The Income-tax Act 1961 was amended in 2012 such that
non-resident taxpayers are not entitled to claim relief under a
tax treaty unless they obtain a tax residency certificate (TRC)
from their country of residence.
The Income-tax Appellate Tribunal recently ruled that not
providing a TRC cannot preclude a non-resident from availing
treaty benefits, as long as the taxpayer is able to
substantiate their residency through other evidence.
Indian law contains a broad treaty override provision which
states that in respect of non-residents to whom a treaty
applies, the provisions of domestic law apply only to the
extent that they are more beneficial than the treaty. The
tribunal held that the provision making it mandatory for a
non-resident to obtain a TRC did not prevail over this general
treaty override provision.
It also noted that this requirement of a TRC could not be
construed as a limitation to the supremacy of a treaty over
domestic law, and that it could be treated only as a beneficial
provision (i.e. once a non-resident provided a TRC in the
format required by law, the tax authorities could not
requisition further details to support the non-resident's claim
for treaty benefits).
Preparatory activities prior to entering into a contract
are not to be considered when determining the duration for
installation permanent establishment (PE)
Under the India-Cyprus treaty, a building site,
construction, assembly or installation project, or related
supervisory activities constitute a PE if the site, project, or
activities remain operational for more than 12 months. The
tribunal in the case of Bellsea Limited ruled that
preparatory and auxiliary activities involving collecting data
and information to make the bid could not be included when
calculating the 12-month period.
The tribunal also noted that the taxpayer had not installed
a project office or developed a site prior to entering into the
contract. It held that preparatory activity purely for making a
bid before entering into the contract, and without carrying out
any activity of economic substance or active work, ought not to
be regarded as activities for carrying out installation or
construction in India. The tribunal also clarified that this
principle would not extend to active preparatory or auxiliary
work carried out after the contract was awarded.
Rakesh Dharawat (email@example.com) and Hariharan
Tel: +91 22 6108 1000