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As per the India-Japan DTAA levy of surcharge and cess cannot exceed 10%

Facts of the case:

  • FCC Co Ltd (hereinafter referred to as the “Assessee”) is non-resident corporate entity and a tax resident of Japan. The Assessee was in the business of manufacturing of clutch systems, facings for engines etc. The Assessee had a wholly owned subsidiary in India i.e., FCC Clutch India Pvt. Ltd (hereinafter referred to as the “Associate Enterprise” or “AE”) which was also into a similar business of manufacturing of supplying automobile clutch assembly.
  • For the AY 2017-18, Assessee filed its income tax return and declared an income of ₹79.65 crores which was offered to tax at the rate of 10% as per the India-Japan DTAA provisions being in the nature of royalty, fees for technical services (FTS) and interest income.
  • The Assessing Officer (AO) in the draft order held that 50% of the amount received by the Assessee towards sale of raw material, components and sale of capital goods were effectively connected with the business of its AE which was effectively the Assessee’s Permanent Establishment (PE) in India and were to be added to the income of the Assessee and offered to tax. To come to this conclusion, the AO had relied on the assessment order passed for AY 2015-16.
  • The Assessee raised objections against such draft order before the Dispute Resolution Panel (DRP). For the AY 2014-15 and 2015-16, the Tribunal had earlier held that the Assessee had no PE in India, however, the DRP observed the view of the earlier DRP for AY 2015-16 and directed the AO to verify whether the facts in AY 2017-18 were the same as the matter raised before the Tribunal pertaining to AY 2014-15 and AY 2015-16. AO confirmed the additions made in the draft order and passed an order under section 143(3) read with 144C(13) of the Income Tax Act, 1961(“Act”).
  • The Assessee filed an appeal before the ITAT on the following issues:
  • Whether the AE would constitute a PE in India as per Article 5 of the India-Japan DTAA; and
  • Whether surcharge and cess can be levied over and above the tax computed at the rate of 10% as per the India-Japan DTAA provisions.

Order of the ITAT:

  • With respect to the first issue, the ITAT relied on the previous judgement of the Hon’ble Tribunal for the identical issue pertaining to AY 2014-15 and AY 2015-16 wherein it was held that Assessee did not have any PE in India in any form. The Hon’ble Tribunal had given such an observations on the basis that:
  • No fixed place PE was constituted as per the provisions of Article 5(1) of the India-Japan DTAA as the AE’s premises did not satisfy the disposal test and the business of the Assessee was not carried on from such place. Herein it was held that the Assessee had mere access to the premises which was limited to rendering of agreed upon technical assistance to the AE, thus not satisfying the disposal test. Also, the AE had its own independent business and clients. The Assessee had supplied goods to the AE, however, the goods were manufactured and sold outside India and consideration was also received outside India, accordingly the title passed outside India and thus the Assessee had not carried out any operations in India in relation to supply of raw material and capital goods.
  • No supervisory PE was constituted as per the provisions of Article 5(4) of the India-Japan DTAA as the employees of the Assessee who visited India assisted the AE in relation to supplies made by the AE to its customers in the form of IT Support, fixing of machines, support in quality check etc. Such employees provided services which were not in the nature of supervisory functions and also there was no installation or assembly projects going on at the AE’s premises. Such income earned by the Assessee was correctly offered to tax as Fees for technical services as the AE would not constitute a Supervisory PE of the Assessee.
  • Accordingly, wherein no PE is constituted, no profit needs to be attributed to a PE, and the additions made by the AO were to be deleted.
  • With respect to issue of whether surcharge and cess can be levied over and above the tax rate as per the treaty provisions, it was held that Article 12 of the India-Japan DTAA states that tax to be charged on FTS and royalty cannot exceed 10% and Article 2 of the DTAA clearly defines tax in India as “income tax including any surcharge thereon”. Accordingly, 10% is a flat rate which includes all surcharge (including cess).

FCC Co Ltd. v. Assistant Commissioner of Income-tax (International Taxation)-1(3)(1) (145
taxmann.com 649, 2022, ITAT Delhi Bench)

SW Point of View: The rates as defined in the DTAA will not subject to any surcharge or cess as these are encompassed in the definition of tax as per the provisions of the treaties.

Direct Tax Team, SW India

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