Delhi High Court Affirms Treaty Benefit In Blackstone Case

Tax residency certificate is sufficient proof of beneficial interest, says the Delhi High Court.

<div class="paragraphs"><p>Delhi High Court. (Source: Website)</p></div>
Delhi High Court. (Source: Website)

In a welcome ruling for investors coming from treaty countries, the Delhi High Court has dismissed allegation of tax evasion against Blackstone Group's Singapore entity.

The high court set aside reassessment proceedings against Blackstone Capital Partners (Singapore) VI FDI Three Pte., while emphasising that revenue authorities cannot question the sanctity of the tax residency certificate.

This decision would provide a huge relief to foreign investors, since the court has categorically recorded that the TRC is statutorily the only evidence required to be eligible for the benefit under the Double Tax Avoidance Agreement, Kumarmangalam Vijay, partner at JSA, told BQ Prime.

The transaction, which prompted a notice from the tax authorities, related to Blackstone's acquisition in India-based Agile Electric Sub Assembly Pvt. back in 2013. Blackstone had later sold its shares in Agile to Igarashi Electric Works Ltd. and others in 2015.

While filing its 2016-17 returns, Blackstone had claimed that the gains earned by it on sale of shares were not taxable by virtue of the DTAA entered into between India and Singapore. In December 2021, the tax department issued a reassessment notice saying that the nature and genuineness of the transaction was not verified.

In its response, Blackstone said that the transaction between the parties was genuine and it was entitled to the benefit of India-Singapore DTAA. To support its contentions, Blackstone relied on various documents such as its bank statement, audited financial statement, memorandum and articles of association, etc. The department disagreed stating that the power to reopen the assessment is wide in nature.

Aggrieved by the department's stance, Blackstone approached the Delhi High Court.

The court noted the revenue authorities' reason for reassessment, namely for verifying the nature and genuineness of the transaction. This, the high court pointed out, is untenable in law as the return of income had been filed by the petitioner within time and with full particulars. The time period for verification as well as for seeking clarification or additional documents and information had also expired, the court said.

"The Assessing Officer has to show that there is a live link or close nexus between the material before the Assessing Officer and the belief that there has been escapement of the income chargeable to tax."

The powers of the Assessing Officer to reopen assessment, though wide, are not plenary. The words of the statute are "reason to believe" and not "reason to suspect".
Delhi High Court

Relying on the CBDT Circulars, press releases, legislative amendments and judicial pronouncements, the court held that tax authorities cannot question the sanction of the tax residency certificate.

A TRC is a document issued by the contracting state that indicates the taxpayer's residency.

The entire attempt of the tax authorities in seeking to question the TRC is wholly contrary to the government's repeated assurances to foreign investors that the TRC is sufficient evidence to show residence and beneficial interest/ownership, the high court held.

Regarding sufficiency of tax residency certificate to avail tax treaty benefits, the tax department’s stand has been quite inconsistent, Rahul Charkha, partner at ELP, said.

On the one hand, the tax department has been issuing circulars and press releases regarding sufficiency of TRC for satisfying residency norms. On the other hand, they are questioning the TRC issued by overseas tax authorities seeking treaty benefits on capital gains, he said.

This is true despite the fact that the said circulars/press release have been recognised by judiciary, including that of the Supreme Court in the case of Azadi Bachao Andolan. This approach of the tax authorities could be perceived as a fundamental alteration to the requirements for receiving treaty advantages.
Rahul Charkha, Partner, ELP

It could contradict the certainty and predictability that such tax treaties were intended to achieve, Charkha said.