unreasonably withheld or delayed.

o Hyatt International was required to align the hotel’s human resource policies with ‘Hyatt Operating Standards’.

o Hyatt International was empowered at its ‘sole and absolute discretion’ to assign its own (or affiliates’) employees to India on an occasional basis as needed without needing prior approval from AHL.

o Hyatt International or its affiliates could also temporarily assign its employees to serve as full-time executive staff at the hotel.

•  Title to the hotel: AHL was restricted from using the hotel as collateral for financing or refinancing without first securing a ‘non-disturbance and attornment agreement’ from the lenders, which was acceptable to Hyatt International. This was to ensure Hyatt International’s rights, including the realisation of its fees, under the SOSA were protected.
•  Service Fee: Hyatt International was entitled to ‘Strategic Fees’ for the services provided. This consideration was not a fixed fee, but it was calculated as a percentage of room revenue and other revenues and income – whether directly or indirectly derived from the hotel’s operations – as well as cumulative gross operating profit.
•  Reimbursement: Hyatt International was entitled to advance its own funds in payment of costs and expenses of AHL. Hyatt International was also entitled to reimbursement of costs for certain services, including internal audits, management operation reviews and specialised training programs. Further, AHL was required to reimburse Hyatt International or its affiliates for which employees were assigned to serve as full-time executive staff at the hotel in terms of the secondment arrangement.
•  Term of Agreement: The SOSA was for a long-term period of 20 years, with an option for a 10-year extension by mutual agreement

Upon examination of the facts of the case and the terms of SOSA and HOSA, the Delhi High Court held that Hyatt International had a fixed place PE in India. The SC dismissed Hyatt International’s appeal against the Delhi HC’s judgment.

SUPREME COURT RULING

As per SC, determination of a fixed place PE involves a fact-specific inquiry, including: the enterprise’s right of disposal over the premises, the degree of control and supervision exercised, and the presence of ownership, management, or operational authority.

The SC distinguished the Hyatt International case from ADIT vs. M/s. E-Funds IT Solutions Inc³ (“E-funds case”) on facts. The SC noted that in the E-funds case, the Indian subsidiary merely provided back-office support and was compensated on an arm’s length basis, with no involvement in core business functions. In contrast, the SC noted that in the Hyatt International case, “the hotel itself was the situs of the appellant’s primary business operations, carried out under its direct supervision and aligned with its commercial interests”.

Similarly, the SC also distinguished UOI v. U.A.E Exchange Centre⁴ case on facts holding that considering the functions of Hyatt International, “cannot be said that they were performing merely ‘auxiliary’ functions.”

3(2018) 13 SCC 294.

4 (2020) 9 SCC 329

The SC’s decision was grounded on the following key principles:

1. The ‘At the Disposal’ Test – Operational vs. Actual Physical Control:

•  The SC negated Hyatt International’s argument that the absence of an exclusive or designated physical space within the hotel precluded the existence of a PE. Relying on the Formula One World Championship Limited v. CIT (“Formula One case”), the SC affirmed the principle that for a place to be considered ‘at the disposal’ of an enterprise, it does not require legal ownership, a rental agreement, or exclusive physical possession of a specific area. Temporary or shared use of space is sufficient, provided business is carried on through that space.
•  The SC also negated the argument that the absence of a specific clause in the SOSA permitting the conduct of business from the hotel premises negated the existence of a PE. Relying on the Formula One case, the SC held that the test is not whether a formal right of use is granted, but whether, in substance, the premises were ‘at the disposal’ of the enterprise and were used for conducting the core business functions of such enterprise. Effectively, SC
•  The SC found that Hyatt International exercised pervasive and enforceable control over the hotel’s strategic, operational, and financial dimensions under the SOSA. Specifically, the SOSA provided Hyatt International with powers to (a) appoint and supervise the General Manager and other key personnel, (b) implement human resource and procurement policies, (c) control pricing, branding, and marketing strategies, (d) manage operational bank accounts, and (e) assign personnel to the hotel without requiring the AHL’s consent.
•  As per the SC, such rights under the SOSA went well beyond mere consultancy and indicated that Hyatt International was an active participant in the core operational activities of the hotel.
•  Hyatt International’s ability to enforce compliance, oversee operations, and derive profit-linked fees from the hotel’s earnings demonstrated a clear and continuous commercial nexus and control with the hotel’s core functions. This nexus satisfied the conditions necessary for the constitution of a fixed place PE under the DTAA. In effect, Hyatt International was running AHL and therefore was carrying on the business of AHL in India.

2. Substance Over Form:

•  The SC looked past the formal bifurcation of contracts (i.e. SOSA for strategic services and HOSA for day-to-day management). It noted that Hyatt India was obligated to implement the policies and standards dictated by Hyatt International. This structure ensured that Hyatt International retained ultimate control over the hotel’s operations, effectively using its Indian affiliate as an instrument to execute its business strategy within the hotel premises. The SC reiterated the well-settled principle that legal form does not override economic substance in determining PE status.
•  This holistic analysis of contracts split up between Hyatt International and its Indian affiliate by SC is similar to the issue of splitting of contracts in the case of Supervisory PE⁵ captured in BEPS Action Plan 7 (Preventing the Artificial Avoidance of Permanent Establishment Status). The recommendation of BEPS Action Plan 7 was eventually adopted in Article 14 (Splitting-up of Contracts) of MLI (Multilateral Convention to Implement Tax Treaty related measures to prevent Base Erosion and Profit Shifting). Although this is not directly applicable to the case of fixed place PE, the principle applied by SC in the Hyatt International case is similar to the principle provided in Article 14 of the MLI.

3. Fixed place PE through presence of employees in India: The SC held that frequent and regular visits by Hyatt International’s employees/ executives established continuous and coordinated engagement, even though no single individual exceeded the 9-month stay threshold. Under Article 5(2)(i) of the DTAA, the relevant consideration was the continuity of business presence in aggregate – not the length of stay of each individual employee. Once it was found that there was continuity in the business operations, the intermittent presence or return of a particular employee became immaterial and insignificant in determining the existence of a PE.

4. Application of Stability, Productivity, and Dependence Tests: The SC implicitly endorsed the Delhi HC’s finding that the 20-year duration of the SOSA, coupled with the Hyatt International’s continuous and functional presence, satisfied the tests of stability, productivity and dependence in constitution of a PE as laid down by the SC in Formula One case.

5 A specialized form of PE that arises when an foreign enterprise 
provides supervisory activities in connection with construction, 
building, installation, or assembly project  if they continue for more than a specified period.

ANALYSIS

The existing tax rules, which were developed by a group of economists appointed by the League of Nations in the 1920s, provided for a threshold for taxation of business profits in the form of PE. The concept of PE is largely conceived as a fixed place of business through which the business of an enterprise is wholly or partly carried on, thereby establishing a taxable nexus based on physical presence.

Under bilateral tax treaties, Article 5 serves as the cornerstone provision that defines the concept of PE. Article 5(1) of the tax treaties captures this fixed place concept of PE. Article 5, in addition to the fixed place concept of PE, recognises other distinct categories of PE, like service PE⁶, agency PE⁷, supervisory PE⁸ etc. Regardless of the type of PE established, the fundamental implication remains consistent, i.e., attribution of profits to the PE for taxation purposes. Once a PE is determined to exist, the source country gains the right to tax the profits attributable to that PE under Article 7 of the bilateral tax treaties.

6 Constitution of service PE is connected with the provisioning of services
 by an enterprise in a jurisdiction through its employees for more than 
a specified period in a year.

7 Agency PE encompasses the situation when a foreign enterprise operates 
through a dependent agent who has the authority to conclude contracts 
on behalf of the foreign enterprise. If the agent habitually exercises 
such authority, a PE is deemed to exist even without a fixed place of business

8 Supra note 5.

The SC’s ruling in the Hyatt International case is a landmark ruling in India’s PE jurisprudence, which reiterates the substance over form principle. The decision not only has significant implications for the hospitality industry but also for all MNCs conducting business in India, especially for MNCs having cross-border service agreements, involving strategic / management advisory, revenue-sharing models, etc.

Economic nexus vis-vis actual physical footprint

Over the years, as businesses become more globalised and conducting business in another country without actual physical presence is enabled through advancement in digital technology, the concept of PE has also evolved. Considering that the determination of PE is a factual exercise, the Indian Courts have adjudicated several principles on this aspect. The Andhra Pradesh High Court in the case of CIT vs. Visakhapatnam Port Trust⁹ explained the concept of a PE as postulating a substantial element of the presence of a foreign enterprise in another country. The presence had to additionally meet the test of an enduring and permanent nature. This decision propounded the concept of ‘virtual projection’.

9 [1983] 15 Taxman 72/1983 SCC Online AP 287

The SC’s decision in case of Formula One case marked another watershed moment in the jurisprudence on PE determination. In the Formula One case, the racetrack was held to be a PE for the foreign entity because it had control and the premises were at its disposal for its business, albeit for a short duration.

The Hyatt International case builds directly on this foundation. The difference is a lack of exclusive physical place ‘at the disposal’ of a foreign taxpayer in India. The SC noted that a 20-year long agreement, along with Hyatt International’s continuous and functional presence, satisfied the tests of stability, productivity and dependence for the constitution of fixed place PE. Essentially, the Indian hotel being controlled by Hyatt International from outside India was the key factor in SC’s determination of a fixed place PE. The decision enforces the principle of economic nexus rather than actual physical footprint to form the basis of taxation.

The SC’s conclusion was heavily influenced by several facts embedded within the SOSA, which collectively demonstrated pervasive control. Some of the facts that serve as a clear warning for businesses are:

•  Absolute Strategic Control: The SOSA explicitly granted Hyatt International ‘complete control and discretion’ over all formulation and establishment of the strategic plan for all aspects of the hotel’s operation, leaving AHL, the owner of the hotel, with minimal rights. This transcended beyond mere quality control.
•  Unfettered Right of Access: The SOSA gave Hyatt International the ‘sole and absolute discretion’ to assign its employees to the Indian hotels whenever it deemed necessary without needing prior approval, which indicates that the premises were constantly available to Hyatt International.
• Overarching Control on Title: The SOSA required AHL to obtain Hyatt International’s acceptance of a ‘non-disturbance and attornment agreement’ before using the hotel as collateral for loans. This showcased a level of control that went far beyond mere service provision.

Employee presence and travel

Even though a service PE was not being constituted (as the time threshold provided in the DTAA was not being met) in this case, the finding of the SC in relation to employee presence/travel is crucial. The SC decision indicated that even if the specific service PE conditions are not met, a fixed place PE can still be established if the foreign enterprise exercises pervasive control over a place where its core business is conducted. The SC has, in effect, concluded that Article 5(1) is broader than the service PE article, and frequent employee travel establishing continuity of business operations may also constitute a fixed place PE. Therefore, in addition to tracking the duration of employee travel, it will be crucial for MNCs to look at the exact role of the employee and the nature of the relationship with the Indian entity to conclude on the constitution of PE.

Even in the absence of travel of employees of a foreign company to India, the determination of the economic employer of employees is also crucial. The Delhi High Court in the case of Centrica India Offshore (P.) Ltd. v. CIT¹⁰ had observed that the substance of the employment relationship has to be looked at instead of the form. Whilst observing the economic employment to be with the Indian entity, courts have considered factors such as (i) control and supervision being exercised with the Indian entity, (ii) the Indian entity bearing the cost of salary and discharging the tax withholding obligations, (iii) the Indian entity having the right to terminate the secondment, etc.¹¹

10  [2014] 224 Taxman 122 (Delhi)/[2014] 364 ITR 336 (Delhi).

11  M/s. Toyota Boshoku Automotive India Pvt. Ltd. v. DCIT, ITPA No. 1646/Bang/2017),
 Goldman Sachs Services (P.) Ltd. v. DCIT, 2022 138 taxmann.com 162 (Bangalore Trib), 
Serco India (P.) Ltd. v. DCIT, 2023 154 taxmann.com 56 (Delhi Trib), 
Abbey Business Services (India) (P.) Ltd. v. DCIT, [2012] 23 taxmann.com 346 (Bang.).

Preparatory and auxiliary / back-office functions

Tax treaties incorporate specific exclusions that prevent certain activities from constituting a PE even when they might otherwise meet the basic definition. Article 5 of tax treaties generally provides a comprehensive list of activities that are explicitly excluded from PE status, including the use of facilities solely for storage, display, or delivery of goods, maintaining a stock of goods for processing by another enterprise, maintaining a fixed place of business solely for purchasing goods or collecting information, and carrying on activities of a preparatory or auxiliary character.

Preparatory activities refer to work undertaken in contemplation of the essential and significant part of the principal activity of an entity¹², while auxiliary activities are those activities that don’t form an essential and significant part of the activity of the enterprise as a whole.¹³ These exclusions ensure that routine, supportive, or preliminary business activities do not inadvertently create taxable nexus in a jurisdiction.

The courts have also held that the provision of back-office or support services should not amount to the creation of PE as they do not form part of the primary business activity of a foreign entity in India.¹⁴

12 Progress Rail Locomotive Inc. vs. Deputy Commissioner of Income-tax,
 International-Taxation, [2024] 466 ITR 76 (Delhi).

13 Klaus Vogel on Double Taxation Conventions, Edited by Ekkehart Reimer 
and Alexander Rust, Wolters Kluwer, 5th edition, Vol. 1, 2022

14 E-funds case; Progress Rail Locomotive Inc. (formerly Electro Motive Diesel Inc.) 
Vs. Deputy Commissioner of Income Tax (International Taxation), Circle  – Noida & Ors

As per the SC in the Hyatt International case, the actual nature of work should be seen in determining whether such activities are auxiliary or preparatory in nature. The SC also laid emphasis on the long period over which the services had been provided to the Indian hotel, along with the remuneration model, to hold that the nature of activities did not fall within the ambit of ‘auxiliary or preparatory activities’ or constitute back-office functions.

CONCLUSION AND WAY FORWARD
This judgment effectively lowers the threshold for what can constitute a fixed place PE. The emphasis has decisively shifted from requiring a specific, physical location (like a dedicated office) to a broader test of whether a location is operationally ‘at the disposal’ of the foreign enterprise. By diluting the traditional requirements, the ruling opens the door for tax authorities to scrutinise a wider range of business arrangements, which will likely lead to an increase in PE-related litigation.

This creates a risky situation for MNCs that have long relied on a bifurcated model — keeping strategic functions and intellectual property in an offshore entity while a local affiliate handles Indian operations. This structure was often perceived as a way to manage PE exposure. The SC has now effectively plugged this perceived loophole. It has sent a clear message that if a foreign enterprise exercises pervasive control and runs its core business through an Indian location, it cannot shield itself from taxation merely by avoiding a direct physical footprint and separating contracts.

Further, this judgment puts the onus on foreign enterprises to demonstrate a genuine separation of functions and independence with their Indian affiliates in the provision of services to third-party Indian enterprises. If the Indian affiliate is merely an extension of the foreign parent, implementing its directives without independent discretion, the structure is vulnerable to being disregarded.

In light of this evolving landscape, MNCs have several crucial steps to consider.

MNCs should conduct a thorough internal review of their operational structures in India, specifically examining the extent of control and involvement of the foreign enterprise in the day-to-day activities of their Indian affiliates. This review should include an assessment of resource allocation, decision-making processes, and contractual arrangements to identify any areas that could be interpreted as creating a fixed place PE. Furthermore, they should consider restructuring their agreements to clearly delineate the scope of services and responsibilities between the foreign enterprise and the Indian affiliate, ensuring that the Indian entity has genuine independent discretion in its operations. Training for local teams on maintaining operational independence and proper documentation of all inter-company transactions will also be vital to withstand potential scrutiny from tax authorities.

BCAJ Admin

India’s startup ecosystem has rapidly evolved into the world’s third largest, expanding from 500 recognised ventures in 2016 to over 1.59 lakh by 2025. Backed by initiatives like Startup India, Atal Innovation Mission, and the Seed Fund Scheme, this ecosystem has attracted nearly $70 billion in funding, created 120+ unicorns, and generated 1.7 million jobs, with growing participation from Tier II and III cities. Startups have disrupted industries ranging from e-commerce to fintech and healthcare, reshaping consumer experiences. However, sustainable growth requires more than innovation – it demands financial discipline, compliance, and governance. Chartered Accountants (CAs) play a pivotal role as strategic partners, guiding founders through structuring, investor agreements, tax compliance, valuations, and risk management. Their contribution spans both in-house leadership and external advisory roles, ensuring startups remain investor-ready and resilient. Increasingly, CAs are also emerging as entrepreneurs themselves, leveraging their expertise to build ventures in fintech, SaaS, and consulting.

INTRODUCTION

In an era of rapid technological advancement and shrinking global boundaries, startups have emerged as powerful engines of economic growth. Over the past decade, India’s entrepreneurial landscape has witnessed an unprecedented surge, with thousands of ventures evolving into unicorns and attracting billions in funding. These startups have redefined convenience, transforming how we order food, travel, make payments, and access healthcare, while creating innovative solutions to address complex societal challenges.

At the forefront of this transformation are technocrats and visionaries leveraging technology to deliver new-age products and services. However, while founders often possess deep technical expertise, many are first-generation entrepreneurs with limited exposure to corporate governance, regulatory frameworks, and structured financial management. This is where Chartered Accountants (CAs) step in, not merely as compliance managers, but as strategic partners enabling startups to grow responsibly, attract investment, and navigate the complexities of a regulated business environment.

INDIAN START-UP SAGA

India’s startup scene in 2025 is nothing short of inspiring. In less than a decade, we’ve gone from just 500 recognised startups in 2016 to over 1,59,000 today, making India the third-largest startup ecosystem in the world, right behind the US and China and it’s not just about numbers. These ventures span everything from cutting-edge AI and deeptech to fintech, healthcare, e-commerce, and manufacturing. While big cities like Bengaluru, Delhi-NCR, Mumbai, and Hyderabad continue to lead the charge, the real game-changer is that more than half of all new startups are now coming from Tier II and Tier III cities. This shift shows that entrepreneurship in India is no longer limited to a few metro hubs, it’s spreading deep into the heart of the country.

Funding too has kept pace. In the first half of 2025 alone, Indian startups pulled in $4.8–5.7 billion in investments, keeping us in the global top three for startup funding. Yes, there’s been some cooling compared to the highs of previous years, but early 2025 saw a healthy rebound – Q1 funding jumped 40% over the same period in 2024. Over the last five years, startups here have raised close to $70 billion, pushing the overall ecosystem value to $500 billion+ and creating 120+ unicorns.

This success is built on a strong foundation, visionary government programmes like Startup India, the Atal Innovation Mission, and the Seed Fund Scheme have made it easier for new ideas to take shape and grow. The impact is visible: 1.7 million+ jobs created, and 75,000+ startups led by at least one-woman director, adding to the diversity of voices shaping India’s innovation journey.

REGULATORY REPERTOIRE

A thriving startup ecosystem depends not only on entrepreneurial energy but also on a conducive business and regulatory environment. Recognising this, governments around the world, including India, have played a pivotal role in nurturing innovation-led enterprises through policy support and institutional backing. One such landmark initiative by the Indian government is the “Startup India, Stand Up India” campaign, launched to promote entrepreneurship, simplify compliance, and facilitate access to funding. This initiative has catalysed the creation of thousands of startups and contributed meaningfully to employment generation across the country.

As a result of India’s digital revolution, the country has seen the meteoric rise of homegrown giants such as Flipkart, Myntra, and Snapdeal, platforms that once began as modest startups and have now become some of the most valuable and influential businesses in India’s entire digital economy. Today, these brands anchor India’s thriving e-commerce sector, competing vigorously alongside new entrants and global players. Flipkart remains one of India’s top online marketplaces, continuously expanding its offerings, while Myntra leads in online fashion and innovation with exclusive labels, AI-driven personalization, and nationwide reach. Snapdeal also retains a prominent role, focusing on value-driven segments and tier-II and tier-III cities. This digital transformation is further reflected by the emergence of other leading platforms including Meesho, Nykaa, AJIO, and JioMart, which have significantly reshaped the e-commerce and retail landscape

CURRENT LANDSCAPE

In recent years, terms like startup, entrepreneurship, and seed funding have become deeply embedded in India’s business vocabulary. This cultural shift has inspired a new generation of aspiring entrepreneurs, particularly among the youth, to take the leap into building ventures of their own. What’s remarkable is that this entrepreneurial wave is not confined to metropolitan hubs alone, it is sweeping across the country, reaching smaller towns and even rural regions, where individuals from diverse backgrounds are now actively pursuing their startup dreams.
At the heart of this transformation is the Startup India initiative, which has served as a catalyst for innovation and enterprise. By simplifying regulatory hurdles, promoting access to capital, and providing incubation support, the program has empowered thousands of young Indians to convert their ideas into scalable business models, thereby contributing to both employment generation and inclusive economic growth.

BRIDGING INNOVATION WITH FINANCIAL DISCIPLINE

While innovation and agility form the lifeblood of any startup, long-term success depends on building a business on solid financial and compliance foundations. Investors, regulators, and even customers increasingly expect young companies to demonstrate transparency, fiscal discipline, and legal compliance from the very beginning. This is where Chartered Accountants (CAs) become indispensable. With their deep expertise in financial structuring, taxation, statutory compliance, and strategic advisory, CAs not only help founders avoid costly mistakes but also position startups for sustainable growth and funding readiness. Their role extends far beyond bookkeeping, they act as financial architects, risk managers, and trusted business partners who translate entrepreneurial vision into a scalable, compliant, and investor-friendly enterprise.

HOW CA’S POWER STARTUP GROWTH – STRATEGIC PERSPECTIVE

While startups are often rooted in bold ideas and rapid innovation, they must also be built on a strong foundation of financial discipline, legal clarity, and operational compliance. Chartered Accountants play a critical role in helping founders navigate this complex landscape by guiding them through key agreements, policies, and compliance processes that safeguard the startup’s interests and facilitate long-term growth.

► Founder’s agreement: Aligning vision and responsibilities: A well-structured Founder’s Agreement is essential in defining the roles, responsibilities, ownership, and equity split among co-founders. CA’s work closely with legal advisors to ensure that this agreement reflects not only the business arrangement but also the financial and tax implications of founder equity, vesting schedules, and capital contributions. This clarity is crucial in preventing future disputes and setting a governance framework from day one.

► Shareholders’ agreement (SHA): Investor protection and financial governance: As startups raise capital from angel investors, venture capitalists, or strategic partners, a robust Shareholders’ Agreement becomes vital. CAs assist in shaping key financial covenants, investor rights, equity dilution protections, exit clauses, and drag-along/tag-along provisions. Their input ensures that the SHA aligns with valuation models, regulatory limits (such as those under FEMA for foreign investors), and long-term funding strategy.

► Non-Disclosure Agreement (NDA): Safeguarding competitive edge: Startups often operate around a unique value proposition, proprietary technology, or confidential financial data. CA’s advise on the financial confidentiality and intellectual property (IP) valuation aspects of NDAs and help establish internal controls that restrict access to sensitive information. This ensures that founders are protected while pitching to investors, onboarding vendors, or engaging with potential acquirers.

► Vendor and customer contracts: Financial and commercial due diligence: CAs review commercial contracts to evaluate risk exposure, cash flow impact, revenue recognition methods, and tax compliance. Startups often enter into service agreements, lease contracts, or payment gateway arrangements, each of which can have implications on accounting treatment, indirect tax obligations, or revenue milestones tied to investor commitments.

► Policies and disclosures: Risk mitigation and statutory alignment: Startups with a digital presence are required to host policies such as Terms of Use, Privacy Policy, Refund Policy, and Cookie Disclosures. While legal teams often draft the text, CA’s ensure these policies are consistent with financial disclosures, refund accounting, GST liabilities, and risk management protocols. They also help startups maintain proper audit trails for any terms with monetary impact.

► Intellectual property and valuation Support: While legal professionals file and prosecute IP registrations, CAs assist in identifying the financial value of IP assets and incorporating them into the startup’s balance sheet or valuation models. For investor presentations, strategic acquisitions, or business transfers, IP forms a critical part of the enterprise value, and CAs play a vital role in validating its commercial worth.

► Statutory and regulatory compliance: Startups must comply with several statutory obligations under the Companies Act, Income-tax Act, GST laws, and FEMA, among others. CAs assist in timely filing of returns, maintenance of records and ensuring compliance with requirements of tax & other laws. Non-compliance, even if inadvertent, can lead to penalties or jeopardize funding opportunities, CAs help mitigate these risks with systematic compliance frameworks.

OVERVIEW OF CHARTERED ACCOUNTANTS’ ROLE IN STARTUPS

IN-HOUSE CHARTERED ACCOUNTANTS

As startups evolve from idea-stage ventures to scalable businesses, the role of finance professionals becomes critical in laying the foundation for sustainable growth. Many startups engage CA’s in-house, particularly in the role of Finance Managers, Controllers, or even Chief Financial Officers (CFOs), depending on the stage of the business. These professionals bring a structured financial lens to what is often an unstructured entrepreneurial setup.

Key responsibilities of in-house CAs include:

► Establishing financial systems: CAs design and implement robust accounting systems and financial processes tailored to the startup’s nature, ensuring real-time tracking of income, expenses, assets, and liabilities.

► Ensuring statutory compliance: They oversee timely compliance with a range of statutory laws including the Companies Act, Income-tax Act, Goods and Services Tax (GST), and, where applicable, the Foreign Exchange Management Act (FEMA).

► Preparing financial statements and reports: CAs prepare quarterly and annual financial statements that meet statutory audit requirements and meet investor expectations, especially where funding is involved.

► Budgeting and forecasting: They play a key role in creating and monitoring budgets, cash flow forecasts, and variance analysis to support prudent financial planning and cost control.

► Advisory to founders and Board: CAs serve as strategic advisors, translating financial data into insights that help the board and founders make informed decisions related to fundraising, expansion, or pivots.

► Managing investor relations: For investor-funded startups, CAs are responsible for MIS reporting, cap table management, and addressing investor queries on financial performance.

► Internal control and risk management: They establish internal controls, define authorisation limits, and manage risks related to procurement, revenue leakage, or fraud.

► ESOP and equity structuring: CA’s help implement Employee Stock Option Plans (ESOPs) and manage equity issuances in line with tax and regulatory frameworks.

In essence, in-house CAs bring professionalism, structure, and strategic depth to startup finance functions, helping balance agility with financial discipline.

ROLE OF PRACTICING CHARTERED ACCOUNTANTS AS CONSULTANTS TO STARTUPS

Not all startups can afford or require full-time finance professionals in their early stages. This is where Practicing Chartered Accountants (CAs in public practice) step in as trusted external advisors. Their role goes far beyond traditional accounting and tax services, encompassing strategic financial support tailored to the dynamic needs of startups.

Key areas of contribution include:

► Business formation and structuring: Practicing CAs help founders choose the right form of business, private limited company, LLP, partnership, or OPC and ensure proper documentation, registration with MCA, PAN/TAN/GST, and DPIIT Startup
India recognition.

► Accounting and book-keeping: Many early-stage startups outsource book-keeping and accounts finalization to CA firms. They ensure timely and accurate accounting, month-end closures, expense classification, and audit preparedness.

► Direct and indirect taxation: Practicing CAs manage end-to-end taxation including:

•  GST registration, invoicing, input tax credit, and returns
•  Income tax computation, advance tax, TDS compliance
•  Representation before tax authorities for assessments and appeals

► Audit and assurance services: Depending on statutory requirements or investor mandates, CAs provide statutory audits, internal audits, limited reviews, and tax audits. They also conduct vendor audits or due diligence as required.

► Fundraising and valuation support: CAs prepare valuation reports under accepted methods (DCF, NAV, CCA) for equity funding, ESOPs, or regulatory purposes. They also assist with investor decks, financial models, and audit readiness.

► Virtual CFO Services: Many startups engage CAs to act as virtual CFOs on a retainer basis. They handle budgeting, investor communication, financial planning, and strategic advisory.

► FEMA and RBI Compliance: For startups receiving FDI or planning overseas expansion, CAs manage FDI compliance via FIRMS portal, FLA returns, pricing certifications, and external commercial borrowings (ECB) filings.

► Project reports and debt financing: CAs prepare CMA data, business plans, and project feasibility reports for securing bank loans, working capital facilities, or grants.

► Payroll and labour law compliance: Startups often outsource payroll processing, TDS deduction on salaries, and PF/ESI filings to CA firms.

► IP capitalisation and financial reporting: While IP registration is handled by legal professionals, CAs advise on capitalisation, amortisation, and balance sheet treatment of IP assets, especially for tech-heavy startups.

► Due diligence and exit readiness: Practicing CAs perform financial due diligence for M&A transactions, investor exits, or strategic buyouts. They help startups prepare for these events by ensuring clean books and internal controls.

► MIS and reporting systems: CAs implement customized reporting frameworks, including KPIs, dashboards, and business intelligence tools for founders and investors.

Thus, Practicing Chartered Accountants offer end-to-end financial, regulatory, and strategic support that is vital for any startup navigating the complexity of growth and funding.

CHARTERED ACCOUNTANTS AS ENTREPRENEURS

Beyond their traditional roles, many Chartered Accountants are now emerging as successful entrepreneurs themselves. Armed with a deep understanding of finance, taxation, compliance, and business models, CAs are well-positioned to build startups of their own, particularly in fintech, SaaS, consulting, and edtech sectors.

CAs turned entrepreneurs bring with them:

•  A structured and risk-managed approach to building businesses
•  Financial acumen to manage capital efficiency
•  Strategic foresight to build scalable and compliant ventures
•  Deep networks across investors, regulators, and industry experts

India’s thriving startup ecosystem offers multiple avenues for CA’s not just as enablers, but as founders and business leaders themselves. Their problem-solving mindset, ethical grounding, and multidimensional skills make them natural candidates to thrive in the startup world.

With the rise of platforms like Shark Tank India and Startup India, the narrative of CA-led startups is only gaining momentum. Many are leading innovations in accounting tech, compliance automation, credit scoring, investment platforms, and more adding value far beyond traditional boundaries.

In summary, Chartered Accountants are no longer just compliance managers but are shaping the future of Indian entrepreneurship both as advisors and as innovators.

ESSENTIAL TRAITS OF A CHARTERED ACCOUNTANT IN THE STARTUP ECOSYSTEM

In today’s dynamic business environment, technical expertise alone is not enough. Chartered Accountants are expected to embody a set of personal and interpersonal qualities that distinguish them as trusted professionals and long-term partners to their clients. These attributes, often subtle yet powerful, become the hallmark of their professional identity and are essential in the context of startup advisory and financial leadership.

Problem-solving mindset: Whether advising a bootstrapped founder or a VC-backed venture, CA’s are consistently approached to solve complex financial, compliance, or strategic issues. Their ability to offer practical, legally sound, and efficient solutions, often under pressure and within tight timelines, is what builds trust. A CA’s role is not just to interpret laws, but to translate them into actionable business decisions, maintaining compliance both in letter and in spirit.

Discipline and strategic focus: Startups thrive on agility, but they also require financial discipline to scale sustainably. CAs bring this balance. They help eliminate inefficiencies, enforce process controls, and guide businesses toward long-term goals. Successful CAs are methodical in their approach, aligning every financial or regulatory step with the startup’s broader strategy.

Confidence rooted in competence: Entrepreneurs look for assurance in the professionals they engage, especially when navigating uncertain financial or regulatory waters. CA’s by virtue of their rigorous training and real-world exposure, are well-positioned to offer this confidence. Whether they are representing a client before the tax department, presenting forecasts to investors, or recommending capital allocation strategies, CAs are expected to speak with clarity and conviction.

People skills and communication: Beyond numbers, a CA must be able to communicate financial implications in a language founders, investors, and employees can understand. In the startup context, this involves translating MIS reports into strategy, presenting audit observations with empathy, or training founders on compliance awareness. CAs with strong people skills are not just advisors—they become extensions of the leadership team.

Work ethic and professional integrity: Startups operate at a frenetic pace, and the professionals they work with must match that energy with reliability and integrity. CAs are bound by a strict code of ethics, and this professional grounding translates into trust, especially when handling sensitive data or representing companies before regulators. Ethical behaviour, independence, and a strong work ethos are not just regulatory requirements, they are core to the CA’s professional identity from day one.

CONCLUSION

In today’s fast-paced and highly competitive startup world, having a great idea is only the beginning. What truly sets successful ventures apart is the ability to pair vision with financial discipline, regulatory clarity, and strategic direction. Chartered Accountants bring exactly this blend, combining deep technical expertise with real-world business insight to help founders make smarter decisions at every stage of their journey. From choosing the right structure and ensuring compliance to planning for sustainable growth, they act as trusted partners who help navigate challenges and unlock opportunities. For any entrepreneur aiming to turn ambition into lasting impact, a Chartered Accountant isn’t just a service provider, they are a catalyst for growth and a steady hand on the wheel.

REFERENCES

https://pib.gov.in/PressReleasePage.aspx?PRID=2093125

https://m.economictimes.com/tech/startups/dpiit-recognises-161150-entities-as-startups-as-of-january-government/articleshow/118887182.cms

https://pib.gov.in/PressReleasePage.aspx?PRID=2098452

https://amity.edu/arjtah/pdf/vol1-2/10.pdf

https://blog.mygov.in/editorial/startup-india-what-it-means-for-the-youth/

https://inc42.com/datalab/presenting-the-state-of-indian-startup-ecosystem-report-2020/.

BCAJ Admin

Intangible assets, especially brands and intellectual property (IP), represent over 90% of corporate value in global enterprises. While trademarks provide legal rights, their true worth emerges through economic activity – marketing, consumer engagement, and brand loyalty – creating a key distinction between legal ownership and economic control.

Case studies reinforce this divide. Nestlé India shareholders resisted increased royalty payouts to the Swiss parent, citing local brand-building efforts. Hyundai India’s IPO also highlighted that despite trademarks being legally owned by Hyundai Korea, significant equity was created in India.

This divergence makes valuation essential, particularly in transfer pricing where tax authorities scrutinise royalty payments, advertising spends, and brand promotion. Courts increasingly apply the principle of substance over form, leading to disputes around AMP expenditure, bright line tests, and allocation of profits. The OECD’s DEMPE framework – Development, Enhancement, Maintenance, Protection, and Exploitation – supported by FAR analysis and income-based valuation methods, ensures arm’s length outcomes aligned with economic contributions

BACKGROUND AND INTRODUCTION

In today’s business environment, intangible assets have become vital strategic resources for multinational enterprises (MNEs) [and local enterprises alike], driving value creation, competitive advantage, and sustainable growth. These assets, which are not physical or financial, inter alia, include patents, trademarks, copyrights, trade secrets, customer lists, and know-how, and their use or transfer would be compensated between independent parties. Among companies in the S&P 500, intangibles make up more than 90% of their market value¹. Intangibles now represent a very large fraction of corporate capital, determining a business’s ability to grow more than physical assets..

1 Reference: Ocean Tomo (2021), Intangible Asset Market Value Study

In the world of intellectual property, trademarks occupy a unique position. They are legal rights with no inherent economic value until activated through consistent and strategic use in the marketplace. While a registered trademark may confer exclusive legal protection, its real value emerges only when it gains consumer recognition, loyalty, and preference. This value is created not merely by registration, but through sustained marketing efforts, brand visibility, product quality, and customer experience. Until consumers prefer to make a conscious choice for a certain trademark, there is no real value attributable to the trademark. However, this conscious choice is extremely valuable for every company.

Many global businesses hold portfolios of high-value trademarks, often referred to as “billion-dollar brands”. A trademark is the legal title to a name or logo, while a brand is the image, trust, and loyalty people associate with it. For example, the word “Nike” is a trademark, but the feelings of performance and style it evokes form the brand. However, the value of these brands is largely attributable to the economic activity surrounding them viz., advertising spend, market penetration, and consumer goodwill. This cannot be attributed to legal ownership alone. As such, in commercial reality, the party funding and driving the brand-building efforts often creates the economic substance of the trademark, even if the legal ownership rests elsewhere.

This distinction becomes critically important in scenarios involving group structures, shareholder disputes, or related-party transfers, where questions of value allocation between the economic and legal owners of trademarks often arise. This article seeks to examine that divide and offer a framework for valuing and allocating the economic benefits of trademarks when legal and economic ownership are not aligned.

Corporate structures often reflect the importance of intangibles, with MNEs’ performance and profitability frequently stemming from the intangible assets of their parent companies. For sound business reasons, MNE groups may centralise ownership of intangibles or rights in intangibles. This can involve transferring legal ownership to a central location, such as a foreign associated enterprise or an “IP company”. While the legal owner may initially receive proceeds from exploitation, the ultimate right to retain returns depends on the functions performed, assets used, and risks assumed by all group members contributing to the intangible’s value. This separation necessitates a thorough functional analysis, considering the Development, Enhancement, Maintenance, Protection, and Exploitation (DEMPE) functions, assets, and risks associated with the intangibles to accurately determine arm’s length compensation for all contributing entities. In such cases, the legal owner generally enters into a licensing arrangement with the entity using the intangible, enabling the user to commercially exploit it in return for an agreed royalty or fee.

ILLUSTRATIVE CASES ON LEGAL VS. ECONOMIC OWNERSHIP OF INTANGIBLES

The following examples highlight situations where the legal ownership of trademarks rests with a foreign parent, yet significant economic value is created by the local entity through its market, operational, and brand-building efforts.

Nestlé

Nestlé is one of the global giants when it comes to brand driven companies and, one of its most important assets are its trademarks.

In 2024, payment of general licence fees (royalty) by Nestlé India Limited (“Nestlé India”) to Société des Produits Nestlé S.A. (“Nestlé Switzerland”) was proposed to be increased from the existing 4.5% to 5.25% of the net sales of the products sold by Nestlé India, net of taxes. The shareholders of Nestlé India had rejected this resolution.

European money managers noted² that royalty payouts have outpaced Nestlé India’s growth in both revenue and profits. They also highlighted a lack of clear justification, stating that Nestlé Switzerland’s marketing and R&D spends did not warrant an increased claim on Nestlé India’s earnings.

2 https://www.livemint.com/companies/news/nestle-india-shareholders-royalty-payment-to-parent-maggi-11716027711804.html

Even in the case of a highly profitable and established group like Nestlé, shareholders pointed out that while Nestlé Switzerland holds legal ownership of the trademarks, Nestlé India contributes significantly to value creation. This incident emphasised that the economic value generated through the Nestlé India’s efforts should rightfully allow Nestlé India to retain a fair share of the resulting benefits.

HYUNDAI MOTOR COMPANY

Hyundai Motor India Limited came out with its IPO in 2024. Hyundai Motor India Limited (“Hyundai India”) is entirely selling goods under the trademark licensed from Hyundai Motor Company, South Korea (“Hyundai Korea”). The Red Herring Prospectus identified five factors for the benefit of the Indian entity:

► First, “strong parentage” of Hyundai Motor Group: Hyundai India has the support of Hyundai Korea in many aspects of its operations including management, R&D, design, product planning, manufacturing, supply chain development, quality control, marketing, distribution, brand, human resources and financing, among others.

► Second, “advanced technology”: Access to “smart factory” platform of Hyundai Korea, global technology access as a part of the Hyundai motor group.

► Third, “Hyundai brand”: The RHP contains: “In addition to benefitting from the strength of the “Hyundai” brand globally, we have established “Hyundai” as a trusted brand in India. We have received the highest number of the Indian Car of the Year (ICOTY) awards over the years (based on data provided in the CRISIL report). We believe these efforts have helped us evolve as an inclusive brand in India, expand and diversify our customer base and bolster our connection with the youth.”

► Fourth, “Localisation”

► Fifth, “Win-Win approach” across stakeholders including customers, dealers, suppliers, employees, environment and community.

Most of the advantages cited are only economically owned by Hyundai India whereas the legal ownership of the underlying intangible assets lies with Hyundai Korea. In spite of this, the Company sought and also got a valuation of around ₹ 1.59 trillion or little less than USD 19 billion. This was as much as 42% of its parent, Hyundai Korea’s USD 44-billion valuation³.

3 https://www.newindianexpress.com/business/2024/Oct/09/hyundai-sets-price-band-at-rs-1865-1960-for-biggest-ever-ipo-of-rs-27870-crore#

NEED FOR VALUING INTANGIBLE ASSETS

A primary and critical need for valuing intangible assets arises in the context of transfer pricing. Tax administrations focus on ensuring that transactions involving the use or transfer of intangibles between associated enterprises comply with the arm’s length principle. Identifying and examining the specific intangibles involved is fundamental to this analysis, regardless of whether they are transferred directly or used indirectly in connection with sales of goods or the provision of services.

Valuation serves to support the necessary functional analysis, which seeks to identify and assess the contributions of different MNE group members in terms of functions performed, assets used, and risks assumed (FAR analysis) in relation to the intangibles’

Development, Enhancement, Maintenance, Protection, and Exploitation (DEMPE). This analysis is essential because legal ownership of an intangible, by itself, does not necessarily confer the right to retain all returns from its exploitation. Compensation must instead be aligned with the actual economic contributions made. Valuation provides a means to determine the appropriate remuneration for these contributions.

Given the often-unique characteristics of intangibles, identifying reliable comparable uncontrolled transactions can be challenging. In such situations, valuation techniques, particularly income-based methods like discounted cash flow, are valuable tools for estimating arm’s length prices. This is especially pertinent for Hard-to-Value Intangibles (HTVI), where projections of future value are inherently uncertain at the time of the transaction. For HTVI, tax administrations may utilise ex post outcomes as presumptive evidence for pricing, acknowledging the information asymmetry and difficulty in objectively verifying taxpayer valuations ex ante.

Beyond the sphere of transfer pricing, intangible valuation is undertaken for several other purposes, including transaction pricing, licensing arrangements, financial accounting requirements (such as purchase price allocations following acquisitions), informing internal management strategy, shareholder disputes, and facilitating access to debt or equity financing. While significant challenges exist in areas like financing due to factors such as the illiquidity of certain intangible assets and limited understanding among lenders, the valuation of these critical assets remains fundamental to ensuring the proper allocation of value based on economic substance.

TAX LITIGATION

Payments for royalties, such as for the use of trademarks or technical know-how, are subject to scrutiny for their arm’s length price. There have been various complex nuances beyond the simple valuation of the rate of royalties or intangible assets, which has often led to developing new concepts such as the bright line test or focusing on substance over form. Some of the topics that have happened are discussed below for information:

► Treatment of AMP Expenditure as Brand Promotion for AE: In the case of Goodyear India Ltd, vs DCIT, Circle 12(1) [ITA No. 5650/Del/2011], the tax department viewed Advertising, Marketing, and Promotion (AMP) expenditure incurred by the Indian entity as being, in part, for the promotion of the brand owned by its foreign Associated Enterprise (AE). This led to the contention that the Indian entity should be compensated by the AE for this alleged service of building or promoting the foreign brand in India. The tax department argued that this activity results in the creation or enhancement of marketing intangibles for the benefit of the AE.

► Application of Substance over Form Principle: Even before the introduction of formal general anti-avoidance regulation in the Income-tax Act, 1961, tax authorities intended to apply the principle of substance over form, looking beyond the formal legal structure of transactions to their underlying economic reality. Litigation can ensue in an attempt to re-characterise transactions as their economic substance may differ from their form or if the form and substance, viewed in totality, differ from arrangements independent entities would adopt and impede appropriate transfer pricing determination.

► Attempt to Segregate AMP as a Separate International Transaction: Tax authorities often attempt to treat AMP expenditure as a stand-alone international transaction, separate from other transactions like manufacturing or distribution, even when the assessee has benchmarked the overall entity’s profitability.

► Historical Reliance on the Bright Line Test (BLT) for AMP: Courts have largely rejected its validity; however, tax authorities have historically and commonly applied the Bright Line Test (BLT) to quantify the portion of AMP expenditure deemed to be for the benefit of the foreign AE. The BLT involves comparing the assessee’s AMP to sales ratio with that of comparable companies and treating the “excessive” expenditure as the value of the international transaction for brand building services.

However, it is to be noted that in practice, the common approach has been to perform or demand a FAR analysis to understand the roles, assets, and risks of each party involved in transactions related to intangibles. This analysis is crucial for determining the appropriate allocation of profits and evaluating whether the compensation received or paid is at arm’s length.

VALUING VARIOUS COMPONENTS OF INTANGIBLE ASSETS

Consistent with the International Valuation Standards (IVS), the basis and premise of value must be defined upfront. IVS 104 deals with bases of value and IVS 105 with valuation approaches and methods, while IVS 210 provides specific guidance on intangible assets, including identification of the subject asset, contributory assets, control, and remaining useful life. ICAI Valuation Standards (ICAI VS) 102 and 103 likewise require clear articulation of the valuation base and premise before proceeding, with ICAI VS 302 covering intangible assets. Under these frameworks, recognised approaches are Market, Income, and the Cost Approach. For compliance with IVS or ICAI-VS, the valuer must select approaches and methods aligned to the stated base and premise, apply them in accordance with prescribed guidance, and ensure the analysis is transparent, well-supported, and fit for the intended purpose of the valuation.

Before initiating any valuation exercise, it is essential to clearly establish the base and premise of valuation i.e., whether the objective is fair valuation or arm’s length pricing. This distinction fundamentally affects the methodology. Fair valuation demands adherence to existing contractual terms; assumptions must reflect the actual economic reality of enforceable agreements. For instance, altering a royalty rate to align with market benchmarks may be appropriate under an arm’s length approach, but if applied in a fair value context, it necessitates remeasuring the associated liability, as the entity no longer enjoys the original contractual benefit. Overlooking such adjustments leads to a misrepresentation of fair value by ignoring the economic cost of deviating from binding terms.

On the other hand, when the valuation is conducted for arm’s length pricing, though it may use fair value principles, it deliberately sets aside the counterbalance required under contractual obligations. This fine distinction is crucial, especially in valuation contexts beyond taxation, and must be clearly understood to ensure that the valuation outcome is both technically sound and contextually appropriate. In this article, we are focusing on arm’s length principle for valuing intangible assets and not the fair valuation aspect, which can yield different results on the overall valuation of an entity.

A core component of applying the arm’s length principle is the Functional Analysis, which seeks to identify the economically significant activities and responsibilities undertaken, assets used or contributed, and risks assumed by the parties to the transactions. This analysis is essential not only for tangible property and services but is of particular significance when dealing with intangibles. In cases involving the use or transfer of intangibles, it is especially important to ground the functional analysis on an understanding of the MNE’s global business and the manner in which intangibles are used to add or create value across the entire supply chain, piercing through the form and looking at the commercial substance that prevails and is in actual practice.

Acknowledging the unique challenges in valuing intangibles and allocating the returns derived from their exploitation, the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) initiative, specifically Action 8, led to the introduction of the Development, Enhancement, Maintenance, Protection, and Exploitation (DEMPE) framework. DEMPE is explicitly outlined as a framework within the OECD’s guidance on intangibles to provide additional clarity. The DEMPE functional analysis serves as a guideline for analysing the functions performed, assets used, and risks assumed by various entities within an MNE concerning intangible assets. It is designed to confirm that the allocation of returns from the exploitation of intangibles, and the allocation of costs related to intangibles, is performed by compensating MNE group entities for their contributions in these specific areas.

The five elements of the DEMPE framework are defined as follows:

► Development: Refers to the creation or enhancement of intangible assets, including activities such as research, design, and testing. Not all research and development expenditures necessarily produce or enhance an intangible.

► Enhancement: Encompasses activities that increase the value, utility, or marketability of existing intangible assets, potentially involving improvements, modifications, or upgrades.

► Maintenance: Involves activities necessary to ensure the ongoing functionality, durability, or relevance of intangible assets, such as upkeep, monitoring, or routine management.

► Protection: Focuses on safeguarding the legal rights and proprietary interests associated with intangible assets, including activities related to intellectual property protection like obtaining patents, trademarks, or copyrights. The availability and extent of legal, contractual, or other forms of protection may affect the value of an item and the returns attributed to it, although it is not a necessary condition for an item to be characterised as an intangible for transfer pricing purposes.

► Exploitation: Encompasses the utilisation or commercialisation of intangible assets to derive economic benefits, involving activities such as licensing, selling, or using the intangible assets in the MNE’s business operations.

The DEMPE framework helps tax authorities and MNEs determine the allocation of profits derived from intangible assets among different jurisdictions based on where the relevant functions are performed, assets are located, and risks are assumed. It emphasises substance over form, with the objective that profits are allocated in a manner that reflects the economic contributions of each entity involved, rather than solely relying on contractual arrangements or legal ownership.

Available literature consistently highlight that legal ownership of an intangible, by itself, does not confer any right ultimately to retain returns derived by the MNE group from exploiting the intangible. Although returns may initially accrue to the legal owner due to legal or contractual rights, the return ultimately retained by or attributed to the legal owner depends upon the functions it performs, the assets it uses, and the risks it assumes. Members of the MNE group performing functions, using assets, and assuming risks related to the DEMPE of intangibles must be compensated for their contributions under the arm’s length principle. This compensation may constitute all or a substantial part of the return anticipated to be derived from the exploitation of the intangible.

The analysis of transactions involving intangibles using the DEMPE framework generally follows a structured approach, as under:

► Identify the intangibles used or transferred with specificity. A thorough functional analysis should support the identification of relevant intangibles, their contribution to value, and interaction with other factors.

► Identify the full contractual arrangements, focusing on legal ownership based on registrations, agreements, and other indicia, as well as contractual rights and obligations.

► Identify the parties performing functions, using assets, and managing risks related to DEMPE via a functional analysis. This includes identifying who controls outsourced functions and economically significant risks.

► Confirm consistency between contractual terms and the conduct of the parties. Crucially, determine whether the party assuming economically significant risks under the contract also controls those risks and has the financial capacity to assume them.

► Delineate the actual controlled transactions related to DEMPE based on legal ownership, contractual relations, and the parties’ conduct and contributions (functions, assets, risks).

► Determine arm’s length prices for these delineated transactions, consistent with each party’s contributions of functions performed, assets used, and risks assumed.

In assigning returns or compensation based on the DEMPE analysis, several aspects are particularly important:

► Compensation for Functions: Each member performing functions related to DEMPE should receive arm’s length compensation. This includes important functions such as designing and controlling research/marketing programmes, directing creative undertakings, controlling strategic decisions and budgets, and managing protection / quality control. Performance of these important functions, or controlling outsourced performance, often makes a significant contribution to intangible value and warrants an appropriate share of the returns. If the legal
owner neither controls nor performs these functions, it may not be entitled to any ongoing benefit attributable to them.

► Compensation for Use of Assets (including Funding): Group members using assets (physical, intangible, or funding) in DEMPE activities should receive appropriate compensation. Specifically regarding funding, a party providing funding but not controlling the associated risks or performing other functions generally receives only a risk-adjusted return. A funder must have the capability and actually make decisions regarding the risk-bearing opportunity and how to respond to risks associated with the funding. A funder that does not exercise control over the financial risk will only be entitled to a risk-free return. The return expected by the funder is generally an appropriate risk-adjusted return, which can be determined based on the cost of capital or a realistic alternative investment with comparable economic characteristics.

► Compensation for Assumption of Risks: The identity of the member or members controlling and assuming risks related to DEMPE is a crucial consideration. Significant risks include development risk, obsolescence risk, infringement risk, product liability risk, and exploitation risks. The party controlling and assuming risks is entitled to the consequences (gains or losses) when the risk materialises differently than anticipated (the difference between ex ante and ex post outcomes). Parties not controlling and assuming relevant risks, nor performing important functions, are generally not entitled to such gains or responsible for losses. In many MNE groups, shared marketing cost arrangements are adopted to pool resources for global brand development, achieve economies of scale, and maintain consistent brand positioning across markets. These arrangements, however, operate within the ambit of transfer pricing rules and multi-jurisdictional legal and regulatory frameworks, which in India have historically included foreign exchange outflow caps under FEMA and restrictions by SEBI on royalty and similar payments to overseas affiliates.

The relative importance of contributions in the form of functions performed, assets used, and risks assumed varies depending on the circumstances. In cases involving unique and valuable intangibles, or where contributions are highly integrated or involve shared assumption of significant risks, traditional transaction methods (like CUP, Resale Price, Cost Plus) or one-sided methods (like TNMM) may be less reliable for valuing the intangible directly. In such situations, transactional profit split methods or valuation techniques (especially income-based methods like discounted cash flow) are often considered more appropriate tools for estimating arm’s length compensation reflecting the relative contributions of multiple parties. Valuation techniques based on the cost of intangible development are generally discouraged as cost rarely correlates with value.

In conclusion, valuing intangible assets and allocating the returns within an MNE structure moves beyond simply identifying the legal title holder. The DEMPE framework, integrated into the FAR analysis, provides a structured approach to identify which entities truly contribute to the value creation of the intangible through their functions performed, assets used, and risks assumed. Arm’s length compensation must then be assigned to these entities commensurate with the economic significance of their contributions and risks controlled, often requiring sophisticated valuation methods beyond simple cost-plus or resale minus approaches, particularly when unique and valuable intangibles or integrated contributions are involved.

BCAJ Admin