According to the India-Japan DTAA, surcharges and cess cannot be levied at a rate more than 10%

Fact and issue of the case

The assessee has filed the present appeal challenging the final assessment order dated 27.06.2022 passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (for short ‘the Act’) pertaining to assessment year 2017-18, in pursuance to the directions of learned Dispute Resolution Panel (DRP).

The issue raised in ground nos. 2 to 7 is, whether the assessee had a Permanent Establishment (PE) in India under Article 5 of Indian- Japan Double Taxation Avoidance Agreement (DTAA) and the consequent attribution of profit to the PE.

Briefly the facts relating to this issue are, the assessee is a non-resident corporate entity incorporated in Japan and a tax resident of Japan. As stated by the Assessing Officer, the assessee is engaged in the business of manufacturing of clutch systems and facings for cars, motorcycles, utility vehicles and other engines. It also undertakes moulding and machining of plastics and manufacturing of various specialized tools and dyes. Initially, the assessee had entered into a joint venture in the name and style of FCC Ricko Ltd., which ultimately merged with a wholly owned subsidiary of the assessee in India, namely, FCC Clutch India Pvt. Ltd., which is also engaged in similar business of manufacturing of supplying automobile clutch assembly. In the year under consideration, the assessee had entered into various international transactions with its AE in India. In the return of income filed for the assessment year under dispute the assessee declared income of Rs.79,65,46,784/- and offered to tax at the rate of 10% as per the treaty provisions. In course of assessment proceeding, the Assessing Officer noticed that the incomes offered by the assessee are in the nature of royalty, Fee for Technical Services (FTS) and interest income. Whereas, amounts of Rs. 94,95,87,223/- and Rs.54,03,953/- received by the assessee towards sale of raw materials and components and capital goods, respectively, were not offered to tax on the plea that the said supplies have been made on a principal to principal basis outside India and the property/title in goods were transferred outside India. After examining the Master Sales Agreement and other materials on record, the Assessing Officer was of the view that the wholly owned subsidiary of the assessee in India is effectively assessee’s PE in India and the raw materials and capital goods sold by the assessee were effectively connected with the activities of the PE. While coming to such conclusion, the Assessing Officer referred to the assessment order passed for assessment year 2015-16. Thus, following the decision taken in the preceding assessment year, the Assessing Officer ultimately held that 50% of the amount received towards sale of raw materials and capital goods is attributable to the PE in India as business income. Accordingly, he added back an amount of Rs.2,77,42,494/-.

Against the draft assessment order so passed, the assessee raised objections before learned DRP. Though, learned DRP was conscious of the decision of the Tribunal in assessment years 2014-15 and 2015-16 holding that the assessee had no PE in India, however, following the direction of DRP in assessment year 2017-18, learned DRP observed that the earlier view of DRP has to be followed. However, the learned DRP directed the Assessing Officer to verify assessee’s claim in terms of Tribunal’s orders and to complete the assessment, keeping in view the departments stand on acceptance of ITAT orders or preferring litigation against the orders of the Tribunal. Basis aforesaid direction of learned DRP, the Assessing Officer confirmed the addition made in the draft assessment order.

Observation of the court

There cannot be any dispute that factually the impugned assessment year stands in identical footing to assessment years 2014-15 and 2015-16. This is further evident from the fact that, both, the Assessing Officer and learned DRP have acknowledged that the factual position in the present assessment year is identical to the preceding assessment years. Thus, respectfully following the decision of the Coordinate Bench, as discussed above, we hold that the assessee had no PE in India in any form whatsoever. Therefore, the addition made by attributing a part of the income of the assessee to the alleged PE has to be deleted. Accordingly, we do so. Grounds are allowed.

In ground no. 8, the assessee has raised a legal issue as to whether surcharge and cess can be levied over and above tax computed at the rate of 10% as per treaty provisions.

Having considered rival submissions, in principle, we accept assessee’s contention that levy of surcharge and cess cannot exceed the tax rate of 10% as per India – Japan DTAA. Article 12 of India – Japan tax treaty provides that the tax to be charged on royalty and FTS shall not exceed 10% of the gross amount of royalty or FTS. Article 2 of the tax treaty defines tax in India as income tax including any surcharge thereon. Therefore, Article 12 read with Article 2 of the tax treaty makes it clear that the rate of tax at 10% would encompass surcharge and education cess as it is also in the nature of surcharge. Therefore, we hold that levy of surcharge and cess over and above the taxable rate of 10% on royalty and FTS is not permissible as per the treaty provisions. While coming to such conclusion, we are well supported by the following decisions: DCIT vs Marubeni Corporation (ITA No.: 11/Mu m/2022) CIT (International Taxation) v. BOC Group Ltd. [2015] 64 taxmann.com 386/[2016] 156 ITD 402 (Kol. – Trib.) JCDecaux S.A., v. ACIT/DCIT, Circle-2(1)(2), International Taxation, New Delhi [2021] 123 com 221 (Delhi – Trib.) DIC Asia Pacific Pte Ltd vs Asst Director of Income Tax, International Taxation (2012) 52 SOT 447 (Kol ITAT) Sunil V. Motiani vs ITO (International Taxation) (2013) 33 com 252 (Mumbai Trib) Parke Davis and Company LLC vs ACIT (2014) 41 com 193 (Mumbai Trib) ITO (Intl Taxn) vs M/s M Far Hotels Ltd in ITA Nos. 43o to 435 / Coch / 2011 dated 5.4.2013 (Cochin Tribunal)

In view of above, this ground is allowed.

Ground nos. 9 and 10, being consequential in nature, do not required adjudication.

In the result, the appeal is allowed, as indicated above.

Read the full order from here

FCC-Co.-Ltd.-Vs-ACIT-ITAT-Delhi