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Case Law Details

Case Name : Skaps Industries India Pvt Ltd Vs Income Tax Officer (ITAT Ahmedabad)
Appeal Number : ITA Nos. 478 and 479/Ahd/2018
Date of Judgement/Order : 21/06/2015
Related Assessment Year : 2013-14 and 2014-15

Skaps Industries India Pvt Ltd Vs ITO (ITAT Ahmedabad)

Author in this articles discusses recent decision of ITAT – Ahmedabad holding that:

1. an eligible assessee cannot be declined the Treaty protection under section 90(2) of the Income Tax Act, 1961 [the Act] on the ground that the said assessee has not been able to furnish a Tax Residency Certificate [TRC] in the prescribed form as required by the section 90(4).

2. but production of TRC by itself may not be sufficient…

The second limb of law as laid down may put an onerous obligation of payers in India.

Citation of the case

Skaps Industries India Pvt Ltd v Income Tax Officer, International Taxation, Ahmedabad dated June 21, 2018

ITA Nos. 478 and 479/Ahd/2018 Assessment years: 2013-14 and 2014-15

Ahmedabad D BENCH of the Income Tax Appellate Tribunal

The judgement is a very brief but a speaking one [11 Pages]. Most relevant paragraphs for this topic are from 8 to 10 [both inclusive]. Copy of judgement is made available for download.

Entering the subject

a) You would be aware that section 90 and section 90A authorise Government of India to enter into agreement [Treaty] with other country[ies] which will over-ride the provisions of the Income Tax Act, 1961 to the extent beneficial to the assessee.

b) Thus a Treaty acts as a shield against double taxation on the same income.

Facts of the case

c) The case revolves around a very narrow compass of facts.

  • An Indian entity [the payer] wants to make a payment to a foreign entity [the payee].
  • The payer wants to source the benefit of treaty of India with the country where the payer resides.
  • Treaty and Income Tax Act, 1961 requires that the Indian payer should have a proof that, the payer is a tax resident of that country.

Issues and Answer

d) Proof of residency of payee [a foreign entity] is required to be produced by Indian payer. In this article, a payer means an Indian payer [the payer] who wants to make payment to a foreign entity [the payee]

e) The relevant paragraphs of the judgement are as follows

19. In the light of these discussions, we are of the considered view that the matter should be remitted to the file of the CIT(A) for fresh adjudication, inter alia, after

(i) giving the assessee a fresh opportunity of furnishing evidences not limited to, but including, the tax residency certificate under section 90(4), in support of US entity’s entitlement to the benefits of Indo US tax treaty benefits;

(ii) taking into account the information furnished by the assessee with respect to the time spent by the representatives of the US entity and all such other information and submissions as may be filed by the assessee; and

(iii) giving the assessee yet another opportunity of hearing while giving effect to these directions.

[Para-phrased and underline by the author]

Questions – in the language of the author Ans.
Whether a TRC of the payee u/s 90(4) is a mandatory requirement for the payer to be eligible to source Treaty benefit? No
Whether production of only TRC of the payer by itself will suffice No
Whether production of other reasonable evidence in addition to TRC is required for proper compliance of test of residency Yes
Whether production of other reasonable evidence, even without TRC, providing proof of residency of the payee will make the payer eligible for the Treaty benefit? Yes
Does this mean that TRC is only one of the evidence but not a conclusive evidence of proof of residency of payee? Yes

Author’s opinion

f) The author is in respectful dis-agreement with the judgement of learned bench. Theoretically speaking this is a very good judgement. But the case should be decided as per law of land. The basic reason for dis-agreement is doctrine of impossibility. The comments in this article are restricted to what a payer has to do while complying with sec 195.

Legislative Background

g) The legislative Background can be traced back to the controversial circular 789 of 2000 dated 13-4-2000. The said circular was upheld to be legally enforceable by Supreme Court in the case of Azadi Bachao Andolan [2003] 132 Taxman 373 (SC)/[2003] 263 ITR 706 (SC)/[2003] 184 CTR 450 (SC). The scope of the case was explained by larger bench of SC in its Vodafone judgement. It restrained an assessing officer from making any further inquiries into veracities of the bonafide or otherwise of residential status of an assessee once a tax residency certificate is produced by the assessee.

h) Though the Government, vide the Finance Act, 2012 made far reaching amendments and that too with retrospective effect, there is no amendment to section 90.

i) The respective sub sections (4) & (5) of section 90 were inserted by the Finance Act, 2013. There was a change in the actual amendment as compared to the proposed one. There was huge hue and cry with the words “shall be necessary but not a sufficient condition”. A controversy arose and Government issued a clarification on 2-3-2013 i.e. even before the passing of the Finance Act, 2013 with title “Finance Ministry Clarification Regarding Tax Residency Certificate (TRC). The journey of the proposed bill and the actual amendment alongwith the above mentioned clarification has been re-produced in Annexure-1.

Download Annexure- 1

j) But the catch point of the discussion in Annexure 1 can be summarised as follows;

Words in the Proposed Finance Bill

The certificate of being a resident in a country outside India or specified territory outside India, as the case may be, referred to in sub-section (4), shall be necessary but not a sufficient condition for claiming any relief under the agreement referred to therein.”.

Words in the Finance Act, 2013

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 may be, is obtained by him from the Government of that country or specified territory.

k) The words “shall be necessary but not a sufficient condition” were specifically removed.

l) Now let’s analyse the law as it stood for interpretation. Relevant portion of Section 90 as it stands for interpretation is re-produced herein below.

CHAPTER IX

DOUBLE TAXATION RELIEF

Agreement with foreign countries or specified territories.

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, 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) ….

(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 certificate 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 prescribed.

Explanation 1.- 4

m) It will be relevant to consider the non-discrimination clause in a treaty

ARTICLE 26

NON-DISCRIMINATION

1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals that other State in the same circumstances are or may be subjected. This provision shall apply to persons who are not residents of one or both of the Contracting States.

2 to 5 …

a) Relevant articles of the treaty with USA Article 4(1) relating to “Residence” reads as follows

For the purposes of this Convention,

the term “resident of a Contracting State” means

any person who, under the laws of that State, is liable to tax therein

by reason of his

  • domicile,
  • residence,
  • citizenship,
  • place of management,
  • place of incorporation, or
  • any other criterion of a similar nature, provided, however,.…

[para-phrased and underline by the author]

What Author says

Doctrine of Impossibility of performance

o) First and foremost, can a payer be burdened with this obligation of proving TRC plus other reasonable evidence to conclusively prove the Tax residency for sourcing treaty benefit. In author’s opinion, it may be hit by doctrine of impossibility. Some details of case law where the said doctrine was applied in income tax matters are given in Annexure 1.

p) It is extremely difficult, if not impossible for a payer to gather reasonable evidence other than TRC to determine the test of residency.

Impossibility faced even by IT dept and tribunal

q) To highlight the gravity of impossibility, I re-produce the observations of Bengaluru bench of ITAT in the case of Google India dated 11-May-2018 in Annexure 1. It is a bit lengthy but definitely interesting to read. Only a small portion of para 164 is re-produced herein below

164. During the course of hearing, we have directed the assessee to produce the agreements executed between Google Inc. USA and GIH, GIH & GNHBV and GNHBV & GIL. In response thereto, the ld. Counsel for the assessee has stated that they have no access to these agreements.

165. Other agreements executed between Google Inc and GIH and GIH & GNHBV were not placed before us. Therefore, in the absence of these agreements, it is very difficult for us to decide as to how much share GIL will get out of the revenue collected in the form of royalty under the Adwords Distribution agreement and services agreement from the GIPL. Since the onus is upon the assessee to establish that GIL is the beneficial owner, assessee could not place any evidence except the oral submission.

r) When the AO, CIT(A) and ITAT could not get the requisite information, how one can expect a common business person to seek such information?

s) The matter was remanded back to the file of AO for fresh adjudication. It means that, even the tribunal where AO and CIT(A) who have all the requisite armory for deciding relevant matters fell short of the same. It relates to ownership v beneficial ownership which is a requirement of treaty and the point of TRC has also been argued.

Secondary and conditional liability

t) Secondly, with-holding tax is secondary and conditional liability. With-holding tax by itself does not and cannot determine the final tax liability. The primary and absolute liability to pay income tax u/s 4 is still with payee.

u) The requisite armory to determine correct tax liability of payee is with IT dept by way of

  • Country by Country reporting rules,
  • Agreements of Automatic exchange of information etc. and most importantly
  • Powers of parliament

TRC conclusive proof [TDS purposes]

v) As referred above, after a huge hue and cry, a clarification was issued that once payer gives TRC, his duty will be dis-charged.

Comments about the reasoning of bench

w) The para 10 of the order reads as follows

10. The judicial approval was, therefore, to the use of Section 90(4) in favour of the assessee in the manner set out above. In view of the provisions of Section 90(2), there cannot be any controversy on this aspect. That is qualitatively much different from the stand of the CIT(A) called into question before us. Our research did not indicate any judicial precedent which has approved the interpretation in the manner sought to be canvassed before us i.e. Section 90(4) being treated as a limitation to the Treaty superiority contemplated under section 90(2), and that issue is an open issue as on now. In the light of this position, and in the light of our foregoing analysis which leads us to the conclusion that Section 90(4), in the absence of a non-obstante clause, cannot be read as a limitation to the Treaty superiority under Section 90(2), we are of the considered view that an eligible assessee cannot be declined the Treaty protection under section 90(2) on the ground that the said assessee has not been able to furnish a Tax Residency Certificate in the prescribed form. To this extent, the approach of learned CIT(A) is clearly erroneous.

x. This issue has been addressed in many of the cases. Following are some of the sources. In the judgements of Google India by Bengaluru bench referred to above, this issue has been referred to.

Source ITAT MUMBAI BENCH ‘C’ – Income-tax Officer (IT) 1(1)(2) v. Atos Worldwide India (P.) Ltd.*[2018] 90 taxmann.com 306 (Mumbai – Trib.)
Text Thus, keeping in view the decision of the Special Bench of the tribunal in the case of Nagarjuna Fertilizers and Chemicals Limited. (supra) which is binding on us , we do not find any infirmity in the order of learned CIT(A) in directing AO to verify whether the payees are entitled for benefits of DTAA and also whether they hold the tax-residency certificate as is required by the provisions of the 1961 Act , which directions of learned CIT(A) we affirm/sustain . ….

…..

   
Source [2014] 50 taxmann.com 415 (Pune – Trib.)/[2014] 66 SOT 224 (Pune – Trib.) – Prashant Kumar Gulati v. Income-tax Officer (International Taxation), Nagpur*
Text 5. ……… Now, the next reason is whether there is a requirement on the part of the assessee to produce the tax residence certificate (TRC) from the UAE authority. Sub-sec. (4) to Sec. 90 which has brought on the statute book by the Finance Act, 2012 w.e.f. 2013 which reads as under:

…..

…..

6. We, therefore, find force in the argument of the Ld. Counsel that in the Act itself there is no provision in the A.Y. 2006-07 to get the tax residence certificate in the prescribed form for claiming the benefit of the treaty. We make it clear that the Non-Resident status of the assessee is not disputed as we understand but the question raised is to the extent of non-furnishing of the tax residence certificate….

….

7. In the case of the present assessee his case is covered under the 1993 DTAA (before the amendment). We, therefore, following the decision in the case of Meera Bhatia (supra) allow the grounds taken by the assessee and hold that Ld. CIT(A) not justified in coming to conclusion that the assessee should have produced TRC from UAE authorities.

   

y) Also refer the relevant paragraphs from the technical guide as published by the Committee on International Taxation of the Institute of Chartered Accountants of India. Though it does not have a binding effect but has, in my opinion, it definitely has a persuasive value.

Source Para 1.6 of Technical Guide On Royalty And Fees For Technical Services as issued by with ISBN – 978-81-8441-471-4 at page No. 26 reads as follows
Text 1.6 However, in India, a person has to be eligible to claim the beneficial provisions of such DTAA. As per section 90(4) of the Act, a person would be eligible to claim the beneficial provisions of the DTAA if he has obtained a  Tax Residency Certificate from the government of the country of which he is a resident. Further, as per subsection (5) of section 90 read with Rule 21AB of the Income-tax Rules, 1962, the tax payer also has to provide a self declaration in Form 10F.
   
Source Aspects of International Taxation — A study (Revised 2016) Page 49 ISBN – 978-81-87080-72-5
Text 3.2.4 Tax Residency Certificate

Tax Residency Certificate is one of the prerequisites for the non-resident’s entitlement to beneficial provisions of the DTAA. As per provisions of section 90(4), a non-resident shall not be entitled to claim any relief under the DTAA unless a certificate of his being resident of the country outside India is obtained from the Government of that country. Further, sub-section (5) of section 90 inserted by Finance Act, 2013 provides that the non-resident shall also provide such other documents and information as may be prescribed. Rule 21AB has been notified by CBDT and the following information shall be furnished in by the non-residents in prescribed Form 10F:

(i) Status of the non-resident

(ii) Nationality or country or specified territory of incorporation

(iii) Non-resident’s tax identification number in the country and in case there is no such number, a unique number on the basis of which the non-resident is identified;

(iv) Period for which residential status is applicable.

(v) Address of the non-resident in the country of residence or

It has been clarified that additional information prescribed may not be required to be furnished if it already forms part of the TRC.

   

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