2023 (6) TMI 394 - AT - Income Tax

Tax Residency of assessee - tax resident of USA or India - levy tax at maximum marginal rate instead of applicable rate as per DTAA on interest income - HELD THAT - Even as on date of this hearing, copy of Tax Residency Certificate is not available with the assessee, so as to able to validate that the assessee is a tax resident of USA. We are of the considered view, CIT(Appeals) has correctly observed that copy of US Passport containing details of travel into India and departure from India by itself, is not enough to confirm / demonstrate that the assessee was a tax resident of USA during the impugned year under consideration. Accordingly, matter is being restored to the file of CIT(Appeals) in order to allow the assessee to provide supporting documents to validate that the assessee was a tax resident of USA during the impugned year under consideration and hence eligible for beneficial rate of tax on interest income under the India USA Tax Treaty. Appeal of the assessee is allowed for statistical purposes.

Summary

Issues Involved:
The appeal against the order passed by the Ld. Commissioner of Income Tax (Appeals)-13, Ahmedabad, regarding the levy of tax at the maximum marginal rate instead of the applicable rate as per DTAA on interest income for Assessment Year 2016-17.

Summary:

Issue 1: Validity of Tax Levy
The Assessee, a U.S. citizen and Non-Resident Indian, filed a return of income declaring total income, including interest income taxed at a special rate under the India-USA Tax Treaty. The Central Processing Centre (CPC) levied tax at the "normal rate" on interest income, leading to a tax demand. Despite the Assessee's rectification request for applying the treaty rate, the Assessing Officer levied tax at the maximum marginal rate. The Assessee contended that the tax was wrongly computed.

Issue 2: Requirement of Tax Residency Certificate (TRC)
The Assessee appealed before the Ld. CIT(A) challenging the levy at the maximum marginal rate. The Ld. CIT(A) dismissed the appeal, citing the Assessee's failure to prove U.S. tax residency with a TRC. The Ld. CIT(A) emphasized that holding a U.S. passport alone does not establish tax residency. The Assessee's non-submission of the TRC led to the denial of treaty benefits. The Assessee, unable to obtain the TRC, sought to rely on a precedent where TRC non-production did not disqualify treaty benefits.

Judgment:
The ITAT Ahmedabad allowed the Assessee's appeal for statistical purposes. Recognizing the absence of the TRC, the ITAT directed the matter to be remanded to the Ld. CIT(A) for the Assessee to provide additional documentation proving U.S. tax residency during the relevant year. The ITAT emphasized the necessity of substantiating tax residency to avail treaty benefits, despite the Assessee's efforts and the lack of TRC issuance.

This judgment highlights the importance of fulfilling documentary requirements, such as the Tax Residency Certificate, to substantiate claims under tax treaties. The decision underscores the need for taxpayers to provide adequate proof of tax residency to benefit from favorable tax rates outlined in international agreements.