[Analysis] TDS on FTS Payments Outside India – Income Tax Act | DTAA | Practical Issues

By Ronak Doshi – Partner and Jinal Jain – Partner | Bansi Mehta & Co.

Table of Contents

1. FTS under the Income Tax Act
2. FTS under the DTAA
3. Recent Judicial Pronouncement
4. Practical Issues
5. Documentation
6. Default in withholding tax – Consequences

1. FTS under the Income Tax Act

1.1 Scope of FTS – S. 9(1)(VII)

Payer

1. the Government,
2. Resident person (Carve out), or
3. Non-Resident (Only in specific cases)

Definition of FTS – Exp 2

FTS means “any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries“

Carve Out

Fees are payable by a Resident

“in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India”

Specific Inclusion

Fees are payable by a Non-Resident

“in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India”

1.2 Source Rule

Doctrine of Source Rule: Source is where the income and wealth is physically or economically produced

A legal fiction was created whereby FTS was brought to tax on the basis of source rule – irrespective of the situs of the services, the tax jurisdiction will be determined by the situs of the payer and the situs of the utilisation of services

Ishikawajma Harima Heavy Industries Ltd v. DIT [2007] 158 Taxman 259/288 ITR 408 (SC) held that

“despite deeming fiction in S.9, for any income to be taxable in India, there must be sufficient territorial nexus between such income and the territory of India. To establish such territorial nexus services have to be rendered and utilised in India”.

FA 2007

“S.9(2) – Explanation.— For the removal of doubts, it is hereby declared that for the purposes of this section, income of a nonresident shall be deemed to accrue or arise in India under….. clause (vii) of sub-section (1) and shall be included in the total income of the nonresident, whether or not,—

(i) the non-resident has a residence or place of business or business connection in India; or”

Still in Jindal Thermal Power Co. Ltd. v. Dy. CIT (TDS) [2009 ] 182 Taxman 252/[2010] 321 ITR 31 (Kar. ) it was held that the Explanation, in its present form, does not do away with the requirement of rendering of services in India. Observation in Ishikawajima (supra) remains unaffected and untouched.

FA 2010

Insertion of clause (ii) in Explanation to S.9(2) (ii) the non-resident has rendered services in India

1.3 Managerial, Technical, Consultancy

These terms are not defined in the IT Act, but are subject matter of judicial interpretation

Managerial services

It essentially implies control, administration and guidance for business, day to day functioning and managing affairs by laying down policies and standards.

The adjective ‘managerial’ relates to ‘manager’ or ‘management’. ‘Managing’ is a wider term than ‘executing’ and contemplates not only execution but also planning part of activity to be done.

Technical services

Services involving specialised knowledge, experience, skill and expertise in areas of technical and science.

Technical services includes professional services.

Mere provision of standard facility/services cannot be termed as technical.

Consultancy services

It involves rendering advice, opinion, recommendation. It refers to involvement of an element of expertise or special knowledge on part of consultant or professional advice given in specialised filed.

Consultancy can only be rendered with human interface or intervention. A machine cannot regarded as be consultant.

1.4 Human Intervention

• CIT v. Bharti Cellular Ltd. [2008] 175 Taxman 573/[2009] 319 ITR 139 (Delhi) as affirmed in CIT v. Bharti Cellular Ltd. [2010] 193 Taxman 97/[2011] 330 ITR 239 (SC):

1. The word ‘technical’ is preceded by the word ‘managerial’ and succeeded by the word ‘consultancy’. Applying the rule of “noscitur a sociis” it would mean that the word ‘technical’ would take colour from the words ‘managerial and consultancy’, between which it is sandwiched.
2. Both the words ‘managerial and consultancy’ involve a human element and thus, technical would also be construed as involving human element or human interface.

• CIT v. Kotak Securities Ltd. [2016] 67 taxmann.com 356/239 Taxman 139/383 ITR 1 (SC): While SC has followed Bharti (supra), it has also sounded a note of caution that

“it cannot be lost sight of that modern day scientific and technological developments may tend to blur the specific human element in an otherwise fully automated process by which such services may be provided. The search for a more effective basis, therefore, must be made.”

1.5 Standard Facility v/s Techincal Services

Skycell Communications Ltd v. Dy. CIT [2001] 119 Taxman 496/251 ITR 53 (Mad.): Held that provision of cellular mobile telephone facility cannot be treated as technical service. Merely because the service is linked to science and technology as are found in most of the gadgets now in use in everyday life it cannot be treated as involving provision of technical  service.

“When a person hires a taxi to move from one place to another, he uses a product of science and technology, viz., an automobile. It cannot on that ground be said that the taxi driver who controls the vehicle and monitors its movement is rendering a technical service to the person who uses the automobile. Similarly, when a person travels by train or in an aeroplane, it cannot be said that the railways or airlines is rendering a technical service to the passenger and, therefore, the passenger is under an obligation to deduct tax at source on the payments made to the railway or the airline for having used it for travelling from one destination to another. When a person travels by bus, it cannot be said that the undertaking which owns the bus service is rendering technical service to the passenger and, therefore, the passenger must deduct tax at source on the payment made to the bus service provider for having used the bus. The electricity supplied to a consumer cannot, on the ground that generators are used to generate electricity, transmission lines to carry the power, transformers to regulate the flow of current, meters to measure the consumption, be regarded as amounting to provision of technical services to the consumer resulting in the consumer having to deduct tax at source on the payment made for the power consumed and remit the same to the revenue”

CIT v. Kotak Securities Ltd. [2016] 67 taxmann.com 356/239 Taxman 139/383 ITR 1 (SC): Held that common service made available by Bombay Stock Exchange [BSE Online Trading (BOLT) System] to all members to carry out trading in securities do not amount to ‘technical services’ provided by Stock Exchange, not being services specifically sought for by user or consumer.

“All such services, fully automated, are available to all members of the stock exchange in respect of every transaction that is entered into. There is nothing special, exclusive or customised service that is rendered by the Stock Exchange. “Technical services” like “Managerial and Consultancy service” would denote seeking of services to cater to the special needs of the consumer/user as may be felt necessary and the making of the same available by the service provider. It is the above feature that would distinguish/identify a service provided from a facility offered. While the former is special and exclusive to the seeker of the service, the latter, even if termed as a service, is available to all and would therefore stand out in distinction to the former. The service provided by the Stock Exchange for which transaction charges are paid fails to satisfy the aforesaid test of specialized, exclusive and individual requirement of the user or consumer who may approach the service provider for such assistance/service.”

1.6 FTS v/s Business Connection, Royalty & Equalisation Levy

Business Connection [S.9(1)(i)]

In case of overlap between FTS and business connection, S. 9(1)(i) cannot be applied on the basis of principle of ‘generalia specialibus non derogant’ i.e. the special provisions would override the general provisions – CIT v. Copes Vulcan Inc USA [1987] 30 Taxman 549/167 ITR 884 (Mad.); Meteor Satellite Ltd. v. ITO [1979] 2 Taxman 424/[1980] 121 ITR 311 (Guj.)

Royalty [S.9(1)(vi)]

• Clause (vi) of Exp 2 – Royalty means

“(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v).”

• Said clause, would override FTS even if severed rendered are technical, managerial or consultancy in nature It was held that FTS is more general category as compared to the Royalty – Meteor Satellite (supra)

Equalisation Levy

• Proviso to S. 163 of EL – EL not applicable where consideration is taxable as royalty or FTS
• If EL applied, the consideration would be exempt u/s 10(5) of ITAct

1.7 Doubling Tax on FTS

The Finance Minister unexpectedly doubled the tax rate on Royalty and FTS from 10% to 20% in case of nonresidents w.e.f. FY 2023-24
Assuming a surcharge rate of 5%, effective tax rate increases to 21.84%, unless the non-resident avails treaty benefit

• Finance Act 1976
  Royalty: 20-40%
  FTS: 40%
• Finance Act 1986
  FTS: 30%
  Royalty: 30%
• Finance Act 1997
  Royalty: 20-30%
  FTS: 20-30%
• Finance Act 2005
  FTS: 10-30%
  Royalty: 10-30%
• Finance Act 2013
  Royalty: 25%
  FTS: 25%

Rationale: Tax Rate in treaties on royalty ranges from 10-25%, whereas S. 115A provides for rate of 10%. In some cases, this has resulted in taxation at a lower rate of 10% even if the treaty allows the income to be taxed at a higher rate. In order to correct this anomaly, tax rate u/s 115Aon royalty and FTS was increased to 25%

• Finance Act 2015
  FTS: 10%
  Royalty: 10%

Rationale: In order to facilitate technology inflow to small businesses at low costs and reduce hardship faced by small entities due to high tax rate of 25%, the tax rate on royalty and FTS was reduced to 10%

• Finance Act 2023
  Royalty: 20%
  FTS: 20%

Rationale: The rationale behind the increase in tax rate is not known

Grossed up arrangement impact

Particulars	Pre-Amendment	Post Amendment
Gross Remittance	10,00,00,000	10,00,00,000
Base Rate	10%	20%
Surcharge	5%	5%
Cess	4%	4%
Effective Tax Rate	10.92%	21.84%
Gross-up Income	11,22,58,644	12,79,42,682
TDS	1,22,58,644	2,79,42,682
Excess Tax Cost (Amount)	1,56,84,038	–
Excess Tax Cost (%)	15.68%	–

1.8 Doubling Tax Rate – Impact

Entitlement to Treaty benefit has become critical

• Tax rate in treaties on Royalty & FTS ranges from 10-15%, generally
• No tax – exclusion of equipment royalty, no FTS clause, make available clause, no fixed base/stay in India in case of Independent Personal Services, etc.
• Anti-abuse provisions – Beneficial Owner test, Limitation of Benefit provisions (LOB), Principal Purpose Test (PPT) under Multilateral Instrument (MLI), etc.
• Valid TRC & Form 10F required to claim treaty benefit

Filing of Return of Income

• S. 115A(5) provides relaxation from return filing where;

1. 1. total income of the nonresident consist only of interest, dividend, royalty and/or FTS, and
   2. tax deducted is not less than that prescribed u/s 115A(1)

• Due to increase in domestic tax rates, most non-resident will seek treaty benefit – Relaxation from ITR filing will not be available

Additional Burden on Payer

• If tax authorities deny treaty benefit to NR, the Payer may be treated as ‘assessee-in-default
• Payer needs to be more vigilant and conduct reasonable due diligence to grant treaty benefit
• Significant increase in cost, where tax has to be borne by Payer

2. FTS under the DTAA

2.1 Allocation of Taxing Rights & Source Rule

Allocation of Taxing Rights

• Typically, Resident State has the primary taxing rights
• Source State also has taxing rights upto a defined tax rate
• Certain anti-abuse provisions (like beneficial owner, LOB, PPT, etc.) have to be passed to claim treaty benefit

Source Rule

• FTS shall be deemed to arise in State where the payer is that State itself, a political sub-division, a local authority or a resident of that State.
• Where a person has a PE/fixed based in a State that the payments are incurred and borned by that PE/fixed base, then the FTS shall be deemed to arise in the State in which the PE/fixed based is situated.

2.2 Types of FTS

Type	India DTAA with
Similar to FTS under IT Act	Germany, Denmark, Ireland, Cyprus
Make Available Clause – Managerial not covered	USA, UK, Netherlands, Canada
Make Available Clause – Managerial covered	Singapore
FTS covered under Royalty definition	Australia
No FTS clause	Philippines, UAE, Greece, Brazil, Thailand
Restricted scope via MFN clause?	France, Spain, Belgium, Sweden

2.3 Specimen Text of FTS Under Treaty

Indo-Germany DTAA |Article 12(4)

“4. The term “fees for technical services” as used in this Article means payments of any amount in consideration for the services of managerial, technical or consultancy nature, including the provision of services by technical or other personnel, but does not include payments for services mentioned in Article 15 [Dependent Personal Services] of this Agreement.”

Indo-Denmark DTAA |Article 13(4)

“4. The term “fees for technical services” as used in this Article means payments of any amount to any person other than payments to an employee of the person making payments, in consideration for the services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel.”

Indo-Singapore DTAA |Article 12(4)

“4. The term “fees for technical services” as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services:

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or

(b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein; or

(c) consist of the development and transfer of a technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein”

“5. Notwithstanding paragraph 4, “fees for technical services” does not include payments:

(a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a);

(b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic;

(c) for teaching in or by educational institutions;

(d) for services for the personal use of the individual or individuals making the payment;

(e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 14;

(f) for services rendered in connection with an installation or structure used for the  exploration or exploitation of natural resources referred to in paragraph 2(j) of Article 5;

(g) for services referred to in paragraphs 4 and 5 of Article 5.”

Indo-USA DTAA |Article 12(4)

“4. For purposes of this Article, “fees for included services” means payments of any kind to any consideration for the rendering of any person in technical or consultancy services (including through the provision of services of technical or other personnel) if such services:

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or

(b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.”

“5. Notwithstanding paragraph 4, “fees for included services” does not include amounts paid:

(a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a) ;

(b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic;

(c) for teaching in or by educational institutions;

(d) for services for the personal use of the individual or individuals making the payments; or

(e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services).”

2.4 No FTS Clause

In the absence of FTS clause, the consideration would be taxable as

Business Profits – Article 7

• Bangkok Glass Industry Co. Ltd. v. Asstt. CIT [2013] 34 taxmann.com 77/215 Taxman 116/257 CTR 326 (Mad.);
• Dy. CIT v. Michelin ROH Co. Ltd. [2022] 138 taxmann.com 497/195 ITD 541 (Delhi – Trib.);
• DIT v. Kalpataru Power Transmission Ltd. [2023] 149 taxmann.com 484/200 ITD 420 (Ahd. – Trib.) etc.

Other Income – Article 21 or 22

Lanka Hydraulic Institute Ltd., In re [2011] 11 taxmann.com 97/199Taxman 232/337 ITR 47 (AAR)

As per IT Act

Dy. CIT v. TVS Electronics Ltd. [2012] 22 taxman 215/52 SOT 287 (Chennai – Trib.)

2.5 Make Available

• There is no concept of ‘make available’ in domestic law, however, it forms part of tax treaties.
• Memorandum of Understanding (MOU) dated May 15, 1989 signed between the India and USA explains the expression with several illustrations

“Generally speaking, technology will be considered “made available” when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available to the person purchasing the service, within the meaning of paragraph 4(b).”

• Several decision have interpreted the expression ‘make available’. Refer: CIT v. De Beers India Minerals (P.) Ltd. [2012] 21 taxmann.com 214/208 Taxman 406/346 ITR 467 (Kar.); Raymond Ltd v. Dy. CIT [2003] 86 ITD 791 (Mum. – Trib.)
• Relevant points to understand the concept of make available:
  • ‘Make available’ is used in the sense of one person supplying or transferring technical knowledge or technology to another. It is said make available when the service recipient is enabled to apply such technology, process contained therein.
  • In simple terms, the service recipient is able to make use of the technical knowledge etc. by himself in his business or for his own benefit without recourse to the performer of the services in future.
  • Some sort of durability or permanency of the result of the ‘rendering of services’ is envisaged which will remain at the disposal of service recipient.
  • The service recipient is at liberty to use such knowledge in his own right.
  • Such technical knowledge etc. must remain with the service recipient even after the rendering of the service comes to an end.
  • There is a thin line of difference between using technical knowledge, etc. to render services vis-a-viz making available the knowledge so that he recipient also acquires the knowledge so as to render such technical services himself.
• Following are irrelevant points, where their inclusion in services will not call for ‘make available’ –
  • Provision of service may require technical input or technically qualified person
  • The services are highly sophisticated in nature
  • Use of product driven by technology
  • Merely allowing somebody to make use of services, whether made use or not
  • Service recipient acquires some familiarity or insights into the manner of provision of services

2.6 Most Favoured Nation (‘MFN’)

• MFN embodies the principle of non-discrimination. It ensures a level playing field for all members
• MFN obligates a country to grant the most favourable treatment to every other country with which it has agreed to MFN clause, that it grants to the first country – ‘favour one, favour all’ – parity!
• MFN in Indian tax treaties,

1. Found in: Protocol which is an integral part of the treaty
2. Nature of income: Generally, covers Dividend, Interest, Royalty and FTS
3. India Treaties having MFN clause: India’s treaty with Netherlands, Switzerland, France, Finland, Philippines, Sweden, Belgium, Spain, Hungary
4. Application of MFN: Plain reading of the MFN texts suggest that the MFN clause could be – Automatic, Subject to negotiation, Subject to notification

Controversy:

1. Can MFN clause be given effect “automatically” or a “separate notification” is required for the MFN clause to come into effect?
2. Can lower tax rate in a Third State treaty be adopted, if that State becomes an OECD member subsequent to signing of its treaty with India?

2.7 FTS v/s Independent Personal Service & PE

Independent Personal Service

• IPS Article covers income derived in respect of professional services or other independent activities
• “Professional services” is generally defined to include independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants
• Service Provider – Individual, Firm, Company?
• FTS provisions under treaty specifically excludes services covered under IPS
• Linklaters LLP v. ITO [2010] 40 SOT 51 (Mum.-Trib.)

Permanent Establishment

• FTS v/s Service PE
• Article 7 on business profits applies, if the beneficial owner of FTS has PE/Fixed Base in Source State and the contract in respect of which the FTS are paid is effectively connected with such PE/Fixed base.

3. Recent Judicial Pronouncement

3.1 MFN Clause | AO (Intl Taxn) vs. Nestle SA (Civil Appeal No. (S) 1420 of TDS on FTS Payments Outside India Ronak G. Doshi & Jinal M. Jain January 23, 2024 30 2023 (SC)

Can MFN clause be given effect “automatically” or a “separate notification” is required for the MFN clause to come into effect?

• SC noted that India has issued separate notifications to give effect to MFN clause in France and Netherlands. There is established and clear precedent, of behaviour, in relation to treaty practice and interpretation.
  • SC also referred to the India-Canada DTAA entered into in 1985 wherein the MFN clause categorically states that the clause “will automatically be applied”. In this case also the treaty practice of India was consistent; a separate notification was later issued.
• The treaty practice in India points to a consistent pattern of behaviour when the signatory to an existing DTAA, points to the event of a third state entering into OECD membership, and a resultant trigger event, the beneficial effect given to the later third-party state has to be notified in the earlier DTAA, as a consequential amendment, preceded by exchange of communication (and perhaps, negotiation) and acceptance of that position by India. The essential requirement of a notification u/s 90 of the Income Tax Act (ITA) of the consequences of the trigger (or causative) event cannot be undermined.
• SC held and declared that:

“A notification under Section 90(1) of the ITA is necessary and a mandatory condition for a court, authority, or tribunal to give effect to a DTAA, or any protocol changing its terms or conditions, which has the effect of altering the existing provisions of law.”

3.2 Others

• Infobip Ltd. v. Asstt. CIT [2023] 150 taxmann.com 503/201 ITD 291 (Delhi-Trib.): A UK based company provided finance support services, technical support, sales support, legal support under Business Cooperation Agreement. Such services were continuously rendered, and AE had to go again and again to the Company. Services rendered did not satisfy ‘make available’ clause as envisaged under article 13(4)(c) to fall within scope of FTS (‘being similar to managerial’), since UK Company did not make available any technical knowledge, experience or skill to its AE. Further, make available was also not satisfied as services provided on continuous basis. AE in no way able to apply and use technical knowledge on its own.
• Kraft Foods Group Brands LLC v. ACIT [ITA No. 2495/Mum/2022]: Absent evidence of cost allocation & actual incurrence, upholds taxability of reimbursement as FTS
• Dy. CIT v. Campus Eai India (P.) Ltd. [ITA No. 355/Del/2021]: Rules on taxability of app development, web-hosting services, marketing & sales support in UAE DTAA

4. Practical Issues

1. Maintenance, Repairs & Operations
2. Training Services
3. Reimbursement of Expense
4. Drawing, Technical Plan and Technical Design
5. Cloud Services
6. Intra – Group or Management Services
7. Arranger Fees and Corporate Guarantee
8. Clinical Trials and Certifications
9. Commission to Overseas Agent

4.1 Retrospective Amendment – Impact on TDS

Retrospective amendment to ITAct provisions cannot fasten obligation to deduct tax at source, when the law is not in force at the time of TDS:

• Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT [2021] 125 taxmann.com 42/432 ITR 471 (SC)
• CIT v. NGC Networks India (P.) Ltd. (ITA No.397/2015)(Bom HC)
• SGS India (P.) Ltd. v. Addl. CIT [2020] 114 taxmann.com 723/182 ITD 498 (Mum.-Trib)
• Procter & Gamble Distribution Company Ltd. v. Dy. CIT [2018] 94 taxmann.com 280 (Mum.-Trib.)
• Channel Guide India Ltd. v. Asstt. CIT [2012] 25 taxmann.com 25/139 ITD 49 (Mum.-Trib.)

5. Documentation – To Claim Treaty Benefit

5.1 Tax Residency Certificate

2000

CBDT Circular No. 789 dated 13-04-2000 – wherever a Certificate of Residence is issued by the Mauritian Authorities, such Certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAC accordingly

2003

UOI v. Azadi Bachao Andolan [2003] 132 Taxman 373/263 ITR 706 (SC): Apex Court upheld the validity of the Circular thereby settling the dust on the controversy

2012

• Vodafone International Holdings B.V. v. UOI [2012] 17 taxmann.com 202/204 Taxman 408/341 ITR 1 (SC): Circular No. 789, dated 13-4-2000 would not preclude the Income-tax Department from denying the tax treaty benefits, if it is established, on facts, that the Mauritius company has been interposed as the owner of the shares in India, at the time of disposal of the shares to a third party, solely with a view to avoid tax without any commercial substance
• Finance Act, 2012: S. 90(4) inserted to provide treaty benefit to non-resident on furnishing of valid TRC
• Explanatory Memorandum: TRC would be

“a necessary but not sufficient condition for availing benefits of the agreements”

2013

• Finance Bill, 2013 proposed to insert S. 90(5) clarifying that TRC shall be necessary but not a sufficient condition for claiming any relief under the agreement referred to therein
• Press Release dated March 01, 2013, issued stating TRC produced by nonresident will be accepted as evidence for tax residency and the Income-tax Authorities in India will not go behind the TRC and question his resident status. The Finance Ministry further clarified that Circular 789 (supra) to be in force
• Proposed S. 90(5) was dropped, and present sub-section (5) was inserted (i.e. Form 10F).

5.2 TRC Conclusive Evidence?

Conclusiveness of TRC

TRC is a conclusive evidence of “Residency”?

• Serco BPO (P.) Ltd. v. AAR [2015] 60 taxmann.com 433/234 Taxman 630/379 ITR 256 (Punj. & Har.)
• HSBC Bank (Mauritius) Ltd. v. Dy. CIT [2018] 96 taxmann.com 544 (Mum. – Trib.)
• CIT v. Alibaba.com Singapore E-commerce (P. ) Ltd. [2023] 152 taxmann.com 110 (Bom.)
• Bid Services Division Mauritius Ltd. v. AAR [2023] 148 taxmann.com 215 (Bom.)
• Blackstone Capital Partners v. Asstt. CIT [2023] 146 taxmnn.com 569 (Delhi) (Interim Stay granted by SC)
• Sapein Funds Ltd. v. CIT [2023] 153 taxmann.com 60 (Delhi – Trib.)

TRC is a conclusive evidence of “Beneficial Ownership”?

• DIT v. Universal International Music B.V. [2013] 31 taxmann.com 223/214 Taxman 19 (Bom.)
• HSBC Bank (Mauritius) Ltd. v. Dy. CIT [2018] 96 taxmann.com 544 (Mum. – Trib.)

TRC is not a conclusive evidence of Beneficial Ownership

• Indostar Capital v. Asstt. CIT [2019] 105 taxmann.com 96/265 Taxman 59 (Bom.)
• Italian Supreme Court decision in case of Ovvio Italia Spa
• Google India (P.) Ltd. v. Jt. DIT [2018] 93 taxmann.com 183/194 TTJ 385 (Bang. – Trib.)
• “AB” Mauritius, In re [2018] 90 taxmann.oom 182/402 ITR 311 (AAR – New Delhi)
• E Trade Mauritius Ltd., In re [2010] 190 taxman 232/324 ITR 1 (AAR – New Delhi)

5.3 TRC | Treaty Entitlement in Absence of TRC

Judicial precedents

• Skaps Industries India (P.) Ltd. v. ITO [2018] 94 taxmann.com 448/171 ITD 723 (Ahd. – Trib.) S. 90(4) requiring Assessee to furnish TRC do not start with a non-obstante clause; Reference to section 90(2A) which provides that GAAR provisions shall override section 90(2); Hence, mere non-furnishing of TRC cannot be construed as a limitation to treaty benefits
• Sreenivasa Reddy Cheemalamarri v. ITO [2020] 118 taxmann.com 684 (Hyd. – Trib.) It has been held that despite best possible efforts, if Assessee is not able to procure; TRC from country of residence, then the situation may be treated as “impossibility of performance”
• Recent
  • Vamsee Krishna Kundurthi v. ITO [2021] 128 taxmann.com 368/190 ITD 68 (Hyd. – Trib.)
  • Ranjit Kumar Vuppu v. ITO [2021] 127 taxmann.com 105/190 ITD 455 (Hyd. – Trib.)
  • Maya Nair v. ITO [ITA No. 2407/Bang/2018]
• Can application of TRC be considered?
• French Supreme Court on 14.12.2020 held that TRC is required to obtain benefits under the DTAA
• Peru’s Apex Court held that furnishing TRC before payment ‘not sine qua non’ for treaty benefits

5.4 TRC | What Point of Time?

Specimen text of TRC

• Past “as at date” or “period”

“I certify to the best of HMRC’s knowledge, as at 24.02.2021, the Company X is resident in the UK in accordance with Article 4 of the Convention”

– Date of issue of TRC – 03.05.2021 OR

“I certify……., the Company during the period 01.01.2020 to 31.08.2020 is resident in ………”

– Date of issue of TRC 13.11.2020

• Futuristic TRC: “Certificate of Tax Residence for Tax Year 2023 – Date of issue of TRC 05.01.2023
• At the time of Assessment: Haresh Sheth v. ITO [ITA No. 1380/Mum/2020], the Tribunal admitted the reason for delay in obtaining TRC and allowed treaty benefit despite failure to obtain and furnish TRC in Assessment proceedings
• As at invoice date or date of remittance
• Past “as at date” or “period”

• “I certify to the best of HMRC’s knowledge, as at 24.02.2021, the Company X is resident in the UK in accordance with Article 4 of the Convention”

– Date of issue of TRC – 03.05.2021 OR

• “I certify……., the Company during the period 01.01.2020 to 31.08.2020 is resident in ………” –

Date of issue of TRC 13.11.2020

Futuristic TRC

• “Certificate of Tax Residence for Tax Year 2023 – Date of issue of TRC 05.01.2023
• UK – HMRC cannot certify residence for a future period.
• UAE – FTA does not issue TRC for a future period from the selected start date of the financial year.

When Should the Payer Have the TRC?

• At the time of Assessment or S. 201 Proceedings: Haresh Sheth v. ITO [ITA No. 1380/Mum/2020], the Tribunal admitted the reason for delay in obtaining TRC and allowed treaty benefit despite failure to obtain and furnish TRC inAssessment proceedings
• As at invoice date or date of remittance

5.5 Genesis of Form 10F

2012

Finance Act, 2012 –

• S. 90(4) inserted requiring furnishing of TRC to claim treaty benefit
• TRC to be issued by foreign government of the country of which assessee is a tax resident
• TRC must contain such particulars as prescribed in Rule 21AB

2013

Finance Act, 2013 –

• “a certificate containing such particulars as may be prescribed” omitted from S. 90(4)
• S. 90(5) inserted and 21AB self correspondingly, Rule amended requiring certified Form 10F

2022

Notification 03/2022 dated 16.07.2022

• Form 10F to be furnished electronically with immediate effect

2023

Circular F. No. DGIT(S)-ADG(S)-3/E-FILING NOTIFICATION/FORMS/2023/13420, dated Mar 28, 2023

• Relaxation from furnishing Form 10F in certain cases

5.6 Form 10F | Rule 21AB

• Status (individual, company, firm etc.) of the assessee;
• Nationality (in case of an individual) or country or specified territory of incorporation or  registration (in case of others);
• Tax/Unique Identification Number in country of residence;
• Period for which the residential status, as mentioned in TRC, is applicable; and
• Address of the assessee in the country or specified territory outside India, during the period for which TRC, is applicable

If TRC contains all the information required to be submitted in Rule 21AB(1), Form 10F is not required

Power of AO

The AO may ask the non-resident to submit the documents in order to substantiate the information mentioned Rule 21AB(1)

Pre-requisite of generating e-Form 10F

• TRC
• PAN

5.7 Form 10F | Electronic Form

• Prior to July 16 2022 – Manual Form 10F
• W.e.f. July 16, 2022 vide Notification No. 03 2022 – Form 10F added to the prescribed list of forms to be furnished electronically
• Partial relaxation from e-Form 10F – In consideration of the practical challenges faced,

“non-resident taxpayers who are not having PAN and not required to have PAN as per relevant provisions of the Income-tax Act, 1961…”

are exempted from mandatory electronic filing of Form 10F till Sep 30, 2023. Circular F. No. DGIT(S)-ADG(S)-3/E-FILING NOTIFICATION/FORMS/2023/13420, dated Mar 28, 2023

• Recently, income-tax e-portal has enabled registration of account by “Non-Residents not holding and not required to have PAN”

5.8 Form 10F | Treaty Benefit

Can treaty benefit be denied if e-Form 10F not generated?

• Article 51(1)(c) of the Constitution of India: The State shall endeavor to foster respect for international law and treaty obligations
• Article 26 of VCLT: Pacta Sun Servanda – Every treaty in force is binding upon the parties to it and must be performed by them in good faith
• It is a trite law that the beneficial provisions of the tax treaty are superior to the provisions of the Act – UOI vs. Azadi Bachao Andolan [2003] 132 Taxman 373/263 ITR 706 (SC) and Engineering Analysis Centre of Excellence (P.) Ltd . v. CIT [2021] 125 taxmann.com 42/281 Taxman 19/432 ITR 471 (SC)
• Denial of treaty benefit on account of non-compliance with electronic filing will lead to unilaterally amending the bilateral agreement that the DTAA inherently is, which is not tenable – Dy. CIT vs. ITC Ltd. [2002] 82 ITD 239 (Kol.-Trib.)
• Skaps Industries India (P.) Ltd. v. ITO (Intl Tax) [2018] 94 taxmann.com 448/171 ITD 723 (Ahd.-Trib.) – In the context of denial of treaty benefit in absence of TRC, ITAT held that S. 90(4) cannot be construed as a limitation to the superiority of treaty over the domestic law

6. Default in withholding tax – Consequences

• Payer to be treated as ‘assessee-in-default’ u/s 201
• Interest liability u/s 201(1A)
• Disallowance of expense u/s 40(a)(i)
• Payer may be treated as Representative assessee u/s 160 r.w. S.163
• Levy of penalty u/s 271C
• Prosecution u/s 276B

6.1 S. 201 Proceeding – Reasonable Time

Time limit for initiating the proceedings from the end of relevant the FY

4 Years

• CIT v. NHK Japan Broadcasting Corpn. [2008] 172 Taxman 230/305 ITR 137 (Delhi)
• CIT v. Satluj Jal Vidyut Nigam Ltd [2012] 27 taxmann.com 186/345 ITR 552 (HP)
• ITO v. Indian Oil Corporation Ltd. [2023] 156 taxmann.com 576/[2024] 296 Taxman 428 (Patna)

6 Years

• DIT v. Mahindra & Mahindra [2014] 48 taxmann.com 150/225 Taxman 306/365 ITR 560 (Bom.)

7 Years

• Bhura Export v. ITO [2011] 13 taxmann.com 162/202 Taxman 88/365 ITR 548 (Cal.)
• Dr. Reddys Laboratories Ltd. v. Dy. CIT [2023] 155 taxmann.com 97 (Telangana)

Proceedings initiated to be completed within 1 year from the end of the FY in which the proceedings is initiated

• Mahindra & Mahindra Ltd v. Dy. CIT [2010] 122 ITD 216/[2009] 30 SOT 374 (Mum.- Trib.) (SB)
• Hathway Cable and Datacom Limited v. TRO (TDS), Rg-1 (ITA No. 3512 to 3514/Mum/2014)
• Atlas Copco (India) Limited v. DCIT, Circle – 8 Pune (ITA No. 1669 to 1671/Pun/2014)