As per Section 90(4) of the Income-tax Act, 1961 (‘IT Act’), a non-resident is not entitled to claim any relief under the applicable Double Taxation Avoidance Agreement (‘DTAA’), unless a Tax Residency Certificate (‘TRC’) is obtained by such non-resident from the Government of their home country. Especially qua the India-Mauritius DTAA, the Central Board of Direct Taxes (‘CBDT’), as early as in 2000, clarified^[1] that a Mauritian resident having a valid TRC issued by the tax authorities of Mauritius, will constitute adequate proof of their residency and beneficial ownership of the asset under consideration. The constitutional validity of this Circular was upheld by the Supreme Court of India (‘SC’)^[2].

Thereafter, the Legislature by way of Finance Bill, 2013, sought to provide that while TRC will be a necessary eligibility condition, but the same will not constitute sufficient evidence of residency and will not be binding on the Indian tax authorities. However, given that such an approach would disrupt the approach so far, the Ministry of Finance clarified^[3] that TRC will be accepted as evidence of the residency of the non-resident and that the Income tax authorities will not go behind it to question the residential status of the non-resident.

The Delhi High Court in its recent decision in Blackstone Capital Partners (Singapore) VI FDI Three Pte Ltd. v. ACIT^[4] (“Blackstone Judgement”) reiterated the law on TRC as being sufficient evidence of residency of a non-resident. However, it is for the first time that it has been recognized by a High Court that the test of “beneficial ownership” is an irrelevant criterion for the purposes of capital gains taxation under the DTAA, unless such test is expressly stated under the relevant provision. In that manner, the High Court has held that TRC would be the only relevant criteria for availing benefits available under the capital gains provision in a DTAA, if any, if the non-resident in question is the legal owner of the asset that is being transferred.

A similar proposition was laid down by the Income Tax Appellate Tribunal (‘ITAT’)^[5], but was recently recalled prior to the Blackstone Judgement.

Nonetheless, any benefit under a DTAA, would be further subjected to a “limitation on benefit” (‘LOB’) clause, if present. In the Blackstone Judgement, the LOB provision under the India – Singapore DTAA^[6] restricted the applicability of benefit under the capital gains provision to an entity which had bona fide business activities, and which was not a shell or conduit. The provision also provided for an annual expenditure threshold for deeming an entity to not be a shell or a conduit. Given that the Singaporean resident in this case had satisfied the annual expenditure threshold, which was duly approved by Singaporean authorities, the High Court prevented the Income Tax authorities to question the veracity of such expenditure in order to deny the satisfaction of the LOB clause. In that manner, it was held that the Singaporean resident was not taxable in India qua the capital gains derived by it from the sale of Indian company shares, as per Article 13(4) of the India – Singapore DTAA.

While it is expected that the Blackstone Judgement will be challenged before the SC, till such time, it provides much required certainty on the capital gains exemption available to foreign investors, holding a valid TRC, at the time of exit from India.

[1] CBDT Circular No. 789 dated 13.04.2000.

[2] Union Of India v. Azadi Bachao Andolan, (2003) 263 ITR 706 (SC); Vodafone International Holdings B.V. v. Union of India, (2012) 341 ITR 1 (SC).

[3] Press Release dated 01.03.2013, containing Finance Ministry’s clarification on Tax Residency Certificate.

[4] Blackstone Capital Partners (Singapore) VI FDI Three Pte Ltd. v. ACIT, Order dated 30.01.2023 in W.P.(C) 2562/2022 (Del. HC).

[5] Blackstone FP Capital Partners v. DCIT, Order dated 17.05.2022 in ITA No. 981 & 1725/Mum./2021 (Mum. Trib.).

[6] Notification No.1022 (E) dated 18.07.2005.