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TMI Blog2024 (11) TMI 1196X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing system software support services 1,83,68,284 Taxed at 10% rate on a gross basis as per the provisions of India-Japan tax treaty 2. Fujitsu Consulting India Private Limited (FCI) Income from supply of software 17,44,73,581 Taxed at 10% rate on a gross basis as per the provisions of India-Japan tax treaty Reimbursement of expenses 5,88,26,793 Taxed at 10% rate on a gross basis as per the provisions of India-Japan tax treaty 3- UCO Bank Interest earned on funds lying with the 2,80,03,480 Taxed at 10% rate on a gross basis as per the provisions of 4. Mizuho Bank Limited (Mizuho Bank) Principal arbitral compensation, Interest on such compensation and Interest earned on funds deposited with the UCO bank 357710655 INR 32,97,07,175 is in the nature of business receipts and not taxable in India. [Ground No. 3 of present appeal] The remaining amount of INR 2,80,03,480 (i.e. INR 35,77,10,655 less INR 32,97,07,175) pertains to the interest earned on the aforesaid funds already been offered to tax as indicated in point no 3. [Ground No. 3 of present appeal 5. From the aforesaid table, the item mentioned in serial number 4 is the point of dispute before us. It is pertinent to note that the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng amount of PO-I / II /III for the supplies made from outside India under the Contract with MTNL under the Arbitral Award 24,95,637-42 51,58,371.00 2 Interest on outstanding invoices of supplies in accordance with Arbitral Award 24,02,478.58 5,071,251.00 TOTAL Amount of Arbitral Amount 48,98,116.00 1,02,29,622.00 32,97,07,174.91 3 Amount of interest paid by UCO Bank on Fixed Deposit of Arbitral Award during the pendency of execution of award on the directions of Hon'ble Delhi High Court 2,80,03,480.00 TOTAL Amount 35,77,10,65491 7. The assessee in accordance with directions of the Hon ble High Court applied for No Objection Certificate to Income Tax Department under Section 197 of the Act for nil deduction of of tax at source. In the aforesaid application, the assessee had disclosed that out of Rs. 35,77,10,655/-, UCO Bank had already deducted tax at source under Section 194A of the Act on the sum of Rs. 2,80,03,480/- being the interest on fixed deposits during the pendency of the said petition. However, the Income Tax Department issued Certificate under Section 197 of the Act directing Mizuho Bank Ltd, Delhi to deduct tax at the rate of 10% on the whole amount of Rs. 35,77,10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gards to receipts from Mizuho Bank. g) Copy of contract / purchase order with FCIPL and FIPL along with invoices on sample basis. h) Copy of Tax Residency Certificate (TRC) for the relevant year. i) Copy of notice under section 143(2) of the Act dated 31-3-2021. j) Copy of notice under section 142(1) of the Act dated 9-9-2021. k) Response to questions relevant for taxability of income. 11. The Learned DRP sought for a remand report on the additional evidences filed by the assessee from the assessing officer. The Learned AO submitted the remand report which is enclosed in pages 247-253 of the Paper Book. The learned assessing officer alleged that compensation for a business dispute leading to non-performance at the end of MTNL could not be acceptable. On reading of the certain clauses of Arbitral Award, the learned assessing officer concluded that the assessee had no privity of contract with MTNL as the lead partner in the consortium who was awarded the contract by MTNL was Fujitsu India Private Limited and not the assessee. Therefore the assessee played an incidental and subsidiary role not directly involved in the business and contract with MTNL. The Learned AO observed that consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome under Article 22(3) of India-Japan Tax Treaty and brought the same to tax. 14. We find that the assessee had placed on record all the documents that were part of the additional evidences filed before the Learned DRP in the Paper Book. The Copy of Arbitration Award is enclosed in Pages 70 to 185 of the Paper Book. The relevant operative portion of the said Award is reproduced below:- PART XVIII Award: Operative Part Description of Claims Amount Awarded INR USD Outstanding balance out of 69.4% of the value of PO-I PO-II 1,78,048/- 19,52,508.42 Outstanding balance out of 70% of the value of PO-III 1,27,12,991/- 5,43,129.00 Customs Duty illegally withheld by wrongly applying the settlement formula: Re: PO-I PO-II PO-III 6,25,18,021/- 13,64,994/- 3,43,57,096 Shortfall in payment of Customs Duty Re: PO-I PO-II 1,05,15,482/- 32,65,778/- Maintenance Charges: Re: Phase-I 23,00,74,880/- Expenses incurred on extension of PBG. PBG-II (from 24-04-2006 to 10-11-2012) PBG-III (from 16-05-2008 to 10-11-2012) JPY 51,58,371 2,64,333.88 182 Consequently, it is directed that the Respondent shall pay to the Claimants the following sums of money: INR: 35,52,51,623.88 USD: 24,95,637.42 JPY: 51,58,3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce testing of the various Purchase orders. (refer para 5.2 at page 75, Para 5.8 at page 76, Para 5.14 at page 77 etc. of the PB) d) 03.03.2009 : The appellant and FIPL invoked arbitration clause against MTNL and Sole Arbitrator Justice Shri R. C. Lahoti was appointed by the parties. (Para 5.16 at page 77-78 of the PB) e) The claims subject matter of arbitration are tabulated at pages 79 to 88 of the PB. f) At page 121 of the PB, one of the issues before the Arbitral Tribunal was whether Claimant No. 2 (i.e. Appellant) is a necessary party to the proceedings. The adjudication of the above issue was made at pages 124 - item no. 9 and further adjudication at page 163 to 164 of the PB. The aforesaid finding of the Arbitral Tribunal is reproduced as under: ..13.9.2 However, still, it may be noted that two companies had submitted the joint bid which was accepted by MTNL. The MTNL has not produced the original bid before the Tribunal to substantiate its contention that Claimant No. 2 was not a bidder who had joined in submitting Bid. Clause 5.2 of the Instructions to Bidders (CV1 Ex3/2 at pg. 9) provides that the lead partner of the Joint Venture would sign contracts. Although the Respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness and contract with MTNL. 49. It is the respectful submission of the Appellant that the Ld. AO has proceeded on conjectures and surmises without considering the complete facts of the case and reading the complete order of Arbitral Tribunal. 50. The Appellant wishes to highlight that the issue of privity to contract was also raised before the Arbitration Tribunal at the time of arbitration proceedings. Your Honours' would appreciate as stated above that Arbitration order passed by the Arbitral Tribunal clearly states Fujitsu Limited (i.e. Appellant) is a party to the contract with the MTNL and thereafter, also awarded the amount due to The Appellant under such contract. Hence, there is no merit in the allegation of the Ld. AO and distinction he wanted to draw that the amount in question is a passive income of the appellant has no legs to stand upon. 51. For the reasons stated above, it is the respectful submission of the Appellant that the receipts pertain to a business dispute of the Appellant has not only been upheld by the Arbitral Tribunal but also the Hon'ble High Court being conclusive and binding on Ld. AO. Hence, taking a contrary view without assigning any reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess income, the impugned receipts would also fall within the meaning of business income and in the absence of a PE be taxable under the provisions of the Indo-Japan Treaty. 56. Applying the above principles to the instant case, the appellant submits that that the taxability of receipts in question is specifically dealt in Article 7 of the DTAA, thus the taxability under the residuary Article 23 of the DTAA does not arise. The Ld. AO's stand that the receipts of the Appellant from Arbitral Award being passive income is liable to be rejected. 17. It is pertinent to note that the aforesaid Arbitral Award is liable for payment of stamp duty. The details of the same are enclosed in Page 183 of the Paper Book. We find that what assessee had got by way of Arbitral Award is for non-payment of dues for offshore supplies made. Hence it had to be construed only as business income of the assessee. It is further pertinent to note that the Learned Joint Commissioner of Income Tax, Range 1(3), International Taxation, Delhi while forwarding the Remand Report of the Learned Assessing Officer had also placed reliance on the decision of Mumbai Tribunal in the case of ACIT vs Ramona Pinto in ITA N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India as per Article 7 of India Japan Tax Treaty. 19. Hence we have no hesitation to hold that the compensation received by the assessee pursuant to an Arbitral Award in the total sum of Rs 35,77,10,655/- 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 Nos. 3 to 4.1. raised by the assessee are allowed. 20. We find that assessee had already offered interest income of Rs 2,80,03,480/- to tax in the return of income. The learned AO by adding the total compensation amount of Rs 35,77,10,655/- had made double addition to the extent of Rs 2,80,03,480/- as admittedly the said figure is included in the total compensation amount of Rs 35,77,10,655/-. Since the fact of double addition is proved and established beyond doubt, we direct the learned AO to delete the addition of Rs 2,80,03,480/- while computing the total income of the assessee in the instant case. Accordingly, the ground No. 4.2 raised by the assessee is allowed. 21. The ground No. 5 raised by the assessee is challenging the initiation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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