ITAT Says Interest in Foreign Arbitral Award is Not Taxable in India

Income Tax Appellate Tribunal(ITAT), Delhi Bench has ruled that the interest awarded in a foreign arbitral award was not taxable in India after it was enforced as a decree by the court.

A US company by the name of Universal Tractor Holding LLC(UTH) was involved in the dispute which arose from the sale of a 49% membership interest in a US company. After there was default on part of the buyer, as to the instalment payments, arbitration proceedings were initiated, which resulted in an award, directing damages along with interest and costs. 

The Delhi High Court later enforced the foreign award as a decree under Section 49 of the Arbitration and Conciliation Act.

Under the Income Tax Act and the India-USA Double Taxation Avoidance Agreement, the authorities sought to impose tax upon the interest. This was not agreed upon by the ITAT.

It held that once the interest became part of a court decree, it had to be considered as a “judgment debt”. Therefore, it could not be treated separately as “interest” under the Income Tax Act.

It also held that Article 11 of the India-USA DTAA will not be applicable because the amount was no longer to be considered as interest.

Therefore, the tax edition was deleted by ITAT and UTH’s appeal was allowed.