‘Education cess’ is an ‘additional surcharge’ and is included in ‘tax’ under the DTAA, where the language of the DTAA includes ‘surcharge’ as ‘tax’. ? Where the DTAA caps the rate of ‘tax’ payable, cess is not separately payable by taxpayer.

Where the DTAA caps the rate of ‘tax’ payable, cess is not separately payable by taxpayer.

• The taxpayer, a Singapore company (FCO), eligible for India-Singapore treaty benefits, filed a return of income disclosing interest and royalty income. FCO claimed that the said incomes were taxable at flat rate of 15% and 10% under Articles 11 and 12, respectively.
• The Tax Department rejected the taxpayer’s contentions and levied surcharge and education cess in addition to the rates applicable to respective incomes.

 ITAT Ruling:

• The expression ‘tax’ is defined in Article 2(1) of the India-Singapore DTAA, in the context of India, to include ‘income tax’ and ‘surcharge’ thereon.
• Article 2(2) of the DTAA covers within its ambit “any identical or substantially similar taxes which are imposed by either contracting state after the date of signature of the present agreement in addition to, or in place of, the taxes referred to in paragraph 1”. Therefore, though education cess was introduced much after the signing of the India-Singapore DTAA on 24th January, 1994, it is covered under the expression ‘tax’.
• Education cess, introduced in India in 2004, is nothing but an additional surcharge and is covered by scope of Article 2 of the DTAA. Accordingly, provisions of Article 11 and 12 will find precedence over provisions of Incometax Act and taxability will be restricted to the specific flat rates provided in the respective income Articles of the treaty.