By 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 account
of short withholding of tax.
Aggrieved, the Taxpayer filed an appeal
before the CIT(A) who reversed AO’s order on the ground that disallowance can
be made only if there was either no deduction or after deduction of tax, the
same was not paid on or before due date of filing of return. However, since
Taxpayer had withheld taxes appropriately at the rates prescribed in DTAA and
also paid the same before the due date of filing of return, no disallowance
could be made.
Aggrieved, the AO appealed before the
Tribunal.
HELD
- Article 2 of
India-Japan DTAA provides that the term “taxes” referred to in the DTAA for
Indian purposes means the income tax including surcharge thereon. A plain
reading of the provisions of DTAA reveals that the amount of tax includes
surcharge.
- Further as
per Article 12, the tax that can be charged on royalty is restricted to 10% of
the gross amount of royalty. Having regard to the definition of “taxes” in
Article 2, the total tax including surcharge is restricted only to 10% under
Article 12. Therefore, Taxpayer was not liable to withhold tax on the payment
made to FCo after including the surcharge over and above the tax rate as
specified under Article 12 of India-Japan DTAA.
- Further, as
held in the case of DIC Asia Pacific Pte. Ltd. (18 ITR 358), since
education cess is charged on the income tax, it partakes the character of the
surcharge. Therefore, Taxpayer was not liable to include education cess over
and above the taxes withheld by the Taxpayer.
