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Interest Under Foreign Award Merges Into , Can't Be Taxed: ITAT Allows Universal Tractor's Appeal
In a significant ruling for cross-border arbitration , the (ITAT) has held that interest awarded under a loses its separate taxable character once the award is deemed a by an Indian court. The tribunal, comprising Judicial Member Vikas Awasthy and Accountant Member Naveen Chandra, allowed the appeal of US-based , deleting an income addition of ₹2,47,82,124.
A Transatlantic Dispute Over Membership Interest
The case stemmed from a 2006 agreement between two US companies: (UTH) and . UTH agreed to sell its 49% membership interest in another US entity, , for USD 1.2 million. After EAMI defaulted on the final two instalments, the matter went to arbitration in the United States. EAMI was subsequently taken over by Indian company , which was substituted in the proceedings.
The arbitral award dated directed to pay USD 475,000 as plus simple interest at 11.25% on outstanding amounts, computed at USD 550,713.87 (equivalent to ₹2,47,82,124). When refused to honour the award in the US, UTH approached the for .
The
On , the declared the foreign award enforceable under , and explicitly deemed it a of the court. This classification became the cornerstone of UTH's tax defence.
When UTH later applied for a , the Assessing Officer rejected the request and directed TDS at 40% on and 15% on interest under the . The upheld the taxability of interest, leading to the assessed addition of ₹2.47 crore.
Arguments Before the Tribunal
UTH's counsel, , argued that the interest had merged into the and thereby lost its character as "interest" under . Relying on the 's decision in Islamic Investment Company (2004) 265 ITR 254, he contended that amounts forming part of a are not subject to . The interest related to defaults occurring outside India between foreign entities and merely received in India through execution of a civil .
The Revenue, represented by , maintained that the interest retained its character and was taxable under , as the award specifically labelled the amounts as "interest."
Legal Analysis: The Alchemy of a
The ITAT carefully examined whether interest awarded by an arbitral tribunal retains its identity once it becomes part of a court
. It noted that the
had explicitly held that
"the Award is in terms of section 49 of the Act deemed to be a
of the Court by the present judgment."
The tribunal relied heavily on the 's ruling in
Islamic Investment Company
, which held that
"such amounts become part of
they lose their original character and assume the character of
."
The ITAT observed that there is no provision in the
that permits deduction from a
on the ground that it contains an interest component.
Importantly, the tribunal distinguished the Revenue's reliance on , noting that in that case, the dispute arose entirely in India, involved an Indian entity, and the interest had not merged into a under the .
The ITAT also held that the nomenclature "interest" used in the arbitral award did not attract the definition of interest under Section 2(28A) of the Act, which applies to money borrowed or debt incurred—not to court-ordered .
Key Observations
The tribunal made a pivotal finding:
"To our mind therefore, the , including the interest has assumed the character of a 'judgement debt' and is beyond the purview of Indian ."
It further observed:
"We are of the considered view that that the amount of Interest received, as part of the of the court, is not and accordingly the same is deleted."
Final Decision and Implications
The ITAT allowed UTH's appeal in full, deleting the entire addition of ₹2,47,82,124. The tribunal directed that the assessee may approach the for release of the amount in US dollars, as prayed.
This ruling clarifies that once a is enforced and deemed a by an Indian court under Section 49 of the Arbitration Act, the interest component merges into the and loses its separate taxability. The decision provides important relief for foreign parties enforcing arbitration awards in India, particularly where the underlying dispute has no nexus with Indian taxation.
