1. Background
The Finance Act, 2012
introduced new provisions viz Section 90(4) and 90A(4) in the Income-tax
Act, 1961 (the Act) which states that a non – resident tax payer to
whom a tax treaty is applicable shall not be entitled to claim relief
under such tax treaty unless a certificate, containing prescribed
particulars stating that he is resident in any country outside India is
obtained by him from the government of that foreign country.
The
memorandum explaining the provisions of the Finance Bill, 2012 (the
memorandum) specified that the amended Section 90(4) and 90A(4) will
come into effect from 1st April, 2013 i.e. Assessment Year 2013-14.
The
following sub-section (4) inserted after sub-section (3) of section 90
and 90A by the Finance Act, 2012, w.e.f. 1st April, 2013, reads as
under:
Section 90 – “(4) An assessee, not being a resident, to
whom an agreement referred to in sub-section (1) applies, shall not be
entitled to claim any relief under such agreement unless a certificate,
containing such particulars as may be prescribed, of his being a
resident in any country outside India or specified territory outside
India, as the case may be, is obtained by him from the Government of
that country or specified territory.”
Section 90A – “(4) An
assessee, not being a resident, to whom the agreement referred to in
sub-section (1) applies, shall not be entitled to claim any relief under
such agreement unless a certificate, containing such particulars as may
be prescribed, of his being a resident in any specified territory
outside India, is obtained by him from the Government of that specified
territory.”
Thus, it is observed that the language of sections 90(4) and 90A(4) is identical.
2.Objective
The
objective behind the introduction of the amendment is explained in the
Memorandum explaining the provisions of the Finance Bill, 2012, as
follows:
“It is noticed that in many instances that, taxpayers
who are not tax residents of a contracting country do claim benefit
under the DTAA entered into by the Government with the country. Thereby,
even third party residents claim unintended treaty benefit.
Therefore,
it is proposed to amend Section 90 and Section 90A of the Act to make
submission of Tax Residency Certificate containing prescribed
particulars, as a necessary but not sufficient condition for availing
benefits of the agreements referred to in these sections.”
Thus, the object is to prevent unintended recipients from availing of the benefit of a DTAA.
The
amendments come into force w.e.f. 1st April, 2013. The Explanatory
Memorandum clarifies that the provisions are applicable with effect from
Assessment Year 2013-14. Hence, it should not be applicable to
assessments up to Assessment Year 2012-13, even if the assessment is
pending as on 1st April, 2013.
3. Effective date of introduction of Rule 21AB
In
view of contradictory and confusing rules of interpretation regarding
effective date of amendment of / introduction of a rule and varying
judicial interpretations thereof, the effective date of the requirement of obtaining TRC with prescribed details, is a matter of confusion and uncertainty in the minds of the tax payers. Queries have been raised by non-residents, resident payers and their tax consultants with regard to effective date of the TRC requirements imposed w.e.f. 1st April, 2013 by the said notification dated 17th September, 2012.
As pointed out earlier, section 90(4) and 90A(4) have been made effective from assessment year 2013-14, but the relevant rules in respect thereof have been notified on 17th September, 2012 providing that the same would be effective from 1st April, 2013. If it is interpreted that the newly inserted rule 21AB is effective from assessment year 2013- 14 [financial year 2012-13] then for the period 1st April, 2012 to 16th Septemberr, 2012, it is impossible for any tax deductor to obtain the TRC having prescribed particulars for the aforesaid period, as the same were notified only on 17th September, 2012. Therefore, a more prudent and plausible interpretation of the effective date of the rule 21AB should be that it would be applicable for the assessment year 2014-15 [previous year 2013-14] onwards.
The CBDT would do well to clarify that the requirement would apply for remittances to be effected on or after 1st April, 2013 i.e. assessment year 2014-15, so as not to cause hardships and the consequent litigation for the tax payers/ tax deductors and in particular, to provide a window of time to the non-residents to obtain the TRC.
4. Impact of Introduction of Sections 90(4) and 90A(4)
4.1 The requirement applies to all Non Residents, whether Individuals, Companies, LLPs, etc., irrespective of the quantum of relief to be obtained. The requirement would apply only if a relief is to be obtained under a tax treaty. A TRC is not required if no relief is to be obtained under a Tax Treaty. To illustrate, if a resident of UK is to receive royalty from an Indian resident, section 115A provides that the royalty will be charged to tax @ 10% and the India-UK DTAA provides for a tax rate of 15%; the provisions of the Act will be applicable since they are more beneficial to him [Section 90(2)] and the assessee will not be obtaining any relief under the DTAA. In such a case, he will not be required to obtain a TRC.
4.2 Consequences of obtaining a TRC
If a Non-resident obtains and furnishes a TRC, what are the consequences? Are the Tax Authorities debarred from making any further enquiries regarding his residential status? Can the A.O. further examine as to whether the non – resident is really a resident of the Foreign Country under Article 4 of the Tax Treaty with that country? There are 2 views in the matter. According to one view, in spite of the TRC, the A.O. is empowered to make further enquiries to reach a conclusion that the Non-resident is not a Resident of the Other Country issuing the TRC as there is nothing in Section 90(4) to explicitly provide that the TRC will be sufficient for establishing the Residential Status of a Non-resident. According to the other view, the A.O. is required to accept the TRC as conclusive and that he cannot go behind it so far as the Residential Status is concerned. The second view seems to be supported by the decision of the Supreme Court in Union of India vs Azadi Bachao Andolan (2003) 263 ITR 706 (SC) upholding the validity of CBDT Circular No. 789 dated 13th April, 2000.
4.3 Net of Tax Payment
In case of net of tax payment due under a contract with a Non-resident, it is the duty of the payer to calculate the tax liability correctly. Therefore, it would appear that the payer needs to obtain a TRC from the payee, in such cases also. However, in case of absence of Payee’s PAN No., if the payer is discharging his liability under the provisions of Section 206AA, it would appear that the payer need not obtain a TRC from the payee, since no relief is being claimed under the relevant Tax Treaty.
4.4 Time for obtaining the TRC for resident tax deductors u/s 195
In a case where a resident is required to make a payment to a non-resident after deducting tax u/s 195 after 17th September, 2012, in order to avoid confusion relating to effective date of the rule 21AB regarding TRC requirements and consequent litigation, it would be prudent for a tax deductor to insist that the non-resident payee furnishes TRC containing prescribed particulars before the remittance is made by the tax deductor, allowing any relief under the applicable tax treaty.
In a situation, where the non-resident payee has applied for the TRC but the TRC could not be obtained by it prior to effecting the remittance, due to procedural requirements or delays, in view of the language of section 90(4)/90A(4), would it be proper for the tax deductor to rely on a self-declaration furnished by the non-resident payee containing relevant particulars available with the payee and after receiving the TRC the same is submitted to the tax deductor? Would it be in order for a Chartered Accountant to issue a certificate u/s 195(6) in Form 15CB based in any such self declaration?
On a strict interpretation of the language of section 90(4)/90A(4) which provides that the non-resident “shall not be entitled to claim any relief under such agreement unless a certificate, containing such particulars as may be prescribed, of his being a resident in any country outside India or specified territory outside India, as the case may be, is obtained by him”, it appears that neither a certificate can be issued by a Chartered Accountant in Form 15CB considering the relief under relevant DTAA, nor the payer can consider the provisions of a DTAA at the time of making the remittance.
This could cause practical difficulties in a large no. of cases of remittance to non-residents and also seriously impact the smooth conduct of business. An immediate clarification by the CBDT in this regard would go a long way in reconciling compliance with the statutory requirements and facilitating the remittance without causing hardships to the concerned business entities.
5. CBDT Notification
To operationalise the said amendments, the Central Board of Direct Taxes (CBDT) has issued notification No. S.O. 2188 (E) dated 17th September, 2012 w.e.f. 01st April, 2013 which prescribes that certain details should be included in the TRC to be obtained by the non – resident to claim tax treaty benefit. Further, the CBDT also notifies the Form 10FA and Form 10FB for resident of India to obtain TRC from the Assessing Officer (AO).
5.1 Non Resident to obtain TRC from respective foreign country / specified territory
i) The prescribed Rule 21AB does not provide for any specific or standard format for the TRC. However, it provides that the TRC issued should contain the following particulars, namely:
(a) Name of the taxpayer
(b) Status (individual, company, firm etc.) of the taxpayer.
(c) Nationality (in case if individual)
(d) Country or specified territory of incorporation or registration (in case of others)
(e) Taxpayer’s 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.
(f) Residential Status for the purposes of tax
(g) Period for which the certificate is applicable
(h) Address of the applicant for the period for which the certificate is applicable.
ii) The Certificate shall be duly verified by the Government of the country or the specified territory of which the taxpayer is a resident for the purposes of tax. However, the format of the verification has not been prescribed.
The contents of a TRC to be obtained by a Non Resident are rather simple and straight forward and do not appear to be very intrusive or onerous. The Non Resident can easily furnish the particulars required to obtain the TRC from his country / territory of residence. Further, it appears that the TRC can be obtained in advance for a given period.
However, as the requirement of obtaining TRC may be construed to be applicable from the Accounting Year commencing from 1st April, 2012, the questions may arise about the fate of transactions which have been concluded without obtaining the TRC prior to 17th September, 2012. The CBDT needs to clarify that it would be in order if the Non Resident payee obtains and furnishes the TRC to the payer after the transaction is concluded or the payment has been made to him by the Resident payer.
5.2 Resident to obtain TRC from Indian Government
Rule 21AB of the Rules also prescribes specified form for residents to obtain a TRC from the respective AO. The taxpayer, being resident of India, shall, for obtaining a TRC for the purposes of the tax treaty, make an application in Form No. 10FA to the A.O., giving the following particulars:
(a) Full Name and address of the assessee
(b) Status (state whether individual, Hindu undivided family, firm, body of individuals, company etc)
(c) Nationality (in case of individual
(d) Country of incorporation/registration
(e) Address of the assessee during the period for which TRC is desired
(f) Email ID
(g) Permanent Account Number/Tax Deduction Account Number (if applicable)
(h) Basis on which the status of being resident in India is claimed
(i) Period for which the TRC is applicable
(j) Purpose of obtaining TRC
(k) Any other detail.
The application form along with supporting documents (not specified) has to be submitted to the AO. The New Rule provides that the AO, on receipt of the application and on being satisfied of the particulars contained therein, should issue the TRC to the resident assessee in Form 10FB. Time limit for issue of the TRC by the A.O. has not been specified.
It is worth noting that there is no mandatory requirement in the various tax treaties signed by India for obtaining a TRC by the Non Residents containing prescribed particulars. Is it proper for the Government of India to unilaterally impose such a requirement upon the non-residents?
