In BlackStone case framed the following as the main issue for consideration: whether the Income Tax Department can go behind the tax residency certificate (‘TRC’) issued by another jurisdiction and issue a re-assessment notice under Section 147, IT Act, 1961 to determine the residence status, treaty eligibility and legal ownership. In this article, I will focus only on the issue of TRC. In the first part of this article, I provide a detailed explanation of the case and in the second part I highlight the stakes involved in the case given that the Supreme Court has decided to hear an appeal against the Delhi High Court’s judgment.
Facts
Blackstone Capital Partners (Singapore) VI FDI Three Pte. Ltd (‘Blackstone Singapore’) acquired equity shares of Agile Electric Sub Assembly Private Limited, a company incorporated in India in two tranches on 16.08.2013 and 31.10.2013. In the Assessment Year 2016-17, Blackstone Singapore sold all the equity shares. In its return of the income, Blackstone Singapore claimed that the capital gains earned by it on sale of shares were not taxable in India as per Article 13(4) of the India-Singapore DTAA. The import of Article 13(4) was that capital gains earned by a resident of India or Singapore were taxable only in its resident state. Since Blackstone Singapore possessed a TRC issued by Singapore, it claimed tax exemption in India on its capital gains under the India-Singapore DTAA. On 08.10.2016, Blackstone Singapore’s return was processed with no demand by the Indian Income Tax Department.
On 31.03.2021 a notice was issued to Blackstone Singapore under Section 148, IT Act, 1961 (reassessment notice). On 28.04.2021 Blackstone Singapore filed its return and requested reasons for re-opening the assessment. Eight months later, on 02.12.2021 Blackstone Singapore was provided reasons for re-opening the case. The primary reason, as per the Income Tax Department, was that Blackstone Singapore was part of US-based management group and it appeared that the source of funds and management of affairs of Blackstone Singapore was from US. And there was an apprehension that Blackstone Singapore was not the beneficial owner of the transaction. The Income Tax Department was claiming that beneficial owner of the shares was Blackstone US, with Blackstone Singapore being a conduit/shell company incorporated to avail tax benefits under the India-Singapore DTAA.
Blackstone Claims Tax Exemption
Blackstone Singapore’s case for tax exemption of capital gains was predicated on the following:
First, Blackstone claimed that it was entitled to claim tax exemption under Article 13(4) of the India-Singapore DTAA. Article 13(4) of the India-Singapore DTAA originally stated that the gains derived by resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs 1,2 and 3 of this Article shall be taxable only in that State. In simple terms it meant that capital gains of a resident of Singapore or India were taxable only in its resident state. Since Blackstone possessed a valid TRC from Singapore, it was as per Article 13(4), not liable to pay tax in India, but in the country of its residence.
Second, Blackstone relied on the chequered history of the India-Mauritius DTAA. In reference to the India-Mauritius DTAA, CBDT had issued a Circular No. 789 on 13.04.2000 stating if a TRC was issued by the Mauritian authorities, it would constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAA accordingly. And the validity of the said Circular was upheld by the Supreme Court in the Azadi Bachao case and its ratio subsequently approved in the Vodafone case. Analogously, Blackstone Singapore claimed that TRC issued by Singapore should be sufficient to qualify for tax benefits under the India-Singapore DTAA.
Third, Blackstone cited a Press Release issued by the Ministry of Finance on 01.03.2013 regarding TRC. The Press Release categorically stated that the TRC produced by a resident of a contracting state will be accepted by the Indian Income Tax Department for the purpose that he is a resident of that contracting state and that the income tax authorities in India will not go behind that certificate to question the resident status. The income tax authorities had no option but to accept the validity of TRC issued by Singapore.
Fourth, Blackstone, to rebut allegations that it was not the beneficial owner or was a shell company in Singapore, argued that it fulfilled the requirements incorporated in the India-Singapore DTAA. Article 3 of the Third Protocol of India-Singapore DTAA added Article 24A in the DTAA w.e.f 01.04.2017. Article 24A contains a detailed LOB clause and as per one of its conditions the resident of one of the Contracting States is prevented from claiming the benefits of DTAA if its annual expenditure on operations in that State was less than Rs 50,00,000 in the immediately preceding period of 24 months from the date the gains arise. In the expenditure was below the prescribed, it was presumed that the company was shell/conduit company. Blackstone Singapore argued that since its expenditure for running the Singapore company was above the prescribed threshold it cannot be considered a shell company and denied treaty benefits.
Income Tax Department Defends its Interpretation of the Treaty
First, the Income Tax Department claimed that the management and funding of Blackstone Singapore was in US and not Singapore. And that the ultimate holding company was in US, and Blackstone Singapore entity was used as a conduit since the India-US DTAA did not provide capital gains exemption. The filings of Blackstone Group before SEC, US were used to underline the control of Blackstone, US over Blackstone, Singapore. Further, the Income Tax Department argued that Blackstone, Singapore had a paid-up capital of US $1 and it was hard to believe that it had independently decided to acquire assets worth US $53 million and in two years made profits of US $55 million.
Second, the Income Tax Department argued that Blackstone Singapore does not meet the LOB test since the expenditure mentioned in the LOB clause is ‘operations expenditure’ and not just an ‘accounting entry’. The Income Tax Department argued that a major part of Blackstone’s expenses were merely management expenses paid to a group company which were nothing more than an accounting entry and did not constitute real expenses.
Third, the Income Tax Department argued that as per Section 90(4) of the IT Act, 1961, TRC was a ‘necessary’ but not a ‘sufficient’ condition to claim DTAA benefits. And that a TRC is only binding when a court or authority makes an inquiry into it and makes an independent decision. Though a plain reading of Section 90(4) does not support this interpretation.
Fourth, an extension of the third argument, it was argued that the Press Release of 2013, Supreme Court’s decision in Azadi Bachao case and the CBDT Circulars that were considered in Azadi Bachao case were issued in the context of India-Mauritius DTAA and were not applicable to India-Singapore DTAA. Further, it was contended that Azadi Bachao case did not circumscribe the jurisdiction of an assessing officer in individual cases. And that CBDT Circulars only provide ‘general’ instructions and cannot interfere with quasi-judicial powers of the assessing officers.
Delhi High Court Favors Blackstone
On the issue of TRC, the findings of the Delhi High Court were categorically in favor of Blackstone Singapore. The High Court observed that:
… the entire attempt of the respondent in seeking to question the TRC is wholly contrary to the Government of India’s repeated assurances to foreign investors by way of CBDT Circulars as well as press releases and legislative amendments and decisions of the Courts … (para 71)
The Delhi High Court noted that the actions of the Income Tax Department in questioning the TRCs were contrary to Azadi Bachao, Vodafone cases and other cases.
On the issue of whether Section 90(4) provides that TRC is a necessary or a sufficient condition to claim DTAA benefits, the Delhi High Court relied on legislative history of Section 90(5) instead of the bare text of Section 90(5). To begin with, Section 90(4) is worded in negative terms and does not use either the word ‘sufficient’ or ‘necessary’. Section 90(4) states that:
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 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.
Clearly, mere reliance on the bare text of Section 90(4) does not throw sufficient light on whether the TRC constitutes a sufficient evidence of residence in a contracting state. The Delhi High Court referred to Finance Bill, 2013 which proposed to introduce Section 90(5). The proposed draft text of Section 90(5) as contained in Finance Bill, 2013 was:
The certificate of being a resident in a country outside India or specified territory outside India, as the case may be, referred to in sub-section (4), shall be necessary but not a sufficient condition for claiming any relief under the agreement referred to therein.”
However, immediately after introduction of the Finance Bill, 2013, the Ministry of Finance issued a clarification via a Press Release clearly stating that a TRC issued by a contracting state would constitute as sufficient evidence of its residence, and the Delhi High Court clarified that the clarification was not Mauritius specific. Since the proposed Section 90(5) was not implemented by the Finance Act, 2013, the Delhi High Court refused to accept the Income Tax Department’s argument that TRC is a necessary but not a sufficient condition to claim DTAA benefits. The High Court also relied on similar reasoning and conclusion arrived at by the Punjab & Haryana High Court in the Serco Bpo Pvt Ltd case.
Accordingly, the Delhi High Court concluded that:
Consequently, the TRC is statutorily the only evidence required to be eligible for the benefit under the DTAA and the respondent’s attempt to question and go behind the TRC is wholly contrary to the Government of India’s consistent policy and repeated assurances to Foreign Investors. In fact, the IRAS has granted the petitioner the TRC after a detailed analysis of the documents, and the Indian Revenue authorities cannot disregard the same as doing the same would be contrary to international law. (para 91)
Aftermath
The Income Tax Department, unsurprisingly appealed against the Delhi High Court’s decision and the Supreme Court, also unsurprisingly, has stayed the decision. The Supreme Court will, in all likelihood, have a final say on the matter; though in India, the Revenue Department wishes to be final authority on all tax matters. Nonetheless, there are important legal and policy questions that are stake in this case. Based on my understanding, I detail and highlight the stakes involved in the second part of this article.