February 2019

Article 2 & Article 12 of India-Japan DTAA; rate prescribed in DTAA is total withholding rate inclusive of surcharge and cess.

Geeta Jani | Dhishat B. Mehta
Chartered Accountants

18.  TS-721-ITAT-2018 (Ahd) ACIT vs. Panasonic Energy India Co. Ltd. Date of Order: 3rd December, 2018 A.Y.: 2008-09

 

Article 2 & Article 12 of India-Japan DTAA; rate prescribed in DTAA is total withholding rate inclusive of surcharge and cess.

 

FACTS


Taxpayer, a private limited company was engaged in the business of manufacturing, trading, and export of dry Batteries along with spare parts of dry batteries. During the year under consideration, the Taxpayer paid brand usage fee and royalty fee to a Japanese company (FCo) after withholding tax on such sum at the rate of 20%1 on the gross amount.

 

The Assessing Officer (AO), however, was of the view that the taxes were required to be withheld at the rate of 22.66% after considering surcharge and education Cess of 2.66% and thus disallowed the proportionate expenditure on account of short deduction of taxes on such payments to FCo.

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1.  India-Japan DTAA provided ceiling of 10%. However, it is not clear from the decision as to why the Taxpayer withheld tax @20%.

 

 

Taxpayer argued that the scope of Article 2 of the DTAA covered both surcharges and education cess. Even otherwise, as per the provision of Article 12 of the DTAA, the payment was liable to tax at the rate not exceeding 10% whereas Taxpayer had withheld tax @20% which was adequate to cover the amount of surcharge and education cess. However, AO disregarded the Taxpayer’s contentions and disallowed the proportionate expenses on ac

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