Facts of the Case

The Revenue filed an appeal under Section 260A of the Income-tax Act, 1961 challenging the order dated 14.11.2024 passed by the Income Tax Appellate Tribunal in ITA No. 2607/Del/2022 for Assessment Year 2019–20. The respondent, Fujitsu Limited, a tax resident of Japan, is engaged in providing information technology support, maintenance support, and software licensing services to group entities, including Indian Associated Enterprises.

During the assessment, the Assessing Officer noted that the assessee had received amounts aggregating to ₹35,77,10,655, including ₹32,97,07,175 as compensation pursuant to an arbitral award for non-payment of dues relating to offshore supplies and ₹2,80,03,480 as interest on such compensation. The Assessing Officer assessed the receipts as “income from other sources.” The assessee contended that the receipts constituted business income and were not taxable in India in view of Article 7 of the India–Japan DTAA, as it had no Permanent Establishment in India.

Issues Involved

Whether compensation received pursuant to an arbitral award for offshore supplies constitutes business income or income from other sources, whether interest received on such compensation is separately taxable as income from other sources, whether such receipts are taxable in India in absence of a Permanent Establishment, and whether any substantial question of law arose from the ITAT’s decision.

Petitioner’s Arguments

The Revenue contended that the Tribunal erred in holding that the arbitral award receipts constituted business income. It was argued that the assessee lacked regularity, continuity, frequency, and volume of business activity in India and that the receipts should be taxed as income from other sources. The Revenue further argued that the interest component should be independently taxed and that the ITAT failed to appreciate the distinction between “business with India” and “business in India.”

Respondent’s Arguments

The assessee submitted that the arbitral award compensation arose directly from contractual obligations relating to offshore supplies and was therefore inextricably linked to its business activities. It was argued that both the principal compensation and the interest were business receipts. The assessee relied on the Supreme Court decision in CIT vs. Govinda Choudhary & Sons, contending that interest on delayed payments under a contract is an accretion to business receipts. It was further submitted that, in absence of a Permanent Establishment in India, Article 7 of the India–Japan DTAA barred taxation of such business income in India.

Court Order / Findings

The Delhi High Court observed that there was no dispute that the arbitral award was granted in respect of claims for non-payment of dues for offshore supplies made by the assessee. The Court held that the receipts were inextricably linked to the assessee’s business activities and therefore constituted business income. The Court affirmed the ITAT’s finding that both the principal compensation and the interest component retained the character of business income.

Relying on Govinda Choudhary & Sons, the Court held that interest on delayed contractual payments is incidental to business income and cannot be artificially segregated and taxed under “income from other sources.” The Court further held that, in absence of a Permanent Establishment of the assessee in India, such business income was not chargeable to tax in India under Article 7 of the India–Japan DTAA. The Court found no infirmity in the ITAT’s decision and held that no substantial question of law arose.

Important Clarification

The Court clarified that receipts arising from arbitral awards for non-payment of contractual dues must be characterised by examining their intrinsic nexus with the underlying business activity. Where such nexus exists, both compensation and interest assume the character of business income. In absence of a Permanent Establishment, Article 7 of the applicable DTAA governs taxability.

Final Outcome

The appeal filed by the Revenue was dismissed. The Delhi High Court upheld the order of the Income Tax Appellate Tribunal holding that the compensation and interest received by Fujitsu Limited pursuant to the arbitral award constituted business income and were not taxable in India in absence of a Permanent Establishment under Article 7 of the India–Japan DTAA. The decision was rendered in favour of the assessee and against the Revenue.

 

Link to Download Order- https://www.mytaxexpert.co.in/uploads/1769594642_COMMISSIONEROFINCOMETAXINTERNATIONALTAXATION1NEWDELHIVsFUJITSULIMITED.pdf

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