Supreme Court to hear stayed ruling on tax residency certificates in March

The Delhi High Court had in January 2023 said that TRC is sufficient for a foreign investor's claim to pay zero or lower tax under treaties between India and foreign jurisdictions

The Supreme Court on Friday refused to vacate the stay on the Delhi High Court order, stating that the Income Tax Department cannot go behind the Tax Residency Certificate (TRC) issued by the other tax jurisdiction.

The case will now be heard in March.

The Delhi High Court (DHC) had in January 2023 said that TRC is sufficient for a foreign investor’s claim to pay zero or lower tax under treaties between India and foreign jurisdictions such as Singapore, Mauritius, and The Netherlands.

It said that the IT department cannot go behind the TRC to challenge treaty benefits on the grounds that the foreign country incorporated in a treaty company is just a shell company. This ruling was stayed by the Supreme Court on January 3, 2024.

In this case, Blackstone Capital Partners (Singapore) VI FDI Three PTE Ltd had acquired equity shares of Agile Electric Sub Assembly Private Limited, a company incorporated in India, in two tranches. The petitioner sold all the equity shares of Agile to Igarashi Electric Works Limited (Igarashi) and other parties on July 30, 2015.

Blackstone electronically filed its return of income and claimed its gains earned on the sale of Agile shares were not taxable in India by virtue of Article 13(4) of the India-Singapore Double Tax Avoidance Agreement (DTAA), based on the Tax Residency Certificate (TRC).

Blackstone’s return of income was processed with no demand. Then a notice was issued to the company for the assessment year 2016–17. The company then filed a return of income and requested the reasons.

The issue raised was whether the IT department can go behind the tax residency certificate issued by the other tax jurisdiction and issue a reassessment notice under the Income Tax Act, 1961, to determine issues of residence status, treaty eligibility, and legal ownership.

“There are broadly two issues. One is the TRC, which is as ambiguous as possible. More importantly, the control and management person is sitting in the US,” counsel for the IT department told the apex court on Friday.

“Tell us what is the consequence of the stay. 108 crores is your (IT Department) assessment,” the court asked him.

“The judgement has to be stayed,” the IT department counsel replied.

The court then said it will not hear the matter on merits and posted the matter for March.