TDK INDIA PRIVATE LTD. ,KOLKATA vs. DCIT, CPC-TDS, UTTAR-PRADESH

The grounds of appeal for these appeals are verbatim identical, which reads as under:- “1. That on the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals)- 22, Kolkata (hereinafter referred to as 'Ld. CIT(A)), has erred in confirming the action of the Ld. DCIT-CPC (TDS) (hereinafter referred to as the 'AO') in considering the rate of withholding tax as per the provisions of Income-tax Act, 1961 (hereinafter referred to as the 'Act'), instead of the rate specified in the relevant Double Tax Avoidance Agreement (hereinafter referred to as the 'tax treaty') entered into between India and Spain read with the protocol signed at the time of conclusion of the tax treaty, in respect of payments made by the appellant to TDK Electronics Components S. A. being a tax resident of Spain.

That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating that it is a well settled principle of law that the protocol signed at the time of conclusion of the principal tax treaty is an integral part of the principal tax treaty and its binding force is equal to that of the principal tax treaty.

That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in stating that the circular issued by the CBDT is binding on Ld. AO, Ld. CIT(A) and Hon'ble Tribunal where it is a settled principle of law that the circular issued by the CBDT is not binding on appellate authorities and the Ld. CIT(A) has further erred in applying the circular to whittle down or override the benefits which are otherwise envisaged in the protocol to the aforesaid bilateral tax treaty.

That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating that the issuance of unilateral notification by the CBDT to amend a bilateral tax treaty as contained in the aforesaid circular has no binding force and as such, it cannot whittle down or override any benefit which is otherwise envisaged in the protocol to the aforesaid bilateral tax treaty.

That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the action of the AO in levying interest under section 201(1A) of the IT Act, 1961. 6. That the appellant craves leave to add to and/ or amend, alter, modify or rescind the grounds hereinabove before or at the time of hearing of the appeal.” Assessment Year: 2019-20 I.T.A. No. 397, 398 & 399/Kol/2023 Assessment Year: 2020-21 TDK India Private Limited

Brief facts of the case are that, assessee, TDK India Private Limited (Formerly known as ‘EPCOS India Private Limited') was incorporated under the Companies Act, 1956 and is a tax resident of India. The company is primarily engaged in manufacture and supply of capacitors and soft ferrite cores. TDK Electronics Components S.A., Spain (Formerly known as EPCOS Electronics Components S.A.) is a company incorporated under the laws of Spain and is a tax resident of Spain. TDK Electronics Components S.A., Spain (hereinafter referred to as ‘TDK Malaga’) renders services to the assessee in the areas of procurement, controlling, logistic coordination, quality management, HR, environment protection and industrial safety, organization, etc. Under the provisions of Income-tax Act, 1961 (hereinafter referred to as the ‘Act'), the aforesaid services rendered by TDK Malaga to the assessee would be liable for deduction of tax at source under the head ’Fees for Technical Services’ (hereinafter referred to as ‘FTS') at the rate of 10.608 percent (10 percent Tax + 2 percent Surcharge + 4 percent Cess) under the provisions of section 115A(1)(b)(B) read with section 9(1)(vii) of the Act. Before making payments to TDK Malaga for the aforesaid services, the assessee deducted tax at source under the head FTS at the rate of 10 percent under the provisions of Article 13 read with Protocol appended below the Indo-Spain tax treaty (hereinafter referred to as the ‘Tax Treaty’) which forms an integral part of the tax treaty from financial year Assessment Year: 2019-20 I.T.A. No. 397, 398 & 399/Kol/2023 Assessment Year: 2020-21 TDK India Private Limited

Aggrieved the assessee is in appeal before this Tribunal.

On Ground Nos. 1, 2 & 4, which are interrelated, the ld. Counsel for the assessee, firstly invited reference to the provisions of section 115A(1)(b)(B) of the Act which prescribes a tax rate of 10 percent (plus applicable surcharge & cess) on income of non- resident arising from fees for technical services. He further referred to the provisions of Article 13 of the Tax Treaty which interalia states that fees for technical services would be taxable at the rate of 20 percent on gross basis in the contracting state in Assessment Year: 2019-20 I.T.A. No. 397, 398 & 399/Kol/2023 Assessment Year: 2020-21 TDK India Private Limited which they arise. It was further submitted that provisions of paragraph 7 of the protocol appended below the Tax Treaty which is an integral part of the Tax Treaty which interalia states that if, under any Convention or Agreement between Indian and a third state which is a member of the Organization for Economic Cooperation and Development (herein after refers to as 'OECD') which enters into force after first January, 1990, India limits its taxation at source on royalties or fees for technical services to a rate lower or a scope lower more restricted than the rate or scope provided for this Convention on the said items of income, the same rate or scope as provided for that Convention or Agreement on the said items of income shall also apply under this Convention with effect from the date on which the present Convention comes into force or the relevant Indian Convention or Agreement, whichever enters into force later. The relevant extract of the Tax Treaty is enclosed at pages 33 to 36 of the paper book.

The ld. Counsel for the assessee further submitted that India has entered into Tax Treaty with Portugal and Sweden which are OECD Member States which enter into force after 1st January, 1990. As per the provision of Article 12 of the India-Portugal Tax Treaty and India-Sweden Tax Treaty, fees for technical services would be taxed at 10 percent (inclusive of cess and surcharge). Further attention was drawn to the provisions of section 90(2) of the Act which states that the provisions of the Act or the Assessment Year: 2019-20 I.T.A. No. 397, 398 & 399/Kol/2023 Assessment Year: 2020-21 TDK India Private Limited provisions of the Tax Treaty whichever is more beneficial to the assessee may be applied.

The ld. Counsel for the assessee submitted that in the instant case, since the provisions of the Tax Treaty is more beneficial than the relevant provision of the statute, the appellant has applied the provisions of the Tax Treaty and deducted tax at source at the rate of 10 percent from fees for technical services before making payment to TDK Malaga. Further reference was made to the Circular No. 3/2022 dated 3 February 2022 issued by the CBDT. The Circular states that the benefit of MFN clause will only be applicable in the event the Government of India has issued a separate notification extending the benefits of the second treaty into the treaty with the first State as required by section 90(1) of the Act. The copy of the circular is enclosed at pages 51 to 58 of the paper book. Thereafter, reference was made to the Tax Treaties that India has entered into with Philippines and with Switzerland, wherein similar provisions for incorporation of favourable provisions contained in other tax treaties are existent in the protocol appended to those tax treaties, but with the exception that in order to make the incorporation effective, the Governments of two countries should first mutually decide of such incorporation in the form of amendment of tax treaty. It is thus evident that since there is no such requirement under the Indo-Spain Tax Treaty, there was no need to amend the Tax Assessment Year: 2019-20 I.T.A. No. 397, 398 & 399/Kol/2023 Assessment Year: 2020-21 TDK India Private Limited Treaty by resorting to issuance of notification for that purpose. The relevant extracts of the Tax Treaty with Switzerland and Philippines are enclosed at 44 to 50 of the paper book.

The ld. Counsel for the assessee finally submitted that, it is evident that the allegation of the Ld. CIT(A) that the requirement for issuance of separate notification by the Government of India is clearly redundant and, in any event, it does not whittle down or override the benefits which are otherwise envisaged in paragraph 7 of the protocol to the Tax Treaty. In the instant case, since the tax treaties with Portugal, Sweden and Spain have entered into force prior to the Assessment Year 2019-20 the rate of tax as per the Tax Treaty on income earned on fees from technical fees cannot not exceed 10 percent.

For this proposition, the ld. Counsel for the assessee relied on the decision of the Hon'ble Kolkata Tribunal in the case of Deputy Commissioner of Income Tax v ITC Ltd reported in 82 ITD 239(Kol), wherein the Hon'ble 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 y issuance of notification by the respective Governments. Further reliance was placed on the decision of the Hon'ble Kolkata Tribunal case of Income Tax Officer v. MSK Travels & Tours Ltd. (ITA 284/Kol/2015) for the Assessment Year 2008-09 wherein the Assessment Year: 2019-20 I.T.A. No. 397, 398 & 399/Kol/2023 Assessment Year: 2020-21 TDK India Private Limited Hon'ble Kolkata Tribunal by following the decision of the DCIT v ITC Ltd. (supra) has held that no separate notification is required to be issued by the Government of India in order to make the protocol applicable. And the decision of the Hon'ble Delhi High Court in the case of Steria (India) Ltd v. Commissioner of Income Tax reported in 386 ITR 390 (Del). (2016) wherein the Hon'ble High Court has held that no separate notification is required for application of paragraph 7 of the protocol contained in Indo-France Tax Treaty. The Hon'ble Court has further held that issuance of a notification has nowhere been stipulated as a condition precedent therein. Section 90(1) of the Act is very clear that only a Tax Treaty would be notified and not the application of such a 'MFN' clause.

The ld. Counsel for the assessee further relied on the following decisions of the various High Courts of the country wherein it has been held that no separate notification is required unless the protocol to the Tax Treaties specifically mention the same: Concentrix Services Netherlands B.V. v. Income-tax [2021] 127 1. taxmann.com 43 (Delhi High Court) Apollo Tyres Ltd. Commissioner of Income Tax, International Taxation [2018] 92 taxmann.com 166 (Karnataka High Court) Galderma Pharma SA v. Income-tax Officer [2022] 138 taxmann.com 44 (Delhi High Court) Assessment Year: 2019-20 I.T.A. No. 397, 398 & 399/Kol/2023 Assessment Year: 2020-21 TDK India Private Limited

The ld. Counsel for the assessee finally prayed that, in view of the above submission, more particularly in view of the judgement rendered by the Juri ictional Tribunal, that the order of the Ld. CIT(A) and the order of the Ld. DCIT- CPC on this issue be set aside and grounds of appeal no. (1), (2) and (4) be allowed.

The ld. D/R, on the other hand, vehemently argued supporting the orders of the lower authorities.

On Ground No. 3, the ld. Counsel for the assessee submitted that on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in stating that the circular issued by the CBDT is binding on Ld. AO, Ld. CIT(A) and Hon'ble Tribunal whereas it is a settled principle of law that the circular issued by the CBDT is not binding on appellate authorities and the Ld. CIT(A) has further erred in applying the circular to whittle down or override the benefits which are otherwise envisaged in the protocol to the aforesaid bilateral tax treaty.

The ld. Counsel for the assessee, placed reliance on the decision of the Hon'ble Supreme Court in the case of CIT v Hero Cycles (P)Ltd (1997) reported in 94 Taxman 271 (SC), wherein the Hon'ble Supreme Court has held as under:

The above referred protocol states that in any Convention or agreement between India and the third State, which is a member of the OECD, which enters into force after 01/01/1990, India limits its taxation at source on royalties or fees for technical services to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of incomes, the same rate or scope as provided for in that Convention or agreement on the said items of income shall also apply under this Convention with effect from the date on which the present Convention comes into force at the relevant Indian Convention or Agreement, whichever enters into force later.

Further it has been submitted before us that India has entered into a tax treaty with Portugal and Sweden which are OECD Member States which enter into force after 1st January, 1990. As per the provision of Article 12 of the India-Portugal Tax Treaty and India-Sweden Tax Treaty, fees for technical services would be taxed at 10 percent (inclusive of cess and surcharge). Further attention was drawn to the provisions of section 90(2) of the Act which states that the provisions of the Act or the provisions of the Tax Treaty whichever is more beneficial to the assessee may be applied. Assessment Year: 2019-20 I.T.A. No. 397, 398 & 399/Kol/2023 Assessment Year: 2020-21 TDK India Private Limited

The ld. CIT(A), has not accepted the contention of the assessee solely on the ground that the said protocol entered between India and Spain has not been notified by the CBDT. However in view of the decision of this tribunal in the case of Deputy Commissioner of Income Tax v ITC Ltd reported in 82 ITD 239(Kol), the 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. It is 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. In view of the above, we find merit in the contention of the ld. Counsel for the 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.

Now, so far as the remaining contention that 10% tax rate as per the DTAA includes surcharge and education cess and no separate surcharge of education cess needs to be added. In other words, the contention of the ld. Counsel for the assessee is that the assessee was required to deduct tax at source only @10% and no separate amount was required to be deducted towards surcharge Assessment Year: 2019-20 I.T.A. No. 397, 398 & 399/Kol/2023 Assessment Year: 2020-21 TDK India Private Limited

This Convention shall also apply to any identical or substantially similar taxes which are imposed by either Contracting State after the date of signature of this Convention in addition to, or in place of, the taxes of that Contracting state referred to in paragraph 1 of this Article. The competent authorities of the Assessment Year: 2019-20 I.T.A. No. 397, 398 & 399/Kol/2023 Assessment Year: 2020-21 TDK India Private Limited

We find that education cess was introduced in India by the Finance Act, 200, and Section 2(11) of the Finance Act, 2004 described it as follows: Assessment Year: 2019-20 I.T.A. No. 397, 398 & 399/Kol/2023 Assessment Year: 2020-21 TDK India Private Limited

It is thus clear that the education cess, as introduced in India initially in 2004, was nothing but in the nature of an additional surcharge. It was described as such in the Finance Act introducing the said cess.

We have also noted that Article 2(1) of the applicable tax treaty provides that the taxes covered shall include tax and surcharge thereon. Once we come to the conclusion that education cess is nothing but an additional surcharge, it is only corollary thereto that the education cess will also be covered by the scope of Article 2. In any case, education cess was introduced by the Finance Act 2004, with effect from assessment year 2005-06 which was much after the signing of India Simngapore tax treaty on 24th January 1994. In view of the specific provisions to the effect, that the scope of Article 2 shall also cover "any identical or substantially similar taxes which are imposed by either Contracting State after the date of signature of the present Agreement in addition to, or in place of, the taxes referred to in paragraph 1", and in view of the fact that education cess is essentially of the same nature as surcharge, being an additional surcharge, the scope of article 2 also extends to the education cess.'

We find that the Article 2 of the India UK Treaty provides that income tax including any surcharge thereon and it further provides that this convention shall also apply to any identical or substantially similar taxes which are imposed by either contracting state after the date of signature of this convention in addition to or in place of the taxes of the contracting state referred to in paragraph 1 of this article.

We have heard both the parties and their contentions have carefully been considered. We found that the issue raised by the assessee is covered in favour of the assessee by the aforementioned decisions of Tribunal in the case of Sunil V. Motiani (supra)." (c) Parke Davis and Company LLC (supra) This judgement was rendered in the context of India USA treaty after considering the decision of the Uttarakhand High Court in the case of Arthusa Offshore Co (supra) which dealt with India US Treaty. It was held that :— "

At the outset it was submitted by Ld. AR that the only issue raised by the assess in the present appeal is that the education cess and secondary and higher secondary education cess of Rs.50,104/- is not liable to be payable when tax is determined as per India US Tax Treaty. It was submitted that this issue is covered in favour of assessee by the decision of ITAT in the case of Sunil V. Motiani v. ITO [2013] 33 taxmann.com 252/59 SOT 37 (Mumbai - Trib). He has placed a copy of the said order on our record and a copy was also given to Ld. DR. He drew our attention towards the observation of the Tribunal in para-5. 3. On the other hand, Ld. DR submitted that education cess and secondary and higher secondary education cess are considered to be tax payable even when the tax is determined on the basis of DTAA. For this purpose she relied upon the decision of Hon'ble Uttarakhand High Court in the case of CIT v. Arthusa Offshore Co. [2008] 169 Taxman 484 and decision of Advance Rulling Authority in the case of Airports Authority of India, In re [2008] 299 ITR 102/168 Taxman 158(AAR - New Delhi).

We have heard both the parties and their contentions have carefully been considered. We found that the issue raised by the assessee is covered in favour of the assessee by the aforementioned decisions of Tribunal in the case of Sunil V. Motiani (supra)." (d) ITO (Intl Taxn) v. M Far Hotels Ltd [2013] 58 SOT 261/32 taxmann.com 100 (Cochin - Trib.) This judgement was rendered in the context of India France treaty. Issue involved was taxability of management fees and interest income under the relevant article of the treaty and the levy of surcharge and education cess to the tax prescribed under DTAA in the relevant article. It was held that :— "If the provisions of DTAA are more beneficial to the taxpayer, then the provisions of DTAA would prevail over the Indian Income Tax Act. Since the DTAA is silent about the surcharge and education cess for the purpose of deduction of tax at source, this tribunal is of the considered opinion that the taxpayer may take advantage of that provision in the DTAA for deduction of tax. The CITA has only deleted the tax component to the extent of surcharge and education cess at the rate applicable under the DTAA. Therefore, this tribunal do Assessment Year: 2019-20 I.T.A. No. 397, 398 & 399/Kol/2023 Assessment Year: 2020-21 TDK India Private Limited not find any infirmity in the orders of lower authority. Accordingly, the same are confirmed. "

In the result, the appeal of the revenue is dismissed.”

After going through the above decision, 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. Therefore, we are of the considered view that 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 at Rs.18,61,442/- is deleted. Further as tax demand has been deleted, the interest levied at Rs.1,53,074/-, also stands deleted being consequential in nature. Accordingly, all the effective grounds raised by the assessee in the instant bunch of appeal stands allowed.

In the result all the, appeals of the assessee are allowed. Order pronounced in the Court on 12th July, 2023 at Kolkata. (SONJOY SARMA) ACCOUNTANT MEMBER Kolkata, Dated 12/07/2023 *SC SrPs

""यथ" / The Respondent 3. संबंिधत आयकर आयु" / Concerned Pr. CIT 4. आयकर आयु" अपील ( ) / The CIT(A)- 5. िवभागीय "ितिनिध ,आयकर अपीलीय अिधकरण, कोलकाता/DR,ITAT, Kolkata, 6. गाड" फाई/ Guard file.