Foreign Entity Having Valid Tax Residency Certificate Is Eligible To DTAA Benefit On Long-Term Capital Gain From Sale Of Share Of Indian Entity: Delhi ITAT

In a recent ruling by the Delhi Income Tax Appellate Tribunal (ITAT), it was determined that a foreign entity with a valid tax residency certificate (TRC) is eligible to claim benefits under the Double Taxation Avoidance Agreement (DTAA) for long-term capital gains arising from the sale of shares of an Indian company. This ruling clarifies important aspects of tax residency and the application of international tax treaties in the context of capital gains taxation.

Background

A foreign entity Tyco Electronics Singapore Pte Limited, which held shares in an Indian company, sold these shares and realized long-term capital gains. The Taxpayer, being a non-resident, sought to benefit from the preferential tax rates on long-term capital gains as stipulated under the DTAA between India and the Taxpayer’s country of residence.

The Income Tax Department challenged the Taxpayer’s eligibility for DTAA benefits, questioning whether the Taxpayer could claim the benefits despite being a foreign entity.

Key Issues

1. Eligibility for DTAA Benefits:

   • Tax Residency Certificate: The primary issue was whether the Taxpayer, holding a valid TRC, could benefit from the reduced tax rates on long-term capital gains under the DTAA. The TRC serves as evidence of the Taxpayer’s residency in its home country and is crucial for claiming DTAA benefits.

2. Application of DTAA:

   • Long-Term Capital Gains: The applicability of DTAA provisions to long-term capital gains was examined. The DTAA typically provides reduced tax rates or exemptions on capital gains to avoid double taxation and facilitate cross-border investment.

3. Compliance with Tax Treaties:

   • Conditions for Benefits: The Tribunal assessed whether the Taxpayer met the conditions required by the DTAA to qualify for preferential tax treatment on capital gains.

Legal Framework

The Double Taxation Avoidance Agreement (DTAA) between India and the Taxpayer’s country of residence outlines the taxation rights of each country over various income types, including capital gains. For the Taxpayer to benefit from the DTAA, it must provide evidence of tax residency in its home country, typically through a TRC.

Tribunal’s Ruling

• Recognition of TRC: The Delhi ITAT ruled that the valid TRC issued by the Taxpayer’s home country was sufficient to establish the Taxpayer’s residency status under the DTAA.
• Eligibility for Benefits: Based on the valid TRC, the Tribunal affirmed that the Taxpayer was eligible to avail of the reduced tax rates on long-term capital gains as per the DTAA provisions.

Implications

• For Foreign Entities: This ruling underscores the importance of obtaining and presenting a valid TRC to claim DTAA benefits. Foreign investors can rely on their TRC to access favorable tax rates on capital gains from investments in India.
• For Tax Authorities: The ruling reinforces the acceptance of TRCs as valid proof of residency and eligibility for DTAA benefits. Tax authorities must recognize TRCs issued by competent authorities in the foreign entity’s home country.

Observation of the Tribunal

The Bench noted that the Assessee, as part of global restructuring, sold 10,37,030 shares of TE Connectivity Global Shared Services India Private Limited to a third party resulting in the long-term capital gains and claimed that it was not liable to pay any tax on the capital gains as the same was tax exempted under Article 13(4) of India-Singapore DTAA.

The Bench opined that the TRC, although not conclusive evidence of a tax residency of an entity, it certainly is statutory evidence and the burden is on the Revenue to establish from the facts and circumstance that the entity has been formed and operated in a manner that the only intention was to take DTAA benefit without there being actual intention of an economic activity.

Conclusion

The Delhi ITAT’s decision affirms that a foreign entity holding a valid tax residency certificate is entitled to benefit from DTAA provisions concerning long-term capital gains from the sale of shares in an Indian company. This case highlights the significance of TRCs in international tax compliance and the application of tax treaties to facilitate cross-border investment.