Withholding tax rate not to include cess and surcharge if treaty is silent on these aspects

In the instant case, the assessee had paid management fee, interest, etc., to a resident of France. However, surcharge was not taken into consideration by assessee while deducting the tax at source. Revenue contended that under the Income-tax Act, the taxpayer is expected to deduct tax after taking into consideration surcharge. Assessee, on the other hand, contended that it was not liable to deduct tax including surcharge as the DTAA between India and France is silent on inclusion of surcharge for the purpose of deduction of tax at source.

On appeal, the Tribunal held in favour of assessee as under:

1) It was not in dispute that there was an agreement between the government of India and Government of France for avoidance of double taxation. It was also not in dispute that the DTAA between the government of India and France didn’t say anything about inclusion of surcharge and education cess for the purpose of deduction of tax at source. Therefore, there was an apparent conflict between the Income-tax Act and DTAA between the two sovereign countries with regard to inclusion of surcharge and education cess for the purpose of deduction of tax at source;

2) In respect of a taxpayer on whom the DTAA applied, the provisions of the Indian Income-tax Act would apply to the extent they were more beneficial to that taxpayer. In other words, if the provisions of DTAA are more beneficial to the taxpayer, then the provisions of DTAA would prevail over the Indian Income-tax Act. Since the DTAA was silent on the surcharge and education cess for the purpose of deduction of tax at source, the taxpayer would take advantage of that provision in the DTAA for deduction of tax – ITO  v. M Far Hotels Ltd. [2013] 32 taxmann.com 100 (Cochin - Trib.)