Loading judgment…
Facts
The assessee, a US tax resident, filed an appeal against an order levying Health and Education Cess on tax payable under the India-USA DTAA. The assessee's income included interest and dividend, taxed at rates specified in the DTAA.
Held
The Tribunal held that Health and Education Cess cannot be levied on tax determined under the DTAA, following decisions of the Delhi High Court and ITAT Pune. The levy of such cess is not permissible when specific DTAA rates are applied.
Key Issues
Whether Health and Education Cess can be levied on income taxed as per the DTAA rates?
Sections Cited
250, 143(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PUNE BENCHES “C” :: PUNE
Before: DR.DIPAK P. RIPOTE & SHRI VINAY BHAMORE
ORDER
PER DR. DIPAK P. RIPOTE, AM:
The Assessee has filed an appeal against the order of ld.Addl./Joint Commissioner of Income Tax (Appeal)-3, Chennai passed under section 250 of the Income Tax Act, 1961 dated 24.03.2025 for A.Y.2022-23, emanating from the order u/s.143(1) of the Act, dated 26.10.2022. The Assessee has raised the following grounds of appeal :
“1. In confirming the levy of Health and Education Cess on amount of tax payable determined as per the rate under DTAA. 2. In concluding that the levy of Health & Education Cess in Income Tax is also to be made applicable while determining the tax rates under the India-U/S. Agreement. 3. The Appellant craves leave to add to, withdraw or modify any of the grounds of appeal at the time of hearing.” Submission of ld.AR :
2. Ld.AR for the assessee submitted that Assessee is a Tax Resident of USA, during the year. The Assessee had filed Return of Income and paid the taxes as per DTAA between India and USA. However, the ADIT(CPC) has levied Health and Education Cess while passing the order u/s.143(1) of the Act. Ld.AR took us through the DTAA relevant Clauses and pleaded that no Health and Education Cess can be levied. Ld.AR filed copies of the DTAA. Ld.AR also relied on the decision of the Hon’ble Delhi High Court in the case of M/s.EPCOS Electronic Components S.A Vs. Union of India and Others, in W.P.(C) No.10417/2018 vide order dated 10.07.2019. 2.1 Ld.AR also relied on the order of ITAT Pune Bench in of Cummins Inc., Vs. DCIT/ACIT(International Taxation) vide order dated 09.01.2020. Ld.AR filed copies of these orders.
Submission of ld.DR : 3. Ld.DR for the Revenue candidly accepted that the issue is covered in favour of Assessee.
Findings & Analysis : 4. We have heard both the parties and perused the records. In this case, Assessee had filed Return of Income on 18.07.2022 for A.Y.2022-23. The Deputy Director of Income Tax(CPC), Bengaluru passed an order u/s.143(1) on 26.10.2022. Aggrieved by the said order, Assessee filed appeal before the ld.CIT(A).
4.1 The ld.CIT(A) decided the appeal vide order dated 24.03.2025. The relevant paragraphs of the order of ld.CIT(A) are reproduced here as under : “7.2 The major ground raised by the appellant in this appeal relates to the action of the CPC in levying Health and Education Cess on amount of tax payable at the rate determined under DTAA. In this regard, as per submission of the appellant she is a non-resident and is a citizen & tax resident of USA and has filed her ITR for the AY 2022-23 declaring total income of Rs. 12,94,44,010/- which includes income from other sources being interest income (Rs.3,61,32,037) and dividend (Rs.1,25,67,354). It is also stated that the tax payable on interest income was computed @ 15% as per Article 11 of DTAA between India and USA and the tax payable on dividend income was computed @ 25% as per Article 10 of DTAA between India and USA. In this regard, the relevant Paragraphs 1 and 2 of Article 11 of the DTAA between India and USA is reproduced below Interest:-
1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed:
(a) 10 percent of the gross amount of the interest, if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution (including an insurance company); and (b) 15 percent of the gross amount of the interest in all other cases.
7.4 The relevant Paragraphs 1 and 2 of Article 10 of the DTAA between India and USA relating to Dividend is reproduced below Dividend; - 1 Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.
2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed:
(a) 15 per cent of the gross amount of the dividends if the beneficial owner is a company which owns at least 10 per cent of the voting stock of the company paying the dividends.
(b) 25 per cent of the gross amount of the dividends in all other cases 7.5 Article 2 of DTAA between India and USA relates to Taxes Covered. The relevant portions are given below Taxes Covered
1. The existing taxes to which this Convention shall apply are.
(a) in the United States, the Federal income taxes imposed by the Internal Revenue Code (but excluding the accumulated earnings tax, the personal holding company tax, and social secunty taxes), and the excise taxes imposed on insurance premiums paid to foreign insurers and with respect to private foundations (hereinafter referred to as "United States tax), provided, however, the Convention shall apply to the excise taxes imposed on insurance premiums paid to foreign insurers only to the extent that the risks covered by such premiums are not reinsured with a person not entitled to exemption from such taxes under this or any other Convention which applies to these taxes, and (b) in India (i) the income tax including any surcharge thereon, but excluding income tax on undistributed income of companies, imposed under the Income-tax Act; and (ii) the surtax (hereinafter referred to as "Indian tax")
Taxes referred to in (a) and (b) above shall not include any amount payable in respect of any default or omission in relation to the above taxes or which represent a penalty imposed relating to those taxes.
The Convention shall apply also to any identical or substantially similar taxes which are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of any significant changes which have been made in their respective taxation laws and of any official published material concerning the application of the Convention.
7.6 Thus Article 2 of the India-US Agreement 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 Hence by this, it is evident that the levy of Health & Education Cess in Income Tax is also be made applicable while determining the tax rates under the convention. When the Article 2 states that "income tax including surcharge thereon", it implies that, the applicable surcharge to be levied in addition to the tax rate.
…………………… 7.8 In view of the above discussion and respectfully following the decision of the Hon'ble High Court of Uttarkhand, it is held that intimation U/s. 143(1) passed by CPC levying Surcharge or Health & Educational Cess on the tax rate determined under DTAA is upheld. Hence, the appeal on this ground is Dismissed.” 4.1 Thus, the only issue before us whether Health and Education Cess can be levied u/s.143(1) or not!, where DTAA is applicable.
This issue has been decided by Hon’ble Delhi High Court in the case of M/s.EPCOS Electronic Components S.A Vs. Union of India and Others vide order dated 10.07.2019. The relevant paragraphs 20 and 21 of the order of Hon’ble Delhi Court are reproduced here as under : “20. The Petitioner has sought a clarification regarding the erroneous payment of the surcharge. Indeed the Court finds that the payment of tax on FTS under the DTAA included surcharge and cess etc. There was no requirement that once the tax rate at the appropriate slab was paid, to separately pay the surcharge and cess.
For the aforementioned reasons, the Court quashes the impugned order passed by the Respondent No.2 and directs the Respondents to permit the Assesee to rectify its return by paying tax on FTS at 10%. The excess amount of tax, including the surcharge and cess paid shall be refunded to the Petitioner along with the interest due thereon, not later than eight weeks from today.”
It is also noted that ITAT Pune in the case of Cummins Inc., Vs. DCIT/ACIT(IT) in vide order dated 09.01.2020 has decided the issue in favour of assessee. The relevant paragraphs of the order are reproduced here as under : “6. The last ground is against the inclusion of Surcharge and Education Cess in the amount of tax charged by the AO under the Double Taxation Avoidance Agreement (DTAA).
7. The Assessing Officer included Surcharge and Education Cess in the amount of tax determined by him under the DTAA against which the assessee has come up in appeal before the Tribunal.
We have heard the rival submissions and perused the relevant material on record. From the computation of income. it can be seen that the income of the assessee which has been charged to tax under the regular provisions has also been subjected to Surcharge and Education Cess. In so far as the taxability of income under the DTAA is concerned, there are specific rates on which such incomes are chargeable to tax. Such rates cannot be further enhanced by Surcharge and Education Cess as has been held in the several decisions including the one dated 30-11-2015 relied by the Id. AR in DDIT (IT) Vs. The BOC Group Limited (ITA No.571/Kol/2013). We, therefore, overturn the impugned order and direct not to charge Surcharge and Education Cess on the rates of tax under the DTAA. This ground is allowed.”
Respectfully following the decision of Hon’ble Delhi High Court(supra) and ITAT Pune Bench(supra), we direct the Assessing Officer not to charge Sur-charge and Education Cess on the rate of tax under DTAA. Accordingly, Ground Nos.1 and 2 raised by the assessee are allowed.
7.1 No decision of Hon'ble Jurisdictional High Court has been brought to our notice.
8. Ground No.3 is general in nature and does not need any adjudication, hence, dismissed.