Volume 5, Issue 22


26th September, 2012


Tax Alert
Govt of India notifies details required in TRC to be obtained by foreign entity seeking tax benefits under tax treaty with India

Background:

The Indian Finance Act 2012 amended sections 90 and 90A of the Income tax Act, 1961 (“ITA”). The amendment requires every non-resident who wishes to claim any relief under a tax treaty signed by India with another country to furnish to the Indian tax authorities a certificate in the prescribed format from the Government of the country with which India has signed the Double Tax Avoidance Agreement (“DTAA”).. Generally, such a certificate is popularly referred to as Tax Residency Certificate (“TRC”).

The certificate will help substantiate the residency condition for claiming treaty reliefs. Earlier, there was no specific provision under the ITA that required a non resident to furnish such a certificate to claim benefits under any DTAA. There is, however, a Circular 789 dated 13th April, 2000, issued by the Central Board of Direct Taxes (“CBDT”) in the context of the DTAA with Mauritius which provides that the certificate of residence issued by Mauritian authorities will be sufficient evidence for the status of residence as well as beneficial ownership under the DTAA. The Supreme Court upheld the validity of this circular in 2003 vide its landmark judgement in the Azadi Bachao Andolan case.

While proposing the amendment to the ITA, the Memorandum to the Finance Bill 2012 clarified that the certificate is a necessary but not sufficient condition for availing the benefit under the agreements referred to in the Sections. Although the Finance Act was passed long back, the particulars of TRC had not been prescribed so far.

Now, the CBDT has issued a Notification which prescribes the particulars mandatorily required to be mentioned in the TRC. This alert summarises the amendments brought about by the latest notification from the CBDT.

Notification issued by CBDT:

In exercise of the powers conferred by section 90 and 90A read with section 295 of the ITA, the CBDT has inserted a new Rule 21AB ( namely “Certificate for claiming relief under an agreement referred to in section 90 and 90A”) after Rule 21AA by amending the Income-tax Rules, 1962.

  • This new rule shall come into force from 1st April 2013
  • As per Rule 21AB, the certificate referred to in sub-section (4) of section 90 and sub-section (4) of section 90A to be obtained by a non-resident from the  Government of the country or the specified territory of which it is a resident shall contain the following particulars, namely:
  • In case of individuals

    In case of others

    Name of the person seeking treaty benefits

    Name of the entity seeking treaty benefits

    Status of the person seeking treaty benefits (i.e. Individual)

    Status of the person seeking treaty benefits (company, firm etc.)

    Nationality

    Country or specified territory of incorporation or registration

    Tax identification number in the country or specified territory of residence or in case no such number, then, a unique number on the basis of which the person is identified by the Government of the country or the specified territory

    Tax identification number in the country or specified territory of residence or in case no such number, then, a unique number on the basis of which the person is identified by the Government of the country or the specified territory

    Residential status for the purposes of tax

    Residential status for the purposes of tax

    Period for which the certificate is applicable

    Period for which the certificate is applicable

    Address of the applicant for the period for which the certificate is  applicable

    Address of the applicant for the period for which the certificate is  applicable

The TRC mentioned above should be duly verified by the Government of the country or the specified territory of which the tax payer claims to be a resident for the purposes of tax.

In the same notification, there is also a provision that affects Indian tax residents seeking benefits in India under any DTAA. For tax residents of India, the newly inserted rule 21AB has prescribed Form No. 10FA for making an application to the assessing officer (“AO”) for obtaining a certificate of residence for claiming any relief under DTAA. The information required to be furnished to the AO includes name, status, nationality, country of incorporation, address, PAN/TAN, purpose for which such certificate is required, tax year(s) for which the certificate is needed. Based on the information furnished in Form No. 10FA, the AO will issue a certificate of residence in Form No. 10FB.

SKP’s comments:

  • The amendments to sections 90 & 90A are effective current year i.e. Financial Year 2012-13. The new Rule has been made effective 1st April, 2013. Now, rules are procedural in nature and therefore, when the same is made effective 1st April, 2013, it means that the rule applies prospectively from 1st April, 2013 i.e. from Financial Year 2013-14. This raises an interesting issue about the format of the TRC for the current year i.e. F.Y. 2012-13. Do we go with the existing formats? What about those countries which do not have the practice of issuing TRCs? These are questions that need to be addressed. Our view is that it would be advisable to obtain a fresh TRC containing the information prescribed even for current year i.e. F.Y. 2012-13. This would be a view that the tax department would not find fault with.
  • Obtaining a TRC containing the prescribed information would be extremely important for every non-resident wanting to claim the benefits under any DTAA.
  • Non resident investors (particularly FIIs and QFIs who invest in India and seek benefits under any DTAA) are advised to obtain the certificate in time to ensure that beneficial treaty claims are neither disputed nor disallowed due to want of the TRC.
  • While obtaining the TRC, the foreigner/foreign entity must bear in mind the fact that in India, the fiscal year is April to March and accordingly, the TRC must cover the entire period of 12 months from 1st April to subsequent 31st March.
  • The information prescribed is only general information and there ought not to be any hindrance in obtaining a TRC from any Govt containing this information. The worry that most investors had (particularly those from Mauritius) about the format that the Govt of India would prescribe appear to have been borne in mind while drafting the new Rule.
  • The new rule would bring about certainty and will help in clearing the air over the issue of format of the TRC.