2013 (12) TMI 1105 - AT - Income Tax

Education cess and surcharge Whether the rate of TAX as per DTAA is inclusive of Education Cess and Surcharge Held that - The non-resident assessee has earned interest from partnership firm in India As per article 11(2) if recipient is beneficial owner of interest, tax so charged shall not exceed 5% of gross interest if the interest is paid by the bank and in other cases 12.5% of the gross interest - The assessee is the beneficial owner of interest and tax charged cannot exceed 12.5% of gross interest As per DTAA between India and UAE - Tax has been defined in Article-2(2)(b) as per which income tax included surcharge - Therefore, tax referred to in Article 11(2) @ 12.5% also includes surcharge Following DIC Asia Pacific Pte Ltd 2012 (6) TMI 686 - ITAT, KOLKATA Decided in favour of assessee.

Summary

Issues:
Whether the assessee is liable to pay education cess and surcharge in addition to the tax on interest income under the provisions of Double Taxation Avoidance Agreement (DTAA).

Analysis:
The appeal involved a dispute regarding the tax liability of the assessee on interest income received from partnership firms in India. The primary issue was whether the assessee, a non-resident based in UAE, was required to pay education cess and surcharge in addition to the tax on interest income under the DTAA between India and UAE.

The Assessing Officer (AO) had levied education cess and surcharge on the interest income received by the assessee, despite the tax rate being capped at 12.5% under the DTAA. The assessee contended that the tax rate of 12.5% included surcharge as per Article 2(2)(b) of the DTAA. However, the CIT(A) upheld the AO's decision, citing a judgment of the Hon'ble High Court of Uttarakhand and considering the interest income as business income.

Before the Tribunal, the assessee's representative argued that the tax rate of 12.5% under Article 11(2) of the DTAA included surcharge and education cess. Reference was made to a previous Tribunal decision supporting this interpretation. The representative distinguished the judgment relied upon by the CIT(A) as pertaining to a different article of the DTAA.

The Departmental Representative supported the lower authorities' decisions, citing the same judgment relied upon by the CIT(A) and another ruling related to business income taxation. It was argued that since the interest income was considered business income and the assessee had a Permanent Establishment in India, Article 11 of the DTAA could not be applied.

After careful consideration, the Tribunal held that the tax payable at 12.5% under Article 11(2) of the DTAA included surcharge and education cess. The Tribunal set aside the CIT(A)'s order and allowed the assessee's claim, emphasizing that the judgments cited by the lower authorities were not directly applicable to the taxability of interest income under the treaty.

In conclusion, the Tribunal ruled in favor of the assessee, stating that the tax payable at 12.5% under the DTAA included surcharge and education cess. The appeal of the assessee was allowed, and the order was pronounced in open court on 27/02/2013.