2017 (12) TMI 1047 - AT - Income Tax

Additions on account of service tax - treated to the income of the assessee company - Held that - ITAT has already decided these grounds in favour of assessee in 2016 (8) TMI 1311 - ITAT MUMBAI by holding that the additions on account of service tax cannot be treated to the income of the assessee company. Therefore, respectfully following the decision of the coordinate bench of Hon ble ITAT in assessee s own case for AY 2008-09 and 2009-10 and in order to maintain judicial discipline and consistency which are applicable mutatis mutandis in the case of the assessee. We accordingly gave similar directions to the AO as were given by Hon ble ITAT for verify the claim of the assessee company, and on finding the same in order deleat the addition made in the hands of the assessee company. It is further directed that the AO in the course of verifying the aforesaid claim of the assessee company shall in all fairness afford an opportunity of being heard to the assessee company Levying Surcharge @ 2.5 percent, Education Cess @2% and Secondary and Higher Education Cess @ 1 percent - assessee has offered its income to tax under Article 13 of Double Taxation Avoidance Agreement (DTAA) between India and France at 10 percent - Held that - We find that the Hon ble ITAT in 2016 (7) TMI 712 - ITAT MUMBAI has already decided this grounds in favour of assessee by holding that revenue cannot levy 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 provision of article 13 of the India-France DTAA r.w.r 2 thereof would prevail over the provision of the domestic Income Tax law and thus the tax liability on royalty income shall be capped at 10%. Therefore, respectfully following the decision of the coordinate bench of Hon ble ITAT and in order to maintain judicial discipline and consistency which are applicable mutatis mutandis in the case of the assessee. We accordingly gave similar directions to the AO as were given by Hon ble ITAT to recompute the tax liability on royalty income accordingly. Thus this ground so raised by the assessee company is allowed

Issues Involved:
1. Inclusion of service tax deducted by customers in the taxable income of the assessee.
2. Levy of surcharge, education cess, and secondary and higher education cess on the income taxed under Article 13 of the Double Taxation Avoidance Agreement (DTAA) between India and France.
3. Levy of interest under section 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

Issue 1: Inclusion of Service Tax Deducted by Customers in Taxable Income

The primary issue was whether the amount of ?1,13,00,467, representing service tax deducted by customers from amounts payable to the assessee, should be included in the taxable income of the assessee. The assessee argued that the liability to deposit service tax under the reverse charge mechanism as per section 66A of the Finance Act, 1994, rests with the customers. Therefore, the deducted amount should not form part of the assessee's income.

The Tribunal referred to its earlier decision in the assessee’s own case for AY 2008-09 and 2009-10, where it was held that such amounts deducted by customers and deposited with the government do not accrue to the assessee as income. The Tribunal noted that the customers deducted the service tax amount from the fee/royalty payable to the assessee and remitted only the balance amount. The assessee had accepted this deduction and had no right to recover the deducted amount from the customers. Hence, the service tax amount did not partake the character of income in the hands of the assessee.

The Tribunal directed the AO to verify the claim of the assessee and, upon finding it in order, to delete the addition of ?1,13,00,467 from the taxable income. This direction was in line with maintaining judicial discipline and consistency.

Issue 2: Levy of Surcharge, Education Cess, and Secondary and Higher Education Cess

The second issue involved the levy of surcharge, education cess, and secondary and higher education cess on the income taxed under Article 13 of the DTAA between India and France. The assessee contended that the income should be taxed at a flat rate of 10% as per the DTAA, without any additional levies.

The Tribunal referred to its decision in the case of Capgemini SA vs. DCIT, where it was held that the rate of tax prescribed in the DTAA cannot be enhanced by including surcharge and education cess. Article 2 of the DTAA includes surcharge within the definition of "income-tax," and thus, the tax rate of 10% on royalty income cannot be increased by adding surcharge or education cess.

The Tribunal directed the AO to recompute the tax liability on royalty income without levying surcharge and education cess, thereby capping the tax rate at 10% as per the DTAA.

Issue 3: Levy of Interest under Section 234B

The third issue was regarding the levy of interest under section 234B of the Income Tax Act. The assessee argued that being a non-resident, its entire income was subject to tax deduction under section 195, and hence, the provisions of section 234B were not applicable.

The Tribunal noted that this ground was consequential in nature and did not require specific adjudication.

Conclusion:

The Tribunal allowed both appeals filed by the assessee, directing the AO to delete the addition of ?1,13,00,467 from the taxable income and to recompute the tax liability on royalty income without levying surcharge and education cess, thereby adhering to the provisions of the DTAA between India and France. The issue regarding the levy of interest under section 234B was deemed consequential and required no specific adjudication.

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