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TRC is sufficient for claiming treaty benefit and tax authority cannot go behind the TRC
Blackstone Capital Partners (Singapore) VI FDI Three Pte. Ltd. [1] (Taxpayer), a Singapore company, sold shares of an Indian company (ICo1) to another Indian company (ICo2) during the tax year 2015-16. Treaty benefit was claimed on capital gains on sale of shares under the India-Singapore tax treaty basis valid tax residency certificate (TRC).
Tax authority initiated reassessment proceedings to verify genuineness of transactions entered by Taxpayer basis information received from withholding tax authority of ICo2, that the Taxpayer is a shell company with no substance and is controlled by a US holding company and hence, not eligible for treaty benefit. Tax authority was of the view that TRC is not “sufficient” evidence of residency and not binding on tax authority or court unless such a conclusion is independently reached. Aggrieved, the Taxpayer filed a writ before Delhi High Court (HC).
The Delhi HC ruled that TRC is sufficient for claiming treaty benefit and tax authority cannot go behind the TRC and same is contrary to Government of India’s (GOI’s) assurance to foreign investors. Basis following reasoning, the HC quashed the reassessment notice:
- Reopening of assessment for verifying the nature and genuineness of the transaction of the Taxpayer is untenable in law as the return of income had been filed by the Taxpayer within time with full particulars (including details of capital gain transaction).
- Tax authority merely relied on information supplied by withholding tax authority of ICo2 without independent application of the mind. Tax authority also relied on information from third-party website to form reasons for reopening, which is not valid.
- The Taxpayer was incorporated in Singapore and is managed by its board of directors based in Singapore. Tax authority failed to establish that the Taxpayer is a tax resident of the US, or that its affairs are managed from the US.
- Under the India-Singapore treaty, treaty benefit of capital gains is available on the basis of legal ownership and not on the basis of beneficial ownership of the income. Beneficial ownership condition is relevant only for treaty benefit in respect of dividend, interest and royalty.
- Finance Bill 2013 proposed to amend to provide that TRC is not a sufficient condition for claiming treaty relief. However, Finance Minister, via press release on 1 March 2013, reiterated that TRC shall be treated as a sufficient condition for claiming relief under the treaty and proposed amendment was omitted from the Finance Act 2013. The circulars issued by the Central Board of Direct Taxes (CBDT)[2] and subsequent decisions of the Supreme Court[3] support that TRC forms sufficient evidence of the taxpayer's residence and beneficial ownership for applying the treaty.
Following the Delhi HC ruling (supra), Delhi Tribunal in case of Reverse Age Health Services Pte Ltd.[4] also delivered a similar ruling wherein it was ruled that TRC is sufficient evidence for claiming treaty benefit.