Tax Residency Certificate - Is No More Conclusively Sufficient?

The Double Tax Avoidance Agreement ('DTAA') is entered between two countries inter alia to ensure that a particular income is not doubly taxed. The Government of India has so far signed comprehensive DTAAs with 82 countries under the provisions of section 90 of Income-tax Act. A taxpayer, who is resident of a contracting country, can claim tax benefits under the provisions of DTAA or Income-tax Act, whichever is more beneficial to him.

Background:

The provisions of section 90 were amended vide Finance Act, 2012 to make submission of Tax Residency Certificate (TRC) a mandatory condition for availing benefits under a particular DTAA. The TRC helps in establishing the country of residence of a particular tax payer. The furnishing of TRC was the only condition to avail benefits under the provisions of a particular DTAA. However, the Finance Bill, 2013 has amended section 90 (also section 90A which deals with agreements between specified associations belonging to two countries) to provide that submission of TRC is a necessary but not a sufficient condition for claiming benefits under DTAA. This amendment is proposed to be introduced retrospectively w.e.f. assessment year 2013-14.

In fact, the Memorandum explaining the amendments introduced by Finance Bill, 2012 mentioned that submission of TRC would be a necessary but not a sufficient condition for availing benefits under DTAAs. It was also mentioned in the Memorandum that it is noticed that in many instances the taxpayers who are not tax resident of a contracting country claim benefit under the DTAA entered into by the Government of India with that country. The focus was for sure to curb the unscrupulous persons claiming unintended treaty benefits. However, this intention was not flowing from the insertion of sub-section (4) in section 90 (and 90A) vide Finance Act 2012. The Memorandum is meant to clarify the intent behind introduction/deletion of a particular provision and not to substitute the provisions of legislation itself. The Government perhaps realizing this deficiency proposes to insert sub-section (5) in section 90 (and 90A) which provides that the TRC shall be necessary but not a sufficient condition for claiming any relief under the DTAA/agreement.

Analysis:

It will be pertinent here to refer to Circular No. 789, dated 13^th April 2000 issued by CBDT (in relation to Indo-Mauritius Tax Treaty) wherein it was clarified that wherever the certificate of residence is issued by the Mauritian authorities, such certificate will constitute sufficient evidence inter alia for accepting the status of residence of a tax payer.

The Courts have over a period of time reiterated that existence of TRC is a conclusive proof that a tax payer is a resident of a particular country which has issued the TRC. The landmark judgment by Hon'ble Supreme Court in the case of Union of India vs. Azadi Bachao Andolan [2003 132 Taxman 373 (SC)] is something which holds the forte as far as matter related to TRC is concerned. The relevant paragraph from the judgment is being reproduced hereinbelow:

" 50. We do not think the circular in any way takes away or curtails the jurisdiction of the assessing officer to assess the income of the assessee before him. In our view, therefore, it is erroneous to say that the impugned circular No.789 dated 13.4.2000 is ultra vires the provisions of section 119 of the Act. In our judgment, the powers conferred upon the CBDT by sub-sections (1) and (2) of Section 119 are wide enough to accommodate such a circular."

Further, the Authority for Advance Rulings (AAR) in the case of Dynamic India Fund [[2012] 23 taxmann.com 266 (New Delhi)] has given the benefit of provision of Indo-Mauritius Treaty based on existence of TRC.

The Ruling of AAR in the case E Trade Mauritius Ltd. [[2010] 190 Taxman 232 (AAR – New Delhi)] is also relevant to be mention here as in this case money was routed in India through Mauritian entity and the ultimate holding company was from USA. The AAR held that the benefits under the Indo-Mauritius Treaty cannot be denied as the assessee is a resident of Mauritius holding TRC issued by Government of Mauritius.

As regards TRC, the tax treaty between India and Mauritius has on most occasions been under limelight as major chunk of investment in equity in India comes from/through Mauritius. There have been attempts in the past to lift corporate veil even where TRC existed. However, it was the tax payer who was successful on most of the counts.

Possible Impact:

The insertion of sub-section (5) as mentioned above would give powers to the tax collectors to disregard the TRC and view the transaction independently. The transaction routed through countries like Mauritius would be under the scanner. The focus may be on lifting the corporate veil especially in case of transactions wherein the investment in India comes through a Mauritian entity which acts as a conduit and ultimate investment comes from a third country.

It would be pertinent to mention here that the implementation of General Anti Avoidance Rule (GAAR) has been deferred for 3 years and will only come into existence w.e.f. assessment year 2016-17. It would be interesting to observe as to how the tax authorities deny the benefits of tax treaties in the absence of GAAR by ignoring TRC.