2023 (10) TMI 1185 - AT - Income Tax

Withholding tax - Intimation u/s 201 - Effect of protocol signed at the time of conclusion of the principal tax treaty - Relevant notification yet to be issued by the Government - rate of tax to be deducted at source on the payment of fees for technical services by the assessee to TDK Electronics Components SA - rate of withholding tax as per the provisions of Income-tax Act, 1961 OR rate specified in the relevant 'tax treaty' entered into between India and Spain read with the protocol entered into with the members of the OECD - As per assessee in view of the provisions of Article 13 read with Protocol appended below the Indo-Spain tax treaty which forms an integral part of tax treaty from Assessment Year 2018-19 and onwards and as the treaty rate is more favourable to the assessee, the assessee was required to deduct tax at source under the head FTS @ 10% HELD THAT - As in view of the decision of this tribunal in the case of ITC Ltd 2001 (12) TMI 196 - ITAT CALCUTTA-A Tribunal has held that the protocol to the DTAA is an integral and indispensable part of the tax treaty and furthermore, the benefit of lower rate as prescribed in the protocol for fees for technical services under the relevant tax Treaty is not dependent on any further unilateral action or issuance of notification by the respective Governments. As also held by this Tribunal that no separate notification is required to be issued by the Government of India in order to make a protocol applicable. We find merit in the contention of assessee that as per the DTAA entered into between India and Spain read with the protocol entered into with the members of the OECD, tax rate of 10% was applicable on the payment for fees for technical services. To this extent, relevant grounds raised by the assessee are allowed. As 10% tax rate as per the DTAA includes surcharge and education cess and no separate surcharge of education cess needs to be added - We find that it has been well settled that in case the rate of tax are adopted as per the DTAA, then no surcharge and education cess is to be applied over and above the tax rate since the tax rate as per the DTAA is held to be all-inclusive of such surcharge and education cess. Since the rate of tax applicable in the case of the assessee is 10% and not 10.608% and since the assessee has rightly deducted the tax at source @ 10%, it cannot be treated as an assessee in default and accordingly the excess amount of tax demanded by the revenue authorities is deleted. Further as tax demand has been deleted, the interest levied also stands deleted being consequential in nature. Accordingly, all the effective grounds raised by the assessee in the instant bunch of appeal stands allowed.

Issues Involved:
1. Rate of withholding tax as per Income-tax Act vs. Double Tax Avoidance Agreement (DTAA).
2. Binding nature of CBDT circulars on appellate authorities.
3. Retrospective applicability of CBDT circulars.
4. Levy of interest under section 201(1A) of the Income Tax Act, 1961.

Summary:

Issue 1: Rate of Withholding Tax
The primary issue was whether the rate of withholding tax should be as per the Income-tax Act, 1961 or the Double Tax Avoidance Agreement (DTAA) between India and Spain. The assessee argued that the rate specified in the DTAA, which is more favorable at 10%, should apply instead of the 10.608% under the Income-tax Act. The Tribunal upheld this view, stating that the protocol to the DTAA is an integral part of the tax treaty and does not require a separate notification by the Government of India to be effective. Consequently, the assessee's deduction at 10% was deemed correct.

Issue 2: Binding Nature of CBDT Circulars
The assessee contended that the CBDT circular, which mandated the issuance of a separate notification for the protocol to be effective, was not binding on appellate authorities. The Tribunal agreed, citing the Supreme Court's decision in CIT v Hero Cycles (P) Ltd, which held that CBDT circulars are binding on the Income Tax Officer but not on appellate authorities or the courts.

Issue 3: Retrospective Applicability of CBDT Circulars
The Tribunal addressed the issue of whether the CBDT circular issued on February 3, 2022, could be applied retrospectively to the assessment years 2019-20 and 2020-21. The Tribunal concluded that the circular was prospective in nature and could not impose new obligations or disabilities retrospectively unless explicitly stated by the legislature.

Issue 4: Levy of Interest under Section 201(1A)
The Tribunal held that since the tax demand was unsustainable, the consequential levy of interest under section 201(1A) of the Income Tax Act was also not justified. The Tribunal relied on the Supreme Court's decision in CCE vs. HMM Ltd, which stated that interest or penalty cannot be levied if the primary demand is unsustainable.

Conclusion:
The Tribunal allowed the appeals of the assessee, setting aside the orders of the lower authorities. The rate of withholding tax was confirmed at 10% as per the DTAA, and the additional demands and interest levied by the revenue authorities were deleted.

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