Nishith Desai Associates: Entitlement to Treaty Benefits - What Constitutes Conclusive Evidence of Residence?

India is no stranger to discussions surrounding the issue of entitlement to tax treaty benefits. Way back in 2003, the Supreme Court of India was required to decide upon the validity of a circular confirming that entities with a valid Mauritius tax residency certificate (“TRC”) would be entitled to the benefits of the India-Mauritius tax treaty. Circular 789 dated April 13, 2000, was introduced to provide clarity on the availability of treaty benefits. It was however challenged on the basis that it restricted revenue authorities from exercising their statutory duties relating to assessment and determination of residence on a case to case basis. The Supreme Court, in an expansive judgment examining issues of Indian constitutional law, international law and administrative law, upheld the validity of the circular and confirmed that Mauritius tax treaty benefits would be available to persons with a valid TRC. Last year, with a view to obtaining complete information for determining the applicability of tax treaty benefits to a taxpayer, the Government introduced an amendment to the ITA requiring taxpayers to obtain TRCs from their countries of residence with such TRCs in a format capturing certain particulars prescribed by the Government of India, in order to be eligible to claim treaty benefits.

This year’s Budget goes one step further with its amendment to sections 90 (Agreement with foreign countries or specified territories) and 90A (Adoption by Central Government of agreement between specified associations for double taxation relief) of the ITA. The amendment provides that a TRC “shall be necessary but not a sufficient condition” to claim tax treaty benefits. While no criterion has been prescribed in the Finance Bill to determine what constitutes ‘sufficient condition’, statements have been made by the Finance Minister that only persons having ‘beneficial ownership’ of assets would be eligible to claim tax treaty benefits. It is unclear at this point in time, what should constitute beneficial ownership since India has historically been a jurisdiction which does not recognize duality of ownership, and which follows the doctrine of form over substance in tax laws. Further, it should be noted that tax treaties specify circumstances e.g. income from royalties, fees for technical services, where beneficial ownership is a criterion for application of tax treaty rules, but it does not provide that beneficial ownership is a criterion for determination of residence for application of tax treaty benefits (which may be subject to the limitation of benefits article in the tax treaties). From a practical perspective, another concern worth noting is that this amendment is proposed to be introduced retroactively, with effect from financial year 2012-2013, a move which could impact non-resident investors across the board if they intend to claim tax treaty benefits. Further, there is currently no clarity by the Central Board of Direct Taxes on the application of the amendment vis-à-vis Circular 789 which provides that a Mauritian TRC would suffice for application of tax treaty benefits. The issue whether a ‘later in time doctrine’ can be applied in such context is also a question open for debate.

While the enactment of the GAAR has been postponed to financial year 2015-16 pursuant to the recommendations of the expert committee led by Dr. Parthasarathi Shome, non-residents may need to consider carefully the possibility that disallowance of tax treaty benefits by Indian revenue authorities may have already begun albeit in another form.