The Government of India is aiming to put India on a high growth trajectory by attracting Foreign Investment. Foreign Investment is critical to the success of these projects and the government on its part is promising ease of doing business on the tax and regulatory front including non-adversarial tax regime, to the potential non-resident investors.

Tax costs are conceivably the foundation of a non-adversarial tax regime. One of the key aspects of the certainty when it comes to the Indian income-tax is the eligibility of the non-residents to access the tax treaties.

Generally, the non-residents access the tax treaties based on Tax Residency Certificate (TRC) issued by the tax authorities of their respective country. However, the tax treaty claims based solely on the TRC have not always accepted by the tax authorities, and there has been significant litigation.

This article discusses a recent ruling pronounced by the Ahmedabad Bench of the Income-tax Appellate Tribunal (‘the Tribunal’) in the case of Skaps Industries India Pvt Ltd [TS-330-ITAT-2018(Ahd)] wherein it was observed that the taxpayer could not be denied the benefit under the India-U.S. tax treaty on the ground that it has not furnished a Tax Residency Certificate (TRC). However, the taxpayer has to satisfy the eligibility for the tax treaty benefit.

Overview of the facts and decision of the Tribunal

Facts

The taxpayer made payments to the U.S. Company for the installation and commissioning services of certain equipment. These payments were made without deduction of tax at source. The taxpayer contended that the payments made were not taxable in India since the installation and commissioning activities were inextricably linked to the purchase of the equipment and there was neither a transfer of technology nor was the technology being made available under the tax treaty.

Tax Authority

The Assessing Officer (AO) held that the U.S. Company had a high degree of technical expertise and it had the desired level of expertise in installing and commissioning of a machine owned by the taxpayer and therefore, the services were taxable as Fees for Included Services (FIS) under the tax treaty.

The Commissioner of Income-tax (Appeals) [CIT(A)] held that in the absence of a TRC and in view of the specific provisions of Section 90(4) of the Income-tax Act, 1961 (the Act), the U.S. company could not be granted tax treaty benefits. The installation and commissioning services cannot be said to be for the purchase of equipment and thus covered by the exclusion clause provided under Article 12(5)(a) of the tax treaty.

Tribunal’s observation

The Tribunal relied on the provisions of Section 90(4) and Section 90(2) of the Act. Section 90(4) provides that the taxpayer will be allowed to tax treaty benefit only if it provides a ‘certificate of his being a resident’ from the country it is a resident of. Section 90(2) of the Act is somewhat unique in providing an unqualified ‘treaty override’. It provides the taxpayer the option to be taxed under the relevant tax treaty if the provisions of the tax treaty are more beneficial to the taxpayer.

Absent a non-obstante clause, despite the fact that Section 90(4) prima facie suggests that furnishing a TRC is a pre-condition to avail treaty benefits, it cannot override Section 90(2) of the Act. Section 90(4) of the Act should be construed as a provision beneficial to the taxpayer, in that, once the taxpayer furnishes a TRC, the AO cannot disentitle it from availing treaty benefits. However, the mere non-furnishing of TRC cannot be ground enough to disentitle the taxpayer from obtaining treaty benefits.

The Tribunal observed that such a construction of Section 90(4) had been confirmed by the Punjab and Haryana High Court in Serco BPO Pvt. Ltd [TS-5847-HC-2015(Punjab & Haryana)-O]. While drawing reference to the clarification issued by the Finance Ministry regarding the TRC in 2013, the Punjab and Haryana High Court held that a valid TRC establishes tax residence ‘beyond doubt’. This decision emphasis that any set of documents which reasonably prove tax residence should suffice.

While non-furnishing of TRC does not disentitle a taxpayer from availing tax treaty benefits, there has to be reasonable evidence of ‘tax residency’ of the payee for it to claim treaty benefits. Such evidence may be in the form of any document which establishes that the taxpayer is a tax resident of the country it claims to be.

In the present case, in the absence of a TRC, the only other evidence which the Tribunal could rely on was Form W9 submitted by the taxpayer. It was noted that Form W9 does not disclose the residential status of the U.S. entity in the relevant period. It is merely a declaration so as to provide inputs to the tax-deductor for fulfilling reporting obligations to the US IRS. Form W9 is wholly irrelevant in respect of tax withholdings outside the U.S. Even on the merits of the contents, it did not prove ‘tax residency’ and it could not be considered to establish the ‘tax residence' of the payee in the U.S.

Points to ponder

Rule 21AB of the Income-tax Rules, 1962 (the Rules) provide for certain details should be included in TRC to be considered as valid TRC. However, in case all the necessary details are not provided for in the TRC, the tax return provides an option to submit a form (Form 10F) which should contain all the relevant details which are not present in the TRC.

While the Rules provides that Form 10F should be provided only to the extent of information missing in the TRC, the Indian deductors request for Form 10F with all details irrespective of whether such information is included in TRC or not.

A question arises to the fact that if Form 10F has to be provided with all details despite TRC is being provided, then what is the relevance of TRC?

The Supreme Court in the case of Azadi Bachao Andolan8 held that TRC issued by Mauritian tax authority constitutes sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the tax treaty. Whether the ratio of the Supreme Court decision would still apply? Whether Form 10F would still be required if TRC furnished by the tax deductor contains all the particulars?

The relief provided to the taxpayer in this decision seems to move in the right direction.

The tax department’s aggressive nature becomes the reason for the tax deductors have become stringent when it comes to the furnishing of documents for availing tax treaty benefits is concerned.

The decision provides clarity that the TRC is not the only document which will allow the foreign payee to claim tax treaty relief. Any other document which demonstrates that the foreign payee is a tax resident of the foreign country should suffice to claim treaty relief.

While the ruling provides that Form W9 will not suffice as the document evidencing residency, it would be interesting to see which other documents can fulfill this rest.

The decision also reinstates the fact that the only provision which can override Section 90(2) – the treaty override provision – is Section 90(2A) which deals with GAAR.

It may be noted that the tax authorities should respect the circular issued by the CBDT as well as the judicial precedents and grant the tax treaty benefits.

While the BEPS project came into existence in the year 2013 mainly as a result of the G20 group of nations to combat aggressive tax planning strategies, the Indian legislature has already incorporated anti-avoidance provisions (GAAR) in the Act.

India is a part of a G20 group of nations and has welcomed the BEPS project. It is expected that the necessary legislative amendments/administrative actions will be undertaken for aligning the Act with the BEPS action plans.