Spanish company's technical service fees qualify for 10% withholding tax under Indo-Spain treaty protocol

The ITAT Kolkata ruled in favor of the assessee regarding withholding tax on fees for technical services paid to a Spanish company. The tribunal held that under the Indo-Spain tax treaty protocol, the applicable withholding tax rate was 10% (inclusive of surcharge and education cess), not the higher domestic rate. Following precedent from ITC Ltd case, the tribunal determined that treaty protocols are integral parts of tax treaties and do not require separate government notifications for implementation. Since the assessee correctly deducted tax at 10%, they were not in default, and the excess tax demand and consequential interest were deleted.

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Issues Involved:
1. Rate of withholding tax as per Income-tax Act vs. Double Tax Avoidance Agreement (DTAA).
2. Binding nature of CBDT circulars on appellate authorities.
3. Retrospective applicability of CBDT circulars.
4. Levy of interest under section 201(1A) of the Income Tax Act, 1961.

Summary:

Issue 1: Rate of Withholding Tax
The primary issue was whether the rate of withholding tax should be as per the Income-tax Act, 1961 or the Double Tax Avoidance Agreement (DTAA) between India and Spain. The assessee argued that the rate specified in the DTAA, which is more favorable at 10%, should apply instead of the 10.608% under the Income-tax Act. The Tribunal upheld this view, stating that the protocol to the DTAA is an integral part of the tax treaty and does not require a separate notification by the Government of India to be effective. Consequently, the assessee's deduction at 10% was deemed correct.

Issue 2: Binding Nature of CBDT Circulars
The assessee contended that the CBDT circular, which mandated the issuance of a separate notification for the protocol to be effective, was not binding on appellate authorities. The Tribunal agreed, citing the Supreme Court's decision in CIT v Hero Cycles (P) Ltd, which held that CBDT circulars are binding on the Income Tax Officer but not on appellate authorities or the courts.

Issue 3: Retrospective Applicability of CBDT Circulars
The Tribunal addressed the issue of whether the CBDT circular issued on February 3, 2022, could be applied retrospectively to the assessment years 2019-20 and 2020-21. The Tribunal concluded that the circular was prospective in nature and could not impose new obligations or disabilities retrospectively unless explicitly stated by the legislature.

Issue 4: Levy of Interest under Section 201(1A)
The Tribunal held that since the tax demand was unsustainable, the consequential levy of interest under section 201(1A) of the Income Tax Act was also not justified. The Tribunal relied on the Supreme Court's decision in CCE vs. HMM Ltd, which stated that interest or penalty cannot be levied if the primary demand is unsustainable.

Conclusion:
The Tribunal allowed the appeals of the assessee, setting aside the orders of the lower authorities. The rate of withholding tax was confirmed at 10% as per the DTAA, and the additional demands and interest levied by the revenue authorities were deleted.

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