COPERION GMBH,FOREIGN vs. ACIT, CIRCLE INTERNATIONAL TAXATION,1(2)(1), NEW DELHI

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 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 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.

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 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.