Monday, June 10, 2013

Tax rate on interest can’t exceed 12.5% under India-UAE DTAA; surcharge and cess can’t be levied in addition

Tax payable at 12.5 per cent on interest income under Article 11(2) of the DTAA between India and UAE is inclusive of surcharge and education cess

In the instant case, the moot issue that arose for consideration of the Tribunal was as under:

Whether the assessee was liable to pay education cess and surcharge in addition to the tax @ 12.5% payable on interest income under the provisions of India-UAE DTAA?

The Tribunal held as under:

1) There are specific Articles in DTAA dealing with taxation of income under different heads and interest income is governed by Article 11;

2) According to the Article 11(2) of India-UAE DTAA, interest income may be taxed in contracting State in which it arises, according to law of that State. If the recipient is beneficial owner of interest, tax so charged shall not exceed 5 per cent of gross interest, if the interest is received from bank and in other cases at 12.5 per cent of gross amount of interest;

3) In the instant case, the tax rate applicable was 12.5 per cent. Income-tax has been defined in Article 2(2)(b) as per which income-tax includes surcharge. Therefore, tax referred to in Article 11(2) at the rate of 12.5 per cent also includes surcharge. Further, nature of education cess and surcharge being same, education cess and surcharge can’t be levied separately as it is included in tax rate of 12.5 per cent.

Thus, in view of the above, it was held that tax payable at the rate 12.5 per cent under Article 11(2) of DTAA is inclusive of surcharge and education cess. Therefore, the claim of the assessee was to be allowed - Sunil V. Motiani v. ITO (International taxation ) [2013] 33 252 (Mumbai - Trib.)