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Income Tax Appellate Tribunal (ITAT) Kolkata in a recent judgment has held that that the surcharge and education cess is not leviable when the tax rate is prescribed under double taxation avoidance agreement (DTAA).

Case Details:
I.T.A No. 571/Kol/2013   Assessment Year 2010-11
D.D.IT (Appellant) vs The BOC Group Limited   (Respondent)
Date of Order: 30-11-2015

Brief Facts of the Case:
The assessee was a foreign company and a tax resident of United Kingdom (UK). The return of income for the AY 2010-11 was filed by the assessee subjecting the income to tax at the rate of 15% in terms of Double Taxation Avoidance Agreement (DTAA) as against the regular tax rate applicable to a foreign company at the rate of 40%. The assessee felt that the provisions of DTAA would prevail over the Act wherever they are inconsistent. While filing the return, the assessee did not calculate surcharge and education cess on the tax rate of 15% as per DTAA , as according to assessee, the tax specified in Article 2 of the Double Taxation Convention entered into between United Kingdom (UK) and India on 25.10.1993, wherein the terms Indian Tax is defined as income tax including any surcharge thereon. It felt that education cess was only an additional surcharge and hence it takes the character of surcharge. Since the Article 2 which defines tax states income tax including surcharge, assessee felt that separately surcharge and education cess was not to be applied on the tax rate of 15% which was inclusive of all and was of the opinion that no other tax other than 15% is payable.

The assessment was completed u/s 143(1) accepting the income returned ignoring the DTAA rates. The tax was calculated at 40% being the rate applicable to foreign company. Thereafter, surcharge and education cess was also applied on the said rate. Before CIT (Appelas) the assessee stated that similar issue for AY 2007-08 was decided in its favour. The assessee pleaded that where the Central Government has entered into an agreement with the Government of a foreign country for avoidance of double taxation, then in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. CITA held that the tax rate to be applicable to the assessee as per DTAA is 15%. He also held that the surcharge and education cess is not to be levied on the tax rate prescribed under DTAA at 15% on fees for technical services.

Important Excerpts from ITAT Judgment
We find that the Article 2 of the India UK Treaty provides that income tax including any surcharge thereon and it further provides that this convention shall also apply to any identical or substantially similar taxes which are imposed by either contracting state after the date of signature of this convention in addition to or in place of the taxes of the contracting state referred to in paragraph 1 of this article. Hence by this , it can safely be concluded that the levy of education cess though introduced from Finance Act, 2004 which is much after the date of signing of this convention would also be made applicable while determining the tax rates under the convention. It is well settled that the education cess is nothing but an additional surcharge. When the Article 2 states that surcharge is included in income tax and the tax rate of 15% for fee for technical services is prescribed in Article 13 shall have to be deemed to include surcharge and since cess is nothing but an additional surcharge, the tax prescribed under DTAA @ 15% in the instant case shall be deemed to included surcharge and education cess. Hence we hold that when the tax rate is determined under DTAA, then the tax rate prescribed thereon shall have to be followed strictly without any additional taxes thereon in the form of surcharge or education cess. Reliance in this regard is also placed on the following decisions in support of our contentions:-

a) DIC Asia Pacific Pte Ltd vs Asst Director of Income Tax, International Taxation in ITA No. 1458 (kol) of 2011 dated 20.6.2012 for Asst Year 2009-10 reported in (2012) 52 SOT 447 (Kol ITAT) This was a case of treaty between India and Singapore. Issue involved was taxability of interest and royalty income under the relevant article of the treaty and the levy of surcharge and education cess to the tax prescribed under DTAA in the relevant article. It was held that :-

“A plain reading of Article 2, 11 and 12 of the treaty show that while interest and royalties can indeed be taxed in the source state, the tax so charged on the same, under Articles 11 and 12, cannot exceed 15% and 10% respectively. The expression ‘tax’ is defined in Article 2(1) to include ‘income tax’ and is stated to include ‘surcharge’ thereon, so far as India is concerned. Article 2(2) further extends the scope of the ‘tax’ by laying down that it shall also cover “any identical or substantially similar taxes which are imposed by either contracting state after the date of signature of the present agreement in addition to, or in place of, the taxes referred to in paragraph 1”.

It is clear that the education cess, as introduced in India initially in 2004, was nothing but in the nature of an additional surcharge. It was described as such in the Finance Act 2004 introducing the said cess.

We have also noted Article 2(1) of the applicable tax treaty provides that the taxes covered shall include tax and surcharge thereon. Once we come to the conclusion that education cess is nothing but an additional surcharge, it is only corollary thereto that the education cess will also be covered by the scope of Article 2. Accordingly, the provisions of Article 11 and 12 must find precedence over the provisions of the Income Tax Act and restrict the taxability, whether in respect of income tax or surcharge or additional surcharge – whatever name called, at the rates specified in the respective article. In any case, education cess was introduced by the Finance Act 2004, with effect from assessment year 2005-06 which was much after the signing of India Singapore traty on 24th January 1994. In view of the specific provisions to the effect that the scope of Article 2 shall also cover “any identical or substantially similar taxes which are imposed by either Contracting State after the date of signature of the present Agreement in addition to, or in place of , the taxes referred to in paragraph 1”, and in view of the fact that education cess is essentially of the same nature as surcharge, being an additional surcharge, the scope of article 2 also extends to the education cess.

For the reasons set out above, we are of the considered view that the education cess cannot indeed be levied in respect of tax liability of the appellant company. The assessee, therefore, deserves to succeed on this issue.

b) Sunil V. Motiani vs ITO (International Taxation) reported in (2013) 33 taxmann.com 252 (Mumbai Trib) This judgement was rendered by the Mumbai Tribunal in the context of India UAE Treaty after considering the decision of the Uttarakhand High Court in the case of CIT vs Arthusa Offshore Co reported in 216 CTR 86 which dealt with India US Treaty. It was held that :-

“5. We have heard both the parties and their contentions have carefully been considered. We found that the issue raised by the assessee is covered in favour of the assessee by the aforementioned decisions of Tribunal in the case of Sunil V. Motiani (supra).”

c) Parke Davis and Company LLC vs ACIT reported in (2014) 41 taxmann.com 193 (Mumbai Trib) This judgement was rendered in the context of India USA treaty after considering the decision of the Uttarakhand High Court in the case of CIT vs Arthusa Offshore Co reported in 216 CTR 86 which dealt with India US Treaty. It was held that :-

“2. At the outset it was submitted by Ld. AR that the only issue raised by the assess in the present appeal is that the education cess and secondary and higher secondary education cess of Rs.50,104/- is not liable to be payable when tax is determined as per India US Tax Treaty . It was submitted that this issue is covered in favour of assessee by the decision of ITAT in the case of Sunil V. Motiani v. ITO [2013 33 taxmann.com 252/59 SOT 37 (Mumbai-Trib). He has placed a copy of the said order on our record and a copy was also given to Ld. DR. He drew our attention towards the observation of the Tribunal in para-5.”

3. On the other hand, Ld. DR submitted that education cess and secondary and higher secondary education cess are considered to be tax payable even when the tax is determined on the basis of DTAA. For this purpose she relied upon the decision of Hon’ble Uttarakhand High Court in the case of CIT v. Arthusa Offshore Co. [2008] 169 Taxman 484 and decision of Advance Rulling Authority in the case of Airports Authority of India, In re[2008] 299 ITR 102/168 Taxman 158(AAR-New Delhi).

5. We have heard both the parties and their contentions have carefully been considered. We found that the issue raised by the assessee is covered in favour of the assessee by the aforementioned decisions of Tribunal in the case of Sunil V. Motiani (supra).”

d) ITO (Intl Taxn) vs M/s M Far Hotels Ltd in ITA Nos. 430 to 435 / Coch / 2011 dated 5.4.2013 (Cochin Tribunal) This judgement was rendered in the context of India France treaty. Issue involved was taxability of management fees and interest income under the relevant article of the treaty and the levy of surcharge and education cess to the tax prescribed under DTAA in the relevant article. It was held that :-

“If the provisions of DTAA are more beneficial to the taxpayer, then the provisions of DTAA would prevail over the Indian Income Tax Act. Since the DTAA is silent about the surcharge and education cess for the purpose of deduction of tax at source, this tribunal is of the considered opinion that the taxpayer may take advantage of that provision in the DTAA for deduction of tax. The CITA has only deleted the tax component to the extent of surcharge and education cess at the rate applicable under the DTAA. Therefore, this tribunal do not find any infirmity in the orders of lower authority. Accordingly, the same are confirmed. “

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ITAT-Surcharge and education cess is not leviable when the tax rate is prescribed under double taxation avoidance agreement (DTAA) | 01-12-2015 |