Loading judgment…
Facts
The assessee, Coperion GmbH (a German non-resident company), earned income from engineering services through its Permanent Establishment (PE) in India and also received royalty and Fee for Technical Services (FTS) income from outside India. While the assessee applied a 2% surcharge on PE income and 10% tax (inclusive of surcharge as per DTAA) on royalty/FTS, the Centralized Processing Centre (CPC) clubbed both income streams. This clubbing resulted in the total income exceeding Rs.10 crore, leading the CPC to levy a 5% surcharge, cess, and interest as per domestic law, which the assessee challenged.
Held
The tribunal held that royalty and FTS income, taxed under Article 12(2) read with Article 2 of the India-Germany DTAA at a maximum rate of 10% (which includes surcharge), cannot be subjected to a higher surcharge rate (5%) by clubbing it with PE income under domestic law. This is particularly so because the royalty/FTS income was not shown to be effectively connected to the PE. The Departmental Authorities erroneously applied the higher domestic surcharge rate.
Key Issues
Whether royalty and FTS income, taxable at a gross rate of 10% under India-Germany DTAA (which includes surcharge), can be subjected to a higher surcharge rate (5%) as per domestic law by clubbing it with PE income, even if not effectively connected to the PE.
Sections Cited
Section 143(1) of the Income Tax Act, Section 154 of the Income Tax Act, Section 234A of the Income Tax Act, Section 234B of the Income Tax Act, Section 234C of the Income Tax Act, Section 2(d) of Finance Act, 2019, Article 2 of India-Germany Double Taxation Avoidance Agreement (DTAA), Article 2(3)(b) of India-Germany DTAA, Article 12 of India-Germany DTAA, Article 12(2) of India-Germany DTAA
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH: ‘D’ NEW DELHI
Before: SHRI SAKTIJIT DEY, VICE- & DR. B.R.R. KUMAR
PER SAKTIJIT DEY, VICE-PRESIDENT
Captioned appeal by the assessee arises out of order dated
05.08.2022 of learned Commissioner of Income Tax (Appeals)-42,
Delhi, pertaining to assessment year 2019-20.
The short issue arising for consideration in the present
appeal is levy of surcharge at 5% as against assessee’s claim of
2%.
ITA No.2431/Del/2022 AY: 2019-20
Briefly the facts are, the assessee is a non-resident corporate
entity incorporated in Federal Republic of Germany and is a tax
resident of Germany, hence, entitled to benefits under India –
Germany Double Taxation Avoidance Agreement (DTAA). In the
year under consideration, the assessee had earned an amount of
Rs.5,61,65,673/- from engineering services rendered to
customers in India. For rendering such services, the assessee has
set up a supervisory Permanent Establishment (PE) in India. In
the return of income filed for the impugned assessment year, the
assessee offered the income earned from engineering services at
the hands of the PE and applied tax rate of 40% on net basis with
surcharge at 2% and cess at 4%, in terms with domestic law. In
addition, the assessee had earned an amount of Rs.4,77,37,428/-
from Information Technology (IT) charges, Marketing fee, Repair
charges and Testing charges. Claiming that such services were
rendered from outside India, the assessee offered them to tax in
India by treating them as royalty and Fee for Technical Services
(FTS) by applying tax rate of 10% on gross basis, in terms with
Article 12 of tax treaty. While processing the return filed by the
assessee under section 143(1) of the Act, the Centralized
2 | P a g e
ITA No.2431/Del/2022 AY: 2019-20
Processing Centre (CPC) clubbed both the receipts, i.e., the
receipts from engineering services and receipts towards royalty
and FTS together and, since, after such clubbing the total amount
exceeded the threshold limit of Rs.10 lakhs, surcharge rate of 5%
was applied with consequential levy of cess thereon as well as
interest under section 234A, 234B and 234C. This resulted in
extra demand on the assessee.
After receiving the intimation issued under section 143(1) of
the Act, the assessee filed an application seeking rectification
under section 154 of the Act. However, the rectification
application was also rejected. Being aggrieved, the assessee went
in appeal before learned first appellate authority.
Before learned first authority, the submission of the
assessee was two fold. Firstly, royalty and FTS income cannot be
clubbed together with the income of PE, which is subjected to tax
under the domestic law. It was submitted, since, royalty and FTS
is governed under the treaty provisions, it cannot be clubbed with
the income chargeable under the domestic law. In this view of the
matter, the income of the assessee does not exceed the threshold
limit of Rs.10 lakhs. Secondly, the assessee submitted that in
3 | P a g e
ITA No.2431/Del/2022 AY: 2019-20
terms with Article 2 read with Article 12(2) of India Germany
DTAA, tax includes surcharge and has to be taxed at the rate of
10% on gross basis. Therefore, the assessee cannot be called
upon to pay more than 10%, insofar as income from royalty and
FTS is concerned. The aforesaid submission of the assessee did
not find favour with learned first appellate authority. He observed
that total income earned by the assessee during the year was to
the tune of Rs.10,39,03,100/-. Therefore, in terms with section
2(d) of Finance Act, 2019, surcharge has to be levied at 5% on the
income tax as total income has exceeded the threshold limit of
Rs.10 crores.
As regards assessee’s contention that as per treaty
provision, rate of tax on royalty and FTS cannot exceed 10%,
learned first appellate authority held that since it is not the case
of the assessee that royalty and FTS income is not effectively
connected with the PE, the income from royalty and FTS has to be
taxed under the domestic law.
We have considered rival submissions and perused the
materials on record. We have also applied our mind to the
decisions relied upon by learned counsel for the assessee. The
4 | P a g e
ITA No.2431/Del/2022 AY: 2019-20
crux of the issue is, whether the royalty and FTS income can be
subjected to levy of surcharge, as provided under the domestic
law. Undisputedly, the assessee has earned an amount of
Rs.5,61,65,672/- from engineering services, which is attributable
to the PE and taxed under the domestic law. Whereas, in respect
of royalty and FTS income of Rs.4,77,37,428/-, the assessee has
claimed benefit under the treaty provisions. While computing the
tax liability of the assessee, CPC has clubbed both streams of
income and, since after clubbing, the total threshold limit of
Rs.10 lakhs surcharge was levied at the enhanced rate of 5%.
From the very beginning, it is the case of the assessee that
for the purpose of levy of surcharge, royalty and FTS income
cannot be considered. Keeping in perspective the aforesaid factual
position, if we delve into the issue, it is to be noted that the
assessee, being a tax resident of Germany, is entitled to treaty
benefits. Article 2 of India – Germany DTAA deals with taxes
covered under the treaty. Article 2(3)(b) deals with taxes in India.
It says, income tax includes any surcharge thereon and wealth
tax. Therefore, as per the definition of income tax under the treaty
provisions, it includes surcharge. Undisputedly, the amount of
5 | P a g e
ITA No.2431/Del/2022 AY: 2019-20
Rs. 4,77,37,428/- is offered as income from royalty and FTS. The
Revenue has not disputed the nature and character of the
income. 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. However, in our view, 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
6 | P a g e
ITA No.2431/Del/2022 AY: 2019-20
to the PE. Therefore, in our view, the royalty 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%.
In view of the aforesaid, we direct the Assessing Officer 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.
In the result, appeal is allowed.
Order pronounced in the open court on 17th January, 2024
Sd/- Sd/- (DR. B.R.R KUMAR) (SAKTIJIT DEY) ACCOUNTANT MEMBER VICE-PRESIDENT Dated: 17th January, 2024. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi
7 | P a g e