AUGUST 22, 2018

By Ashish Mittal, CA

1. IN order to determine the tax rate for transactions with Non Residents, the first thing to analyse is whether the payment being made to Non Resident is taxable in India as per the provisions of the Income Tax Act 1961.

2. If the transaction is not subject to tax in India either on account of the provisions of Income Tax Act or the applicable provisions of Double Tax Avoidance Agreement (DTAA) then there is no TDS to be deducted.

3. Alternatively, if the transaction is subject to tax in India then it is important to understand the rate at which the TDS is required to be deducted. In such case, we check for existence of DTAA between India and the country of the non-resident. If there is no DTAA between India and the country of the non-resident, then the rate as per Income Tax Act is to be applied.

4. On the other hand, if there is DTAA between India and the country of Non Resident then rate as per the DTAA or Act whichever is beneficial is applied. It is to be noted that the beneficial rate as per DTAA can be applied based on availability of requisite documentation like TRC, Form 10F etc and the same is not analysed in this article.

5. Assuming there is DTAA between India and the country of the non-resident person and also that the rate as per DTAA is more beneficial then Income Tax Act, then the next question to deal with is whether the rate as per DTAA should be increased by surcharge and education cess (It is to be noted that with effect from Financial Year 2018-19, Education Cess on income-tax and Secondary and Higher Education Cess on income-tax has been replaced with a new cess, by the name of "Health and Education Cess" to be levied at the rate of four per cent). These aspects have been dealt with below.

DTAA RATE - Should it be increased by SURCHARGE AND CESS?

6. Now let us understand the tax rate as per DTAA, for example let us analyse India Singapore DTAA. Article 2 of Indo-Singapore DTAA states 'tax' shall include income tax and surcharge.

7. As the Article 2 clearly indicates that the DTAA rate includes surcharge then it can be interpreted that the tax as specified in DTAA need not be further increased by surcharge. As far as education cess is concerned, it is to be noted that education cess @ 2% was introduced in Finance Bill 2004 and later additional 1% in the year 2007. Now in Finance Act 2018 the existing 3 per cent education cess has been replaced with a 4 per cent 'Health and Education Cess' to take care the education and health needs of poor and rural families. It can be understood that Cess is nothing but an additional surcharge levied by the Central Government to raise funds for specific purpose.Thus, it can be concluded that as per Article 2 of Indo-Singapore DTAA, the rate of tax already includes surcharge and education cess.

8. In the case of DIC Asia Pacific Pte Ltd Vs ADIT (I.T.A. No.: 1458/Kol/2011) - 2012-TII-78-ITAT-KOL-INTL, the Hon'ble tribunal has held as follows:

"9. We have also noted that 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 tax treaty 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.

10. 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."

(Emphasis supplied)

9. In the case of Department of Income Tax vs The BOC Group Limited, Kolkata (I.T.A No. 571/Kol/2013) - 2015-TII-195-ITAT-KOL-INTL, in the context of India UK DTAA, the Hon'ble tribunal has held that Surcharge and education cess are not leviable when the tax rate is prescribed under DTAA. The relevant extracts of the ruling is provided below:

6.1. 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 ."

(Emphasis supplied)

10. In the case of Osram India Pvt. Ltd., Gurgaon vs DCIT ITA No. 4052/Del./2015, the Hon'ble tribunal relying on the decision in the case of DIC Asia Pacific Pte Ltd Vs ADIT (as given above) has held that education cess cannot be added to the tax rate as per DTAA.

11. In the case of Capgemini SA Vs DCIT ITA 888/Mum/2016 - 2016-TII-173-ITAT-MUM-INTL, the Hon'ble tribunal has held that surcharge and education cess cannot be added to the tax rate as per DTAA. The relevant extracts of the ruling is provided below:

"11. We have carefully considered the rival submissions. Article 2 of India-France DTAA provides a definition of taxes which are governed by such treaty and the same, inter-alia, prescribes that the expression "income-tax" would include any surcharge thereon. Clause (2) of Article 2 further prescribes that the treaty shall also apply to any "identical or substantially similar taxes" which may be imposed by either of the two countries after the signing of the treaty. In the present context, it is not in dispute that 'education cess' introduced by the Finance Act, 2004 is akin to surcharge and the Kolkata Bench of the Tribunal in the case of DIC Asia Pacific Pte. Ltd. (supra) held the same to be in the nature of an additional surcharge. Now, since clause (1) of Article 2 provides that the taxes governed would include taxes and surcharge thereon, we find no reason for the Revenue to levy the surcharge and education cess, which is also in the nature of surcharge, over and above the cap of 10% prescribed in Article 13 as the tax rate for royalty income. In any case, the provisions of Article 13 of the India-France DTAA, prescribing a cap of 10% on the rate of tax, read with Article 2 thereof would prevail over the provisions of the domestic income-tax law and thus the tax liability on royalty income shall be capped at 10% . The aforesaid plea of the assessee, in our view, is clearly in tune with the phraseology of the India-France DTAA and is fully supported by the precedents cited before us."

(Emphasis supplied)

12. The above Hon'ble Tribunal's ruling was duly followed in the case of M/s. Meridien SA, vs DIT (ITA 4035 & 4036/ Mum/2016).

13. While in the above decisions the Courts have reasoned that when the definition of 'income tax' in the treaty is stated to include 'surcharge', then the DTAA rate is not required to be increased by surcharge and education cess, however the Hon'ble Cochin Tribunal in the case of ITO vs M/s M Far Hotels Ltd (I.T.A No. 430 to 435/Coch/2011) = 2013-TII-84-ITAT-COCHIN-INTL has taken a view that as the DTAA between India and France is silent about the surcharge and education cess, for the purpose of deduction of tax at source, the taxpayer may take advantage of that provision in the DTAA since the provisions of DTAA would prevail over the Indian Income Tax Act.

14. Hence, on the issue of whether the rate as per DTAA is required to be increased by surcharge and educational cess, based on the above analysis, it can be understood that when a specific rate is mentioned in DTAA, then such rate can be considered as inclusive of surcharge and education cess unless the treaty specifically states so. As in the Finance Act, 2018, Education Cess and Secondary and Higher Education Cess has been replaced with Health and Education Cess, the above analysis shall be equally relevant to the new cess i.e. Health and Education Cess and conclusion can be drawn that the surcharge along with Health and Education Cess cannot be added to the DTAA rate.

(The views expressed are strictly personal.)