DB ENGINEERING & CONSULTING GMBH,BENGALURU vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(1), INTERNATIONAL TAXATION, , BENGALURU

We wish to draw your kind attention to the First Schedule of Finance Act, 2019 (No.2) which is relevant to AY 2020-21 (Pages 125-141 of Paper book). Part III of the First Schedule of Finance Act specifies the rates of income tax applicable for AY 2020-21. Paragraph E lays down the rate of taxes applicable for companies. The rate of tax applicable for a company other than a domestic company (i.e. a foreign company like your appellant) are as under (Page 127 of Paper book):

From the above it is clear that surcharge is to be computed on the income specified in this part and also on income covered by section 111A being tax on short term capital gains or under sections 112 or 112A being tax on long term capital gains. Tax on income chargeable to tax as per rates specified in DTAA is not covered in this part of the First Schedule. Hence the question of levying surcharge on income covered by DTAA rates or including them for determining the rate of surcharge does not arise.

Also, Chapter II – Rates of Income tax of the Finance (No.2) Act,2019 states as under:

In support of his arguments, the learned AR relied on the following judgments:

On the other hand, the learned DR relied on the Order of the lower authorities and submitted that the surcharge is on the basis of the total income, if it exceeds Rs.10 Crores or more, then 5% surcharge is to be levied. The learned DR further submitted that the total income of the assessee for the Assessment Year is as defined in section 5 of the IT Act. In the case of the assessee if the parent company’s income is reduced, the taxable income will be less than Rs.10 Crores which will not affect for the levy of surcharge @ 5%, since the total income declared in the return is more than Rs. 10.00 Crore. While calculating the applicability of surcharge, the total income of assessee is considered. Therefore, the CIT(A) has rightly dismissed the appeal of the assessee.

Considering the arguments from both sides, the assessee has raised the sole issue related to levy of surcharge on its total income including the income covered under DTAA. The contention raised by the assessee has been carefully examined and we note that as per the various precedents, the tax rate provided in the DTAA is the maximum tax rate and no further levy of surcharge or cess shall be applicable as per the judgment of the ITAT Bench in the case of Soregam SA Vs. DDIT (supra) on the income covered under DTAA. The relevant paragraph is as under:

Respectfully following the above judgment, for the income which is covered under DTAA, no surcharge and cess shall be levied on such income of Rs. 78,62,500/- . Further, we note that the Indian entities’ income under the profit gains from business or profession is Rs.9,41,94,586/- and income chargeable under DTAA is Rs.78,62,500/-. Resultantly, the total income of the assessee is Rs.10,20,57,090/-. However, the surcharge is applicable on the total income as per the Finance Act for the year under consideration. In the case of every company other than a domestic company having a total income exceeding Rs.10 Crores, surcharge @ 5% of such income is levied which clearly indicates that the surcharge is to be calculated on the total income of the assessee. The total income of the assessee crosses the threshold for IT(IT)A No.1377/Bang/2024 Page 7 of 8 calculating the surcharge @ 5% on the total income. In the case of non- resident person, the total income has been defined in section 5(2) of the Act which is as under:

From the above section, it is very clear that the CPC has taken into consideration the total income which includes all incomes from whatever sources derived while calculating the surcharge. On conjoined reading of section 5(2) of the I T Act and paragraph ‘E’ II and Surcharge on income tax of the FIRST SCHEDULE ( see section 2) PART I , the surcharge is to be levied on the total income of the assessee. Here, in the case on hand, the assessee’s total income includes income covered under DTAA of Rs.78,62,500/- which is considered as income from other sources and taxable at special rate as per DTAA. Therefore, while giving effect, the AO has to calculate separately the tax at special rate on the income declared under other source of its parent company’s income by following the above judicial pronouncements noted supra, no surcharge is to be levied on tax calculated at Rs. 78,62,500/-. The AO shall calculate tax on the rest of the income covered under profits and gains of business or profession of Rs. 9,41,94,586/- and apply surcharge on such income tax

In the result, appeal of the assessee is partly allowed.