Deduction of surcharge and education cess levied on non-domestic companies

[MAHESH MATHUR]

As per DTAA with Germany Tax on Technical Services is 10% As Article 12. As per Finance Act TDS for Non-Resident Companies for such services is also 10%. However, as per Finance Act there is a further levy of Surcharge @2.5% on Non Domestic Companies if Income to be remitted is more than 1 crore plus levy of Education Cess @ 3%. How much Deduction should be made in such a situation? Should it be resticted to 10% only or it should be at 10.56%?

[sanjay gupta]

The rate of tax under DTAA or local law whichever is favourable in applicable. Here the DTAA rate 10% is to be applied.

[Surender Gupta]

The applicability of rate of tax under income tax has been specified under section 2(37) of the Income Tax Act, 1961. Section 2(37)(iii) is the sub clause which related the tax and tds rates with the DTAA. This section is talking about the basic rate of tax. The beneficial rate of tax shall be determined under section 2(37) but the same shall be increased by surcharge which is in addition of basic rate. Therefore in your case, TDS is to be deducted at 10.56% [10% plus surcharge 2.5% plus cess 3%]

[Anuj Gupta]

There are 2 department circulars clarifying the issue very clearly.The TDS rates as per DTAA are final rates and are not to be increased by any surcharge or cess.However if you wish to use the Indian Income Tax Rates then you need to definitely increase the same by surcharge or cess.

[Guest]

Mr. Anuj Gupta can you please mention the dept. circular no. It will definetly help us.

AI Summary

DTAA withholding rate governs whether surcharge and education cess may be added to domestic TDS obligations. The issue is whether the DTAA withholding rate for technical services to nonresident companies is final or must be increased by domestic surcharge and education cess. One position applies the DTAA rate alone; an opposing position treats the DTAA as the basic rate to which surcharge and cess are added. Contributors note departmental circulars supporting the treaty-rate-as-final view, while others rely on statutory charging measures to justify adding surcharge and cess to determine the TDS deduction.