“Education cess” is “additional surcharge” & is included in “tax” under DTAA. If DTAA caps the rate of “tax” payable, cess is not payable by foreign assessee
The assessee, a Singapore company, offered interest and royalty income to tax at the rate of 15% & 10% as specified in Articles 11 & 12 of the India-Singapore DTAA respectively. The AO held that the assessee was also liable to pay surcharge and education cess in addition to the tax. The CIT (A) upheld the assessee’s claim that surcharge was not leviable though he rejected the claim with regard to cess. On further appeal by the assessee, HELD allowing the appeal:
Articles 11 & 12 of the DTAA provide that the “tax” chargeable in India on interest and royalties cannot exceed 15% and 10% respectively. The expression ‘tax’ is defined in Article 2(1) to include ‘income tax’ and includes ‘surcharge’ thereon. Article 2(2) extends the scope of the ‘tax’ by laying down that it shall also cover “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”. “Cess” was introduced by the Finance Act, 2004 and it is described in s. 2(11) of the Finance Act 2004 as “additional surcharge for purposes of the Union, to be called the “Education Cess on income-tax”. Accordingly, the “education cess” is in the nature of an “additional surcharge” and is covered by Article 2. Accordingly, education cess cannot be levied in respect of the assessee’s tax liability.