Foreign Award Interest Becomes Judgment Debt After HC Deems Award A Decree, Not Taxable In India: ITAT Delhi

The Income Tax Appellate Tribunal (ITAT), Delhi, has held that interest awarded under a foreign arbitral award loses its separate character as “interest” once the award is enforced and deemed to be a decree by the Delhi High Court. The tribunal ruled that the interest received as part of the decree was not taxable in India.

“To our mind therefore, the damages, including the interest has assumed the character of a 'judgement debt' and is beyond the purview of Indian Income Tax Act,” the tribunal observed.

A bench comprising Judicial Member Vikas Awasthy and Accountant Member Naveen Chandra was dealing with Universal Tractor Holding LLC's appeal against taxation of ₹2,47,82,124, representing interest awarded under the arbitration.

Universal Tractor, a US company with no presence or Permanent Establishment in India, was awarded damages and interest in an arbitration dispute with another US entity. Escorts Ltd., which had taken over that entity, was later substituted in the arbitration proceedings.

The award dated August 24, 2010 granted USD 475,000 as damages and simple interest at 11.25% on the outstanding amounts. The interest was computed at USD 550,713.87, equivalent to ₹2,47,82,124.

After Universal Tractor approached the Delhi High Court for implementation, the high court, in its July 13, 2012 order, declared the foreign award enforceable under Section 49 of the Arbitration Act and held that “the Award is in terms of section 49 of the Act deemed to be a decree of the Court by the present judgment.”

Section 49 deals with enforcement of a foreign arbitral award. In this case, the Delhi High Court deemed the award to be a decree, and the tribunal noted that the damages awarded, including interest, therefore constituted a decree of the court.

The Dispute Resolution Panel (DRP), invoking Article 11(2) of the India-US Double Taxation Avoidance Agreement, held that the interest was taxable in India. The income was subsequently assessed at ₹2,47,82,124.

Universal Tractor argued before the tribunal that the interest had merged into the decree and therefore became a judgment debt rather than retaining its character as interest. It also contended that the interest related to a period of default between foreign entities outside India neither arose nor accrued in India.

The tribunal relied on the Supreme Court's ruling in Islamic Investment Company, which held that amounts forming part of a judgment debt lose their original character and assume the character of the judgment debt.

It further held that although the arbitral award used the term “interest”, the amount did not attract the definition of interest under Section 2(28A) of the Income Tax Act.

“We are of the considered view that that the amount of Interest received, as part of the decree of the court, is not exigible to tax and accordingly the same is deleted,” the tribunal observed.

The tribunal accordingly deleted the ₹2,47,82,124 addition and allowed Universal Tractor's appeal.

For Assessee: Advocate Durgesh Shankar, 

For Revenue: Banita Devi Neorem, CIT-D.R