Trading Mechanism refers to the structured system and procedures through which financial instruments such as securities, commodities, or derivatives are bought and sold on an exchange platform. It determines how orders are placed, matched, executed, and settled between market participants. In modern exchanges, trading mechanisms are primarily based on electronic screen-based trading systems, where buyers and sellers submit orders through a digital platform. These orders are automatically matched using predefined rules—typically price–time priority, meaning orders with the best price are executed first, and if prices are the same, the order placed earlier gets priority.

Table of Contents

1. Membership on Exchanges Having Commodity Derivatives Segment
2. Trading System in the Exchanges

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1. Membership on Exchanges Having Commodity Derivatives Segment

Membership of Exchange is governed by the SEBI Stock Brokers Regulation. The Regulation prescribes the procedures for the grant of recognition of a member, different types of members, net worth criteria, deposits, members’ fees and charges for different categories of members.

Clearing Corporation is an entity that is different from an Exchange. Exchanges are governed by SEBI’s Stock Exchange and Clearing Corporation Regulations, 2012. The same regulations provide governance norms for Clearing Corporations also. Clearing Corporation’s main role is to carry out settlement of the trades executed on the Exchange platform. The entity which guarantees settlement is Clearing Corporation. For trading purpose, Exchange membership is required while for clearing purposes, membership of a clearing corporation is required.

Commodity Exchanges prescribe different eligibility criterion for different classes of membership. While admitting members, the commodity exchanges generally take into account specific factors such as corporate structure, capital adequacy, track record, educational levels and the experience of the promoters, infrastructure set-up, manpower, etc. to ensure that the members are equipped to offer quality broking services so as to build and sustain confidence among investors in the Exchange’s operations. An applicant for commodity exchange membership must possess the minimum stipulated networth which varies across commodity exchanges as per their rules, regulations and bye-laws. The membership categories are more or less similar across the exchanges but vary considerably when we consider the membership criteria in terms of deposit/networth requirements, admission fees, and other membership requirements.

The members of the commodity exchanges are classified as below:

(a) Trading Member (TM) – A Trading Member can trade either on their own account or on behalf of the clients. This category of membership entitles a member to execute trades on his own account as well as for clients registered with him. The clearing and settlement of the trades done through a trading member is accomplished through a clearing member who is a member of clearing corporation where the security/commodity is being traded.

(b) Self Clearing Members (SCM)/Trading cum Clearing Member (TCM) – This category of membership entitles a member to execute trades on his own account as well as for his clients and also to clear and settle trades executed by himself as well as of  his clients. Clearing members are members of the clearing corporation. They help the clearing corporations carry out risk management activities effectively and provide for confirmation/inquiry of trades through the trading system.

(c) Professional Clearing Member (PCM) – A professional clearing member is entitled to clear and settle trades executed by other members of the commodity exchanges (TMs/TCMs) but does not have the right to execute trades. A professional clearing member is a clearing member and is not a trading member. Typically, banks and custodians become professional clearing members and clear and settle trades done by their trading members or the clients of the trading members. They are not entitled to execute any trades on the exchanges unless it is for the purpose of risk management.

Most of the members of the exchanges operate as Trading cum Clearing Members (TCMs) of more than one exchange. Most of the trades of  Institutional participants are done through the trading members and are cleared by the professional clearing member (PCM).

1.1 Authorised Persons (APs)

SEBI had earlier allowed spread of sub-brokership as well as Authorised Person’s network to expand the brokers’ network. However, SEBI Board in its meeting held on June 21, 2018 decided that sub-brokers as an intermediary shall cease to exist with effect from April 01, 2019. All existing sub-brokers would migrate to become Authorised Persons (APs) or Trading Members if the sub-brokers meet the eligibility criteria prescribed under Stock Exchange bye-laws and SEBI Regulations.

An Associated Person is an individual employed by a SEBI-registered intermediary (stockbroker, investment advisor etc.) who interacts with the clients or has access to client information. They are crucial in facilitating securities transactions but cannot act independently. Their responsibilities include, soliciting clients for securities transactions and handling their client accounts and transactions. They are expected to route all monetary transactions of their clients directly through the brokers and not to be handled by themselves. They must be qualified and certified by SEBI to ensure competent and ethical conduct within the securities market.

2. Trading System in the Exchanges

2.1 Screen Based Trading System

Derivative Exchanges offer a nation-wide online fully automated screen-based trading system (SBTS). In this system, the trading member of the exchange can put in the orders and the prices at which they would like to transact. The transaction gets executed as soon as a buy order matches with a sell order in terms of price.

The order matching is done on a price-time priority basis. This means that all the orders received are first sorted on ‘best-price’ basis i.e., orders are first ranked according to their prices and similar priced orders are then sorted on a time-priority basis (i.e., the order that comes in early gets priority over the order that came in later). Highest priced buy orders and lowest priced sell orders are matched first for trade, after which next highest buy order or next lowest sell order comes up for trade match. It indirectly means that reducing buy order limit will delay execution while increasing buy order price will increase the probability of the order getting matched and converted into trade. Also, reduction in quantity of the order from the original quantity will not change its price-time priority. SBTS enables market participants to see the prices on a real-time basis and trade with one another simultaneously, irrespective of their geographical location.

In this trading system, an order number or trade number is generated for the orders (that are entered into the system after being accepted) and for the executed trades (as the order gets matched for the price and quantity and becomes trade). A trading system also provides other live market information such as the last traded price, traded quantity, open, high, low, close price, total traded value, total traded quantity, etc. Connectivity to SBTS can be accomplished through laptops, tablet PCs, desktop computers, and mobile phones.

A commodity exchange provides a trading platform or an electronic trading system and lays down well defined trading rules such as:

Rules for Buy and Sell Side of Futures Contracts Sell Side	Buy Side
The seller needs to pay an upfront initial margin as prescribed by the exchanges to take a short position in the commodity futures market.	The buyer needs to pay an upfront initial margin as prescribed by the exchanges to take a long position in commodity futures market.
The open short position is exposed to mark to market.	The long position is exposed to mark to market if kept open.
Open short position may result in giving physical delivery or cash settlements on expiry date. Quality certification is a mandatory requirement.	Open long position may result in an obligation to receive physical delivery or cash settlements on expiry date depending on the settlement mode of the derivative contract.
The sell position can be squared off during the same day or any time during the life time of the contract.	The buyer if desires can square off his position during the same day or any time during the period of contract.
The margins are released if the short position is squared off.	The margins are released if the long position is squared off.

Other than the SBTS, trading in commodity derivatives can be done using algorithms which measures market movements and pushes orders for the best buy/sell executions given the market conditions.

2.2 Algorithmic Trading

Algorithmic trading is introduced and defined as trading in financial instruments where a computer algorithm automatically determines individual parameters of orders such as initiation of order, timing, price or quantity, managing the order post submission without/with limited human intervention.

Any order generated using automated execution logic is known as algorithmic trading. Algorithmic trading permits the use of programs and computers to generate and execute orders in markets with electronic access and does not require human intervention. It employs a defined set of instructions on timing, price, quantity, or any mathematical model for placing orders at a faster pace and with higher frequency.

Algo trading is tailored to perform according to the account type an investor chooses. For example, an investor who prefers a conservative investment profile will have an automatic trading protocol that is programmed to perform in a conservative manner, meaning if a commodity’s price movement is too volatile, it may sell that commodity automatically to prevent a potential loss. Another example would be the opposite scenario, where an investor may prefer an aggressive investment strategy. The algorithm on that particular account would be programmed to ride the wave of volatility, allowing for large market fluctuations without squaring off a trade or cancelling a standing order. Algo trading is permitted in commodity exchanges subject to the broad SEBI guidelines dated 27th September, 2016.

High Frequency Trading (HFT) is part of algorithmic trading that comprises
latency-sensitive trading strategies and deploys high speed networks to connect and trade on the trading platform. As per the regulatory norms, Immediate or Cancel and Market orders are not allowed for the algorithmic traders. Members are expected to prevent any unauthorised access to the software and should allow it to be handled by the authorised dealers only. There are provisions of audit. The regulations provide for disincentivizing higher number of orders which are not executed. The exchanges provide penalty provisions at different slabs of Order-to-trade ratio.

The algorithms need to be reviewed by the Exchanges before it is used by brokers. The algorithm which leads to the orders resulting in taking away liquidity from the market, or abnormal or manipulative prices are not approved for use.

If Algo trading is used without due care and diligence, it may throw huge risk to market integrity even with small error. The member should have adequate risk management system and control for the same. They should have separate dealer-wise limit, internal price bands so that ordered price doesn’t cross a level and order size limit.

2.3 Trading Hours

Trading in the commodity exchanges take place on all days except Saturdays and Sundays and the exchange-notified holidays. The holidays are notified in advance.

Types of Commodities	Trading Days and Time (IST)
Domestic Agricultural Commodities	Monday to Friday (9:00 AM – 5:00 PM)
Agricultural Commodities including agri-processed commodities	Monday to Friday (9:00 AM -9:00 PM)
Non-agricultural Commodities	Monday to Friday (9:00 AM – 11:30 PM/11.55 PM*) * After the end of US daylight savings (fall season)

Exchanges have flexibility to fix their own market timings within the above timing provided by SEBI. For non-agricultural commodities, trade timings are allowed up to 11:30/11:55 PM due to specific reasons. In case of market outages that leads to a delay in the relaunch of the markets within 30 minutes before scheduled closure of the respective market segment, the timing for the same can be extended by another 30 minutes. The intimation regarding the extension of trading hours would have to be sent at least 15 minutes before the scheduled closure of market timings (i.e. before 4:45 PM, 8:45 PM and 11:10 PM (only if the scheduled market closure is 11:25 PM). Most of the non-agricultural commodities’ futures markets follow international benchmark prices. For example, prices of Oil, Gold, Silver, Metals are based on internationally decided benchmark prices. Hence, to arrive at fair value of DSP or FSP in Futures trading in India, trading (timings) of these commodities in Indian exchanges would have to be in alignment with the international markets to provide for real time hedging opportunities when the benchmark markets are operational.

2.4 Trading Parameters Across Contracts

2.4.1 Base Price

When a new future contract is made available for trading, the exchange decides its base price, which is used to decide Daily Price Limit on first day. This price is determined on the basis of a few minimum number of trades happening during first half an hour of trading or up to an extended period of total one hour. Once the contract is listed on the exchange, the base price keeps changing from the second day of its launch as per the official closing price of that contract on the exchange on the preceding day.

2.4.2 Open, High, Low and Last Traded Prices

All commodity exchanges continuously disseminate open, low, high and last traded prices on a real time basis on their screen during the trading session.

2.4.3 Circuit Filters

Circuit filters, also known as the Daily Price Range (DPR) or Daily Price Limit (DPL), is the maximum price range within which contracts would be permitted to trade during a day. This is used as a risk management tool in highly volatile markets. DPL regulations provides a price limit and a cooling off time and a permanent closure of the market beyond a limit for domestic commodities. Details of separate pre-defined DPR for various agricultural and non-agricultural commodities are discussed in section 7.10 of this workbook.

2.4.4 Settlement Price

In commodities futures, there are two types of settlement price – one is the Daily Settlement Price (DSP), known as closing price, and the other is the final settlement price (FSP), also known as Due Date Rate (DDR). Daily settlement price is used to calculate the daily mark-to-market profit or loss. It helps the clearing corporations to avoid accumulation of losses on the part of participants. Final Settlement Price (FSP) is the price at which the delivery or final cash settlement is done at the expiry of the contract. FSP or DDR is also used for determination of “delivery default penalty” in case of non-delivery of short sell quantity. It is also used to determine delivery and payment obligations arising out of the expiry of Options on Goods or the devolved open positions from an expired Options on Futures contracts. FSP in case of Options on Futures is DSP of the underlying Futures itself while in the case of Options on Goods, it is the same as FSP of Futures expiring on the same day. There are regulatory guidelines to arrive at the Daily Settlement Price (DSP), Final Settlement Price or Due Date Rate and the delivery default penalty and working out compensation to the buyer in such case, using the FSP/DDR.

The procedure for arriving at FSP is generally defined in Contract Specifications which is very much standardized as per the SEBI prescribed guidelines based on the polled spot market prices from a portfolio of spot market ecosystem participants. Exchanges have their internal policies in addition to the regulatory guidance to arrive at FSP in case of non-availability of Spot Markets on the contract expiry day. Last Traded Price at the end of the day or on expiry of contract (LTP) may be different from the DSP/FSP/DDR. This is because DSP or FSP is arrived at by using documented methodology while LTP is actually the price at which the last contract of the day was traded.

2.4.5 Delivery Process

Each futures contract for the specified delivery month is deemed to have entered into the delivery period from such date of its expiry month, as specified by the Exchange in the relevant contract specification. Each commodity has its own pre-specified delivery logic as provided in the respective contract specification. Delivery logic means buyers and sellers’ choice on open positions during the tender/delivery period. Basically, two delivery options are available in the commodity derivative markets:

• Compulsory delivery
• Cash Settlement

In the compulsory delivery option, both buyer and seller having an open position during the tender/delivery period of the contract are obligated to take/give delivery of the commodity.

Other trading parameters that are mostly common across major commodities are as follows:

• Start Date of Trading and Last Date of Trading – These are generally common across a few commodities in an Exchange. These dates coincide with the trading cycle adopted by that Exchange. For example, many contracts on MCX ends on 5th of the month while on NCDEX, many contracts start on 1st of the start month and ends on 20th of the expiry month.
• Funds Pay-in Pay-out – All the obligations arising out of  Initial Margin, MTM loss, Option purchase price needs to be paid before the next day morning.
• Initial Margin & ELM – These are normally based on Value at Risk (VaR) calculated based on price volatility considering a holding period of 2 days. In normal situation for many contracts, we see Initial Margin to be around 4% while ELM of 1%. However, these are also flexible and vary depending upon volatility of prices, Margin Period of Risk (MPOR), etc. If the holding period or settlement period i.e., MPOR is considered more, then initial margin will also increase as the volatility risk is higher on longer settlement periods.
• Additional/Ad hoc or Special and Concentration Margins – Enabling provisions exist in contracts for Exchanges to levy these margins in case their imposition is warranted to maintain market integrity.
• Open Position Limit at the Broker Level and Client Level – Specified in the contract generally in line with SEBI norms. Member level limits are normally 10 times that of client level limit in numeric terms.
• Instrument Type – A specific code that clearly distinguishes derivative instruments such as Commodity Futures, Options on Futures, Options on Goods, Index Options and Index Futures from each other.
• Trading Days and Trading Time – These are provided in advance and specified for most agricultural commodities and non-agricultural commodities based on SEBI norms.
• Basis Centre and Additional Delivery Center – Provided as part of the contract specifications to enable a robust process for the discovery of commodity prices.
• Staggered Delivery Period and Delivery Period Margin – These are specified for the commodities that are settled through the physical delivery-based final settlement. In a recent change in the regulatory policy the mandatory minimum of 3 days has been prescribed as the minimum number of days for staggered delivery of any given commodity.
• Devolvement Margins for Options on Futures and Delivery Margins for Options on Goods – These enabling clauses exists so that the exchange can charge margins to cover up the gaps in margin if the opted and eligible Options on Futures devolve on to the underlying Futures Position or to cover up the gaps in payment, if instrument such as Options on Goods ends up in delivery-based settlement of goods upon expiry.

List of a few more typical contract specifications are specified in section 6.4, which are common components of all the contracts.

2.5 Introduction of Investor Risk Reduction Access (IRRA) Platform in Case of Disruption of Trading Services Provided by the Trading Member¹

Salient features of the SEBI circular are given below. For additional information participant may refer to the SEBI circular.

• A joint platform to provide Investor Risk Reduction Access (IRRA) service has been developed by the exchanges to provide the investors an opportunity to square off/close the open positions and/or cancel pending orders in case of disruption of trading services provided by the Trading Member.
• The IRRA service shall support multiple segments across multiple exchanges.
• TMs, upon facing technical glitches which lead to disruption of trading services, can request for enablement of the IRRA service as per the procedures specified by the stock exchanges from time to time and IRRA shall be enabled on receipt of such requests.
• Once the service is enabled, all the investors of the TM shall be informed by the exchange of the availability of the service through email/SMS and a public notice on exchanges’ website. TMs shall also communicate the same by displaying on their website.

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1. https://www.sebi.gov.in/legal/circulars/dec-2022/introduction-of-investor-risk-reduction-access-irra-platform-in-case-of-disruption-of-trading-services-provided-by-the-trading-member-tm-_66785.html

The post Trading Mechanism and Commodity Exchange Membership appeared first on Taxmann Blog.

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Documentation under the Companies Act, 2013 refers to the systematic creation, maintenance, storage, and management of corporate records, documents, registers, and information required to be maintained by a company in compliance with statutory provisions. The Act recognises documents to include notices, requisitions, orders, registers, forms, declarations, minutes, agreements, and other records maintained by a company either in physical or electronic form. Provisions such as Section 88 require companies to maintain statutory registers like the Register of Members, while Section 120 read with Rules 27 and 28 of the Companies (Management and Administration) Rules, 2014 permits companies to maintain documents and records in electronic form, subject to conditions relating to readability, retrievability, digital authentication, and secure storage.

Table of Contents

1. Purpose of Documentation
2. Electronic Repository of Documents
3. Physical Repository
4. Coding and Nomenclature
5. Safety and Retrieval of Records

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1. Purpose of Documentation

FAQ 1. A listed entity incorporated on 11th January 2018 under the Companies Act, 2013 having its registered office at a State X in the country. The company has a paid-up capital of Rs. 100 crore and a turnover of another Rs. 500 crore during the last three preceding financial years. The company at present has 13 lakh shareholders B, one of its shareholders inspected the companies records at the registered office and found that register of members is not properly maintained and accordingly complained to the Registrar of Companies (RoC). During the course of inquiry, it was noticed that the register of member was found to be incomplete. Based on the above fact and citing a leading case, explain who is responsible for maintaining a register of its members and related provisions as per the Companies Act, 2013?

The Company Secretary is responsible for maintaining, storing, retrieving, certifying and explaining corporate documents. Proper document management includes safe storage, backup of records, timely access and compliance with statutory retention requirements.

As per section 88 of the Companies Act, 2013, every company limited by shares must maintain a Register of Members in Form MGT-1 from the date of its registration.

Penalty for Non-Compliance

If a company fails to comply with section 88:

• The company and every officer in default are liable to a fine not less than Rs. 50,000 and up to Rs. 3,00,000.
• In case of a continuing default, an additional fine of Rs. 1,000 per day may be imposed.

Case Law – M/s SDU Holdings Private Limited

During an inquiry under section 206, the Registrar of Companies, Bangalore found that the Register of Members (Form MGT-1) maintained by the company was incomplete. After giving a reasonable opportunity of being heard, the Adjudicating Officer imposed penalties on the company and its directors for violation of Section 88.

Conclusion

The case highlights the importance of proper maintenance of statutory registers. Failure to maintain complete records attracts monetary penalties on the company and its officers. Therefore, the Company Secretary must ensure accurate and timely compliance with statutory record-keeping requirements.

FAQ 2. What is the meaning of document and records, and the manner in which the records in electronic form should be maintained as per the provisions contained in the Companies Act, 2013?

Section 120 of the Companies Act, 2013 read with Rule 27 & 28 of the Companies (Management and Administration) Rule, 2014 provides for maintenance of documents in electronic form.

The Rule 27 provides that every listed company or a company having not less than 1000 shareholders, debenture holders and other security holders, may maintain its records in electronic form.

Section 2(36) of the said Act relates to the definition of “document” which includes summons, notice, requisition, order, declaration, form and register, whether issued, sent or kept in pursuance of Companies Act or under any other law for the time being in force or otherwise, maintained on paper or in electronic form.

The term “records” means any register, index, agreement, memorandum, minutes or any other document required by the Act or the Rules made thereunder to be kept by a company. Therefore, such documents and records can also be maintained in electronic form.

However, the records in electronic form shall be maintained in such manner as the Board of directors of the company may think fit, provided that:

(a) the records are maintained in the same formats and in accordance with all other requirements as provided in the Act or the rules made there under;

(b) the information as required under the provisions of the Act or the rules made there under should be adequately recorded for future reference;

(c) the records must be capable of being readable, retrievable and reproducible in printed form;

(d) the records are capable of being dated and signed digitally wherever it is required under the provisions of the Act or the rules made there under;

(e) the records, once dated and signed digitally, shall not be capable of being edited or altered;

(f) the records shall be capable of being updated, according to the provisions of the Act or the rules made there under, and the date of updating shall be capable of being recorded on every updating.

FAQ 3. What do you mean by Good Documentation? What are some examples of Good Documentation Practices as well as Poor Documentation Practices?

The term documentation includes any and all forms of documentation recorded by a person in professional capacity in relation to his professional duties and includes written and electronic records, audio and video tapes, emails, facsimiles, images, charts, check lists, communication books, management reports, incident reports and working notes or any other type or form of documentation.

The good documentation promotes good corporate governance practices and compliance level of the company and also improves communication and dissemination of information between and across various stakeholders.

These guiding principles support professionals, employers, policy makers and managers in assessment, planning, execution and evaluation.

Examples of Poor Documentation Practices:

• Document with errors, correction, not signed/dated, and didn’t include a reason for the correction;
• Write-overs, multiple line-through & use of “White-out” or other masking device;
• Recording of events is not in sequence & tabled;
• The delegation of work is not recorded/documented;
• Standards operating procedures as adopted by the professional is not authorised.

Examples of Good Documentation Practices:

• Records should be completed at time of activity or when any action is taken;
• Superseded documents should be retained for a specific period of time;
• Concise, legible, accurate and traceable;
• Picture is worth a thousand words;
• Clear examples; Don’t assume knowledge/information.

FAQ 4. What is Good Documentation Practice, along with the Do’s and Don’ts of Good Documentation?

Good documentation practices is a set of best practices for documentation and record keeping. It aims to preserve the data integrity of important documents and records and can also serve as guidelines for how to record information and store data appropriately.

The good documentation promotes good corporate governance practices and compliance level of the company and also improves communication and dissemination of information between and across various stakeholders.

These guiding principles support professionals, employers, policy makers and managers in assessment, planning, execution and evaluation.

Good Documentation Do’s and Don’t

Do’s	Don’ts
Do record the data/document as soon as it is generated	Don’t delay in data/document recording
Do add the reference notes (if possible) to provide the context	Don’t make the data confusing, vague and unreadable
Do validate your computerised system or document software	Don’t encourage handwritten documentation
Do limit document access to authorised personnel	Don’t intentionally falsify the record/document
Do specify when the data/document was recorded, reviewed and approved	Don’t pre-date or back-date the data/document
Do keep data back-up, either automatically or by storing the true copy in separate location	Don’t archive data/documents unless explicitly authorised to do so

FAQ 5. What does the term documentation connote? What are the 10 C’s which form the guiding principles of good documentation?

The term documentation includes any and all forms of documentation recorded by a person in professional capacity in relation to his professional duties and includes written and electronic records, audio and video tapes, emails, facsimiles, images, charts, check lists, communication books, management reports, incident reports and working notes or any other type or form of documentation.

The good documentation promotes good corporate governance practices and compliance level of the company and also improves communication and dissemination of information between and across various stakeholders. Also, the good documentation practices and policies demonstrate the professional obligation, accountability and legal requirement to communicate and record client information and good secretarial practice.

The guiding principles for good documentation are as follows:

1. Clear
2. Correct
3. Concise
4. Comprehensive
5. Complete
6. Collaborative
7. Contemporary
8. Client Centric
9. Consecutive
10. Confidential

FAQ 6. What is the purpose of Documentation?

Client Service	Documentation is a tool for professionals to serve better to their clients in a timely and effective manner.
Communication	Documentation is the base for better communication between professionals. Clear, complete, accurate and factual documentation provides a reliable permanent record of client.
Accountability	Documentation demonstrates professional accountability and records the work of the professional. It may be used in relation to performance management, internal inquiries, regulatory proceedings and/or legal proceedings.
Professional Responsibility	Documentation is an integral part of professional practice and forms the basis for evidence of professional conduct.
Legal Requirement	Professionals are required to make and keep records of their professional work in accordance with practice standards followed and organisational policy. However, the laws mandate specific information to be recorded and maintained.
Quality	Documentation may be used to evaluate professional practice in terms of Peer reviews, Quality reviews, audits and accreditation processes, Regulatory inspections or critical incident reviews.
Research	Documentation is a valuable source of data for researchers. It provides information to professional, evaluates client outcomes and is a concise record, essential for accurate research data and evidence-based practice.

2. Electronic Repository of Documents

FAQ 7. What are the disadvantages of electronic records?

Advantages of the Electronic Records:

• Cost Effective – Storing and maintaining records in digital form is much cheaper than in any other format. With the increase in the technology advancement, the Digital media costs drop every day.
• Ease of Use – It’s very easy to locate and share electronic documents through Computer’s aid searching now a days the process of filing doesn’t exist anymore. The Document management system take care for finding and maintaining Records consistent locations.
• Labor Savings – The labour required to locate, manage and dispose of electronic documents is almost nil and minimum. With electronic documents, all the steps like filing collating, stapling etc. can be automated and that labour completely disappears.
• Search Ability – Electronic documents can be made searchable by doing OCR of a document and make the whole text keyword searchable. That is not possible with paper documents.
• Portability – It’s very easy to transport electronic documents. No more boxes of records and trucks and semi-trucks to haul records archives. They can easily be stored on a removable hard drive or thumb drive and taken to the courthouse or to the field office.
• Version Tracking – In case of the version tracking, it is very easy with electronic documents, making it easy to see who has made changes to a document, when they made those and what the document looked like before the change. Version tracking and document management in the hard copy world is much more complex and much more costly.

FAQ 8. What is DMS and its benefits, and its relevant provisions of the Companies Act, 2013?

Document management refer the process of managing and tracking of the documents and records through an electronic or physical source of documents. In an electronic repository, Document Management Systems (DMS) works by using a computer system and software to store, manage and track electronic documents and electronic images of paper-based information captured through the use of a scanner.

The term document management system can be defined as the software that controls and organises documents of an organisation. It incorporates document and content capture, workflow, document repositories and output systems, and information retrieval systems. Also, the processes used to track, store and control documents.

Advantages of DMS are as follows:

• Tracking on check-in/check-out by various officers
• Locking and unlocking of Document
• Simultaneous editing
• Document Version Control
• Roll-back options/Retrieve option
• Ease in Audit trail
• Annotation and Stamps

Section 120 of the Companies Act, 2013 (the Act) read with Rules 27 & 28 of the Companies (Management and Administration) Rule, 2014, provides for maintenance of documents in electronic form. The provisions also provide for inspection of documents maintained in electronic form. It states that any document, record, register, minutes, etc. that are required to be kept by a company or allowed to be inspected or copies to be given to any person by a company under the Act, may be kept or inspected or copies given, as the case may be, in electronic form. Rule 27 provides that every listed company or a company having not less than one thousand shareholders, debenture holders and other security holders, may maintain its records in electronic form.

3. Physical Repository

FAQ 9. What are Physical Data Room and Virtual Data Room?

No.	Basis	Physical Data Room	Virtual Data Room
1.	Form of documents	Papers, files, boxes or other tangible thing	Electronic/Digital/soft copies of documents including video/audio documents
2.	Security of documents	Lies with the integrity of person who is in-charge of the data room	More secured through specific log-in id and pass word. In addition, facilities like internet fire walls are there
3.	Time required for creation of data room	Longer time required	Can be created within 48 hours once demands of prospective bidders are identified
4.	Cost	Cost is high because of reasons like-Requirement of one person to take care of data room. Requires bidders to travel from their place to the place of location of data room, etc.	Cost is Low as the documents can be viewed from any location with internet security
5.	Convenience	Searching the documents is time consuming	More convenient as it enables multiple bidders to review documents at the same time with search facility also
6.	Accessibility to data room	Timings to access data may be restricted	Data may be accessed nearly any time
7.	Facility to restrict access of specific document	Difficult to implement any Restriction	Access can be restricted
8.	Ability to copy documents	Possible	Not possible always

4. Coding and Nomenclature

FAQ 10. In the naming of a document, what is the concept of a Descriptive file and a non-Descriptive file?

For naming of any documents adopting good file naming conventions can help ensure that files will work with different operating systems. Further, the file names can be either self-descriptive or non-descriptive.

• The Descriptive file names are useful for small, well-defined projects with existing identification schemes that link the digital object to the source material. However, inconsistent application of terms or typos will increase to indexing and sorting errors.
• Non-descriptive file names are usually system-generated sequential numerical string or the system based, such as a digital ID number, combination of Date and time, name of original file and are often linked to meta data stored elsewhere. Non-descriptive file names are often created for large scale digitization projects and may employ a digital ID number and numerical sequences to indicate batch or parent-child relationships. The advantage of non-descriptive names is that there is less chance of repeated or non-unique file names within a data structure.

Some applications and computer scripts could not recognize spaces or process files differently when using spaces. A best practice is to replace spaces in file names with an underline (_) or hyphen (-). However, the punctuation, symbols, or special characters (periods, commas, parentheses, ampersands, asterisks, etc.) should be avoided.

FAQ 11. What are the best practices for file naming?

The following are best practices for file naming.

The File names should:

• Be unique and consistently structured;
• Be persistent and not tied to anything that changes over time or location;
• Limit the character length to no more than 25-35 characters;
• Use leading 0s to facilitate sorting in numerical order if following a numeric scheme “001, 002, 010, 011 … 100, 101, etc.” instead of “1, 2, …10, 11 … 100, 101, etc.”;
• Contain a file format extension; Use a period followed by a file extension (for example, .tif, .jpg, .gif, .pdf, .wav, .mpg);
• Use lowercase letters. However, when a name has more than one word, start each word with an uppercase letter for example, “File_Name_Convention_001.doc”;
• Use numbers and/or letters but not characters such as symbols or spaces that could cause complications across operating platforms;
• Use hyphens or underscores instead of spaces;
• Use standard date notation (YYYY-MM-DD or YYYYMMDD);
• Avoid blank spaces anywhere within the character string; and
• Not use an overly complex or lengthy naming scheme that is susceptible to human error during manual input, such as “filenameconventionjoesfinal versioneditedfinal.doc”.

The strength of a folder and file naming convention is dependent on the proposed naming structure and the quality and quantity of the data elements chosen to build it. It should be of no surprise that for any business activity there is always an ideal naming structure. However, any structured naming convention that attempts to be all encompassing may result in overkill and unwieldiness.

FAQ 12. Citing the basic rules that could serve as a general guideline in structuring folder and file naming. Give nomenclature of the file in following cases:

(a) Annual Return MGT-7, Financial Year 2022-23 of TZ Pharma.

(b) Search Report of PTK RESORTS, Invoice dated 30 July, 2023, PDF document.

(c) Mohit Nair Max Life 8561 3 POLICY date 19/October/2022, white paper structured file naming Strategy document.

(a) D:TZPFY22-23ARMGT-7.doc

Rule – Avoid extra-long folder names and complex hierarchical structures but use information rich file names instead.

(b) PTKRESORTS_SearchReport_Invoice30.07.2023.pdf

Rule – Put sufficient elements in the structure for easy retrieval and identification but do not overdo it.

(c) Mohit-Nair_Maxlife_8561_3_POLICY_2020-10-19.pdf | | WhitePaper_Structured File Naming Strategy.doc

Rule – Use the hyphen (-) to define it words within an element or capitalise the first letter of each word within an element.

5. Safety and Retrieval of Records

FAQ 13. What are the key measures which should be adopted for effective document control, and what key concepts should be considered to take care of records and archives?

To assure the best quality of documents, it is to be assured that sufficient records are maintained to furnish evidence of the activities affecting quality. The records should incorporate the following:

(a) Operating Logs – the names of the individuals who all have worked on the same documents;

(b) Results of Reviews – the recording of the changes suggested by each reviewer and basis of the rejection on Non agreement;

(c) Inspections – list of individuals who have access of the records and have inspection rights of the same;

(d) Monitoring of Work Performance – will ease in the monitoring of work performed by the person to whom the file is shared;

(e) Information Analyses – Provide ease in the Information system of the organisation and tracking of files.

Records should be identifiable and retrievable and should consistent with applicable regulatory requirements. The company should comply with requirements concerning record retention, such as duration, location, and assigned responsibility. Every record must be well managed in order to ensure that they are protected for both administrative purposes and to serve as evidence of the organization’s work.

Records management provides a professional approach to caring for records. The care of records and archives is governed by three key concepts.

The post Documentation under Companies Act – Coding | Nomenclature appeared first on Taxmann Blog.

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1. Facts

Delta Metals Limited (hereinafter referred to as “the company”) operates a large metal processing facility where production activities are highly dependent on a continuous and stable supply of electricity. Any interruption in the power supply, even for a short duration, can halt production and result in significant operational and financial losses.

To meet its energy requirements, the company has installed a captive power generation system within its manufacturing premises. The system includes a primary generator, which is regularly used to generate the electricity required for the plant’s day-to-day operations.

Considering the critical nature of an uninterrupted power supply, the company has also installed a backup generator. This generator is intended to function as a standby unit and will be operated only when the primary generator becomes unavailable due to an unexpected breakdown, major repairs, or scheduled maintenance.

Under normal operating conditions, the standby generator is expected to remain idle for most of the time, and its actual usage is likely to be infrequent. Nevertheless, management believes that the backup generator is essential to ensure operational continuity and prevent production disruptions in the event of the primary generator’s failure. The useful life of both generators is assessed to be the same, as they are designed to operate within the same power generation system and technological environment.

The company’s management is in a dilemma regarding the accounting treatment of the backup generator. Considering that the backup generator is expected to be used only in exceptional circumstances and may remain idle for most of its life, the management wants to understand whether the cost of the standby generator should be recognised as Property, Plant and Equipment and depreciated over its useful life, or should it be treated differently due to its infrequent use under the Indian Accounting Standard (Ind AS) framework?

2. Relevant Provision

Ind AS 16 – Property, Plant and Equipment

Para 7 of Ind AS 16

The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:

(a) it is probable that future economic benefits associated with the item will flow to the entity; and

(b) the cost of the item can be measured reliably.

Para 8 of Ind AS 16

Items such as spare parts, stand-by equipment and servicing equipment are recognised in accordance with this Ind AS when they meet the definition of property, plant and equipment. Otherwise, such items are classified as inventory.

Para 55 of Ind AS 16

Depreciation of an asset begins when it is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with Ind AS 105 and the date that the asset is derecognised. Therefore, depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated. However, under usage methods of depreciation the depreciation charge can be zero while there is no production.

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The post Recognition and Depreciation of Standby Assets under Ind AS 16 appeared first on Taxmann Blog.

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Case Details: Naseema Bano Personal Guarantor SRS Meditech Ltd. vs. State Bank of India – [2026] 183 taxmann.com 716 (NCLAT-New Delhi)

Judiciary and Counsel Details

• N. Seshasayee, Judicial Member & Arun Baroka, Technical Member
• Ms Kritika, Rajat K. Mittal & Ms Heena Khatun, Advs. for the Appellant.
• Harshit Gupta & Shaun Jomon, Advs. for the Respondent.

Facts of the Case

In the instant case, the appellants stood as personal guarantors to a loan advanced to the corporate debtor. The corporate debtor defaulted on the loan, and it was eventually classified as a Non-Performing Asset (NPA).

The financial creditor issued a notice under section 13(2) of the SARFAESI Act, and, pursuant to the same notice, it also invoked the personal guarantee furnished by the appellants. In the aforesaid circumstances, the appellants invoked section 94 of the IBC.

The Adjudicating Authority (NCLT) dismissed the petition filed by the appellants under section 94 of the IBC, on a solitary ground that the petition was filed only after the financial creditor had invoked the SARFAESI Act for the realisation of debt. Then, an appeal was made before the NCLAT against the order passed by the NCLT.

NCLAT Held

The NCLAT held that the dismissal of the Section 94 application solely on the ground that the financial creditor had initiated proceedings by issuing a notice under Section 13(2) of the SARFAESI Act was not legally sustainable.

Therefore, the matter was to be remanded back to the Adjudicating Authority for its consideration, other than that which formed the line of its reasoning in the impugned order.

List of Cases Reviewed

• Naseema Bano, In re [2025] 171 taxmann.com 158 (NCLT-Chd.)
• Syed Mazahir Askari, In re [2025] 171 taxmann.com 329 (NCLT-Chd.) (para 5) reversed.
• Getz Cables (P.) Ltd. v. State Bank of India [2024] 169 taxmann.com 609 (NCLAT- New Delhi) (para 4) followed

List of Cases Referred to

• Getz Cables (P.) Ltd. v. State Bank of India [2024] 169 taxmann.com 609 (NCLAT- New Delhi) (para 3).

The post Section 94 IBC Plea Not Barred by SARFAESI Notice | NCLAT appeared first on Taxmann Blog.

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Case Details: Deys Medical (U.P.) (P.) Ltd. vs. Principal Commissioner of Income-tax - [2026] 184 taxmann.com 101 (Calcutta)

Judiciary and Counsel Details

• Rajarshi Bharadwaj & Uday Kumar, JJ.
• J.P. Khaitan, Pratyush Jhunjhunwala, Ms Sruti Datta & Ms Sakshi Singhi, Advs. for the Appellant.
• Prithu Dudhoria & Ms Sukanya Dutta, Advs. for the Respondent.

Facts of the Case

The assessee, a company, was a unit of the Dey’s Medical Stores Group and involved in manufacturing products. It used the Group Companies’ infrastructure, marketing, and sales promotion services on a reimbursement basis for incurred expenses. Such expenses were apportioned as a percentage of net sales based on historical data and treated as reimbursements.

The assessee did not deduct tax at source (TDS) on such payments. AO disallowed the reimbursement expenses under section 40(a)(ia) for failure to deduct TDS. On appeal, the CIT(A) deleted the disallowance, but the Tribunal partially restored it. The aggrieved assessee filed the instant appeal before the Calcutta High Court.

High Court Held

The High Court held that the Tribunal rightly emphasised that the payments did not correspond to actual, verifiable expenses incurred by the recipients. Genuine reimbursements are characterised by their nature as payments made post-facto, directly linked to specific, documented expenses supported by bills, vouchers or other tangible evidence.

In contrast, the payments in question lacked such detailed documentation. Instead, they appeared to be structured as fixed commissions or service fees, amounts that are inherently not reimbursements but contractual consideration for services rendered.

While commercial arrangements often involve apportioning costs based on historical data or arm’s-length negotiations, such practices cannot override the statutory requirement to deduct TDS at the time of payment or credit when the transactions are contractual in nature and fall within the scope of Section 194C.

Therefore, the Tribunal’s reasoning was sound, well-reasoned and supported by the record evidence. The payments in question, being contractual and not genuine reimbursements, squarely fall within the scope of Section 194C. The failure to deduct TDS in these circumstances justifies the disallowance under Section 40(a)(ia). The assessee’s arguments to the contrary lack merit and do not withstand scrutiny.

List of Cases Reviewed

• Shree Choudhary Transport Company v. ITO [2020] 118 taxmann.com 47/426 ITR 289/272 Taxman 472 (SC) (para 26) followed
• ITAT Appeal No. 1703/Kol/2018, dated 29-11-2023 (para 31) affirmed

List of Cases Referred to

• Zephyr Biomedicals v. Jt. CIT [2020] 122 taxmann.com 124/[2021] 276 Taxman 305/428 ITR 398 (Bombay) (para 9)
• Shree Choudhary Transport Company v. ITO [2020] 118 taxmann.com 47/426 ITR 289/272 Taxman 472 (SC) (para 25).

The post Sales-Linked Payments to Group Firms Attract TDS u/s 194C | HC appeared first on Taxmann Blog.

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Case Details: Assistant Commissioner of Income-tax vs. Freightbridge Logistics (P.) Ltd. - [2026] 183 taxmann.com 744 (Mumbai-Trib.)

Judiciary and Counsel Details

• Anikesh Banerjee, Judicial Member & Girish Agrawal, Accountant Member
• Ajay R. Singh & Akshay Pawar for the Appellant.
• Ms Kavitha Kaushik, Sr. DR for the Respondent.

Facts of the Case

The assessee was a private limited company engaged in the business of logistics and freight forwarding. For the relevant assessment year, it filed its return of income, declaring a total income of ₹ 9.31 crore on a turnover of ₹ 353.68 crore.

During the scrutiny proceedings, the Assessing Officer (AO) observed that three major vendors, namely CMA CGM SA, MSC Mediterranean Shipping Company SA, and ZIM Integrated Shipping Services Limited, were non-resident shipping lines, which had either filed nil returns or had not declared business income in India. Further, the assessee furnished confirmations from 26 vendors, along with party-wise ledger accounts, bank statements, and supporting documents.

Unsatisfied with the response, AO rejected the books of account and estimated profit at 8% of turnover. Aggrieved by the order, the assessee preferred an appeal to CIT(A). The CIT(A) deleted the additions made by AO, and the matter reached the Mumbai Tribunal.

ITAT Held

The Tribunal held that the assessee was engaged in the business of logistics and freight forwarding for a long time. The three major vendors, CGM SA, MSC Mediterranean Shipping Company SA, and ZIM Integrated Shipping Services Limited, were found to be non-resident shipping lines filing returns under the applicable provisions of the Act. The remand report itself acknowledged that these entities are non-residents and file returns under the statutory framework applicable to international shipping operations.

Significantly, the CIT(A) did not rely solely on the assessee’s submissions but conducted independent verification by issuing notices under section 133(6) to the major vendors. Two of the parties responded and furnished the requisite details confirming the transactions. The findings recorded in the appellate order clearly demonstrate that the addition was based on an ad hoc estimation without any cogent material to justify the application of an 8% net profit rate.

Moreover, the net profit ratios declared by the assessee over the years reveal consistent, modest margins typical of the logistics and freight forwarding industry. The AO did not present any comparable case or industry data to justify the arbitrary 8% estimate. The rejection of books of account and the estimation of profit cannot be sustained merely because certain vendors filed nil returns in India, especially when they are non-resident shipping companies governed by specific provisions of the Act. Accordingly, there was no infirmity in the order of the CIT(A) directing the deletion of the addition.

The post ITAT Rejects 8% Profit Estimation on Logistics Firm appeared first on Taxmann Blog.

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This article analyses key International Tax Rulings that clarify issues relating to the existence of PE in India, taxation of extra-territorial income, validity of reassessment proceedings, and the principles for attributing profits to a PE under international tax law. Extra-territorial income, Permanent Establishment (PE), liaison offices, secondment of employees, reassessment proceedings, and attribution of business profits are key concepts governing the taxation of cross-border business activities. Under the OECD Model Convention and various Double Taxation Avoidance Agreements (DTAAs), courts have repeatedly examined whether foreign enterprises have a taxable presence in India and the circumstances under which their income can be taxed in the country.

Table of Contents

1. Extra-Territorial Income
2. Permanent Establishment (PE) [Article 5 of OECD Model Convention]
3. Fixed Place PE
4. Liaison Office
5. Secondment of Employees
6. Strategic Oversight Services Agreement
7. Insurance PE
8. Reassessment
9. Business Profits [Article 7 OF OECD Model Convention]
10. Global Net Loss

Check out Taxmann's Yearly Tax Digest & Referencer which is Taxmann's definitive annual record of income-tax jurisprudence in India, systematically capturing how the law has been interpreted and applied by courts and tribunals. The 2026 Edition consolidates 3,550+ rulings reported during 2025 (updated till 16th November 2025) across the Supreme Court, High Courts, and ITAT. Presented as a two-volume, section-wise and issue-wise judicial digest, it enables precise identification, validation, and citation of precedents. This publication serves as an essential litigation and advisory reference for tax professionals, in-house teams, revenue authorities, and researchers dealing with complex, precedent-driven tax matters.

1. Extra-Territorial Income

Income-tax authorities in India do not have jurisdiction to bring to tax income arising from extra-territorial source, that is outside India, in respect of business carried on by foreign companies outside India [Assessment years 2008-09 to 2015-16] [In favour of assessee] [Article 12 of OECD Model Convention]

Vodafone Idea Ltd. v. Dy. DIT, (International Taxation) [2023] 152 taxmann.com 575/457 ITR 189 (Kar.)

Assessee was an ILD license holder and responsible for providing connectivity to calls originating/terminating outside India. It had entered into an agreement with NTOs for international carriage and connectivity services. Assessee had also entered into a capacity transfer agreement with a Belgium entity (Belgacom) which had certain arrangement with Omantel for utilisation of bandwidth. Assessing Officer passed an assessment order holding assessee as ‘defaulter’ for failure to deduct TDS while making payments to the said company. Equipments and submarine cables were situated overseas and Belgacom did not have any ‘permanent establishment’ in India.

Held that the income-tax authorities have no jurisdiction to bring to tax income arising from extra-territorial source. Further, withholding tax liability should not be levied at a higher rate. Since, in the instant case, facilities were situated outside India and agreement was with a Belgium entity which did not have any presence in India, tax authorities in India would have no jurisdiction to bring to tax income arising from extra-territorial source.

Case Review – SLP dismissed in Dy. CIT (International Taxation) v. Vodafone Idea Ltd. [2025] 173 taxmann.com 695/304 Taxman 594 (SC); Dy. CIT, International Taxation v. Vodafone Idea Ltd. [2025] 176 taxmann.com 626/306 Taxman 267 (SC)

2. Permanent Establishment (PE) [Article 5 of OECD Model Convention]

Existence of PE in India

Where Commissioner invoked revisionary proceedings on ground that Assessing Officer had not conducted necessary inquiries to verify claim of assessee, a Singapore based company, that it had no PE in India and to verify whether any commercial substance existed in Singapore, since said tentative opinion that assessee was a conduit company formed to obtain tax benefits of India-Singapore DTAA were not put to assessee and assessee was not given any opportunity of hearing, revisionary order was to be set aside [Assessment year 2017-18] [In favour of assessee] [Article 12 of DTAA between India and Singapore]

CIT, International Taxation-3 v. Zebra Technologies Asia Pacific Pet. Ltd. [2024] 169 taxmann.com 187/[2025] 302 Taxman 380/472 ITR 745 (Delhi)

Assessee, a company incorporated in Singapore, was engaged in the business of wholesale distribution of electronic products as well as services related to after sales, repairs, and technical support services to customers in various parts of world including India. Assessee had received certain amount for rendition of technical support, repair, and maintenance services. Assessee filed its income tax returns for relevant assessment year, inter alia, claiming that it had no PE in India and was not liable to pay tax in respect of aforesaid receipts. Assessing Officer accepted assessee’s claim. Commissioner opined that Assessing Officer had not verified the relevant details to ascertain whether assessee had a PE in India and to ascertain whether any commercial substance existed in Singapore or assessee was merely a conduit company. Accordingly, Commissioner initiated proceeding under section 263 by issuance of a show cause notice. Tribunal set aside the revisionary order on the ground that assessee was not afforded an opportunity to counter allegation. It was noted that Commissioner had faulted Assessing Officer for not undertaking certain enquiries. However, Commissioner had not put the issue regarding treaty shopping to assessee.

Held that there was no fault with the decision of the Tribunal in setting aside the revisionary order passed by the Commissioner.

Case Review – Zebra Technologies Asia Pacific Pte. Ltd. v. CIT (International Taxation) [2023] 150 taxmann.com 467/201 ITD 87 (Delhi – Trib.) affirmed.

3. Fixed Place PE

Dependant Agent PE (DAPE)

Where assessee, a foreign company, had established a liaison office in India which was followed by incorporation of a fully owned subsidiary in India, since revenue had abjectly failed to prove that said subsidiary stood conferred with authority to bind or conclude contracts on behalf of assessee, no DAPE could be said to have come into existence and, thus, assessee could not be said to have a fixed place PE in India [Assessment years 1997-98 and 1998-99] [In favour of assessee] [Article 5 of the DTAA between India and Finland]

CIT, International Taxation v. Nokia Network OY [2025] 171 taxmann.com 757/479 ITR 515 (Delhi)

Assessee, a foreign company, was engaged in manufacture of advanced telecommunication systems and equipment. It had established a liaison office in India in 1994 which was followed by incorporation of a fully owned subsidiary, NIPL, in India. Assessee filed its return of income taking a position that offshore supplies were not exigible to tax. Assessing Officer held that NIPL was liable to be treated as Dependent Agent Permanent Establishment (DAPE). He further held that 70 per cent of total equipment revenue was attributed towards sale of hardware and 30 per cent of the same was attributed towards supply of software and same was taxed as royalty. It was noted that NIPL was pursuing an independent line of business with Indian telecom operators. Revenue had abjectly failed to prove that NIPL stood conferred with authority to bind or conclude contracts on behalf of assessee. NIPL was not generating any revenue or income for the assessee. Onshore activities of NIPL were totally disconnected with supply contracts of assessee. There was, thus, a clear and discernible distinction between the activities undertaken by NIPL and supply contracts executed by assessee.

Held, on facts, that no DAPE could be said to have come into existence and, thus, assessee could not be said to have a fixed place PE in India. Further, income derived from sale of equipment and licensing of software in India could not be taxed in the hands of assessee.

Where MIPL was not performing additional function, in absence of material, it could not be taken as dependant agency PE to assessee, a non-resident company [Assessment year 2009-10] [In favour of assessee] [Article 5 of DTAA between India and Japan]

CIT (International Taxation)-2 v. Mitsui and Co. [2025] 170 taxmann.com 827 (Delhi)

Where MIPL was not performing additional function, in the absence of material, it could not be taken as dependant agency PE to assessee (a non-resident company) liable to tax in India.

Case Review – Dy. CIT (International Taxation) v. Mitsui & Co. [2022] 141 taxmann.com 128/94 ITR(T) 34 (Delhi – Trib.) affirmed and SLP dismissed in CIT International Taxation 2 v. Mitsui and Co. [2025] 170 taxmann.com 828/303 Taxman 331 (SC).

Where Assessing Officer initiated reassessment proceedings against assessee, a US based company, on ground that assessee had fixed place PE and dependent agent PE in India and was, therefore liable to pay tax in India, since there was no tangible material to establish existence of a PE in India for relevant assessment years, impugned reassessment proceedings were to be quashed [Assessment years 2013-14 to 2016-17] [In favour of the assessee] [Article 5 of DTAA between India and USA]

GE Renewables Grid LLC v. Asstt. CIT [2025] 174 taxmann.com 460 (Delhi)

Assessee, a US-based company, was engaged in development of power grid transmission and distribution management software and engineering services, was issued reassessment notices under section 148 based on survey findings alleging existence of dependent agent PE and fixed place PE in India. It was noted that reasons recorded for reopening did not contain any tangible material to substantiate existence of PE in India for the relevant assessment years.

Held that in the absence of any cogent material to establish existence of PE in India, reassessment proceedings initiated under section 148 were to be quashed.

Where Assessing Officer initiated reassessment proceedings against assessee, a foreign company, on ground that assessee had fixed place and dependent agent PE in India and, thus, it was liable to pay tax in India, since reasons as recorded in support of formation of opinion that income had escaped assessment had not alluded to any facts specific to assessment years 2013-14 to 2017-18, impugned reassessment proceedings were to be quashed [Assessment years 2013-14 to 2017-18] [In favour of assessee] [Article 5 of DTAA between India and Finland]

Grid Solutions OY (Ltd.) v. Asstt. CIT, International Taxation [2025] 170 taxmann.com 498/303 Taxman 288/477 ITR 698 (Delhi)

Assessee, a foreign company, was engaged in the business of manufacturing products for efficient power transmission, reactive power compensation and harmonic filtering, as well as related project engineering. Assessee had been awarded a contract by Indian company to supply equipments from outside India. Assessee claimed to have received payment of only 10 per cent advance during the year from Indian company and, accordingly, had shown nil income. Assessment was completed under section 143(3) accepting income as shown by assessee. Subsequently, a survey under section 133A(2A) was conducted upon GE group which had taken over grid business of assessee in the year 2015. Based on the said survey, impugned reassessment proceedings were initiated against the assessee on the ground that the nature of activities by assessee would establish that assessee had fixed place and dependent agent permanent establishment in India and, thus, it was liable to pay tax in India on income earned from the said contract. It was noted that the Assessing Officer had merely proceeded to adopt and reiterate what was found in the course of survey.

Held that since reasons as recorded in support of formation of opinion that income had escaped assessment had not alluded to any facts specific to assessment years 2013-14 to 2017-18, impugned reassessment proceedings were to be quashed.

Where Assessing Officer issued reopening notice against assessee, a foreign company, on ground that a survey conducted on a company revealed that assessee had fixed place and dependent agent PE in India and, thus, it was liable to pay tax in India, since revenue had woefully failed to establish that formation of opinion was based on any independent inquiry or material that Assessing Officer might had collated for purposes of forming an opinion as to whether income in relevant AYs had escaped assessment, impugned reassessment notice was to be set aside [Assessment years 2013-14 to 2017-18] [In favour of assessee] [Article 5 of DTAA between India and Switzerland]

GE Grid (Switzerland) GMBH v. Asstt. CIT [2025] 172 taxmann.com 227 (Delhi)

Assessee-company was incorporated and registered under the laws of Switzerland. It was engaged in the business of supplying equipments and spares to Indian entities. A survey was conducted upon company GE in June, 2019 which revealed that assessee had a business connection as per the Income-tax Act as well as a PE in India as per India-Switzerland DTAA and, thus, a part of its business profits arising from India was to be taxed in India as income of PE. Accordingly, Assessing Officer issued a reassessment notice. It was noted that revenue had woefully failed to establish that formation of opinion was based on any independent inquiry or material that Assessing Officer might had collated for the purposes of forming an opinion as to whether income in AYs 2013-14 to 2017-18 had escaped assessment. As was ex facie evident from a reading of reasons which stood assigned for invoking section 148, solitary basis was survey conducted in June 2019.

Held, on facts, that the impugned reassessment notice issued against the assessee was to be set aside.

4. Liaison Office

Where assessee, a US based company, engaged in business of rendering money transfer services, established a liaison office (LO) in India, since activities undertaken by LO were merely preparatory or auxiliary in character and far removed from core business of assessee, LO would not constitute a PE [Assessment years 2001-02 to 2004-05, 2006-07, 2007-08, 2011-12, 2013-14 and 2015-16] [In favour of assessee] [Article 5 of the DTAA between India and USA]

DIT (International Taxation) v. Western Union Financial Services Inc. [2024] 169 taxmann.com 461/[2025] 472 ITR 220 (Delhi)

Assessee, a US-based company, was engaged in the business of rendering money transfer services. For the said purpose, it had entered into agreements appointing agents in India. In terms of agency agreements, assessee had established a liaison office (LO) in India. Assessing Officer opined that assessee had a fixed place of business which constituted a ‘Fixed Place’ PE. Tribunal held that the activities undertaken by LO were merely preparatory or auxiliary in character and, thus, it would not constitute a PE.

Held that the permission granted by RBI proscribed LO from undertaking any commercial, trading or industrial activity in India and since activities undertaken by LO were far removed from core business of assessee, tests of ‘preparatory’ and ‘auxiliary’ as embodied in Article 5(3)(e) stood satisfied and, thus, LO would not constitute a PE. Further, since LO did not have any authority to conclude contracts, it could not be classified as a DAPE. Furthermore, since software merely constituted a medium of communication which enabled Indian agents to talk and communicate with servers of assessee housed in USA, deployment of software would not result in creation of a PE.

Where Liaison Office (LO) of assessee in India did not finalize and transact a business deal on its own or in name of head office, activities carried out by LO could not be said to be preparatory or auxiliary in nature and, thus, LO did not constitute Permanent Establishment of assessee [Assessment year 2009-10] [In favour of assessee] [Article 5 of DTAA between India and Japan]

CIT (International Taxation)-2 v. Mitsui and Co. [2025] 170 taxmann.com 827 (Delhi)

Where liaison office of assessee, a Japanese company, in India did not finalise and transact a business deal on its own or in the name of head office, activities carried out by LO could not be said to be preparatory or auxiliary in nature and, thus, LO did not constitute Permanent Establishment, liable to tax in India.

Case Review – Dy. CIT (International Taxation) v. Mitsui & Co. [2022] 141 taxmann.com 128/94 ITR(T) 34 (Delhi – Trib.) affirmed and SLP dismissed in CIT International Taxation 2 v. Mitsui and Co. [2025] 170 taxmann.com 828/303 Taxman 331 (SC).

Where Assessing Officer issued reopening notice based on materials gathered during survey conducted for earlier assessment years at Indian LO of non-resident assessee, and held that LO constituted a fixed place PE of assessee in India and income attributable to such PE was taxable in India, since assessee did not assert that facts in relevant assessment year were distinct from those which had fallen for detailed examination of revenue and had ultimately culminated in passing of a judgment by High Court in earlier assessment years, impugned reassessment proceedings were justified [Assessment year 2009-10] [In favour of revenue] [Articles 5 and 7 of DTAA between India and Italy]

GE Nuovo Pignone S.P.A v. CIT (International Taxation) [2024] 167 taxmann.com 351/[2025] 477 ITR 659 (Delhi)

Assessee was a non-resident company incorporated in Italy and part of GE group. A survey was conducted at LO of assessee’s group company and based on material gathered in the course thereof, notices under section 148 came to be issued to various entities of GE Group including assessee for assessment years 2001-02 to 2008-09. Thereafter, Assessing Officer issued reopening notice for the relevant assessment year on the ground that LO constituted a fixed place PE of assessee in India and income attributable to such PE was taxable in India. Assessee contended that the entire reassessment action was based upon the survey report and material which had been gathered and collated for assessment years other than the relevant assessment year and could not have justifiably formed the basis for invocation of section 148. It was noted that assessee did not assert that the facts in the relevant assessment year were distinct or distinguishable from those which had fallen for detailed examination of revenue in litigation which had ensued and had ultimately culminated in passing of a judgment by the High Court in earlier assessment years holding that assessee had a PE in India.

Held that the impugned reassessment proceedings were justified.

Case Review – GE Nuovo Pignone SPA v. Deputy CIT (IT) [2019] 101 taxmann.com 402 (Delhi – Trib.) affirmed.

5. Secondment of Employees

Where assessee, a South Korean company, had seconded employees in India, however, those employees were not discharging functions or performing activities connected with global enterprise of assessee and their placement in India was with objective of facilitating activities of Indian subsidiary, those employees would not meet qualifying benchmarks of a PE [Assessment years 2007-08 to 2009-10, 2011-12 to 2015-16 and 2017-18] [In favour of assessee] [Article 5 of DTAA between India and South Korea]

Pr. CIT, International Taxation v. Samsung Electronics Co. Ltd. [2025] 170 taxmann.com 417/303 Taxman 212/478 ITR 271 (Delhi)

Assessee, a South Korean company, was engaged in manufacturing and sale of electronic goods. It had two wholly owned subsidiaries in India. Assessing Officer held that Indian subsidiary was liable to be considered as a PE per se. He also held that the said subsidiary met tests of DAPE as well as service PE. Tribunal noted that seconded employees were not discharging functions or performing activities connected with the global enterprise of assessee. Their placement in India was with the objective of facilitating activities of Indian subsidiary and, thus, collection of market information, collation of data for development of products, market trend studies or exchange of information would not meet the qualifying benchmarks of a PE.

Held that the Tribunal was justified in interfering with the opinion formed by DRP which had spoken of a deemed PE having come into being merely on account of secondment of employees.

Case Review – Samsung Electronics Co. Ltd. v. Dy. CIT (Int. Taxation) [2018] 92 taxmann.com 171/64 ITR(T) 99 (Delhi – Trib.) affirmed.

6. Strategic Oversight Services Agreement

Where assessee, a Dubai based company, entered into an agreement with Indian hotel to provide strategic planning and ‘know-how’ to ensure that hotel was developed and operated efficiently, since assessee exercised pervasive and enforceable control over hotel’s strategic, operational, and financial dimensions, hotel premises satisfied criteria required to be classified as a “fixed place of business” or PE within meaning of article 5(1) of DTAA and, thus, income received under SOSA was attributable to such PE and was taxable in India [Assessment years 2009-10 to 2017-18] [In favour of revenue] [Articles 5 and 7 of the DTAA between India and UAE]

Hyatt International Southwest Asia Ltd. v. Addl. DIT [2025] 176 taxmann.com 783/306 Taxman 241/478 ITR 238 (SC)

Assessee, a company incorporated in Dubai, entered into two Strategic Oversight Services Agreements (SOSA) with ASL, India. Under the said agreement, assessee agreed to provide strategic planning and ‘know-how’ to ensure that hotel was developed and operated efficiently. Assessing Officer passed assessment orders taxing hotel related services rendered by assessee, inter alia, on the ground that assessee had a PE in India in form of place of business under article 5(1) of DTAA. High Court upheld the order passed by the Assessing Officer. It was noted from contractual provisions detailed in SOSA that assessee exercised pervasive and enforceable control over hotel’s strategic, operational, and financial dimensions. It was also noted that assessee’s executives and employees made frequent and regular visits to India to oversee operations and implement SOSA.

Held that the 20-year duration of SOSA, coupled with assessee’s continuous and functional presence, satisfied the tests of stability, productivity and dependence and, thus, hotel premises clearly satisfied the criteria required to be classified as a “fixed place of business” or PE. Furthermore, assessee’s ability to enforce compliance, oversee operations, and derive profit-linked fees from hotel’s earnings demonstrated a clear and continuous commercial nexus and control with hotel’s core functions which satisfied conditions necessary for constitution of a fixed place PE under Article 5(1) of India-UAE DTAA. Thus, assessee had a fixed place PE in India within the meaning of article 5(1) of DTAA and income received under SOSA was attributable to such PE and taxable in India.

Case Review – Hyatt International-Southwest Asia Ltd. v. Addl. DIT [2024] 158 taxmann.com 136/297 Taxman 497/464 ITR 508 (Delhi) affirmed.

7. Insurance PE

Where assessee, an insurance company, made payments towards reinsurance premium to Non-Resident Reinsurers (NRRs) without deducting tax at source, since brokers were acting as independent entities merely playing role of facilitators, no tax at source was to be deducted on these payments, thus, impugned payments made by assessee to NRRs could not be disallowed under section 40(a)(i) [Assessment years 2005-06 to 2010-11, 2013-14 and 2014-15] [In favour of assessee] [Article 5 of the DTAA between India and Switzerland]

Pr. CIT – 4 v. Cholamandalam MS General Insurance Company Ltd. [2025] 175 taxmann.com 452 (Mad.)

Assessee was an insurance company carrying on reinsurance business. It made payments towards reinsurance premium to non-resident reinsurers (NRRs) without deducting tax at source. Assessing Officer disallowed such payments under section 40(a)(i) for non-deduction of TDS under section 195. It was noted that the discussion in the order of Tribunal sat out the relevant facts making it clear that brokers were acting as independent entities merely playing the role of facilitators. Tribunal, thus, concluded that brokers did not either constitute a business connection in terms of Explanation 2 to section 9(1)(i) or a Permanent Establishment in terms of article 5 of relevant DTAAs.

Held that no material was produced by the Department before the court to dislodge factual findings rendered by the Tribunal. Thus, the impugned payments made by assessee to NRRs could not be disallowed under section 40(a)(i).

8. Reassessment

Where reassessment proceedings were initiated against assessee on ground that non-resident parent company and its affiliates had a business connection and a PE in India and, thus, assessee was liable to deduct tax under section 195 on payments made by it to them, since subsequent order passed under section 201(1) found that except for one, all other affiliates did not have a PE in India, impugned reassessment proceedings were to be quashed [Assessment years 2006-07 and 2007-08] [In favour of assessee] [Article 5 of OECD Model Convention]

Honda Cars India Ltd. v. Dy. CIT [2024] 166 taxmann.com 623/301 Taxman 653 (Delhi)

Assessee-company was engaged in the business of manufacturing and selling of cars in India. It filed its return of income which was accepted and an assessment order was passed. Subsequently, a survey was conducted upon assessee and on the basis of same, reassessment proceedings were initiated against the assessee on the ground that non-resident parent company and its affiliates had a business connection and a PE in India and, thus, assessee was liable to deduct tax under section 195 on payments made by it to them and since assessee had failed to do so, provisions of section 40(a)(i) were attracted and amount claimed as expenditure was liable to be disallowed under section 40(a)(i). Assessee submitted that subsequent order dated 10-12-2018 passed under section 201(1) found that except for one, all other affiliates did not have a PE in India.

Held, on facts, that the impugned reassessment proceedings initiated against the assessee were to be quashed.

9. Business Profits [Article 7 OF OECD Model Convention]

Profits Attributable to PE, Computation Of

Where issue regarding attribution of profit to AE on merits already stood concluded in favour of assessee by Court in earlier year, questions raised in Revenue’s appeal having become academic, appeal under section 260A was not maintainable [Assessment year 2011-12] [In favour of assessee]

CIT, International Taxation-3 v. Travelport LP [2025] 179 taxmann.com 613 (Delhi)

Assessing Officer held that assessee had a PE in India and profit of 100% was attributed to the assessee. Tribunal, however, held that the provisions of section 144C with all its sub-section did not apply to assessee, and so assessment order was void ab initio. Tribunal also held that even on the merits of the case, assessee had to succeed inasmuch as findings given by the Assessing Officer was totally based upon findings given in earlier assessment years and assessee was not responsible to explain recipients of receipts shown in Form No. 26AS. It was noted that in assessee’s case for earlier AYs, namely, CIT, International Taxation v. Travelport L.P. USA [2024] 158 taxmann.com 351 (Delhi), it was held that since assessee had not deployed any assets in India and major part of business activities took place in USA, Appellate Authority was justified in holding that 15 per cent of assessee’s profit was to be attributed to India.

Held that since the issue on merits already stood concluded in favour of assessee by Court in earlier year, questions raised in Revenue’s appeal having become academic, appeal under section 260A was not maintainable.

10. Global Net Loss

For computing profits attributable to Indian PE of assessee, net profit margins of assessee were to be applied and since assessee recorded a global net loss in relevant assessment year, no profit/income would be attributable to PE [In favour of assessee] [Articles 5 and 7 of the India-Finland DTAA]

CIT (International Taxation) v. Nokia Solutions and Networks OY [2023] 147 taxmann.com 165/455 ITR 157 (Delhi)

For computing the profits attributable to Indian PE of assessee, a Finland based company, net profit margins of assessee were to be applied and since assessee recorded a global net loss in the relevant assessment year, no profit/income would be attributable to PE.

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Adv. Bhavni Sahai – [2026] 184 taxmann.com 29 (Article)

1. Introduction

The Supreme Court of India, in Sports Authority of India v. Dr Kulbir Singh Rana, addressed the critical question of interpreting the recruitment rules applicable to contractual employees. The court clarifiedthe legal effect of recruitment rules framed by the Sports Authority of India (SAI) for regulating the method of recruitment to certain posts, including “initial constitution.This judgment provides crucial guidance on the rights of contractual employees and the obligations of employers. The judgment also highlights the role of administrative law/service law in safeguarding employees’ interests against arbitrary actions by the Sports Authority of India.

2. Factual Background

The dispute arose following the introduction of the Sports Authority of India (Executive Cadre) Staff Recruitment Rules, 2022 (“2022 Rules”), which sought to restructure SAI’s then workforce. But the respondents, who had been engaged as contractual physiotherapists, were excluded from retention under the 2022 Rules. Instead, the Sports Authority of India (SAI) issued a fresh recruitment notice for similar positions, requiring even the existing contractual employees to reapply. The respondents participated in the selection process, and on 09.02.2023, SAI issued a circular making public disclosure of non-eligible candidates for High Performance Analyst positions on a contractual basis. Being aggrieved, the respondents challenged the recruitment process before the Central Administrative Tribunal, Principal Bench at New Delhi, by filing an original application (OA).

The Tribunal allowed the application and, inter alia, directed on 04.11.2023 that since the applicants possessed the prescribed qualifications and had been selected through a process of open competition, therefore, their appointment was not ‘illegal’ but irregular and therefore they should be considered as part of the initial constitution as laid down in 2022 rules. Accordingly, the right held by employees working on an ad hoc basis remained intact. Against this order SAI filed a writ petition before the Delhi High Court. During arguments, counsel appearing for SAI stated that they did not intend to press the writ petition on the merits. They would be satisfied if more time were given to them to comply with the tribunal’s directions for considering the respondents’ case as “initial constituents” as per of the 2022 Rules. The writ petition was accordingly disposed of on 28.02.2024 by extending the time granted by the Tribunal to the petitioners for passing orders after considering the case of the respondent as ‘Initial Constituents’ as per 2022(4) Staff Recruitment Rules dated 03.08.2022 by eight weeks from the date of the judgment. However, SAI did not consider their case for “initial constituents.” Therefore, the respondent filed a contempt petition before the Tribunal (being Contempt Petition No. 140 of 2024) for willful disobedience of the order dated 04.11.2023, passed by the Tribunal. The High Court, however, dismissed the recall applications.

Despite the counsel’s statement, SAI did not consider their case for “initial constituents”; instead, it filed two recall applications against the above order of the High Court on 28.02. 2024 on the ground that the statement made by the counsel seeking time to comply with the order of the Tribunal, was made without the instructions from SAI and neither did SAI filed an affidavit stating that they have not instructed their counsel to make such a statement, instead the only ground which the counsel took for SAI was that they had actually misunderstood the order of the Tribunal. The High Court, however, dismissed the recall applications by stating that it is not denied by the counsel appearing for SAI that the statement made by the counsel seeking time to comply with the order of the Tribunal, was made without the instructions from SAI and neither did SAI filed an affidavit stating that they have not instructed their counsel to make such a statement, instead the only ground which the counsel took for SAI was that they had actually misunderstood the order of the Tribunal. Thereupon, the appellant filed an appeal before the Supreme Court.

3. Areas of Conflict

A reading of the Supreme Court decision reveals the following areas of conflict:

1. Whether the respondents are recognisedas ‘Initial Constituents’ as per 2022(4) Staff Recruitment Rules?
2. Whether the recall applications that the statement made by the counsel seeking time to comply with the order of the Tribunal without the instructions from SSI maintainable?
3. Whether the decision of SAI to terminate the services services of the respondents and advertise new positions was validly made?

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Case Details: Gail (India) Ltd., In re - [2026] 183 taxmann.com 708 (AAR-ODISHA)

Judiciary and Counsel Details

• P. R. Lakra & Ms Yamini Sarangi, Member
• S.C. Kamra, Adv., R.C. Patra, Dy. G.M. & R.K. Sahoo, Chief G.M. for the Petitioner.

Facts of the Case

The appellant company was engaged in transmission of natural gas through pipelines across the country and owned a network of cross-country pipelines. For expansion of its transmission network, the appellant procured pipes, fittings and works contract services for laying underground pipelines used for transportation of natural gas. Since substantial investment was involved, the appellant sought an advance ruling regarding admissibility of input tax credit (ITC) on goods and works contract services used for construction and laying of such pipelines. The Authority for Advance Ruling held that cross-country pipelines did not qualify as “plant and machinery” and therefore ITC was not admissible in view of Section 17(5)(d) of the CGST Act. Aggrieved by the ruling, the appellant preferred an appeal before the Appellate Authority for Advance Ruling.

AAR Held

The Appellate Authority held that cross-country natural gas pipelines constituted immovable property as they were embedded in earth for permanent use and formed part of long-term infrastructure. It was further observed that Section 17(5)(c) specifically blocks ITC on works contract services used for construction of immovable property, and Section 17(5)(d) also restricts ITC on goods or services used for construction of immovable property on own account, except where such property qualifies as plant and machinery. Since the definition of “plant and machinery” under the CGST Act expressly excludes pipelines laid outside factory premises, the pipelines laid by the appellant could not be treated as plant and machinery. Consequently, ITC on goods and works contract services used for construction and laying of such pipelines was not admissible. The appeal was therefore decided in favour of the Revenue.

List of Cases Reviewed

• M/s. Gail (India) Limited, In re Advance Ruling ORDER No. 6/ODISHA-AAR/2025-26 dated 23.07.2025 (para ), Affirmed
• Chief Commissioner of Central GST v. Safari Retreats (P.) Ltd. [2024] 167 taxmann.com 73 (SC)/[2024] 90 GSTL 3 (SC)/[2024] 106 GST 250 (SC) (para 5.4), followed
• Western Concessions Private Limited, Inre [GST-AAR, Application No.94, dated 26.11.2018] (para 5.4), approved
• Bharti Airtel Ltd. v. CCE [2024] 168 taxmann.com 489 (SC) (para 5.5), Distinguished

List of Cases Referred to

• Union of India v. Delhi Cloth & General Mills Co. Ltd. 1997 taxmann.com 1003 (SC) (para 2.4)
• H-Energy Gateway (P.) Ltd., In re [2025] 175 taxmann.com 656 (AAR – MAHARASHTRA) (para 2.4)
• South Bihar Sugar Mills Ltd. v. Union of India 1968 taxmann.com 2 (SC) (para 2.4)
• Bharti Airtel Ltd. v. CCE [2024] 168 taxmann.com 489 (SC) (para 2.5)
• Chief Commissioner of Central GST v. Safari Retreats (P.) Ltd. [2024] 167 taxmann.com 73 (SC)/[2024] 90 GSTL 3 (SC)/[2024] 106 GST 250 (SC) (para 3.0)
• Western Concessions Private Limited, Inre [GST-ARA, Application No. 94, dated 26.11.2018] (para 5.4).

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Taxmann presents Practical Insights on Ind AS and SAs, a weekly series exclusively for Accounts and Audit Module subscribers of Taxmann.com, focusing on the practical application of Ind AS and Standards on Auditing through structured, issue-based analysis.

Each week features a focused topic with real-world illustrations. This edition provides practical insights into the applicability and transition-related issues of Ind AS for Non-Banking Financial Companies (NBFCs), supported by regulatory references and real-world illustrative scenarios.

1. Introduction

The convergence to Indian Accounting Standards (Ind AS) represents a major reform in financial reporting, particularly for regulated entities such as Non-Banking Financial Companies (NBFCs), with the objective of improving transparency, consistency, and comparability of financial information. The transition to Ind AS for NBFCs has been introduced in a phased manner under the regulatory framework prescribed by the Reserve Bank of India and the applicable statutory rules, which specify thresholds, implementation timelines, and eligibility criteria. Given the varied business structures and operations within the NBFC sector, entities often encounter practical challenges during transition, especially in areas such as consolidation, net worth determination, and alignment of accounting policies across group entities following different reporting frameworks. This document provides practical insights into these issues through real-world illustrations.

2. Meaning of NBFC

Rule 2(g) of the Companies (Indian Accounting Standards) Rules, 2015, as amended by the Companies (Indian Accounting Standards) Rules, 2016, defines the term Non-Banking Financial Company (NBFC).

An NBFC means a company defined under clause (f) of Section 45-I of the Reserve Bank of India Act, 1934. The definition includes the following types of companies:

• Housing Finance Companies
• Merchant Banking Companies
• Micro Finance Companies
• Mutual Benefit Companies
• Venture Capital Fund Companies
• Stock Broker or Sub-Broker Companies
• Nidhi Companies
• Chit Companies
• Securitisation and Reconstruction Companies
• Mortgage Guarantee Companies
• Pension Fund Companies
• Asset Management Companies
• Core Investment Companies

2.1 Definition of NBFC under RBI Act

As per Section 45-I(f) of the Reserve Bank of India Act, 1934, a Non-Banking Financial Company means:

(a) A financial institution which is a company;

(b) A non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner;

(c) Such other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify.

3. Phased Implementation of Ind AS for NBFCs

Ind AS adoption for Non-Banking Financial Companies (NBFCs) was implemented in two phases to facilitate a gradual transition from Accounting Standards (AS) to Ind AS.

3.1 Phase 1 of Ind AS Implementation for NBFCs

Ind AS became applicable for accounting periods beginning on or after 1st April 2018 to:

(a) NBFCs having a net worth of ₹500 crore or more.

(b) Holding companies, subsidiaries, joint ventures or associate companies of such NBFCs.

These companies were required to prepare comparative financial statements for the period ending 31st March 2018.

However, any holding, subsidiary, associate or joint venture of an NBFC that had already adopted Ind AS voluntarily under Rule 4(1)(i) or mandatorily under Rule 4(1)(ii) or (iii) was excluded from this phased implementation.

3.2 Phase 2 of Ind AS implementation for NBFCs

Ind AS became applicable for accounting periods beginning on or after 1st April 2019 to:

(a) NBFCs whose equity or debt securities are listed or are in the process of listing on any stock exchange in India or outside India and having net worth less than ₹500 crore.

(b) Unlisted NBFCs having net worth of ₹250 crore or more but less than ₹500 crore.

(c) Holding companies, subsidiaries, joint ventures or associate companies of the above companies.

These companies were required to present comparative financial statements for the period ending 31 st March 2019.

Entities already covered under voluntary or mandatory adoption provisions under Rule 4(1)(i), (ii) or (iii) were excluded from this phase.

Also See – Practical Insights on Ind ASs and SAs – An overview of transitioning framework under Ind AS 101

4. Determination of Net Worth for NBFCs to Determine Applicability of Ind AS

For the purpose of determining the applicability of Ind AS, net worth should be calculated in the following manner:

(a) An existing NBFC should calculate its net worth as on 31st March 2016.

(b) If an NBFC’s first accounting period ends after 31st March 2016, it should calculate net worth at the end of that accounting period.

(c) If an NBFC was not in existence as on 31st March 2016, net worth should be calculated on the basis of its first audited financial statements.

(d) If an existing NBFC meets the specified net worth threshold after 31st March 2016, the net worth should be calculated based on the financial statements of the year in which the threshold is crossed.

(e) Net worth must be calculated on the basis of standalone financial statements.

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