S.2(22)(e)Chapter I — Preliminary
Deemed dividend
Any payment by a closely held company to a shareholder (who holds ≥10% voting power) in the form of a loan or advance is treated as deemed dividend in the hands of the shareholder, to the extent of accumulated profits. This provision catches inter-company loans in closely-held group structures, effectively treating working capital loans between group entities as dividend income — taxed at the applicable slab rate without the benefit of the lower dividend tax rate. The deemed dividend is taxable in the hands of the recipient (not the paying company) and is not deductible by the paying company.
Practice Note
Section 2(22)(e) is one of the most litigated provisions in Indian tax law. The Supreme Court in Bhaumik Colour Pvt Ltd and Gopal & Sons HUF v CIT held that the provision applies even where the loan is for genuine commercial purposes if the structural conditions are satisfied. Structuring inter-company arrangements as trade credit or subscription to instruments (instead of loans) can avoid triggering S.2(22)(e).
Related:S.8S.56S.115-O
S.9Chapter II — Basis of Charge
Income deemed to accrue or arise in India
Section 9 creates a deeming fiction — certain incomes are deemed to accrue or arise in India even if the transaction is between two non-residents or the payment is made outside India. Key deeming provisions: (a) S.9(1)(i) — business income from a business connection in India (including PE); (b) S.9(1)(ii) — salary for services rendered in India; (c) S.9(1)(vii) — fees for technical services (FTS) paid by an Indian resident to a non-resident; (d) S.9(1)(vi) — royalties paid by Indian residents to non-residents. S.9 forms the basis of India's claim to tax on cross-border service fees, royalties, and business profits earned by non-residents with an India nexus — the starting point for all inbound tax planning.
Practice Note
Post the equalisation levy (S.165A Finance Act 2016) and the 2021 Finance Act changes, digital services of non-residents are now taxable even without a Permanent Establishment (PE) under S.9(1)(i). The "business connection" concept now expressly includes significant economic presence (100,000+ users or Rs 2 crore+ Indian revenue).
Related:S.195S.206AAS.90S.92
S.43BChapter IV-D — Profits and Gains of Business
Certain deductions on actual payment basis
Certain expenditures are deductible only when actually paid (not on accrual basis): (a) taxes, duties, cess, fees paid to government; (b) employer's contribution to PF/ESI/gratuity funds; (c) bonus and commission to employees; (d) interest on loans from public financial institutions, banks, NBFCs; (e) leave encashment; (f) payment to MSME vendors (since Finance Act 2023 — if payment to an MSME is not made within the time limit prescribed under MSMED Act, it becomes deductible only in the year of actual payment). The MSME amendment (effective FY2023-24) has significant working capital implications — outstanding MSME payables that cross the 45-day payment window are effectively disallowed in the payer's hands until paid.
Practice Note
The MSME payment clause in S.43B (inserted by Finance Act 2023) has created an urgent compliance need for large companies — all MSME vendor contracts must be mapped, payment terms tracked against the 15/45-day MSMED Act timeline, and any outstanding amounts cleared before the financial year-end to ensure deduction.
Related:S.36S.37S.40A
S.56(2)(x)Chapter IV-E — Income from Other Sources
Income from other sources — gift tax / deemed income on receipt without consideration
Section 56(2)(x) is the "gift tax" provision. Where any person (including a company) receives any sum of money, movable or immovable property without consideration, or for inadequate consideration, the difference between the fair market value (FMV) and consideration paid is taxable as "income from other sources" in the recipient's hands. For shares: if the consideration is less than the FMV (determined as per Rule 11UA), the deficit is taxable. For immovable property: if stamp duty value exceeds consideration by more than Rs 50,000, the excess is taxable. Key exceptions: gifts from relatives, gifts on occasions like marriage, inheritance, and transfers under will or irrevocable trust are exempt. For companies receiving equity at below FMV in a startup funding round — S.56(2)(x) can potentially apply.
Practice Note
S.56(2)(x) creates an asymmetric double taxation risk in M&A: the seller may pay capital gains tax on the actual sale consideration, while the buyer may pay income tax on any deemed FMV shortfall. DPIIT-recognised startups have an exemption from S.56(2)(x) for consideration received for equity shares up to the aggregate consideration of Rs 25 crore — the "angel tax" exemption.
Related:S.50CS.50CAS.56(2)(viib)
S.90Chapter IX — Double Taxation Relief
Double Taxation Avoidance Agreements (DTAA)
Section 90 authorises the Central Government to enter into DTAA (tax treaties) with foreign governments. A DTAA overrides the Income Tax Act to the extent it is more beneficial to the taxpayer — this is the fundamental "treaty override" principle. India has DTAAs with 90+ countries. For a non-resident to claim DTAA benefits: (a) they must be a "tax resident" of the treaty country (must produce a Tax Residency Certificate — TRC); (b) their income must fall within a taxable category under the DTAA; and (c) the Principal Purpose Test (PPT) / Limitation on Benefits (LOB) provisions in the DTAA must be satisfied. Post-BEPS (Base Erosion and Profit Shifting), most Indian DTAAs now include a Principal Purpose Test — treaty benefits can be denied if obtaining the benefit was one of the principal purposes of the arrangement.
Practice Note
The India-Mauritius DTAA amendment (2016) and India-Singapore DTAA amendment (2017) ended source-based taxation of capital gains — capital gains on Indian shares acquired after April 1, 2017 are now taxable in India regardless of the treaty. This significantly reduced Mauritius and Singapore routing structures for FPI investments.
Related:S.9S.195S.90A
S.92Chapter X — Transfer Pricing
Transfer pricing — computation of income from international transactions
Section 92 requires that all international transactions between associated enterprises (AEs) be at arm's length price (ALP). "Associated enterprises" broadly covers entities with: ≥26% common shareholding, controlling relationships, loan financing above 51%, or other specified control relationships. The five transfer pricing methods are: CUP (Comparable Uncontrolled Price), RPM (Resale Price Method), CPM (Cost Plus Method), PSM (Profit Split Method), and TNMM (Transactional Net Margin Method). If the declared price differs from ALP, the Transfer Pricing Officer (TPO) can adjust the income upward. An Advance Pricing Agreement (APA) under S.92CC provides certainty — the CBDT and taxpayer agree on the ALP methodology for 3–5 years in advance.
Practice Note
Transfer pricing audits in India cover: management fees, intra-group service charges, royalty on brand/IP, corporate guarantee fees, and financial transactions. The Safe Harbour Rules (Rule 10TD) provide fixed margins for certain routine transactions — software development services at 17–18% NCP margins, for example — avoiding full TP documentation for eligible taxpayers.
Related:S.92AS.92BS.92CS.92CCS.144C
S.115JBChapter XII-B — MAT
Minimum Alternate Tax (MAT)
Companies that pay zero or very low tax due to deductions/exemptions must pay a Minimum Alternate Tax (MAT) of 15% (plus surcharge and cess) on their "book profits" (as computed under S.115JB using Ind AS/AS financials, with prescribed adjustments). Book profits differ significantly from taxable income — they add back provisions, deferred tax credit, and certain reserve transfers, while allowing only prescribed deductions. The excess MAT paid over regular tax is available as a "MAT credit" (S.115JAA) that can be carried forward and set off against future regular tax liability for 15 years. For foreign companies and companies opting for the new concessional tax regime under S.115BAA/S.115BAB, MAT does not apply.
Practice Note
Companies that have large accumulated MAT credits on their balance sheet (common in infrastructure, real estate, and start-up phase companies) face a strategic decision when transitioning to the new concessional tax rate (22% under S.115BAA) — they must forfeit the MAT credit balance. The trade-off between current tax savings and forfeited MAT credit must be carefully modelled.
Related:S.115JAAS.115BAAS.115BAB
S.195Chapter XVII — Collection and Recovery
TDS on payments to non-residents
Any person making a payment to a non-resident (or foreign company) that is chargeable to tax in India must deduct tax at source under S.195 before remittance. The payer has a "withholding agent" obligation — failure to deduct makes the payer an "assessee in default" (S.201). TDS rates: 20% for royalties and FTS, 40% on business income (unless DTAA provides a lower rate). The payer must obtain a "nil deduction" or "lower deduction" certificate from the AO (S.197) if the non-resident claims treaty protection or if the income is not chargeable in India. For all remittances above Rs 5 lakh, Form 15CA (payer's declaration) and Form 15CB (CA certificate) must be filed before the bank will remit.
Practice Note
The most common dispute under S.195: whether a payment for software license/SaaS is "royalty" (taxable at source) or "business income" (taxable only if PE exists). The SC in Engineering Analysis Centre of Excellence v CIT held that a pure software license fee is NOT royalty under the India-USA, India-Germany, and similar DTAAs — overturning years of conflicting ITAT decisions.
Related:S.9S.90S.197S.201S.206AA