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2024 (1) TMI 1181 - AT - Income TaxClubbing of income of Non-resident and Permanent Establishment (PE) - Levy of surcharge at 5% as against assessee s claim of 2% as clubbing the total amount exceeded the threshold limit of Rs. 10 lakhs - whether the royalty and FTS income can be subjected to levy of surcharge, as provided under the domestic law? HELD THAT - Taxability of royalty and FTS has been dealt under Article 12 of India Germany DTAA. As per Article 12(2) of the treaty, royalty and FTS can be taxed in the source state at a rate not exceeding 10% of the gross amount, if the recipient is the beneficial owner of such royalty and FTS. Undoubtedly, the assessee, being a beneficial owner of royalty and FTS, has offered to tax the royalty and FTS on gross basis by applying rate of 10%. This, in our view, is in compliance with the treaty provisions. Therefore, further levy on account of surcharge exceeds the rate of 10%, hence, cannot be levied on royalty/FTS income, as, it would be in violation of Article 12(2) read with Article 2 of India Germany DTAA. To get over the mandatory condition of Article 12(2) of the Act, learned first appellate authority has made an attempt to link royalty/FTS income to the Supervisory PE. Neither it is the case of the assessee that such income is linked to the PE, nor the department has brought any material on record to demonstrate that royalty and FTS income is effectively connected to the PE. Therefore, in our view, the r oyalty and FTS income offered by the assessee has to be essentially governed under the treaty provisions and not under the domestic law. Thus, in our view, the Departmental Authorities have erroneously clubbed the royalty and FTS income with the income of the PE for the purpose of surcharge at the rate of 5% . Direct the AO to accept assessee s computation and delete the extra demand raised on the assessee, both on account of surcharge as well as consequential demand relating to cess and interest. Decided in favour of assessee.
Issues:
The main issue in this case is the levy of surcharge at 5% instead of 2% as claimed by the assessee. Summary: The appeal by the assessee pertains to the levy of surcharge at 5% instead of 2% on income earned from engineering services and royalty/FTS under the India-Germany Double Taxation Avoidance Agreement (DTAA). The assessee, a non-resident corporate entity from Germany, offered income from engineering services at 40% tax rate with 2% surcharge and cess, and income from royalty/FTS at 10% tax rate on gross basis. The Centralized Processing Centre (CPC) clubbed both incomes, resulting in a surcharge of 5% due to total exceeding threshold. The assessee's rectification application was rejected, leading to an appeal. The first appellate authority upheld the surcharge at 5%, stating total income exceeded the threshold. The authority held that royalty/FTS income, if connected to the Permanent Establishment (PE), should be taxed under domestic law. However, the appellate tribunal found that as per the India-Germany DTAA, royalty/FTS income should not be subject to surcharge exceeding 10%. The tribunal ruled that the department erred in clubbing royalty/FTS income with PE income for surcharge purposes, as it should be governed by treaty provisions. The tribunal directed the Assessing Officer to accept the assessee's computation and delete the extra demand. In conclusion, the appeal was allowed, and the extra demand on the assessee was deleted, including surcharge, cess, and interest.
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