N. Venkataraman, Additional Solicitor General of India, Supreme Court has called for the constitution of a Special Bench before the ITAT President in the matter of Essar Communications.

Among other things, the role of a tax residency certificate (TRC) in transactions that are sham, shell or temporary entities and its relevance in half a dozen identified legal circumstances will come under scrutiny, according to a report by Taxsutra.

The validity of the TRC has been upheld several times in the past. Recently, the Delhi High Court ruled in favour of Blackstone, saying TRCs were sufficient for availing tax treaty benefits. The revenue department challenged the verdict in the apex court.

A Special Bench is generally constituted to resolve contentious and high-value tax issues on which there are differing views. Experts believe that companies may no longer be able to liberally use a TRC to claim treaty benefits in all matters.

“Solid arguments would be needed for the ITAT to rule on how the TRC is not enough and treaty relief should not be given even if there is a TRC in place. Also, the use of the TRC in direct transfer cases is limited to pre-2017 in case of Mauritius and Singapore since India has the right to tax gains for shares purchased post 2017,” said Ashish Sodhani, Partner, Parakram Legal.

Entities relying solely on TRC in cross-border transactions are now facing greater scrutiny. “Such entities should be able to meet substance tests in addition to the production of TRC. The degree of reliability assigned to TRC is only that of sufficient evidence and not that of irrebuttable evidence. It is sufficient, to begin with, but not infallible,” said Ashish Karundia, Founder, Ashish Karundia and Co.

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According to Harshal Bhuta, Partner, PR Bhuta and Co, the Supreme Court in Vodafone International Holdings BV versus Union of India, in relation to FDI, has stated that the revenue can disregard a foreign entity’s presence if it does not have commercial or business substance. This was before GAAR was legislated.

Moreover, a Principle Purpose Test that has recently been made part of many treaty agreements can deny a specific tax treaty benefit if the arrangement or transaction is without a bonafide purpose. Similarly, GAAR can deny the treaty benefit altogether in an abuse situation (except for grandfathered investments).

“TRC, on a standalone basis, may not be sufficient to claim treaty benefits,” said Bhuta.

The view given by a Special Bench is binding on the ITAT (Income Tax Appellate Tribunal) benches and could be made applicable to all similar cases.

Essar Group’s Mauritius unit, Essar Communications, had sold 22 per cent in Vodafone Essar to the Vodafone Group for $4.2 billion in July 2011. Vodafone, paid Essar $3.32 billion after withholding $0.88 billion (around Rs 4,000 crore) as tax on long-term capital gains. In 2017, Essar Group sought a refund for this amount when it sold its stake in the telecom venture to Vodafone of the UK.