[Opinion] Tax Residency Certificates | Another Litigious Issue Brewing?

Kunal Singhal – [2024] 164 taxmann.com 215 (Article)

Tax Residency Certificate (“TRC”) is an official document granted by a country’s tax authorities, certifying the tax residency status of a tax payer, for a tax year. In the context of Indian domestic income-tax regulations, tax treaties generally contain beneficial provisions in relation to taxation of business profits, Royalty income, Fees for technical services, Dividend etc. Hence, establishing tax residency of a tax payer attains significance in case of taxation of non-residents.

1. Legal requirement to furnish TRC

The requirement of furnishing a TRC to be eligible for beneficial provisions under any tax treaty was brought under the Income-tax Act, 1961 (“the Act”) vide section 90(4) from AY 2013-14. Hence, TRC plays a pivotal role in availing tax treaty benefits. It follows that pivotal role played by TRC in availing tax treaty benefits, some contentious issues have also come up. One of the most recent and thought provoking issue which has come up is whether TRC is conclusive evidence of tax residency or the tax authorities should go beyond it for determining tax residency.

2. Treaty benefits in absence of TRC

Before we discuss this issue, lets first understand the role of a TRC in enabling a tax payer to claim beneficial provisions of a tax treaty. More importantly, whether tax treaty benefits can be denied to a taxpayer in absence of a TRC.

Section 90(4) vs section 90(2)

As discussed earlier, section 90(4) of the Act makes it mandatory for a NR to obtain TRC from its home country to avail tax treaty benefits in India. Whereas section 90(2) of the Act provides as following:

“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.“

(Emphasis supplied)

Generally, Article 4(1) of a tax treaty ‘”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, place of management, place of incorporation or any other criterion of a similar nature.It is important here to note that the tax treaties usually do not require any tax payer to produce a TRC or any specific document for proving its eligibility to avail beneficial treaty provisions. Thus, it should be sufficient for tax payer to demonstrate that it is tax resident of a particular country, through a relevant document. A question arises as to whether section 90(4) overrides section 90(2) to the extent that it imposes production of certain specific documents upon the tax payer for availing benefits under tax treaty.

2.1 Judicial view

The jurdiiary till date has answered the above question in negative. Ahmedabad ITAT observed that the provisions of section 90(2) of the Act shall apply only to the extent they are more beneficial to that the taxpayer and that section 90(4) cannot be construed as limitation to the tax treaty superiority. Therefore, in the absence of a valid TRC provisions of section 90(4) could not be invoked to deny tax treaty benefits. Nevertheless, onus was on the taxpayer to give sufficient and reasonable evidence to satisfy the requirements of Article 4(1) of the tax treaty. Similar views have been upheld by Hyderabad ITAT.

However, lower tax authorities still favour the view that production of TRC is a mandatory requirement, specially when there is minimal guidance available on what other documents would constitute as sufficient enough proof of tax residency. Therefore, obtaining and production of TRC and Form 10F remains an important requirement to provide tax treaty benefits to an assessee.

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