Tax Residency Certificate - A must for claim of benefits under DTAAs

THE Finance Minister as part of the Finance Bill, 2012, has proposed to introduce the requirement of a Tax residency certificate into the tax provisions making it mandatory for every non-resident to obtain a certificate from the Government of the country in which such person is a resident for evidencing such person's residency in that country. This is one such amendment that was adopted out of the proposals in the Direct Taxes Code Bill. The Finance Bill proposes that the benefits contained in the Double taxation avoidance agreements (DTAA) signed between India and the respective

countries would be denied to a person if a tax residency certificate, containing such particulars as may be prescribed, is not obtained from the Government of the respective country. The Memorandum to the Finance Bill, 2012 provides that obtaining such a certificate is a necessary but not a sufficient condition for availing the benefits contained in the DTAA.

To step back, the extant provisions do not contain a specific requirement for obtaining a tax residency certificate ('TRC') in order to claim benefits under the DTAA. A Circular was issued by the Central Board of Direct taxes in the year 2000 in the context of claiming benefits under the DTAA between India and Mauritius which clarified that 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 DTAA accordingly. Subsequently, the Supreme Court in the year 2003 in the landmark case of Azadi Bachao Andolan confirmed the validity of this Circular, holding that the TRC issued by the Mauritian tax authorities should constitute sufficient evidence for accepting the status of residence for applying the provisions of the India-Mauritius DTAA.

The Bill proposes that the TRC should be obtained in a manner containing such particulars as may be prescribed by the Indian Income-tax authorities, in regard to the residency of the assessee in the respective country outside India. Till we wait to look at what the ‘prescribed particulars' are, the challenges that remain are ‘would the Government of the respective countries co-operate in providing the TRC in a manner required by the Indian Income-tax provisions?' And that ‘would the tax residency be challenged if the TRC produced by an assessee is in substance a valid document evidencing the residency, but however not in a manner prescribed by the Income-tax authorities?'.

While one will need to wait to hear more from the tax authorities in this connection, the proposed amendment if passed in its current form, is likely to throw open procedural challenges in claiming relief under the DTAA and needless to mention, increased litigation, at the minimum.