The Blackstone tax case has foreign investors on tenterhooks

The Delhi HC had ruled in favour of Blackstone, saying TRCs were sufficient for availing benefits from double tax avoidance agreements (DTAAs). The revenue department challenged the verdict in the apex court, which stayed the order on Friday. The case will soon come up for final judgement.

A TRC is a document issued by the tax department to non-resident investors that mentions the jurisdiction where the fund is based out of, and acts like a proof for availing DTAA benefits.

At the crux of the dispute is whether TRCs alone are sufficient for foreign funds to claim benefits under DTAAs. The funds say they are, but the revenue department says the funds also need to prove they have proper establishment in the foreign country, and not just produce a residence certificate.

“Typically, in disputes with tax authorities, the principal contention often hinges on the sufficiency of a TRC as the definitive document for claiming benefits under tax treaties, supported by established judicial precedents. Should the Supreme Court revise this stance, affirming that a TRC alone does not suffice to secure tax treaty benefits, this could embolden the tax office to scrutinize treaty benefit claims more rigorously," said Suresh Swamy, a partner at Price Waterhouse & Co. Llp.

Experts say the tussle between Blackstone and the revenue department will have an industry-wide impact.

“The decision of the apex court to grant a stay and look into the matter on the tax department’s plea may unfold new dimensions to the issue and would be keenly watched by investors who may look forward to certainty on the position from the highest level," said Kumarmanglam Vijay, a partner at law firm JSA.

In the Blackstone case, the revenue department has claimed that the global fund underpaid tax to the tune of ₹108 crore. “We are not interested in ₹108 crore immediately being protected," the ASG emphasized in the Supreme Court. “The judgment has to be ‘stay’ here (sic.) because this will replicate."

Offshore funds often route their India investments through jurisdictions like Singapore, Mauritius and Luxembourg. Such structuring is done to ensure both tax efficiency and operational efficiency.

For instance, a US-based fund may set up an intermediary structure in Singapore to invest in India. In such a case, the TRC from the tax department in India would note that the fund is a resident of Singapore. Now, the fund may claim it is entitled to benefits under the India-Singapore DTAA, which provides for concessional tax rates.

However, the tax department says that the fund having a residency certificate of Singapore is not enough to claim treaty benefits. It also needs to show that it has a proper establishment in Singapore and the whole arrangement was not for tax avoidance.

“In case the Supreme Court decides the issue against the taxpayer, foreign investors may have to establish that they are a resident of a foreign jurisdiction in substance and not merely by producing the residency certificate. Also, an adverse ruling from the Supreme Court may trigger reassessment proceedings on foreign investors where tax authorities have reasons to doubt the residency of the taxpayer," said Mitesh Jain, partner, Economic Laws Practice.