Evidentiary Role of TRC is Limited u/s 245R(2) of Income Tax Act: Supreme Court says TRC not Conclusive to get DTAA benefit [Read Order]

The Supreme Court held that a Tax Residency Certificate (TRC), though relevant, is not conclusive proof for claiming DTAA ( Double Tax Avoidance Agreement ) benefits.

The court said that its evidentiary value is limited especially while examining whether an arrangement is prima facie designed for tax avoidance under the bar contained in Section 245R(2) of the Income Tax Act.

The appeals were filed by the Authority for Advance Rulings (Income Tax) and the Revenue against Tiger Global International II Holdings, III Holdings and IV Holdings (Mauritius entities).

The company claimed treaty benefits under the India-Mauritius DTAA on capital gains from sale of shares in Flipkart Pvt. Ltd. (Singapore) as part of the Walmart acquisition transaction.

The assessees relied on their TRCs issued by the Mauritius Revenue Authority, contending that the certificates established their tax residency and entitled them to DTAA protection.

The Additional Solicitor General submitted that a TRC constitutes only prima facie evidence of residence and cannot override the principle of “substance over form.”

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The counsel also asserted that the decisions in the cases of Azadi Bachao Andolan and Vodafone both confirm that while a TRC is relevant, it is not conclusive, and authorities may examine the real nature of the transaction.

According to the Additional Solicitor General, if a transaction is genuine, taxing rights vest in Mauritius. If abusive, treaty protection stands denied and the transaction is taxable under Indian domestic law.

Hearing the submissions, the Supreme Court observed that residency documentation like TRC cannot act as a “complete shield” against scrutiny where the transaction structure raises concerns of treaty abuse or tax avoidance design.

The Court noted that after the DTAA amendment, there can be no doubt whatsoever that a TRC alone is not sufficient to avail the benefits under the DTAA.

“Section 90(4) of the Act only speaks of the TRC as an "eligibility condition". It does not state that a TRC is "sufficient" evidence of residency, which is a slightly higher threshold ", said the court.

Further, the bench added that the residence certificate is not binding on any statutory authority or Court unless the authority or Court enquires into it and comes to its own independent conclusion.

“The TRC relied upon by the applicant is non- decisive, ambiguous and ambulatory, merely recording futuristic assertions without any independent verification. Thus, the TRC lacks the qualities of a binding order issued by an authority” said the bench of Justice R. Mahadevan and Justice J.B. Pardiwala.

Therefore, the court finally ruled that the sale of shares of Flipkart by the assessee to Walmart is taxable under Income tax act.

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