2008 (3) TMI 172 - HC - Income Tax

Court interprets 'tax' in DTAA to include 'surcharge,' impacting foreign company tax rate.

The Court held that the term 'tax' in the Double Taxation Avoidance Agreement (DTAA) includes 'surcharge,' requiring a foreign company to pay tax at 65% ... Assessee a foreign company, NRC, resident of USA – rate of tax – revenue submitted that ‘surcharge’ is includible within the meaning of ‘tax’ as ‘surcharge’ is nothing but ‘additional tax’ - Tribunal has erred in law in holding that word ‘tax’ does not include ‘surcharge’ for the purposes of Clause (2) of Article 14 of the DTAA with United States of America - Assessing Officer is justified in holding that the respondent assessee is liable to pay tax at the rate of 65 %, instead of 60% Issues:Interpretation of the term 'tax' in the Double Taxation Avoidance Agreement (DTAA) with the United States of America for the Assessment Year 1994-95.Analysis:1. Issue: Interpretation of the term 'tax' in the DTAA.- The case involved a foreign company, a resident of the United States, offering tax at 60% instead of the maximum 65% applicable to foreign companies.- The Assessing Officer contended that 'tax' includes 'surcharge,' resulting in a higher tax rate for the company.- The Commissioner of Income-tax (Appeals) upheld the company's stance, leading to an appeal by the Revenue before the Income Tax Appellate Tribunal (ITAT).2. DTAA Provisions:- The DTAA between India and the USA outlined that a company from the USA could be taxed in India at a higher rate than domestic companies, not exceeding 15 percentage points.- The disagreement arose regarding whether 'tax' in the agreement encompassed 'surcharge.'3. Arguments and Precedents:- The respondent's counsel argued that 'surcharge' should be excluded from the calculation, citing a previous case.- The Revenue's counsel referred to a legal principle stating that 'surcharge' is a form of 'additional tax.'- The Court analyzed the constitutional provisions related to 'surcharge' and 'tax' but emphasized that the DTAA's clauses were paramount in determining tax liability for foreign companies.4. Judgment:- The Court concluded that the respondent was liable to pay tax at 65%, including the surcharge, based on the provisions of the DTAA and the Finance Act of 1994.- The ITAT and CIT(A) were found to have erred in limiting the tax liability to 60%, leading to the appeal's allowance.- The orders of the CIT(A) and ITAT were set aside, and the Assessing Officer's decision to impose a 65% tax rate on the respondent was upheld.5. Conclusion:- The judgment clarified the interpretation of 'tax' in the DTAA, emphasizing that the agreement's clauses override conflicting provisions of the Income Tax Act.- The decision highlighted the importance of adhering to international agreements in determining tax liabilities for foreign entities, ensuring consistency and compliance with bilateral treaties.By analyzing the specific provisions of the DTAA and relevant legal arguments, the Court resolved the issue of tax liability for the foreign company, establishing a precedent for future cases involving similar tax disputes under international agreements.