Taxability of Amount received under Arbitration Settlement: ITAT upholds Addition [Read Order]

The Delhi bench of Income Tax Appellate Tribunal (ITAT) has recently upheld the addition made by the assessing officer upon the income received on arbitration settlement.

Assessee TGE Gas Engineering was incorporated in Germany and is a tax resident therein. The assessee had a Project office in India during the year under consideration. During the year under consideration, the assessee had received an arbitration settlement payment of Euro 2.0 Million from Indian Oil Tanking Pvt.Ltd. on account of breach of contract by its client.

The assessee has not offered such an amount to tax in India. The Assessing Officer treated the settlement amount as taxable income in India.Assessee objected to the addition before the Dispute Resolution Forum but they confirmed the addition amount. Against this order assessee filed an appeal before ITAT.

S.K.Aggarwal counsel for the assessee submits that, As per Article 21 of India – Germany Double Taxation Avoidance Agreement (DTAA), the income of a non resident under the head “other sources” is taxable in India only if the said income is effectively connected with the Permanent Establishment (PE) of the non-resident, otherwise the income would be taxable only in Germany.

Gangadhar Panda counsel for the revenue opposed these submissions and supported the orders of the authorities below. After considering the contentions of the both parties the division bench of the ITAT comprising Kul Bharat, (Judicial Member) and Narendra Kumar Billaiya, (Accountant Member) allowed the appeal filed by the assessee and observed that, “the assessee had a PE in India during the period he assessee was engaged in the project only through its PE in India. In view of the complete involvement of the PE as above, the settlement amount, arising out of the MOU consequent upon project termination is also effectively connected to the PE. The said sum falls within the Scope of Article 21 (2) of the DTAA and will be taxable in India under Article 7 of the DTAA.”

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