2012 (6) TMI 686 - AT - Income Tax

DTAA between India and Singapore - whether education cess and higher education cess can be levied in addition to the tax rates prescribed in DTAA - assessee(Singapore company), offered interest and royalty income to tax at the rate of 15% & 10% as specified in Articles 11 & 12 of the India-Singapore DTAA respectively - Held that - Under Articles 11 & 12 of the said DTAA, tax charged on interest and royalties 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 . Education cess, introduced by the Finance Act, 2004, described in Section 2(11) of the Finance Act 2004, is nothing but in the nature of an additional surcharge. Accordingly, the education cess being in the nature of an additional surcharge is covered by Article 2. Accordingly, education cess cannot indeed be levied in respect of tax liability of the appellant company - Decided in favor of appellant.

Summary

Issues:
Challenge to correctness of CIT(A)'s order on assessment under section 143(1) of the Income Tax Act, 1961 for the assessment year 2009-10. Adjudication on the levy of 'education cess' and 'higher education cess' in addition to tax rates prescribed in the India Singapore Double Taxation Avoidance Agreement.

Analysis:
The appellant challenged the correctness of the CIT(A)'s order regarding the assessment for the year 2009-10 under the Income Tax Act, 1961. The main issue was the levy of 'education cess' and 'higher education cess' in addition to the tax rates specified in the India Singapore Double Taxation Avoidance Agreement. The appellant, a company from Singapore, claimed benefits under the tax treaty for interest and royalty income. While the tax rates specified in the treaty were accepted, the appellant objected to the levy of surcharge and education cess. The CIT(A) upheld the education cess, stating that there was no provision in the treaty to exempt cess. The appellant appealed this decision.

The Tribunal analyzed the relevant provisions of the tax treaty, specifically Articles 2, 11, and 12. It noted that the treaty limits the tax on interest and royalties to 15% and 10% respectively. The definition of 'tax' in Article 2 includes 'income tax' and 'surcharge'. The introduction of education cess in India was considered an additional surcharge. The Tribunal concluded that education cess is covered under the treaty as an additional surcharge, restricting taxability as per the treaty rates. Since the education cess was introduced after the treaty, it falls under the scope of 'identical or substantially similar taxes' mentioned in Article 2. Therefore, the education cess cannot be levied on the appellant company's tax liability.

In summary, the Tribunal allowed the appeal, ruling that the education cess cannot be imposed on the appellant's tax liability under the India Singapore tax treaty. The decision was based on the interpretation of treaty provisions and the nature of the education cess as an additional surcharge.