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Income Tax Appellate Tribunal, MUMBAI BENCH “L”, MUMBAI
Before: SHRI G.S. PANNU & SHRI AMARJIT SINGH
The captioned appeal by the assessee is directed against the order of Assessing Officer dated 21.12.2015 passed under section 144C(13) r.w.s. 143(3) of the Income Tax Act, 1961 (in short ‘the Act’), which is in terms of the directions issued by the Disputes Resolution Panel-I, Mumbai under section 144C(5) of the Act dated 23.11.2015.
In this appeal, assessee has raised the following Grounds of appeal :
“1. The Assessing Officer/Dispute Resolution Panel erred in holding that guarantee commission received by the Appellant amounting to Rs.33,40,347/- was liable to tax in India.
2. The Assessing Officer/Dispute Resolution Panel erred in holding that guarantee commission was liable to tax under section 9 of the Income Tax Act, 1961.
3. The Assessing Officer/Dispute Resolution Panel erred in holding that income on account of providing corporate guarantee was taxable in India under Article 23 of the Double Taxation Avoidance Agreement (DTAA) between India and France.
4. Having regards to the facts and circumstances of the case and the provisions of law, the Appellant submits the taxation of guarantee commission is erroneous and the addition requires to be deleted.
5. Without prejudice to Ground Nos. 1 to 4, the Assessing Officer erred in levying surcharge at the rate of 5% to the tax levied on guarantee commission received by the Appellant.
6. The Assessing Officer erred in adding surcharge, education cess and secondary and higher education cess to the tax on the Royalty income charged as per the provisions of the DTAA between India and France.
7. The Assessing Officer erred in levying interest under section 234B of Rs.10,18,290/-.
8. The Assessing Officer erred in levying interest under section 234C of Rs.39,315/-.”
Insofar as Ground of appeal nos. 1 to 4 are concerned, they relate to a single issue arising from the action of income-tax authorities in holding that guarantee commission earned by the assessee amounting to Rs.33,40,347/- was liable to tax in India.
4. In this context, the relevant facts are that the appellant is a foreign company incorporated in France and is a tax resident of France. It is engaged in the business of providing various support, sustenance and developmental service to Capgemini Group companies across the world. During the year under consideration, assessee-company had earned royalty from two of its associate concerns in India, viz., Capgemini India Pvt. Ltd and Capgemini Business Services India Pvt. Ltd. In the return of income filed by the assessee for the assessment year under consideration it declared an income of Rs.9,52,52,240/- on account of such royalty income. In the course of assessment proceedings, the Assessing Officer noticed that assessee had received guarantee commission of Rs.33,40,347/- from the two associate Indian concerns in return for assessee having extended corporate guarantee to BNP Paribas, France for the credit facilities extended by BNP Paribas, France to the associate concerns in India. Before the Assessing Officer the plea of the assessee was that such guarantee commission was not chargeable to tax in India either under the domestic law or even in terms of Double Taxation Avoidance Agreement (DTAA) between India and France. The pertinent point made out by the assessee was that no service was rendered by the assessee, much less a professional/ technical service, and in any case, no service can be said to have been rendered in India. The plea of the assessee did not find favour even with the DRP and accordingly, the Assessing Officer held the guarantee commission of Rs. 33,40,347/- as taxable.
5. At the time of hearing, the learned representative for the assessee pointed out that an identical controversy was considered by the Mumbai Bench of the Tribunal in the assessee’s own case for Assessment Year 2009-10 vide dated 28.3.2016. The relevant discussion in the order of the Tribunal dated 28.3.2016 (supra) reads as under :-
“3. Rival contentions have been heard and record perused. Facts in brief are that the assessee is a resident of France and does not have a permanent establishment in India. During the year assessee has given a corporate guarantee BNP Paribas, a French Bank in France, on behalf of its various subsidiaries worldwide. During the year under consideration, in India, two subsidiaries of the assessee M/s.Capgemini India Pvt. Ltd. and Capgemini Business Services (India) Ltd. were sanctioned credit facilities by the Indian Branches of BNP Paribas, which credit facilities to the extent of USD 15 million4and 2 million respectively, were secured by the said corporate guarantee given by the assessee. The assessee has charged guarantee commission @ 0.5% per annum for the corporate guarantees given on behalf of its subsidiaries in India. The AO has taxed the same by holding it to be "Other Income" under Article 23 of the DTAA between India and France.
The assessee is before us against the said addition.
We have considered rival contentions and found that the AO taxed the guarantee commission on the plea that guarantee has been provided for the purpose of raising finance by an India company. As per the AO finance was raised in India. The AO further observed that finance requirement is met by a Indian branch of the bank, the benefits of guarantee are shared by the Indian entity with the assessee by making a compensatory payment. Accordingly the AO held that fees for guarantee arise in India. From the record we found that guarantee commission received by France company did not accrue in India nor it can be deemed to be accrued in India, therefore,
not taxable in India under Income Tax Act. Furthermore, as per Article 23.3, income can be taxed in India, only if it arises in India. In the instant case, the income clearly arises in France because the guarantee has been given by the assessee, a French company to BNP Paribas, a French Bank, in France and, therefore, Article 23.3 has no applicability as income does not arise in India.”
Before us, it was a common point between the parties that the facts and circumstances of the dispute in the instant year are similar to those considered by the Tribunal in Assessment Year 2009-10 (supra). It was also a common point between the parties that decision of the Tribunal dated 28.3.2016 (supra) continues to hold the field and, therefore, following the aforesaid precedent, in the instant year also the guarantee commission of Rs. 33,40,347/- earned by the assessee from the two associate Indian concerns cannot be held to be taxable in India. As a consequence, on this aspect, the assessee succeeds.
Ground of appeal no. 5 is rendered infructuous in view of assessee having succeeded on Ground of appeal nos. 1 to 4. Thus, the same is dismissed as infructuous.
The controversy in Ground of appeal no. 6 arises from the action of the income-tax authorities in holding that the surcharge and education cess is payable in addition to tax of 10% payable on royalty income. On this aspect, there is no dispute between the assessee and the Revenue that the royalty income earned by the assessee is to be taxed @ 10% in view of the DTAA between India and France. The dispute is whether the assessee is liable to pay surcharge and education cess in addition to the tax leviable @ 10%.
9. As noted earlier, assessee is a foreign company which is a tax resident of France. The royalty income earned by the assessee is liable to be taxed in India @ 10% in terms of Article 13 of DTAA between India and France. While calculating such liability, the Assessing Officer also charged surcharge and education cess in addition to tax @ 10%. The plea of the assessee before us is that the rate of tax of 10% prescribed in Article 13 of the DTAA cannot be enhanced by including surcharge and education cess. In this context, the learned representative pointed out that similar situation has been considered by the Mumbai Bench of the Tribunal in the case of Sunil V. Motiani vs. ITO (International Taxation)-4(1), 59 SOT 37 (Mum Trib) and the Kolkata Bench of the Tribunal in the case of DIC Asia Pacific Pte. Ltd. vs. DIT (IT), 52 SOT 447 (Kolkata Trib). At the time of hearing, the learned representative also furnished copy of the DTAA between India and France to point out that the treaty is similarly worded qua the impugned aspect, as were the India-UAE and India-Singapore treaties, considered by the Mumbai Bench and Kolkata Bench of the Tribunal respectively. It was, therefore, contended that surcharge and education cess could not be charged separately over and above the rate of 10% prescribed in Article 13 of the India-France DTAA.
On the other hand, the ld. CIT-DR appearing for the Revenue has not disputed the factual matrix brought out by the assessee, but defended the order of the authorities below.
We have carefully considered the rival submissions. Article 2 of India-France DTAA provides a definition of taxes which are governed by such treaty and the same, inter-alia, prescribes that the expression “income-tax” would include any surcharge thereon. Clause (2) of Article 2 further prescribes that the treaty shall also apply to any “identical or substantially similar taxes” which may be imposed by either of the two countries after the signing of the treaty. In the present context, it is not in dispute that ‘education cess’ introduced by the Finance Act, 2004 is akin to surcharge and the Kolkata Bench of the Tribunal in the case of DIC Asia Pacific Pte. Ltd. (supra) held the same to be in the nature of an additional surcharge. Now, since clause (1) of Article 2 provides that the taxes governed would include taxes and surcharge thereon, we find no reason for the Revenue to levy the surcharge and education cess, which is also in the nature of surcharge, over and above the cap of 10% prescribed in Article 13 as the tax rate for royalty income. In any case, the provisions of Article 13 of the India-France DTAA, prescribing a cap of 10% on the rate of tax, read with Article 2 thereof would prevail over the provisions of the domestic income-tax law and thus the tax liability on royalty income shall be capped at 10%. The aforesaid plea of the assessee, in our view, is clearly in tune with the phraseology of the India-France DTAA and is fully supported by the precedents cited before us. As a consequence, we direct the Assessing Officer to re-compute the tax liability on royalty income accordingly. Thus, on this aspect also assessee succeeds.
Insofar as Ground of appeal nos. 7 & 8 are concerned, they relate to charging of interest u/s 234B & 234C of the Act which are stated to be consequential in nature and do not require any specific adjudication.
In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on 13th July, 2016.