2024 (11) TMI 1196 - AT - Income Tax

Characterization of receipt - Taxability of arbitral award - taxability of the principal portion of the compensation received - pursuant to the directions of DRP passed the final assessment order wherein the addition in respect of the aforesaid sum was made by holding that the receipts are in the nature of income from other sources under the Act as well as Other Income under Article 22(3) of India-Japan Tax Treaty and brought the same to tax - HELD THAT - The principal portion of the compensation received pursuant to an Arbitral Award in the sum would have to be construed only as business income of the assessee as it arises out of contractual obligation of the business. Undisputably there is no PE for the assessee in India. Hence in view of Article 7 of India Japan Tax Treaty, the same would not be chargeable to tax in India. Taxability of interest received on the compensation arising out of an Arbitral Award - We find it difficult to comprehend how the interest receipts by the assessee can be treated as receipts which flow to it de hors the business which is carried on by it. In our view, the interest payable to it certainly partakes of the same character as the receipts for the payment of which it was otherwise entitled under the contract and which payment has been delayed as a result of certain disputes between the parties. It cannot be separated from the other amounts granted to the assessee under the award and treated as income from other sources . Respectfully following the same, the interest portion also had to be treated as business income of the assessee and in the absence of PE in India, the same would not be chargeable to tax in India as per Article 7 of India Japan Tax Treaty. No hesitation to hold that the compensation received by the assessee pursuant to an Arbitral Award would have to be construed only as business income of the assessee and in the absence of any PE of the assessee in India, as per Article 7 of the India Japan Tax Treaty, the same would not be chargeable to tax in India. Accordingly, the Ground raised by the assessee are allowed. Double deduction of tax - We find that assessee had already offered interest income to tax in the return of income. AO by adding the total compensation amount had made double addition as admittedly the said figure is included in the total compensation amount. Since the fact of double addition is proved and established beyond doubt, we direct the AO to delete the addition while computing the total income of the assessee in the instant case. Accordingly, the ground raised by the assessee is allowed. Penalty proceedings u/s 270A - Since the entire additions made by the learned AO are hereby directed to be deleted, the penalty proceedings would have no legs to stand. Accordingly, ground is allowed.

Summary

Issues Involved:

1. Taxability of the principal portion of the compensation received from an arbitral award.
2. Taxability of interest received on the compensation from the arbitral award.
3. Double deduction of tax at source on the interest portion.
4. Initiation of penalty proceedings under Section 270A of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Taxability of the Principal Portion of the Compensation:

The primary issue was the taxability of the principal portion of the compensation amounting to Rs 32,97,07,175/- received by the assessee from an arbitral award. The assessee, a tax resident of Japan, argued that this amount should be treated as business income and not taxable in India due to the absence of a Permanent Establishment (PE) in India, as per Article 7 of the India-Japan Double Taxation Avoidance Agreement (DTAA). The arbitral award arose from a contractual obligation related to the supply of equipment to Mahanagar Telephone Nigam Limited (MTNL). The Tribunal found that the compensation was indeed a business income, as it stemmed from the non-payment of dues for offshore supplies made by the assessee. Therefore, in the absence of a PE in India, the compensation was not taxable in India under the DTAA.

2. Taxability of Interest on the Compensation:

The assessee also received interest of Rs 2,80,03,480/- on the compensation, which was initially offered to tax. However, the Tribunal, citing the Supreme Court's decision in CIT vs. Govinda Choudhary & Sons, held that such interest should be treated as business income as it was attributable and incidental to the business carried on by the assessee. Consequently, in the absence of a PE in India, this interest was also not taxable in India under Article 7 of the India-Japan DTAA.

3. Double Deduction of Tax at Source:

The assessee highlighted that the interest portion had suffered double tax deduction at source. Initially, UCO Bank deducted tax on the interest under Section 194A, and subsequently, Mizuho Bank was directed to deduct tax on the entire compensation amount, including the interest. The Tribunal acknowledged this double deduction and directed the Assessing Officer to delete the addition of Rs 2,80,03,480/- from the total income, recognizing the double taxation issue.

4. Initiation of Penalty Proceedings:

The assessee challenged the initiation of penalty proceedings under Section 270A of the Act. Since the Tribunal directed the deletion of the entire additions made by the Assessing Officer, the penalty proceedings were deemed unsustainable. Consequently, the Tribunal allowed this ground of appeal.

Conclusion:

The Tribunal concluded that the entire compensation received by the assessee, including the interest, should be treated as business income and not taxable in India due to the absence of a PE. The Tribunal also addressed the issue of double deduction and directed the deletion of the interest amount from the total income. The appeal was partly allowed, with directions to delete the additions and cancel the penalty proceedings.