Benefits of DTAA cannot be denied for not providing Tax Residency Certificate (TRC) only

In today’s interconnected world, people are not limited to earning income solely in their own area, city, state, or country. Globalization has opened up opportunities for individuals to explore earning potential in different countries. This not only allows for business growth but also presents the advantage of foreign exchange fluctuations. However, a common concern for affluent individuals earning income in multiple countries is whether they are obligated to pay taxes in both their country of residence and the country where they earned income.

To address the issue of double taxation, countries enter into Double Taxation Avoidance Agreements (DTAAs) with each other. These agreements aim to distribute the right to taxation to the source-based country and establish specific criteria for tax liability. India, for example, has signed DTAAs with nearly all countries to facilitate the prevention of double taxation. This article explores how foreign companies in India and Indians in other countries (Non-Resident Indians or NRIs) can benefit from DTAAs, the legal requirements under Indian tax law to avail these benefits, and the practical challenges they may face for the TRC.

Under income tax law, an individual earning income in a country where he is not a resident but liable to pay taxes must be granted a tax credit for the taxes paid in the income source country when filing taxes in their home country. However, to take advantage of DTAAs, it is essential to prove residency in the country where the income was earned. This is achieved by obtaining a Tax Residency Certificate (TRC) from the individual’s home country.

According to section 90(4) of the Income Tax Act, an assessee not being a resident, covered by DTAA, cannot claim relief under such DTAA without obtaining a tax residency certificate from the government of the country where they are a resident. In essence, this certificate establishes the person’s residency outside India or in a specified territory.

The crucial point to note is that the benefits of DTAAs can only be availed of if the individual holds a valid Tax Residency Certificate (TRC) from a country where a DTAA has been signed. Situations may arise where individuals have not obtained a TRC but still claim DTAA benefits. Tax authorities may reject such claims, applying the provisions of the income tax act due to the absence of the TRC.

In our view and in line with judgments from various esteemed bodies such as the Income Tax Appellate Tribunal (ITAT) and courts, a taxpayer should not be denied DTAA benefits solely because they have not produced a TRC. The income tax law allows the assessee to choose between the benefits provided by the DTAA or the income tax act, opting for whichever is more favorable. It is crucial to understand that the income tax law does not override or overlook the provisions of the DTAA. When it comes to a conflict, the conditions outlined in the DTAA will prevail.

Section 90(4) stipulates that a Tax Residency Certificate (TRC) is necessary to avail the benefits of Double Taxation Avoidance Agreements (DTAA). However, it’s important to note that possessing a TRC isn’t the sole requirement to benefit from DTAA provisions. Section 90(5) mandates that the assessee must also furnish additional documents and information as prescribed.

Rule 21AB of the Income Tax Rules outlines the specific details that the assessee must provide to claim DTAA benefits alongside the TRC. In instances where the required information isn’t fully provided in the TRC or is partially mentioned, the assessee is obligated to submit Form 10F, which includes the following particulars:

The Circular : No. 789, dated 13-4-2000 clarified that wherever a Certificate of Residence is issued by the Mauritian Authorities, such Certificate will constitute sufficient evidence for accepting the status of residence for applying the DTAA accordingly.

In the case of Skaps Industries India Pvt Ltd vs Income Tax Officer International Taxation, Ahmedabad ITA Nos. 478 and 479/Ahd/2018 it was noted that :

The first question that we must address, at the threshold itself, is whether the TEI, i.e. the US entity to which the payments were made by the assessee company, was entitled to the benefits of Indo US tax treaty. There are two aspects to this fundamental question- first, whether the treaty protection could be declined to TEI simply on the short ground that the TEI was not able to, or did not, furnish the tax residency certificate under section 90(4) of the Act; second, whether TEI did not, on merits, satisfy the requirements of the Indo US tax treaty. As for the first aspect, the stand of the learned Departmental Representative is that non furnishing of the Tax Residency Certificate under section 90(4) itself, on a standalone basis, can be reason enough for declining the treaty protection.

In support of this proposition, reliance is placed on the wordings of Section 90(4) which provide that “An assessee, not being a resident, to whom an agreement referred to in sub section (1) applies, shall not be entitled to claim any relief under such agreement unless a certificate of his being a resident in any country outside India or specified territory outside India, as the case maybe, is obtained by him from the Government of that country or specified territory”. It is thus contended that furnishing of the tax residency certificate is a condition precedent for invoking the treaty protection under section 90(2) of the Act. As we deal with this aspect of the matter and proceed to adjudicate upon the arguments of the parties on the same, let us take a quick look at the statutory provisions of Section 90 which deal with the double taxation avoidance agreements entered into by India. The statutory provision, as it stands now, is as follows:

            90. (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,—

(a) for the granting of relief in respect of—

 (i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or

(ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or

(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in the said agreement for the indirect benefit to residents of any other country or territory), or

(c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or

(d) for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be,

and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.

(2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.

(2A) Notwithstanding anything contained in sub-section (2), the provisions of Chapter X-A of the Act shall apply to the assessee even if such provisions are not beneficial to him.

(3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf.

(4) An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless a certificate³² of his being a resident in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory.

(5) The assessee referred to in sub-section (4) shall also provide such other documents and information, as may be prescribed³³.

Explanation 1.—For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company.

Explanation 2.—For the purposes of this section, “specified territory” means any area outside India which may be notified as such by the Central Government.

Explanation 3.—For the removal of doubts, it is hereby declared that where any term is used in any agreement entered into under sub-section (1) and not defined under the said agreement or the Act, but is assigned a meaning to it in the notification issued under sub-section (3) and the notification issued thereunder being in force, then, the meaning assigned to such term shall be deemed to have effect from the date on which the said agreement came into force.

Explanation 4.—For the removal of doubts, it is hereby declared that where any term used in an agreement entered into under sub-section (1) is defined under the said agreement, the said term shall have the same meaning as assigned to it in the agreement; and where the term is not defined in the said agreement, but defined in the Act, it shall have the same meaning as assigned to it in the Act and explanation, if any, given to it by the Central Government.

A plain look at the above provisions would show that Section 90(2) is somewhat unique in providing an unqualified, what is, in India, often termed as, ‘treaty override’ in the sense that no matter what be the provisions of the Income Tax Act, 1961, in respect of a person to whom an agreement entered into under section 90(1) applies, “the provisions of this Act shall apply (only) to the extent they are more beneficial to that assessee”. Going by the plain words of the statute, the provisions of the Act, in a situation covered by the tax treaty, cannot put the assessee to any greater burden than the burden placed by the provisions of applicable tax treaty. The only limitation placed on this unqualified, rather almost unqualified- post insertion of sub section 2(A), is that “notwithstanding anything contained in sub-section (2), the provisions of Chapter X-A (dealing with the General Anti Avoidance Rules) of the Act shall apply to the assessee even if such provisions are not beneficial to him”. Section 90(2A) is the only statutory provision in the Income Tax Act, 1961, which starts with a non-obstante clause vis-à-vis the provisions of Section 90(2), and, in that sense, it is the only rider to the treaty override provision set out in Section 90(2). That is the only rider to the superiority of tax treaty provisions vis-à-vis the provisions of the Indian Income Tax Act, 1961, is the exception carved out for the application of general anti avoidance rules set out in Chapter X-V.

Whatever may have been the intention of the lawmakers and whatever the words employed in Section 90(4) may prima facie suggest, the ground reality is that as the things stand now, this provision cannot be construed as a limitation to the superiority of treaty over the domestic law. It can only be pressed into service as a provision beneficial to the assessee. The manner in which it can be construed as a beneficial provision to the assessee is that once this provision is complied with in the sense that the assessee furnishes the tax residency certificate in the prescribed format, the Assessing Officer is denuded of the powers to requisition further details in support of the claim of the assessee for the related treaty benefits.

In a similar scenario, in the case of Ranjit Kumar Vuppu vs. ITO (2021) 190 ITD 455, the Income Tax Tribunal in Hyderabad made the following observations:

ITA No 86 of 2021 Ranjit Kumar Vuppu Hyderabad “11. I have considered the rival submissions and carefully perused the material on record. From the Orders of the Ld. Revenue Authorities , I find that the Ld. AO has disallowed the exemption claimed by the assessee under Article 15(1) of the India-Austria DTAA only for want of Tax Residence Certificate (TRC) from Austria. The submission of the assessee in this regard was that despite best possible efforts he was not able to procure TRC from country of residence and the situation may be treated as “impossibility of performance”. I find merits in the submission of the assessee. Normally it is a herculean task to obtain certificates from alien countries for compliance of domestic statutory obligations. In such circumstances the taxpayer cannot be obligated to do impossible task and penalized for the same.

If the assessee provides sufficient circumstantial evidence in such cases, the requirement of section 90(4) ought to be relaxed. Further, it is obvious that where there is a conflict between the Treaty and the Act, the Treat shall overrule the Act. In the case of the assessee, by virtue of the Treaty, the assessee is liable to tax in Austria for the services rendered in Austria and not in India. Therefore, though the Act mandates Tax Residency Certificate of Austria , non-production of the same before the Ld. Revenue Authorities shall not enable the Ld. Revenue Authorities not to grant the benefit of the Treaty to the assessee. Therefore, the Ld. Revenue Authorities have erred in not granting the benefit of the Treaty to the assessee just for the reason that the assessee has not submitted the Tax Residency Certificate from Austria. The Ahmedabad Bench of the Tribunal in the case of Skaps Industries India (P.) Ltd vs. ITO, International Taxation, Ahmedabad reported in 171 ITD 723 taking cue from the decision of the Hon’ble P & H High Court in the case of Secro BPO (P.) Ltd vs. Authority for Advance Ruling reported in 379 ITR 256 had held that “Whatever may have been the intention of the lawmakers and whatever the words employed in Section 90(4) may prima facie suggest, the ground reality is that as the things stand now, this provision cannot be construed as a limitation to the superiority of treaty over the domestic law. It can only be pressed into service as a provision beneficial to the assessee…..”. Therefore, the stand of the Ld. Revenue Authorities on this issue is devoid of merits.

Hence, the assessee may provide additional evidence, such as a copy of their passport, to support their residency status and duration of stay in another country. We advise our client to strategize and obtain the Tax Residency Certificate (TRC) promptly to avail the benefits of DTAA and submit Form 10F. Residents seeking TRC in India must complete Form 10FA and submit it to the assessing officer. Upon receipt and verification of the application, the Assessing Officer will issue a certificate of residence in Form No. 10FB for the assessee. Therefore, it is essential to initiate the TRC application process in a timely manner to maximize DTAA benefits and comply with relevant tax regulations effectively.

What is TRC?

TRC stands for Tax Residency Certificate. It is an official document issued by the government of a particular country to certify an individual’s tax residency status in that country for a specific period. The TRC is often required for individuals or entities claiming tax benefits under Double Taxation Avoidance Agreements (DTAAs) between countries. It helps determine in which country an individual should pay taxes on their income, ensuring that they do not face double taxation on the same income in both their country of residence and the country where the income was earned. The TRC serves as proof of tax residency and is typically obtained by providing necessary documentation and fulfilling specific requirements set by tax authorities.

Benefits of Tax Residency Certificate (TRC)

The Tax Residency Certificate (TRC) provides several benefits for individuals or entities engaged in cross-border transactions and seeking to avoid double taxation. Here are some key benefits of obtaining a TRC:

1. Double Taxation Avoidance: The primary purpose of a TRC is to avoid double taxation on the same income in both the individual’s country of residence and the country where the income was earned. This is particularly important for individuals conducting business or earning income in multiple countries.
2. Claiming Treaty Benefits: TRCs are often required to claim benefits under Double Taxation Avoidance Agreements (DTAAs) between countries. These agreements outline the tax treatment of various types of income (such as dividends, interest, or royalties) and provide relief from double taxation.
3. Tax Credits: In the absence of a TRC, tax authorities may withhold taxes at a higher rate on certain types of income. With a TRC, individuals can often avail themselves of reduced withholding tax rates as specified in tax treaties.
4. Legal Recognition: TRC serves as official documentation provided by the tax authorities of a country, confirming the tax residency status of the holder. It carries legal recognition and can be used as evidence to support tax residency claims in international tax matters.
5. Facilitates Compliance: Having a TRC streamlines tax compliance procedures for individuals or entities engaged in cross-border transactions. It provides clarity regarding tax obligations and helps ensure that tax filings are accurate and in accordance with relevant tax laws and treaties.
6. Avoidance of Tax Disputes: By obtaining a TRC, individuals or entities can mitigate the risk of tax disputes or challenges related to their tax residency status. It provides a clear and documented basis for claiming tax benefits and reduces the likelihood of discrepancies or misunderstandings with tax authorities.