Tribunal allows appeals, directs deletion of addition from taxable income, & recompute tax liability per DTAA.

The Tribunal allowed both appeals filed by the assessee, directing the AO to delete the addition of Rs. 1,13,00,467 from the taxable income and to recompute the tax liability on royalty income without levying surcharge and education cess, thereby adhering to the provisions of the DTAA between India and France. The issue regarding the levy of interest under section 234B was deemed consequential and required no specific adjudication.

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Issues Involved:
1. Inclusion of service tax deducted by customers in the taxable income of the assessee.
2. Levy of surcharge, education cess, and secondary and higher education cess on the income taxed under Article 13 of the Double Taxation Avoidance Agreement (DTAA) between India and France.
3. Levy of interest under section 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

Issue 1: Inclusion of Service Tax Deducted by Customers in Taxable Income

The primary issue was whether the amount of Rs. 1,13,00,467, representing service tax deducted by customers from amounts payable to the assessee, should be included in the taxable income of the assessee. The assessee argued that the liability to deposit service tax under the reverse charge mechanism as per section 66A of the Finance Act, 1994, rests with the customers. Therefore, the deducted amount should not form part of the assessee's income.

The Tribunal referred to its earlier decision in the assessee’s own case for AY 2008-09 and 2009-10, where it was held that such amounts deducted by customers and deposited with the government do not accrue to the assessee as income. The Tribunal noted that the customers deducted the service tax amount from the fee/royalty payable to the assessee and remitted only the balance amount. The assessee had accepted this deduction and had no right to recover the deducted amount from the customers. Hence, the service tax amount did not partake the character of income in the hands of the assessee.

The Tribunal directed the AO to verify the claim of the assessee and, upon finding it in order, to delete the addition of Rs. 1,13,00,467 from the taxable income. This direction was in line with maintaining judicial discipline and consistency.

Issue 2: Levy of Surcharge, Education Cess, and Secondary and Higher Education Cess

The second issue involved the levy of surcharge, education cess, and secondary and higher education cess on the income taxed under Article 13 of the DTAA between India and France. The assessee contended that the income should be taxed at a flat rate of 10% as per the DTAA, without any additional levies.

The Tribunal referred to its decision in the case of Capgemini SA vs. DCIT, where it was held that the rate of tax prescribed in the DTAA cannot be enhanced by including surcharge and education cess. Article 2 of the DTAA includes surcharge within the definition of "income-tax," and thus, the tax rate of 10% on royalty income cannot be increased by adding surcharge or education cess.

The Tribunal directed the AO to recompute the tax liability on royalty income without levying surcharge and education cess, thereby capping the tax rate at 10% as per the DTAA.

Issue 3: Levy of Interest under Section 234B

The third issue was regarding the levy of interest under section 234B of the Income Tax Act. The assessee argued that being a non-resident, its entire income was subject to tax deduction under section 195, and hence, the provisions of section 234B were not applicable.

The Tribunal noted that this ground was consequential in nature and did not require specific adjudication.

Conclusion:

The Tribunal allowed both appeals filed by the assessee, directing the AO to delete the addition of Rs. 1,13,00,467 from the taxable income and to recompute the tax liability on royalty income without levying surcharge and education cess, thereby adhering to the provisions of the DTAA between India and France. The issue regarding the levy of interest under section 234B was deemed consequential and required no specific adjudication.

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