In the first part of this Article, I detailed Delhi High Court’s decision in the Blackstone case. This part focuses on the immediate and larger issues that are likely to be considered by the Supreme Court in its decision on the appeal against the Delhi High Court’s decision. The central issue in the appeal is likely to be the eligibility for tax benefits under a DTAA, and as one witnessed in the Azadi Bachao case, any legal opinion on the issue will navigate both domestic and international tax law.
Interpretation of DTAAs
To begin with, DTAAs, a legislative instrument agreed to and signed by two contracting states, needs to be interpreted to decipher the agreement between the two sovereign states. The Delhi High Court had to contend with two issues relating to DTAA: whether Article 13 incorporated the concept of beneficial ownership and the conditions imposed by the LOB clause. With regards to the former, the High Court compared Article 13, as it stood at the relevant time, with other provisions of the DTAA, i.e., Articles 10, 11, and 12 which provide for taxation of dividends, interest, and royalties respectively. The High Court correctly pointed out that in India-Singapore DTAA the concept of beneficial ownership attracted taxation only qua Articles 10,11, and 12 which expressly provided for it and beneficial ownership cannot be read into Article 13 in the absence of any mention of the same in the latter. (para 61)
The Delhi High Court was also unequivocal in its conclusion that the LOB clause included in Article 24A of the India-Singapore DTAA provides for an objective and not a subjective test. As per the LOB clause, only companies that are not shell companies can claim benefits of the India-Singapore DTAA and to establish if a company is not a shell company there is an expenditure test. The High Court observed that the audited financial statement of Blackstone Singapore and independent chartered accountant certificate established that the expenditure of the company is above the prescribed limit. The High Court rejected the Income Tax Department’s view that Blackstone Singapore was a shell company by observing that all expenditure incurred by it in Singapore, direct and indirect, will be considered an operational expense. The Income Tax Department’s attempt to bifurcate expenses into operational and other expenses was rejected. (para 70)
In interpreting both Article 13 and LOB clause in Article 24A of the India-Singapore DTAA, the Delhi High Court adopted a good faith interpretation of the treaty. One could also suggest that a strict interpretation was adopted. Either way, it is the acceptable and welcome interpretive approach as it avoids reading into the DTAA phrases and expressions that are not expressly included in its text. Particularly, notable are the Delhi High Court’s observations that LOB clause incorporates an objective test. If the expenditure threshold is met and the expenses are verified, the Income Tax Department cannot form a subjective opinion that the expenses are not operational expenses.
The interpretation of both the above provisions is likely to be tested before the Supreme Court. Though the Delhi High Court’s opinion stands on firm footing, it is difficult to ascertain how the Supreme Court will approach the same issues.
Validity of TRCs and Relevance of Azadi Bachao Ratio
From a domestic tax law perspective, an issue that needs determination is the mandate and requirements of Sections 90(4) and 90(5). As I’ve mentioned in the first part of this article, Section 90(4) states than an assessee, who is not a resident of India, is not entitled to claim any tax relief under DTAA unless it obtains a TRC from the country of residence. And Section 90(5) states that an assessee referred to in sub-section (4) shall provide such other documents and information, as may be prescribed. Both the sub-sections, in no manner, state that TRC is a necessary but not a sufficient condition to claim DTAA benefits. This interpretation is not only borne out by the bare text of the provisions, but also their legislative history. The Delhi High Court, like the Punjab and Haryana High Court, arrived at a correct conclusion that the legislative history of these provisions does not support the Income Tax Department’s argument that it can go behind the TRC issued by a contracting state.
Further, the appeal will necessarily involve engagement with the Supreme Court’s ratio in Azadi Bachao case. The Azadi Bachao case settled various issues, the relevant portion of the ratio for the purpose of our discussion here are: under Section 119, IT Act, 1961, CBDT possesses the power to issue a Circular stating that TRC issued by Mauritius would be a sufficient evidence of the assessee’s residence status. While the Circular was issued in the context of India-Mauritius DTAA, there is no legal reason why a similar approach would be invalid in the context of India-Singapore DTAA. Especially, as the Delhi High Court noted, the Press Release of the Ministry of Finance issued in 2013 also adopted a similar position. And the Press Release described the general legal position and not in context of India-Mauritius DTAA.
Nonetheless, the arguments about the scope and mandate of CBDT have reared their head often and will perhaps do so in the future. And the impugned appeal provides an opportunity to raise the issue about CBDT’s powers again. But we do need an understanding beyond the simple dictum that CBDT’s Circulars are binding on the Income Tax Department. If and to what extent do the assessing officers possesses the mandate to scrutinize returns and question the TRC still does not have a straightforward answer. Does CBDT Circular and Azadi Bachao case foreclose any possibility of an assessing officer questioning the TRC? The Supreme Court, in Azadi Bachao case, was categorical in its conclusion that the Circular No. 789 issued by CBDT – mandating acceptance of TRC issued by Mauritius – in reference to India-Mauritius DTAA was within the parameters of CBDT’s powers under Section 119, IT Act, 1961. And the said Circular did not crib, cabin or confine the powers of the assessing officers but only formulated ‘broad guidelines’ to be applied in assessment of assessees covered under the India-Mauritius DTAA.
Both the above aspects in respect of domestic tax law, specifically IT Act, 1961 will likely be argued and examined in the impugned appeal. The nature and extent of their influence will only be known in due time.
Way Forward
Prima facie, there is little to suggest that the Delhi High Court’s view deviates from the accepted interpretation of the Azadi Bachao case and the guiding principles of tax treaty interpretation. Neither is the Delhi High Court’s understanding of legislative history of Section 90(4) and 90(5) incorrect. The Supreme Court can and may have other views. Irrespective of the outcome, the arguments advanced by both parties, the reasoning and approach of the Supreme Court and the outcome of the case will impact Indian tax jurisprudence in multiple ways.