INCOME TAX ACT, 1961

--Double taxation relief--Agreement between India and Singapore Whether education cess was to be levied in addition to tax rates prescribed in DTAA--Assessee, a Singapore based company, being eligible for the benefit of India-Singapore Tax Treaty had claimed interest and royalty income to be taxable at the rate of 15 per cent and 10 per cent respectively as per provisions of articles 11 and 12 of applicable tax treaty. AO accepted the claim of taxability at the rates specified in articles 11 and 12 but also levied surcharge and education cess in addition to the above tax liability. Held: Was not justified, as a plain reading of the provisions revealed that tax charged on interest and royalties cannot exceed 15 per cent and 10 per cent respectively as per articles 11 and 12 and the expression 'tax' as defined in article 2(1) to income-tax and were stated to include surcharge thereon so far as India was concerned. Moreso, education cess introduced in India initially in 2004 was nothing but in the nature of additional surcharge and the provisions of articles 11 and 12 must find precedence over the provisions of IT Act and restrict the taxability, whether in respect of income-tax or surcharge or additional surcharge at the rates specified in the respective article and in any case education cess was much after signing of India-Singapore Tax Treaty.

Article 2(1) of the applicable tax treaty provides that the taxes covered shall include tax and surcharge thereon. Once the conclusion is arrived that education cess is nothing but an additional surcharge, it is only corollary thereto that the education cess will also be covered by the scope of article 2. Accordingly, the provisions of articles 11 and 12 must find precedence over the provisions of the Income Tax Act and restrict the taxability, whether in respect of income-tax or surcharge or additional surcharge ' whatever name called, at the rates specified in the respective article. In any case, education cess was introduced by the Finance Act 2004, with effect from assessment year 2005-06 which was much after the signing of India Singapore Tax Treaty on 24-1-1994. In view of the specific provisions to the effect that the scope of article 2 shall also cover 'any identical or substantially similar taxes which are imposed by either Contracting State after the date of signature of the present Agreement in addition to, or in place of, the taxes referred to in paragraph 1', and in view of the fact that education cess is essentially of the same nature as surcharge, being an additional surcharge, the scope of article 2 also extends to the education cess. For the reasons set out above, the education cess cannot indeed be levied in respect of tax liability of the assessee company. [Para 9]