Domestic law compliance for treaty benefits in India – should non-residents take the bait?

The Indian income tax law has conferred rights on a non-resident to claim the benefit of the provisions of tax treaties if they are more favourable than the domestic laws. The benefits conferred by tax treaties could be relevant in determining the taxability of an income with its source in India or the rate at which that income is taxed in India.

As a precondition for claiming treaty benefits, domestic law requires non-residents to furnish a certificate establishing that they are a tax resident (a tax residency certificate, or TRC) of the relevant treaty country. The person is also required to provide details regarding their status, nationality, tax identification number, and address, and the period for which residential status applies, if that information is not already contained in the TRC. The information is required to be given in Form 10F, prescribed by the Indian tax authorities.

Form 10F was previously furnished manually by the non-resident to the payer in India along with a TRC and a no permanent establishment declaration for claiming treaty benefits. The filing of Form 10F was mandated to be submitted online through the Income Tax Department’s portal from July 2022.

Any online filing through the portal required the user to possess a permanent account number (PAN) (similar to a tax identification number). This mandate led to a lot of confusion and scepticism among non-residents who were not very comfortable in obtaining a PAN in India and subjecting themselves to possible action from the Indian tax authorities.

Taking into account the above difficulties, the requirement for online filing of Form 10F was deferred until October 2023 for non-residents who are not required to obtain a PAN and, consequently, do not possess one. These non-residents were given an option to continue to submit Form 10F manually until September 2023.

From October 1 2023, the Income Tax Department portal has been modified to allow non-residents without a PAN to furnish Form 10F electronically. This comes as a big relief to non-residents who are not otherwise required to obtain a PAN in India.

It is important to note that this facility can only be availed by a non-resident who is legally not required to obtain a PAN. Generally, non-residents earning taxable income from India may be liable to obtain a PAN. There are only a few instances where such non-residents have been explicitly exempted from obtaining a PAN. It will therefore be important for non-residents to evaluate the requirement to obtain a PAN in India to ensure proper compliance.

While the law is worded clearly to state that if a TRC is not supplied, treaty benefits cannot be claimed, the language is not couched in as precise terms with regard to the furnishing of Form 10F. It is also pertinent to understand that a requirement to file a TRC in itself is an obligation that stems only from domestic law. It therefore begs the question as to whether the submission of a TRC and filing of Form 10F (if required) is mandatory for claiming treaty benefits. This also assumes relevance from the perspective of tax deductors, who are required to consider treaty provisions in determining their withholding obligation.

When the amendment in law requiring a TRC was first made in 2012, it was framed in such terms to state that the certificate should contain specific information; in the absence of which, a treaty benefit could not be claimed by a taxpayer. In 2013, the mandatory requirement to provide a TRC with specific information was modified. Though submission of a TRC continued to be mandatory, the requirement of certain information to be contained in the TRC was removed.

If one were to analyse the intent behind the requirement to furnish a TRC and Form 10F, the same is to ensure that only legitimate taxpayers who are residents of another contracting state claim benefits under the treaty. Furthermore, few judicial precedents dealing with the eligibility of treaty benefits have held that treaty benefits cannot be denied for non-submission of a TRC if the taxpayer can establish their residency based on other documents and evidences (Skaps Industries India P Ltd v ITO [ITA 478,479/Ahd/2018] and Sreenivasa Reddy Cheemalamarri v ITO [ITA 1463/Hyd/2018]).

Seen from this perspective, it is possible to contend that the submission of a TRC and the filing of Form 10F may not be construed as a precondition to claim a treaty benefit as long as a taxpayer is able to demonstrate, using facts, that they are indeed a resident of the other contracting state. That said, it is quite probable that a tax deductor may be unwilling to take a position to apply beneficial treaty provisions in cases where the TRC, accompanied by Form 10F (if required), is not made available by the non-resident taxpayer.

It may be prudent for non-resident taxpayers who have income from sources in India and who wish to seek benefit from tax treaties to obtain a TRC and furnish Form 10F electronically, as required under the domestic laws of India. This will avoid the withholding of taxes at higher rates under the domestic laws and elaborate compliance procedures and/or litigation in India. Where, for any reason, it is not possible to do so, the onus would be on the taxpayer to sufficiently demonstrate to the satisfaction of the tax authorities that they are entitled to the treaty benefits.