India: Arbitral award under business contract treated as business income under Japan treaty (Tribunal decision)
The income was thus not taxable in India absent a permanent establishment (PE) in India.
The Delhi Bench of the Tribunal held that an arbitral award (and interest thereon) received by the taxpayer in connection with a dispute regarding a business contract constituted business income, and not other income, under the India-Japan income tax treaty. The taxpayer thus was not taxable in India on the income absent a permanent establishment (PE) in India.
The case is: Fujitsu Ltd. v. ACIT
Summary
The taxpayer, a Japanese company engaged in the business of providing information technology (IT) services, maintenance support, and software licensing, entered into a contract with an Indian customer to provide telecom equipment. The customer failed to pay for certain delivered goods, and the taxpayer subsequently received compensation from the customer, along with accrued interest, under an arbitral award.
The taxpayer took the position that the income was business income under the India-Japan income tax treaty and thus not taxable in India because the taxpayer did not have a PE in India. The tribunal agreed with the taxpayer on the grounds that the arbitral award arose from a business transaction in the ordinary course of the taxpayer’s core business. Moreover, the interest income was merely incidental to the arbitral award and thus retained the same character as the arbitral award.
Read a November 2024 report prepared by the KPMG member firm in India