Strategic Advisory: Managing Unutilized GST ITC in Apparel Exports

An apparel exporter paying 18% GST on inputs but exporting garments at 5% GST on items priced below ₹1000 faces a significant accumulation of excess input tax credit (ITC). Since exports are zero-rated under GST, exporters can claim a refund for the unutilized ITC. However, having been using the IGST refund mechanism for years (paying 5% IGST and claiming refunds), the company now holds a large carried-forward ITC balance, which has not been refunded separately. Switching to the LUT (Letter of Undertaking) mechanism allows the company to claim refunds for future ITC, but the past ITC (accrued over the years) may no longer be refunded due to the two-year time limit for refunds.

This advisory outlines strategies to legally utilize or monetize the accumulated ITC, with associated compliance steps, risks, and the pros and cons of each approach.

GST Zero-Rating & Refund Framework

Under GST, exports are treated as zero-rated supplies, meaning that the export of goods or services is subject to a 0% GST rate, effectively making them exempt from output tax. The zero-rating provision under Section 16(1) of the IGST Act allows exporters to either:

1. Pay IGST on exports and claim a refund of the IGST paid on inputs, or

2. Export without paying IGST (by submitting a Letter of Undertaking or bond) and claim a refund of the unutilized input tax credit in the credit ledger.

Both methods enable exporters to recover the input taxes paid on inputs and services used for export. However, refund claims for unutilized ITC must be filed within two years from the date of export, as per Section 54(6) of the Central Goods and Services Tax (CGST) Act.

Current Issue: Why ITC Is Accumulated

The company’s input taxes (18% GST on inputs) significantly exceed the output taxes on exports, which are taxed at only 5% on items priced below ₹1000. This results in excess ITC accumulation. As the company has been using the IGST route for refunds on exports, it has received refunds on the 5% IGST paid but has carried forward the excess credit. Over time, this ITC accumulation has grown substantially.

Because refunds of ITC are allowed only within two years (from the date of export), much of this legacy ITC may no longer be eligible for a refund. The current challenge lies in legally utilizing or monetizing this accumulated credit before it expires.

Option 1: Continue with the IGST Refund Mechanism

Approach:

The company can continue paying IGST (5%) on exports and claim the refund of IGST paid on the inputs used for exports. Any excess ITC can remain in the credit ledger, carried forward for future use.

• Action Steps: Ensure that all exports are invoiced with IGST and file the RFD-01 form for the refund of the IGST paid. Carry forward any remaining ITC balance in the GST credit ledger.

• Pros: There are no changes to the current export procedure, and the existing IGST refund mechanism continues to operate smoothly. No immediate compliance burden, and the company's export process remains unchanged.

• Cons: The accumulated ITC will not be utilized, and the past credits (which are now older than the two-year period for refund claims) cannot be refunded or monetized. Over time, this excess credit will continue to grow without any practical use.

• Risks: If any past refund claims have not been filed correctly or fully, the company may lose the opportunity to recover unutilized credits. Also, this approach does not address the existing large ITC balance and its monetization.

Option 2: Switch to the LUT Route (Future ITC Refunds)

Approach:

The company can switch to LUT (Letter of Undertaking) under the GST law, allowing it to export goods without paying IGST and instead claim a refund of the full unutilized ITC in the credit ledger.

• Action Steps: Apply for an LUT and submit RFD-01A for future refunds of unutilized ITC. Ensure all future export transactions are completed without the payment of IGST, using the LUT mechanism.

• Pros: Going forward, the company can recover the entire input taxes paid on exports in the form of a refund. This enhances cash flow as the company will not need to pay IGST upfront and can instead recover the input tax credit immediately.

• Cons: Past ITC (accumulated over the last 5-6 years) cannot be refunded due to the two-year limitation on refunds. The company will only be able to claim refunds on future ITC after switching to LUT. Additionally, the company may need to update its invoicing systems to reflect exports under the LUT mechanism.

• Risks: There is a risk of non-compliance with the LUT procedure, as exporters must meet certain conditions, such as providing bank guarantees (if required), and failing to adhere to the LUT regulations may lead to penalties or delays in refunds.

Option 3: Divert Some Exports to Domestic Sales to Absorb Credit

Approach:

The company could consider diverting some of its exports to the domestic market, where a higher GST rate applies. Selling domestically at 12% GST instead of exporting at 5% would enable the company to utilize some of the accumulated ITC.

• Action Steps: Identify specific products that can be sold domestically at a higher GST rate. File GST returns for domestic sales (CGST and SGST) and utilize the carried-forward ITC to pay the GST.

• Pros: Immediate use of the accumulated ITC. The company could increase its domestic sales while addressing the excess input credit. This approach would reduce the outstanding ITC balance and can help offset some of the excess credit.

• Cons: This will reduce exports, potentially impacting revenue. The company must be careful about maintaining competitive pricing in the domestic market. Additionally, a new compliance burden will arise, including domestic invoicing and filing separate returns.

• Risks: The company must ensure that it is genuinely supplying goods for domestic use, as GST authorities may scrutinize such changes. Misclassifying products or misusing the domestic supply route could invite penalties.

Option 4: Claim Inverted Duty Refund on Domestic Sales

Approach:

If the company starts domestic sales at a lower tax rate than the input tax, it can claim an inverted duty refund for the excess ITC incurred on inputs. For example, if the company is buying inputs at 18% GST but selling at 12%, it may be eligible for an inverted duty refund on the input tax.

• Action Steps: File GST RFD-01 after ensuring that the company qualifies for the inverted duty refund under Rule 89 and maintain the necessary documentation (e.g., invoices, receipts).

• Pros: Converts accumulated ITC into a cash refund. The company can use the inverted duty refund mechanism to reduce the credit balance and improve liquidity.

• Cons: The inverted duty refund mechanism is complex and subject to specific eligibility conditions. Not all input taxes are refundable under this scheme, and the refund process may take time. The company must ensure that domestic sales are correctly reported.

• Risks: Inaccurate documentation or claims under the inverted duty refund scheme could lead to audits or penalties by the tax authorities.

Option 5: Restructure Contract Labour or Job Work

Approach:

If the company is using contract labour or job work for certain processes, it may consider insourcing some of the jobs or working with registered composition suppliers. This would help reduce the input tax credit buildup from 5% job work GST, and by shifting to in-house processes, the company may avoid paying GST on services.

• Action Steps: Review labour structures, hire in-house staff, or work with composition suppliers who do not charge GST. Transition to in-house production for specific items where possible.

• Pros: Reduces ITC accumulation over time. The company may also benefit from greater control over production and reduced reliance on external vendors.

• Cons: Increased payroll and potential capital expenditure for in-house facilities. The savings on GST from job work reduction may not fully offset the higher operational costs.

• Risks: Changing vendor relationships or restructuring may lead to disruption in the business operations, and any misclassification of job workers or suppliers could lead to compliance issues.

Option 6: Corporate Restructuring or ITC Transfer

Approach:

In some cases, the company could consider restructuring its business by transferring its export operations to a different entity within the corporate group. Under Section 18 of the GST law, a business that transfers assets or operations as a going concern can transfer its unutilized ITC to the new entity.

• Action Steps: Initiate a slump sale or asset transfer to another company within the group, ensuring that the new entity can utilize the ITC.

• Pros: The accumulated ITC may be fully utilized by the receiving entity. This also provides a new legal entity focused on export activities.

• Cons: Complex legal processes and documentation requirements for restructuring. Potential risks of unforeseen compliance issues during the transfer of ITC.

• Risks: GST authorities could challenge the transfer if correct procedures are not followed, potentially leading to penalties or disallowed credits.

Conclusion and Strategic Recommendations

Given the complexity of the situation, the best course of action depends on the company’s future export projections, cash flow needs, and long-term business goals. However, the company should consider switching to the LUT mechanism for future ITC refunds and explore monetizing excess credits through options like domestic sales, inverted duty refunds, or restructuring.

Careful tax planning, diligent record-keeping, and understanding the legal nuances under GST will help maximize the value from unutilized ITC, ensuring that the company remains compliant while addressing its growing credit balance.

Maximizing ITC Monetization for Exporters: Advanced Legal Insights, Strategies, and Case Studies

Introduction:

In the competitive world of export business, ensuring efficient tax management is essential. The Input Tax Credit (ITC) mechanism under the Goods and Services Tax (GST) can significantly improve the financial health of exporters. However, the process of claiming refunds, avoiding common pitfalls, and adopting proactive strategies requires an in-depth understanding of GST law and its application. This article explores advanced strategies to maximize ITC benefits for exporters, including detailed case studies of two distinct export sectors—a garment exporter and an IT service exporter—along with practical solutions for each scenario.

Case Study 1: Garment Exporter Maximizing ITC Refunds and Domestic Utilization

Background:

Elegant Exports Ltd., a garment exporter with an annual turnover of ₹50 crore, faced challenges with ₹75 lakh ITC accumulated from various inputs including freight services, consulting, and raw materials for garment manufacturing. The company needed to monetize this ITC to improve liquidity and comply with GST regulations.

Action Steps:

1. Claiming Refund via IGST on Exports (Legal Reference: Section 16(3) of IGST Act):

   • Process: Elegant Exports opted for the refund process under Section 16(3) of the IGST Act, applying for refunds through Form GST RFD-01.

   • Key Documents: The exporter submitted the shipping bill, customs clearance certificates, export invoices, and bank realization certificates.

   • Outcome: The refund of ₹65 lakh was processed in 6 months, with the remaining ₹10 lakh deferred due to delayed export receipts.

   Critical Checkpoints for Refund Process:

   • Ensure that export proceeds are received within the specified timeframe (typically 1 year) to avoid delayed refund processing.

   • Double-check the shipping bills for accurate HSN codes, value declarations, and matching invoices to expedite the process.

2. Optimizing Liquidity via LUT Filing (Legal Reference: Rule 96A of CGST Rules):

   • Filing an LUT: Elegant Exports filed a Letter of Undertaking (LUT) under Rule 96A to avoid paying IGST on their export transactions.

   • Outcome: This decision allowed the company to maintain liquidity, as they no longer needed to pay IGST upfront on their exports valued at ₹20 crore annually.

   Key Points to Ensure Successful LUT Filing:

   • File LUT at the start of the financial year for uninterrupted export activity.

   • Ensure all GST returns (GSTR-1 and GSTR-3B) are filed on time to maintain compliance.

3. Domestic ITC Utilization (Legal Reference: Section 49(2)):

   • Domestic Sales Strategy: The company used ₹10 lakh of the ITC for its domestic sales, offsetting GST liabilities on ₹2 crore worth of local sales.

   • Legal Insight: Under Section 49(2), ITC can be utilized against domestic sales provided the credit is correctly matched to the purchases, and the goods/services are not excluded.

   Key Challenges in Domestic ITC Utilization:

   • Ensure that ITC on non-business goods/services is not claimed. Any ineligible ITC can lead to penalties or rejections.

   • Proper matching of invoices between purchases and sales is essential to avoid discrepancies during audits.

Outcome & Key Takeaways from Case Study 1:

• Timely Refund Claims: Refund claims should be submitted quarterly for faster processing, especially for exporters with significant ITC accumulation.

• LUT Filing: Filing an LUT ensures liquidity, preventing upfront IGST payment on exports.

• Domestic Utilization: Use ITC on local sales efficiently to reduce GST liabilities, thereby freeing up cash flow for business operations.

Case Study 2: IT Service Exporter Adjusting ITC Claims and Business Restructuring

Background:

TechExport Solutions Pvt. Ltd., a leading IT services exporter with a turnover of ₹100 crore, accumulated ₹40 lakh ITC on services such as cloud hosting, consulting, and freight services. The company faced issues with ITC utilization due to certain invoices being rejected and delayed export receipts.

Action Steps:

1. Claiming Refund on ITC for Export of Services (Legal Reference: Section 54(3)):

   • Refund Filing: TechExport filed a refund claim under Section 54(3) of the CGST Act for the unutilized ITC on their export services.

   • Required Documents: The company submitted Form GST RFD-01, export invoices, and bank realization certificates to establish proof of export.

   • Outcome: The refund was processed and received within 4 months.

   Critical Checkpoints for Export Services Refund:

   • Ensure bank realization certificates are matched with export invoices to avoid discrepancies.

   • Cross-check HSN codes and service descriptions to ensure they align with the export classification under GST.

2. LUT Filing for Future Exports (Legal Reference: Rule 96A of CGST Rules):

   • Action: TechExport filed an LUT to avoid IGST payments on future export services, streamlining cash flow.

   • Outcome: This approach freed up ₹3 lakh in working capital as the company no longer had to pay IGST upfront.

   LUT Filing Best Practices:

   • Ensure timely submission of LUT to avoid delays in export clearance.

   • Double-check GST returns for timely and accurate reporting of exports under LUT.

3. ITC Transfer via Business Restructuring (Legal Reference: Section 18(3)):

   • Business Restructuring: TechExport Solutions transferred ₹15 lakh ITC to a newly formed subsidiary for IT services.

   • Outcome: The subsidiary used this ITC to offset its GST liability on its own services, optimizing cash flow across the group.

   Key Considerations for ITC Transfer:

   • Restructuring must be done in accordance with Section 18(3), which allows the transfer of ITC during business reorganization or mergers.

   • Both entities must fulfill the ownership condition to ensure the legitimacy of the ITC transfer.

Challenges and Solutions in Case Study 2:

• Delayed Export Receipts: TechExport faced delays in receiving payment for some services, which could have delayed their refund processing.

  • Solution: Implement a real-time tracking system for receipts and ensure regular follow-up with international clients to avoid late payment issues.

• Invoice Matching Issues: A few invoices were initially rejected due to mismatches in HSN codes and service descriptions.

  • Solution: Regularly audit GST invoices and ensure the correct service codes are used in alignment with the HSN list for export services.

Tax Planning for Exporters: Key Considerations and Actionable Insights

1. Regular ITC Audits: Exporters should perform quarterly audits of their ITC claims to ensure that all eligible credits are correctly claimed and refunds are filed promptly.

2. LUT Filing Strategy: File an LUT at the beginning of the financial year to prevent paying IGST upfront. This improves liquidity and ensures smooth export operations.

3. ITC Optimization through Business Restructuring: For large export houses with multiple divisions, consider ITC transfer between business units under Section 18(3) for efficient tax management.

Comparison Table: Case Study 1 vs. Case Study 2

Aspect	Garment Exporter (Case Study 1)	IT Service Exporter (Case Study 2)
Refund Filing Time	6 months	4 months
LUT Filing	Yes	Yes
ITC Transfer Strategy	Utilized for domestic sales	Transferred to subsidiary
Refund Amount	₹65 lakh	₹40 lakh
Challenges	Documentation accuracy	Export receipt tracking, invoice matching

Conclusion

Exporters must adopt a comprehensive strategy for maximizing their ITC benefits. The detailed steps outlined in the case studies above, combined with proactive filing of LUTs and timely refund claims, can lead to improved cash flow, tax savings, and operational efficiency.

Actionable Steps for Exporters & consultants

• File ITC refund claims promptly to ensure faster processing and enhanced cash flow.

• Adopt an LUT filing strategy at the beginning of the financial year to reduce working capital requirements.

• Engage in business restructuring where applicable to optimize ITC utilization and enhance tax efficiency.

• Ensure timely and accurate filings of GST returns, LUTs, and ITC refund claims to enhance liquidity and avoid penalties.

• Advise clients on ITC transfer strategies during business restructuring to help them optimize their tax liabilities.

By following these advanced strategies and utilizing the insights from these real-world case studies, exporters can significantly enhance their financial position, streamline operations, and stay ahead of the curve in the complex GST landscape.

Impact of CBDT Notification No. 38/2025 on Regulatory Settlement Expenses

On April 23, 2025, the Central Board of Direct Taxes (CBDT) issued Notification No. 38/2025, which significantly modifies the treatment of settlement expenses under Section 37 of the Income-tax Act, 1961. These amendments introduce clarity on the non-deductibility of expenses related to settlements under specific regulatory frameworks, impacting the tax treatment of such costs. This will be effective from Assessment Year 2025-26 onwards.

Understanding the Legal Framework: Section 37 of the Income-tax Act

Section 37(1) of the Income-tax Act, 1961 provides that an expense will be allowed as a deduction if it is wholly and exclusively incurred for the purpose of the taxpayer's business or profession. However, expenses related to illegal activities or prohibited by law are explicitly disallowed.

Explanation 1 and Explanation 3 to Section 37

Explanation 1 to Section 37 ensures that illegal expenses or those incurred in activities prohibited by law cannot be claimed as business expenses.

Explanation 3, introduced through the Finance (No. 2) Act, 2024, broadens this provision by specifically including expenses incurred to settle proceedings initiated due to contraventions under certain specified laws. This clarification impacts regulatory proceedings under the following acts:

• Securities and Exchange Board of India Act, 1992 (SEBI Act)

• Securities Contracts (Regulation) Act, 1956 (SCRA)

• Depositories Act, 1996

• Competition Act, 2002

Key Impact of CBDT Notification No. 38/2025

The CBDT Notification No. 38/2025, issued on April 23, 2025, formally incorporates the SEBI Act, SCRA, Depositories Act, and Competition Act into the non-deductible expense category. This means that any expenses incurred by businesses in settling proceedings initiated due to violations or defaults under these laws will no longer be deductible under Section 37 of the Income-tax Act.

Practical Implications for Businesses

Non-Deductibility of Regulatory Settlement Expenses

Businesses involved in regulatory settlements related to the above-mentioned laws must account for settlement expenses in a manner consistent with the new tax treatment. These expenses will be treated as non-deductible and will increase the taxable income, leading to a higher tax liability.

Required Amendments to Tax Audit Reporting

From Assessment Year 2025-26, businesses must ensure proper disclosure of non-deductible settlement expenses in their Tax Audit Reports. This is done under Clause 21(b) of Form 3CD, which has been updated per CBDT Notification No. 23/2025 dated March 28, 2025.

Steps for Businesses to Ensure Compliance

To ensure compliance with the updated provisions, businesses should follow these steps:

1. Identify Non-Deductible Settlement Expenses

   • Review any expenses incurred in settlements under SEBI, SCRA, Depositories Act, or the Competition Act.

   • Ensure such expenses are flagged as non-deductible in accounting records.

2. Update Financial Records and Tax Calculation

   • Adjust your taxable income calculations to reflect the non-deductible nature of these expenses.

   • Ensure these expenses are clearly excluded from deductions in your tax filings.

3. Amend Tax Audit Disclosures (Form 3CD)

   • Disclose the non-deductible settlement expenses under Clause 21(b) of Form 3CD as per the updated CBDT notification.

   • Ensure the updated disclosures are submitted accurately to avoid non-compliance.

4. Revise Standard Operating Procedures (SOPs)

   • Update SOPs to incorporate these new guidelines and ensure future settlements are accounted for correctly with regard to tax implications.

5. Training for Internal Teams

   • Conduct training for your finance and compliance teams to familiarize them with the new amendments.

   • Ensure auditors are briefed on how to handle these expenses in light of the latest regulations.

Illustrative Checklist for Compliance

Action	Description	Responsible Department
Identify Non-Deductible Expenses	Review past and current regulatory settlement expenses.	Finance & Compliance
Flag Expenses in Accounting Records	Mark settlement-related expenses as non-deductible.	Accounting
Tax Audit Disclosures (Form 3CD)	Disclose non-deductible expenses in Clause 21(b) of Form 3CD.	Tax Auditors
Update SOPs	Revise SOPs to ensure tax-compliant handling of future settlements.	Management & Finance
Team Training & Awareness	Train finance teams and auditors on the new tax treatment.	HR & Compliance

Conclusion

CBDT Notification No. 38/2025 introduces crucial changes for businesses involved in regulatory settlements under specific laws. By disallowing the deduction of settlement expenses under the SEBI Act, SCRA, Depositories Act, and Competition Act, the notification ensures that these costs cannot be used to reduce taxable income, leading to an increase in overall tax liability.

For businesses, understanding and implementing the changes outlined in this notification is essential to remain compliant. Proper financial record-keeping, tax audit disclosures, and internal process updates are key steps to mitigate any risks of non-compliance. Businesses should also ensure that finance teams and auditors are fully aware of these changes, enabling them to handle the updated provisions effectively from Assessment Year 2025-26 onwards.

The Future of Brand Valuation: Building Beyond Numbers into Trust, Technology, and Trajectory

In the twenty-first century, a brand is not just what a company sells—it is what the world remembers."
— Anonymous

Introduction

Brand valuation, traditionally a financial exercise rooted in historical performance and forecasted cash flows, is undergoing a fundamental transformation.
Technological advancements, evolving consumer behaviour, and new data ecosystems are reshaping how brand value is measured and perceived.

Today, Artificial Intelligence, blockchain, and behavioural science are moving from the periphery to the centre of brand valuation discussions.
In this evolving environment, valuation professionals, founders, and investors must look beyond financial metrics and prepare for a multidimensional valuation approach that reflects trust, innovation, loyalty, and future brand momentum.

Reframing the Core Questions of Brand Valuation

The nature of brand assets is becoming increasingly intangible and complex. This gives rise to important new valuation questions:

• How should emotional trust and consumer affinity be monetised?

• Can Artificial Intelligence accurately predict brand momentum and future resilience?

• Will blockchain technology enable measurable and auditable loyalty metrics?

• Can customer advocacy and cultural relevance be formally reflected in financial valuation?

• Will Intellectual Property protection drive significant valuation premiums?

The answers to these questions are emerging, and they point towards a future where financial strength is complemented by emotional, cultural, and technological metrics.

The Emerging Pillars of Modern Brand Valuation

Predictive Brand Metrics

Artificial Intelligence and advanced analytics are enabling valuation models to become forward-looking.
By integrating real-time social sentiment, cultural trend analysis, and engagement metrics, brand valuations will increasingly incorporate forecasts of brand resilience, relevance, and future earning potential rather than relying solely on historical performance.

Blockchain-Enabled Loyalty Authentication

Blockchain offers an auditable and transparent way to verify customer loyalty, repeat transactions, and authentic user-generated content.
Through this verification, intangible elements like customer trust and brand advocacy can transition into measurable assets, strengthening the credibility of brand valuation reports.

Emotional Equity Quantification

Behavioural science and digital analytics are providing new tools to quantify brand love, trust, and cultural relevance.
Emotional equity scoring, based on real-world data such as customer sentiments and engagement behaviours, will become an increasingly important dimension of brand value.

Intellectual Property as a Strategic Multiplier

Intellectual Property rights—encompassing trademarks, copyrights, and patents—are not only legal protections but strategic assets that can justify valuation premiums.
Brands with strong IP portfolios will be able to leverage this strength during negotiations, mergers, and fundraising activities, especially in technology-driven and consumer-focused sectors.

Traditional Valuation Frameworks: Still the Foundation

Despite these emerging trends, traditional valuation methodologies remain the recognised gold standard, particularly for regulatory, reporting, and litigation purposes.
These include:

• Discounted Cash Flow (DCF): Assessing the present value of projected future cash flows.

• Relief-from-Royalty Method: Estimating the hypothetical royalties a business avoids by owning its brand.

• Excess Earnings Method: Valuing intangible assets by isolating earnings attributable specifically to the brand.

These methods are endorsed by frameworks such as the International Valuation Standards (IVS) and the guidelines issued by the Institute of Chartered Accountants of India (ICAI).

Emerging metrics should be viewed as complementary, providing a richer narrative and more strategic insights without replacing foundational financial models.

Strategic Comparison: Traditional Versus Emerging Paradigms

Dimension	Traditional Frameworks	Emerging Frameworks
Core Focus	Historical financial performance	Future brand trajectory and emotional resilience
Methodology	DCF, Relief-from-Royalty, Excess Earnings	AI analytics, Blockchain verification, Behavioural metrics
Data Inputs	Financial statements, historical cash flows	Real-time engagement, cultural sentiment, verified loyalty
Customer Advocacy	Implicit through financial results	Explicitly measured through loyalty authentication
Role of Intellectual Property	Ownership documentation	Strategic premium in brand narrative and valuation
Regulatory Recognition	Fully codified and accepted	Emerging, evolving into best practices
Scope of Narrative	Financial and operational	Financial, emotional, cultural, and technological

Strategic Implications for Founders, CFOs, and Brand Consultants

In the coming years, the key question will no longer be limited to, "What is my brand worth today?"
Instead, organisations must ask, "What are the underlying drivers that will enhance my brand’s value tomorrow, and are we actively building towards them?"

Founders, CFOs, and brand consultants should prepare by:

• Investing in real-time brand intelligence and engagement tracking

• Building strong, defensible Intellectual Property portfolios

• Leveraging blockchain to create transparent and auditable loyalty ecosystems

• Embracing behavioural science to measure and enhance emotional equity

• Developing valuation narratives that are forward-looking, multi-dimensional, and strategy-aligned

Organisations that adopt these approaches will not only maximise their valuation today but also secure sustainable competitive advantages for the future.

Conclusion

The future of brand valuation will be defined by a multidimensional lens—integrating financial precision with emotional intelligence, technological verification, and cultural relevance.
Brands that proactively invest in these new value drivers will command premium valuations, foster stronger stakeholder trust, and build enduring legacies.

"The true value of a brand lies not just in what it has achieved, but in the future it is destined to create."

Cash Payments and Exemptions Under Rule 6DD: A Legal Analysis of Arasappan Madhivanan vs. Income-tax Officer

In the landmark case of Arasappan Madhivanan vs. Income-tax Officer ([2025] 173 taxmann.com 876, Madras High Court), the Madras High Court delved into the intricacies of Section 40A(3) and its interplay with Rule 6DD, providing clarity on the scope of exemptions for cash payments, particularly when the recipient is a company. The case addresses a crucial question: whether cash payments exceeding ₹20,000 made by a distributor to a company engaged in milk production could benefit from the exemption under Rule 6DD(e)(ii).

Case Background

Arasappan Madhivanan, a wholesale distributor of Arokya Milk for Hatsun Agro Products Limited, made cash payments exceeding ₹20,000 to the company. During the assessment process, these payments attracted scrutiny under Section 40A(3) of the Income Tax Act, which prohibits cash payments exceeding ₹10,000 (₹20,000 for specific transactions) unless a valid exception exists under Rule 6DD.

The assessee contended that the exemption under Rule 6DD(e)(ii) applied, as Hatsun Agro was involved in milk production. However, the Assessing Officer (AO) rejected this argument, asserting that the provision did not cover cash payments to a company. The matter eventually reached the Madras High Court for further interpretation.

Key Legal Issue: Application of Rule 6DD to Companies

The central issue in this case was whether the exemption under Rule 6DD(e)(ii), which applies to cash payments made to producers of milk, could be extended to a company involved in the pasteurization and distribution of milk.

The Assessee's Argument:

The assessee argued that Hatsun Agro, being a company engaged in milk production, should fall under the definition of a 'producer' as per Rule 6DD(e)(ii), which provides an exemption for cash payments made to producers of agricultural or dairy products.

The AO’s Ruling:

The Assessing Officer disagreed, noting that the term 'producer' in Rule 6DD refers specifically to dairy farmers and not to companies engaged in the pasteurization and commercialization of milk. The AO held that Rule 6DD does not extend to cash payments made to corporate entities.

Madras High Court's Judgment:

The Madras High Court upheld the decision of the Assessing Officer and provided a thorough analysis of the legal provisions:

1. Interpretation of the Term 'Producer':

   • The Court held that the term 'producer' in Rule 6DD(e)(ii) is specific to dairy farmers and does not extend to companies. It emphasized that the term should be understood in the context of agriculture, forestry, poultry farming, and similar activities, in line with the interpretation of 'cultivator' and 'grower'.

   • The Court further clarified that the intention behind Rule 6DD was to provide relief to small-scale producers directly involved in primary agricultural or dairy production, not to large corporations that process or commercialize these goods.

2. Scope of Rule 6DD and Section 40A(3):

   • Section 40A(3) is designed to discourage large cash transactions in business, and its operation is meant to be absolute, with limited exceptions. The exemption under Rule 6DD serves to carve out exceptions in specific, genuinely unavoidable circumstances. However, the Court noted that Rule 6DD was not intended to provide blanket relief for corporations that have full access to banking channels.

   • The ruling emphasized that both the distributor (the assessee) and Hatsun Agro had full access to banking facilities, and there was no justifiable reason provided for making cash payments. This lack of an exigent circumstance meant that the cash payments could not be exempted under Rule 6DD.

3. Impact of Banking Facilities and Formal Transactions:

   • The Court reaffirmed the legislative intent behind Section 40A(3): to promote transparency and prevent tax evasion through formal banking channels. Cash transactions are discouraged unless there is a genuine reason for their necessity. In this case, there was no justification for why banking facilities were not used for the payments.

Legal and Practical Implications

1. Limited Scope of Exemption for 'Producers':

   • The case reinforces the strict interpretation of the term 'producer' under Rule 6DD(e)(ii). It underscores the need for businesses to be cautious when claiming exemptions, as Rule 6DD applies specifically to small-scale producers of agricultural or dairy products and not to large commercial entities involved in secondary processing like pasteurization.

2. Importance of Banking Transactions:

   • The ruling highlights that both small and large businesses that have access to banking facilities are expected to conduct their transactions through formal financial channels. The exemption under Rule 6DD will not apply where such access exists, and businesses must justify cash payments only in genuinely unavoidable circumstances.

3. Corporate Responsibility and Compliance:

   • For companies in the dairy industry or similar sectors, this judgment serves as a reminder to avoid cash payments exceeding ₹10,000 without valid reasons. Section 40A(3) will be enforced rigorously, and any attempt to bypass banking transactions may lead to disallowances.

4. Clarifying Exemptions under Rule 6DD:

   • The Court’s ruling offers clarity on Rule 6DD, limiting its scope. The exemption is intended to cater to individual producers or small-scale entities. Corporates, even if they deal with agricultural products, cannot claim this benefit unless they meet the specific conditions laid out in the Rule.

Conclusion

The Arasappan Madhivanan case provides critical insights into the application of Section 40A(3) and Rule 6DD. The Madras High Court has clarified that the exemption under Rule 6DD(e)(ii) does not apply to companies involved in the pasteurization or commercialization of milk, as it is meant for dairy farmers or small-scale producers. The ruling reinforces the absolute nature of Section 40A(3), which discourages cash payments exceeding ₹10,000 without a valid exemption.

For businesses, particularly those in the dairy or agricultural sectors, this case underscores the need for compliance with banking transactions and a clear understanding of the limited scope of Rule 6DD exemptions. Cash payments should only be made when genuinely necessary, and businesses must be prepared to justify such payments if they fall under the purview of Section 40A(3).

Maximizing Tax Efficiency: Leveraging DTAA to Avoid Capital Gains Tax on Mutual Funds for NRIs

1. Introduction

In recent years, a growing number of wealthy Non-Resident Indians (NRIs) have utilized the Double Taxation Avoidance Agreements (DTAA) between India and select foreign nations to legally eliminate capital gains tax on mutual fund investments in India.
The strategy revolves around residing in countries where capital gains on mutual funds are either not taxed or the taxation rights lie with the country of residence, as per the provisions of the DTAA.
Countries such as the United Arab Emirates (UAE), Singapore, Mauritius, Malaysia, Oman, Qatar, Saudi Arabia, Kuwait, and Bahrain are among those that offer this unique tax advantage.

This document provides a legal overview, interpretation of the relevant provisions, a strategic approach for implementation, and a detailed checklist and declaration template to guide the process of claiming this tax benefit efficiently.

2. Relevant Legal Framework

A. Income Tax Act, 1961 – Section 5 and Section 90(2)

Under the Income Tax Act, 1961, the taxability of income for an individual is primarily determined by their residential status:

• Section 5: The income of a person is taxed in India depending on their residential status. Non-Residents are taxed only on income sourced from India or income received in India.

• Section 90(2): This provision allows an individual to opt for the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and their country of residence, if the provisions of the DTAA are more beneficial than the domestic tax laws.

B. DTAA – Article on Capital Gains (Typically Article 13)

Most DTAAs between India and foreign countries contain specific provisions regarding the taxation of capital gains arising from the sale of property other than immovable property (which includes mutual fund units).
Under such agreements, capital gains are typically taxable only in the country of residence of the taxpayer, with the specific provision varying across agreements.

For example, the India–UAE DTAA, Article 13(4) provides:

"Gains derived by a resident of a Contracting State from the alienation of any property other than immovable property ... shall be taxable only in that State."

Thus, when the country of residence does not levy capital gains tax (e.g., UAE), and the DTAA restricts India’s taxing rights, these gains are not subject to tax in India.

C. Section 90(4) and Section 90(5) – Documentation Requirement

• Section 90(4) mandates that individuals claiming DTAA benefits must obtain a Tax Residency Certificate (TRC) from the foreign tax authorities to substantiate their claim.

• Section 90(5) requires the submission of Form 10F, along with other necessary documentation, for the successful claim of benefits under the DTAA.

3. Interpretation and Analytical Explanation

A. Legal Interpretation

1. Non-Resident Status and Capital Gains Tax:
   According to Section 6 of the Income Tax Act, 1961, an individual must be outside India for more than 182 days in the relevant financial year to qualify as a Non-Resident Indian (NRI). For NRIs, only income earned in India or received in India is taxable under Indian laws.

2. DTAA Exemption on Capital Gains:
   As per Section 90(2), NRIs can avail themselves of the provisions of the DTAA, which often provides that capital gains from the sale of mutual fund units are taxable only in the country of residence.
   If the country of residence does not impose capital gains tax (such as in the UAE, Singapore, etc.), these gains are exempt from tax in India as well.

3. Documentation Requirements:
   The legal validity of this exemption relies on proper documentation:

   • The Tax Residency Certificate (TRC) confirms the individual's status as a tax resident in the foreign country.

   • Form 10F substantiates the taxpayer's claim and provides details of the foreign tax identification number, address, and residency status.

4. Anti-Avoidance Measures:
   It is important to ensure that the NRI's stay in the foreign country is genuine and not artificially structured to claim tax exemptions. The General Anti-Avoidance Rules (GAAR) may apply if the tax residency is deemed to be a sham or temporary.

4. Strategic Approach and Planning

Here’s a clear, structured approach for NRIs planning to benefit from the capital gains tax exemption under DTAA provisions:

Step-by-Step Plan for Claiming DTAA Benefit:

Step	Action
1	Obtain long-term residence visa (e.g., UAE Golden Visa) and establish residence in a DTAA country.
2	Stay abroad for more than 182 days in the relevant financial year (under Section 6 of the Income Tax Act).
3	Establish physical residence — rent a property, open bank accounts, and accumulate relevant documentation (e.g., utility bills, residence permit).
4	Apply for Tax Residency Certificate (TRC) from the foreign country’s tax authorities, covering the entire financial year of the capital gains realization.
5	Submit Form 10F through the Indian Income Tax Portal, declaring the foreign tax identification number and confirming NRI status.
6	Sell/redeem mutual funds after obtaining TRC and Form 10F, ensuring compliance with NRI status at the time of the transaction.
7	File Income Tax Return (ITR) in India, disclosing the capital gains and claiming DTAA exemption under Section 90(2) and the relevant DTAA provisions.
8	Attach supporting documents: TRC, Form 10F, proof of foreign residency, sale/redemption statements, and a declaration confirming genuine tax residency.

5. Compliance Checklist for DTAA Capital Gains Exemption

Ensure all of the following for successful execution:

Action Item	Details
Residential Status	Stay abroad for >182 days during the financial year; maintain proof of physical residence (e.g., tenancy agreements, utility bills).
Tax Residency Certificate (TRC)	Obtain TRC from the foreign tax authority.
Form 10F	Upload Form 10F on the Income Tax Portal, detailing foreign residency status and tax identification.
Mutual Fund Transactions	Record all capital gains transactions — including date of investment, date of redemption, and gain amount.
Supporting Documents	Keep passport, visa/residence card, foreign bank account statements, TRC, Form 10F, and mutual fund sale contracts.
ITR Filing	Correctly report mutual fund capital gains and claim exemption under DTAA provisions in ITR. Attach TRC, Form 10F, and other necessary documents.
Audit Trail	Retain a copy of all documentation for at least 8 years for potential future verification by Indian tax authorities.

6. Sample Declaration Format

This declaration must accompany the ITR filing to assert the claim of DTAA exemption:

[Declaration Format for DTAA Capital Gains Exemption]

Date: [Insert Date]
To
The Assessing Officer,
Income Tax Department,
[Insert Jurisdiction]

Subject: Declaration for Claiming Exemption on Capital Gains under India–[Country] DTAA for FY [Year]

I, [Full Name], PAN: [Insert PAN], presently residing at [Foreign Address], do hereby declare:

1. I am a Non-Resident under Section 6 of the Income-tax Act, 1961 for FY [Insert Year].

2. I am a tax resident of [Country] and hold a valid Tax Residency Certificate (TRC).

3. The capital gains earned from the sale/redemption of Indian mutual funds during the year are disclosed in my Income Tax Return (ITR).

4. As per Article 13 of the India–[Country] DTAA, such capital gains are taxable only in the country of residence.

5. The country of my residence ([Country]) does not levy capital gains tax.

6. I have attached all necessary documentation, including the TRC, Form 10F, and proof of residence.

7. I affirm that this tax residency is not a sham or temporary, but is in line with the regulations of the foreign country.

Verification:
I solemnly declare that the above is true and correct to the best of my knowledge and belief.

Signature: ___________
Name: [Full Name]
Passport No.: [Passport Number]
PAN No.: [PAN Number]

7. Key Benefits of This Strategy

• Zero Indian tax on mutual fund capital gains for NRI residents of DTAA countries.

• No capital gains tax in countries like UAE, Singapore, etc., if they don't levy it.

• Legally compliant strategy with proper documentation.

• Freedom of reinvestment or repatriation of funds without tax concerns.

Conclusion

Leveraging the DTAA capital gains exemption requires careful planning, substantial documentation, and an understanding of both Indian tax laws and foreign residency laws. By following the outlined steps and ensuring proper compliance with TRC and Form 10F, NRIs can efficiently minimize their tax liabilities on mutual fund investments.