2025 (1) TMI 278 - AT - Income Tax

Education cess applicability to DTAA between India and the USA - assessee is citizen of USA and residing permanently in India - assessee submitted that the rates as specified in DTAA include surcharge and surtax and education cess would be applicable only for income earned in India - CIT(A) has denied the claim on the ground that the assessee has claimed relief u/s 90 - HELD THAT - Tax rates are computed first and thereafter, applicable relief is granted to the assessee. As per Article 2(1)(b)(i) (ii) of India-USA DTAA, surcharge and surtax are included in the maximum rates as specified under Articles 10 and 11 of DTAA. Therefore, when Article-2 states that surcharge is included in Income Tax and the Tax Rate as prescribed under Article 10 / 11 shall be deemed to include tax surcharge and since cess is nothing but an additional surcharge, the prescribed tax rates under DTAA shall be deemed to include the cess also. In the decision of The BOC Group Ltd. 2016 (1) TMI 414 - ITAT KOLKATA it was held that surcharge and education cess is not leviable when the tax rates are prescribed under DTAA. Similar is the decision of M/s M. Far Hotels Ltd. 2013 (4) TMI 339 - ITAT COCHIN and Motiani 2013 (12) TMI 1105 - ITAT MUMBAI No contrary decision has been shown to us. Accordingly, we hold that the tax rates as prescribed under DTAA would embed education cess as well. The CPC is directed to re-compute the tax liability of the assessee.

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered in this judgment is whether the education cess should be applied to tax rates prescribed under the Double Taxation Avoidance Agreement (DTAA) between India and the USA.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents:

The primary legal framework involves the interpretation of the DTAA between India and the USA, particularly Articles 10 and 11, which specify the tax rates applicable to income. The key statutory provision under consideration is Section 154 of the Income Tax Act, which deals with rectification of mistakes. Additionally, the case references include decisions from various tribunals, such as the Kolkata Tribunal in DDIT vs. The BOC Group Ltd., the Cochin Tribunal in ITO vs. M/s M. Far Hotels Ltd., and the Mumbai Tribunal in Sunil V. Motiani vs. ITO, which have addressed similar issues regarding the applicability of education cess on DTAA rates.

Court's Interpretation and Reasoning:

The court's interpretation hinges on the understanding that the DTAA rates are comprehensive and include all forms of surcharge and surtax. The court reasoned that since the DTAA explicitly includes surcharge and surtax in the tax rates, the education cess, being an additional surcharge, should also be considered as included within these rates. The court emphasized that the DTAA rates are intended to be the maximum tax rates applicable, which inherently include any additional levies like the education cess.

Key Evidence and Findings:

The court reviewed the rectification order under Section 154, which accepted the total declared income of the assessee but levied education cess on the entire tax liability, including that calculated under DTAA rates. The court noted that the assessee's argument was supported by tribunal decisions that have consistently held that education cess is not applicable when tax rates are prescribed under a DTAA.

Application of Law to Facts:

The court applied the principles established in the relevant tribunal decisions to the facts of the case. It determined that the education cess should not be levied on the tax calculated under DTAA rates, as these rates already encompass all forms of surcharge, including cess. The court directed the Centralized Processing Center (CPC) to recompute the tax liability accordingly, excluding the education cess from the DTAA-calculated tax.

Treatment of Competing Arguments:

The assessee argued that the education cess should only apply to income earned in India and not to income taxed under DTAA rates. The court found this argument persuasive, supported by tribunal precedents. The opposing argument from the CIT(A) was that education cess is an additional levy applicable on the basic tax liability. However, the court rejected this view, aligning with the precedent that DTAA rates are inclusive of all surcharges and cess.

Conclusions:

The court concluded that the DTAA rates include education cess, and therefore, the CPC's computation of tax liability, which included education cess on DTAA rates, was incorrect. The appeal was allowed, and the CPC was directed to recompute the tax liability without applying the education cess to the DTAA rates.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning:

The court stated, "when Article-2 states that surcharge is included in Income Tax and the Tax Rate as prescribed under Article 10 / 11 shall be deemed to include tax surcharge and since cess is nothing but an additional surcharge, the prescribed tax rates under DTAA shall be deemed to include the cess also."

Core Principles Established:

The judgment reinforces the principle that DTAA rates are comprehensive and include all forms of surcharge and cess. It affirms that education cess should not be separately levied on tax liabilities calculated under DTAA rates.

Final Determinations on Each Issue:

The court determined that the education cess is embedded within the DTAA rates, and the CPC's computation, which included education cess on these rates, was incorrect. The appeal was allowed, and the CPC was instructed to recompute the tax liability in accordance with the court's findings.

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