NRIs getting income tax notices for claiming lower tax rate benefit under DTAA; Know how to resolve this situation

Many non-resident Indians (NRIs) those who claimed benefit of lower or nil rate of taxation under the Double Taxation Avoidance Agreement (DTAA) are receiving income tax notice(s) for failing to file Form 10F. The Income Tax Act, 1961, allows NRI taxpayers to declare their income and file ITR by applying for lower or nil rate of income tax (in some cases) under DTAA. For availing the benefit of lower or nil taxes under DTAA, NRIs must submit a Tax Residency Certificate (TRC) and Form 10F. This form could be filled any time before filing Income Tax Return (ITR). As per the existing Indian tax law, there is no deadline to file Form 10F and it can be filed electronically by all NRIs who may or may not have a PAN card.

The mentioned income tax notice given to NRIs read as follows: “Incorrect claim u/s 143(1)(a)(ii): Adjustment to total income has been done as per Schedule Capital gains & Special Income, and for this DTAA benefit is to be claimed then relevant statutory form shall be filed. This required adjustment to the income within the meaning of Section 143(1)(a) and accordingly this is an opportunity provided to respond within the time allowed.”

Read below to know the reason why this is happening, how to solve it and what should NRIs do now to save themselves from this problem.

Why are NRIs getting income tax notice under Section 143(1)(a)?

The tax notice under Section 143(1)(a) is being sent because the said NRI has not filed Form 10F, which as per the Income Tax Department should have been filed to claim DTAA benefits. Without claiming the DTAA benefits the NRI’s income would be taxed at the standard rates prescribed in the Income-tax Act, 1961 applicable to all taxpayers.

Three chartered accountants and one lawyer, whom ET Wealth spoke, have confirmed to us that their clients have received an intimation notice under Section 143 (1) (a) for claiming beneficial tax rate under DTAA without filing “a statutory form”. Experts have suggested that this ‘statutory form’ is Form 10F.

1. S. Vasudevan, Executive Partner, Lakshmikumaran & Sridharan, says: “Yes. We have seen such an intimation being sent for AY 2024-25. Some of our non-resident clients have received such intimation under section 143(1)(a) of the Income Tax Act, 1961, wherein the benefits claimed under tax treaties are sought to be summarily denied apparently on account of non-filing of Form 10F. The intimation notice does not explicitly provide reasons for such denial of tax treaty benefit (DTAA). However, examination of the surrounding facts reveals that such denial is apparently on account of non-filing of electronic Form 10F by the NR.”
2. Amarpal Chadha, Tax Partner, EY India, says: Yes. We have come across the notices for FY 2023-24 (AY 2024-25) wherein intimations under Section 143(1)(a) of Income Tax Act, 1961 have been issued by Income Tax Authorities – CPC proposing adjustments (i.e., non-grant of relief under the treaty) in the absence of Form 10F being e-filed.
3. Amit Maheshwari, Tax Partner, AKM Global, says: Yes, we have received such notices for a few clients over the past three months. The Income Tax Department has been issuing notices to Non-Resident Indians (NRIs) who claimed a beneficial tax rate under a Double Taxation Avoidance Agreement (DTAA) but failed to electronically file Form 10F on the income tax portal.
4. Chartered Accountant Ashish Karundia says: Our office has got some cases where NRIs got tax intimation notice under Section 143(1)(a) for failure to file Form 10F and claiming a beneficial tax rate under DTAA.

Are NRIs getting tax notices only for not filing Form 10F?

The problem seems to be that some NRIs have not submitted their Form 10F. The reason for such notice could be because the Income Tax Department has taken a stance that filing Form 10F is mandatory even if the NRI’s TRC has mentioned all the required information asked through Form 10F. However, the legal interpretation by lawyers and chartered accountants seems to be different.

Chadha from EY India, says: “Section 90(5) of the Income Tax Act, 1961 read with Rule 21AB of the Income Tax Rules, 1962 requires Non-Resident (NR) taxpayers to furnish Form 10F in order to be eligible for treaty benefits. NR taxpayers are required to furnish Form 10F if the details as required under Form 10F are not available in the Tax Residency Certificate issued by the Country of Residence of the NR Taxpayers (like nationality, taxpayer identification number, address, period of residential status etc).”

S. Vasudevan agrees with Chadha and adds: “If some of the requisite information is not contained in the TRC, then the non-resident is also required to file Form 10F electronically.”

Karundia also agrees with Chadha and Vasudevan. He says: “It is important to note that the requirement to file Form 10F arises only if the details required to be filled therein are not mentioned in the Tax Residency Certificate (TRC). However, there are cases where the taxpayers have received 143(1)(a) notice for non-filing of Form 10F irrespective of the details mentioned in the TRC.”

Mihir Tanna, associate director, S.K Patodia LLP says, “Information in Form 10F are sought if certain prescribed details are not available in the TRC. But department insist on Form 10F even if all particulars are available in TRC.”

Despite being NRI you will be taxed as Indian resident if your income in India is above this

How can NRIs save themselves from this income tax notice under Section 143(1)(a)?

We have asked various experts about how NRIs can protect their interests if they got such a tax notice for FY 2023-24 (AY 2024-25) preventing them from availing the benefits of DTAA. Here’s what they said:

File Form 10F if there is still time to respond to the notice

Usually there is a 30-day time limit to respond to a Section 143 (1) (a) notice. Hence experts suggest to use this time to File 10F, then the notice will be closed.

Chadha from EY India says: “In a scenario wherein an intimation is being served upon the taxpayer, the following actions can be undertaken:

• An option to file Form 10F is available, even when an intimation issued by the Authorities proposing an adjustment
• Accordingly, if the said Form was not filed previously, the taxpayer can proceed to e-file the Form 10F for the concerned year and correspondingly, disagree with the proposed adjustment by filing an online response on the income tax portal
• While filing Form 10F, a copy of the TRC should be uploaded, if available.

Maheshwari from AKM Global says, NRIs should not forget to attach the freshly filed Form 10F in response to the Section 143(1)(a) intimation notice. “Respond to the notice via the e-proceedings portal, attaching the TRC and the freshly filed Form 10F as supporting documents,” he says.

If the time limit to respond to the notice is over then apply for reprocessing of ITR after filing Form 10F

Karundia says if NRIs don’t respond to the Section 143 (1)(a) notice within the specified time (usually 30 days) then the tax department may go ahead to process the ITR with a higher tax rate by giving another notice under Section 143(1).

“If no response is provided to the 143(1)(a) notice and the ITR is processed with a higher tax rate and the 143(1) intimations has already been received, taxpayers are advised to still file Form 10F and submit a rectification request for reprocessing of the ITR. In this solution, the CPC removes the adjustment made on account of the non-filing of Form 10F, says Karundia.

Fight the case in CIT (A) or ITAT or court as there exists legal judgement precedent

The first step to an income tax litigation case is to file an appeal against any order passed by the Income Tax Department to the Commissioner of Income Tax (Appeal) (CIT A). If still aggrieved, then the taxpayer has to go to Income Tax Appellate Tribunal (ITAT) and then High Court and then Supreme Court if there is a question of law.

S. Vasudevan from Lakshmikumaran & Sridharan says, “It is pertinent to note that the requirement to furnish TRC or file Form 10F stems from domestic law. Income tax tribunals in the past have held that tax treaty benefits (DTAA) cannot be denied merely on account of non-submission of TRC, if the taxpayer is otherwise able to prove their tax residency based on other documents. The same principle can be borrowed and applied for Form 10F as well. Thus, NR taxpayers can consider filing a rectification application or an appeal before the Commissioner of Income Tax (Appeal) to contest such a demand.”

What is the system to be followed for the way forward?

If the Income Tax Department has taken any hard stance on any question of law, then common taxpayers should follow it unless any judiciary judgement says otherwise.

Chadha suggests its best to file Form 10F going forward to avoid an unfavourable outcome. “Considering the current automated processing functionality, it is recommended to file Form 10F before claiming the relief to avoid any unfavourable outcome at the time of processing of tax returns by CPC.”

“Henceforth, given the increasing enforcement of DTAA compliance, NRIs should proactively file Form 10F and TRC at the time of claiming treaty benefits to avoid such notices in the future,” says Maheshwari.

“It’s important to note that payers of such income may receive notices asking for the basis of granting treaty benefits to the recipient at the time of payment if Form 10F was not filed,” says Karundia