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‘Authorities can’t doubt tax residency certificate’: ITAT

Mumbai, Feb 23, 2023

Tax authorities cannot question the validity of a tax residency certificate (TRC) issued by authorities of an overseas country. This was stated by the Delhi bench of the Income Tax Appellate Tribunal (ITAT) in a recent order in the case of Reverse Age Health Care Services, a Singapore entity. The decision follows that of the Delhi high court in the case of Blackstone Capital. These decisions are being regarded as a big win for foreign investors.

A TRC is proof of tax residency of a country so as to be eligible for the benefits under the relevant tax treaty. It is not uncommon for tax authorities to challenge the eligibility of benefits — such as a nil or lower tax rate provided in the tax treaty. “The recent orders by the court and ITAT will set to rest any apprehensions among foreign investors who are tax residents in tax-favourable jurisdictions and will also guide I-T officials,” said Anish Thacker, a chartered accountant.

In this case, Reverse Age Health Services sold its stake in Dr Fresh Health Care, a private company, in India to VIC Enterprises, another Indian entity. The Indian company which purchased the stake deducted tax at source (TDS) against the capital gains that accrued to the Singapore-based seller. In turn, this TDS of Rs 1.09 crore was claimed as a refund during the financial year 2017-18 by Reverse Age Health Services, as it contended that short-term capital gains were not taxable in its hands under the India-Singapore tax treaty.

Under the amended India-Singapore tax treaty, shares in Indian companies acquired on or after April 1, 2017 are subject to tax in India. In this case, the shares were acquired prior to this date.

The ITAT bench, composed of N K Billaiya and Anuhav Sharma, observed that the treatment by the Indian tax authorities of the Singapore entity as a shell or conduit company, which led to denial of the tax treaty benefits, does not hold any water. The veracity of expenditure incurred by this company was accepted as genuine by the Singapore tax authorities. Companies that meet a certain threshold of expenditure are not regarded as shell companies under the tax treaty. The bench also pointed out that the I-T Act provides for an exemption from GAAR provisions if the tax benefit is less than Rs 3 crore.

Relying on the earlier order of the Delhi high court, the ITAT concluded that as a valid TRC had been provided with other documents, including tax assessment orders by the Singapore tax authorities, the tax treaty benefits cannot be denied.

[The Times of India]

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