Arbitral Award for Non-Payment of Supplies Is Business Income, Not Taxable Under Article 7 of Japan-India DTAA: Delhi HC [Read Order]

In a recent ruling, the Delhi High Court held that an arbitral award received for non-payment of supplies is business income and not taxable in India under Article 7 of the India-Japan Double Taxation Avoidance Agreement (DTAA), as the assessee had no permanent establishment in the country.

Fujitsu Limited, a company based in Japan, filed an appeal challenging an assessment order that classified Rs. 35.77 crores received under an arbitral award as “income from other sources.” The amount represented compensation for unpaid dues from Indian entities for offshore supplies.

The company had treated the amount as business income in its return and claimed exemption under Article 7 of the DTAA, citing that it did not have a permanent establishment in India.

The revenue’s counsel argued that the amount did not qualify as business income because it lacked the usual features such as regularity, continuity, and frequency. They further argued that since the amount arose from an arbitral award rather than direct business operations in India, it should be taxed as income from other sources.

The appellant’s counsel argued that the compensation was directly linked to business transactions involving offshore supply of goods, and therefore, it clearly fell under the category of business income. They also argued that the interest received on the award was incidental to the delay in payment and formed part of the same business transaction.

The division bench comprising Justice Vibhu Bakru and Justice Tejas Karia observed that the arbitral award was granted in favour of the assessee for non-payment of dues related to business contracts.

The court also observed that since the income arose from a commercial contract and was directly tied to the assessee’s business, it had to be classified as business income. Regarding the interest portion, the court referred to a Supreme Court ruling that such interest, when connected to delayed payments under a contract, also retains the character of business income.

The court found that the assessee had no permanent establishment in India and under Article 7 of the DTAA such business income could not be taxed in India. The court upheld the findings of the Income Tax Appellate Tribunal and dismissed the revenue’s appeal, holding that no substantial question of law arose.

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