Tax tribunal ruling wherein it was reaffirmed that protocol to the Double Taxation Avoidance Agreement (‘DTAA’) is an integral and indispensable part of the tax treaty.

Facts of the case

• The taxpayer being a Company is engaged in manufacture and supply of capacitors and soft ferrite cores avails procurement, controlling, logistic coordination, quality management, HR, environment protection and industrial safety, organization, etc from Spanish group company (‘Spanish Co’);
• The aforesaid services rendered by Spanish Co to the taxpayer would be liable for tax deducted at source (‘TDS’) under the head ’Fees for Technical Services’ (‘FTS’) at the rate of 10.608% (10% tax + 2% surcharge + 4% Cess) under the provisions of section 115A(1)(b)(B) read with section 9(1)(vii) of the Income Tax Act, 1961 (‘the Act’);
• Also, it is to be noted that the taxpayer had deducted TDS at the rate of 10% as against 20% provided in the Article 13 of India-Spain tax treaty on the basis of the MFN Clause in the protocol to the DTAA which allowed for lower rate of tax, if the same is allowed to any other OECD member after January 1, 1990 as per a DTAA with India;
• The taxpayer relied on India’s tax treaty with Portugal and accordingly adopted for 10% tax on FTS and deducted the tax at source accordingly;
• The taxpayer received intimations under Section 200A for short deduction of tax at source and the tax authorities raised the demand along with interest under Section 201(1A);
• The Commissioner of Income Tax (Appeals), by following CBDT Circular No. 3/2022, that the taxpayer is not entitled to the benefit of the Protocol appended to DTAA as no notification under Section 90 has been issued by the CBDT with respect to the aforesaid DTAA specifying lower rate of tax to be deducted at source;
• CIT(A) also held that the Circular is binding on the Revenue and has retrospective effect.

Key excerpts from the Ruling

• The Tribunal observed that there is no separate requirement for Government of India to issue a notification separately in order to make the protocol applicable and therefore the MFN Clause shall be applied to determine the tax rate;
• Also, observes that it has been well settled that in case the rate of tax is adopted as per the DTAA, then no surcharge and education cess is to be applied over and above the tax rate since the tax rate as per the DTAA is held to be all-inclusive of such surcharge and education cess;
• Accordingly, the rate of tax applicable in the case of the taxpayer is 10% and not 10.608% and since the assessee has rightly deducted the tax at source @ 10%, it cannot be treated as an assesses-in-default.