DB ENGINEERING & CONSULTING GMBH,BENGALURU V. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(1), INTERNATIONAL TAXATION, , BENGALURU

ITA 1377/BANG/2024

AI Insights

The case involves M/s. DB Engineering and Consulting GMBH, a foreign company engaged in providing engineering and technical consultancy services, which appealed against the order of the CIT(A) regarding the computation of surcharge on its income for the Assessment Year 2020-21. The primary contention was the incorrect application of a 5% surcharge instead of 2% on the income of the branch, as the total income including the head office's income exceeded Rs. 10 Crores. The Tribunal examined the applicability of DTAA rates and the Finance Act, 2019, and referenced several judicial precedents to determine the correct application of surcharge on the income covered under DTAA.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 32964 (ITAT-BANGALORE)
• Duration Of Justice: 3 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-11-2024
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 25-10-2024
• Assessment Year: 2020-2021
• Appeal Filed On: 22-07-2024
• Other Referred Cases: Soregam SA Vs. DDIT, DIC Asia Pacific Pte. Ltd. Vs. ADIT, Outotec (Finland) OY Vs. DCIT, Shell International B. V. Vs. DCIT(IT)
• Laws Referred To: Income Tax Act, Finance Act, 2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SUSAN MATHEW
• Keywords: Tax effect; Capital Gains; Double taxation relief
• Section: 143(1); 22; 5(2)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI. LAXMI PRASAD SAHU, ACCOUNTANT MEMBER AND SHRI PRAKASH CHAND YADAV, JUDICIAL MEMBER AND IT(IT)A No.1377/Bang/2024 Assessment Year : 2020-21 M/s. DB Engineering and Consulting GMBH, 82/4, 3rd Floor, North Wing, Hulkul Brigade Centre, Lavelle Road, Ward No.76, Bangalore – 560 001. PAN :AAECD 9085 B Vs. DCIT (International Taxation), Circle – 1(1), Bangalore. APPELLANT RESPONDENT Assessee by : Smt. Susan Mathew, CA Revenue by : Shri. Subramanian S, JCIT(DR)(ITAT), Bengaluru. Date of hearing : 25.10.2024 Date of Pronouncement : 19.11.2024 O R D E R Per Laxmi Prasad Sahu, Accountant Member : This is an appeal filed by the assessee against the order passed by the CIT(A) vide Order dated 30.-05.2024 (DIN No.ITBA/APL/S/250/2024-25/1065244914(1)), on the following grounds: 1. The learned AO (CPC) has grievously erred in the computation of surcharge on the total income. The total income of the branch (excluding income of the Head Office, which is taxable as per rates specified in DTAA) is Rs.9,41,94,590/-. The income of the Head Office,which is IT(IT)A No.1377/Bang/2024 Page 2 of 8 taxable as per DTAA rates was Rs. 78,62,500/-. The CPC has added this to the income of the branch consequent to which total income has exceeded Rs. 10 crores and has charged surcharge at 5% instead of 2% on the tax on income of the Branch. The CIT(A) has grievously erred in upholding the computation done by the CPC/AO. 2. For these and other grounds that may be adduced at the time of hearing, the intimation u/s 143(1) passed by CPC / AO and as sustained by the learned CIT(A) be quashed to the extent appealed against. 2. Briefly stated, facts of the case are that assessee is engaged in the business of rendering engineering and technical consultancy services. It filed the return of income on 30.12.2020 declaring income of Rs.10,20,57,090/-. The return was processed under section 143(1) of the Act by the CPC. While processing the return, the CPC made an addition of Rs.22,20,976/- under section 36(1)(va) of the Act towards belated remittance of employees’ contribution towards PF and the CPC applied surcharge @ 5% instead of 2% as computed by the assessee. 3. Aggrieved from the above Order of the CPC, the assessee field an appeal before the CIT(A). The CIT(A), after considering the entire submissions, dismissed the appeal of the assessee. 4. Aggrieved from the above Order, assessee has filed an appeal before the Tribunal only on the sole issue regarding levy of surcharge @ 5% instead of 2%. The learned AR reiterated the submissions made before the lower authorities. He has submitted written submissions which is as under: IT(IT)A No.1377/Bang/2024 Page 3 of 8 As regards Ground 1 – Erroneous computation of rate of surcharge by including income covered under DTAA. 1. We wish to draw your kind attention to the First Schedule of Finance Act, 2019 (No.2) which is relevant to AY 2020-21 (Pages 125-141 of Paper book). Part III of the First Schedule of Finance Act specifies the rates of income tax applicable for AY 2020-21. Paragraph E lays down the rate of taxes applicable for companies. The rate of tax applicable for a company other than a domestic company (i.e. a foreign company like your appellant) are as under (Page 127 of Paper book): 2. Further the relevant portion from the Finance Act, 2019 as regards computation of surcharge, is as under (Pages 127-128 of Paper book): IT(IT)A No.1377/Bang/2024 Page 4 of 8 3. From the above it is clear that surcharge is to be computed on the income specified in this part and also on income covered by section 111A being tax on short term capital gains or under sections 112 or 112A being tax on long term capital gains. Tax on income chargeable to tax as per rates specified in DTAA is not covered in this part of the First Schedule. Hence the question of levying surcharge on income covered by DTAA rates or including them for determining the rate of surcharge does not arise. 4. Also, Chapter II – Rates of Income tax of the Finance (No.2) Act,2019 states as under: IT(IT)A No.1377/Bang/2024 Page 5 of 8 As per clause (1) above, rates of tax are as specified in Part I of the First Schedule and such taxes are increased by surcharge. Hence, in the current context of a foreign company, the rates of taxes specified in Part I of the First Schedule do not include income chargeable to tax as per rates specified in the DTAA. Hence the question of including it in the computation of rate of surcharge also does not arise. The only exception to this is with respect to Agricultural income as contemplated in Clause 2(a) above.’ 5. In support of his arguments, the learned AR relied on the following judgments:  Soregam SA Vs. DDIT in ITA No.123/Delhi/2015 (Order dated 30.11.2018) reported in [2019] 101 taxmann.com 94 (Delhi – Trib.)  DIC Asia Pacific Pte. Ltd., Vs. ADIT in ITA No.1458/Kol/2011 (Order dated 20.06.2012) reported in [2012] 22 taxmann.com 310 (Kol.)  Outotec (Finland) OY Vs. DCIT in ITA Nos.350 and 351/Kol/2022 (Order dated 28.02.2023) reported in [2023] 151 taxmann.com 308 (Kolkata – Trib.)  Shell International B. V. Vs. DCIT(IT) in ITA Nos.2788 and 2789/Ahd/2017 and Oths (Order dated 20.03.2024) reported in [2024] 160 taxmann.com 761 (Ahmedabad – Trib.) 6. On the other hand, the learned DR relied on the Order of the lower authorities and submitted that the surcharge is on the basis of the total income, if it exceeds Rs.10 Crores or more, then 5% surcharge is to be levied. The learned DR further submitted that the total income of the assessee for the Assessment Year is as defined in section 5 of the IT Act. In the case of the assessee if the parent company’s income is reduced, the taxable income will be less than Rs.10 Crores which will not affect for the levy of surcharge @ 5%, since the total income declared in the return is more than Rs. 10.00 Crore. While calculating the applicability of surcharge, the total income of assessee is considered. Therefore, the CIT(A) has rightly dismissed the appeal of the assessee. IT(IT)A No.1377/Bang/2024 Page 6 of 8 7. Considering the arguments from both sides, the assessee has raised the sole issue related to levy of surcharge on its total income including the income covered under DTAA. The contention raised by the assessee has been carefully examined and we note that as per the various precedents, the tax rate provided in the DTAA is the maximum tax rate and no further levy of surcharge or cess shall be applicable as per the judgment of the ITAT Bench in the case of Soregam SA Vs. DDIT (supra) on the income covered under DTAA. The relevant paragraph is as under: “21. We have heard both the parties and perused all the relevant material available on record. The Ld. AR relied upon the decision of Elektrobit Automotive GmbH (supra) wherein the Tribunal held that education cess is only a surcharge as clarified by the Finance Act and surcharge is only a tax clarified by the Hon'ble Apex Court in case of K. Srinivasan (supra), therefore, education cess or any other surcharge should not be added separately to the tax rate as per the DTAA. The Tribunal relied on the coordinate Bench decision in the case of Osram India (P.) Ltd., (supra) to come to this conclusion. Thus, the issue is squarely covered in favour of the assessee. Ground No. 5 is allowed.” 8. Respectfully following the above judgment, for the income which is covered under DTAA, no surcharge and cess shall be levied on such income of Rs. 78,62,500/- . Further, we note that the Indian entities’ income under the profit gains from business or profession is Rs.9,41,94,586/- and income chargeable under DTAA is Rs.78,62,500/-. Resultantly, the total income of the assessee is Rs.10,20,57,090/-. However, the surcharge is applicable on the total income as per the Finance Act for the year under consideration. In the case of every company other than a domestic company having a total income exceeding Rs.10 Crores, surcharge @ 5% of such income is levied which clearly indicates that the surcharge is to be calculated on the total income of the assessee. The total income of the assessee crosses the threshold for IT(IT)A No.1377/Bang/2024 Page 7 of 8 calculating the surcharge @ 5% on the total income. In the case of non- resident person, the total income has been defined in section 5(2) of the Act which is as under: “(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which-(a)is received or is deemed to be received in India in such year by or on behalf of such person; or(b)accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation 1. - Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Explanation 2. - For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.” 9. From the above section, it is very clear that the CPC has taken into consideration the total income which includes all incomes from whatever sources derived while calculating the surcharge. On conjoined reading of section 5(2) of the I T Act and paragraph ‘E’ II and Surcharge on income tax of the FIRST SCHEDULE ( see section 2) PART I , the surcharge is to be levied on the total income of the assessee. Here, in the case on hand, the assessee’s total income includes income covered under DTAA of Rs.78,62,500/- which is considered as income from other sources and taxable at special rate as per DTAA. Therefore, while giving effect, the AO has to calculate separately the tax at special rate on the income declared under other source of its parent company’s income by following the above judicial pronouncements noted supra, no surcharge is to be levied on tax calculated at Rs. 78,62,500/-. The AO shall calculate tax on the rest of the income covered under profits and gains of business or profession of Rs. 9,41,94,586/- and apply surcharge on such income tax IT(IT)A No.1377/Bang/2024 Page 8 of 8 @ 5% since the assessee has crossed the total income of more than Rs.10 Crores as specified by the Finance Act noted supra. Accordingly the AO is directed to calculate necessary tax effect and surcharge in above terms. 10. In the result, appeal of the assessee is partly allowed. Pronounced in the open court on the date mentioned on the caption page. Sd/- (PRAKASH CHAND YADAD) Sd/- (LAXMI PRASAD SAHU) Judicial Member Accountant Member Bangalore, Dated: 19.11.2024. /NS/* Copy to: 1. Appellants 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file By order Assistant Registrar, ITAT, Bangalore. "