Court; Mumbai Income Tax Appellate Tribunal
Citation: M/s. Gold crest Exports Vs. ITO [2010-TII-124-1TAT-MUM-INTL]
Brief :Mumbai Income-tax Appellate Tribunal (the Tribunal) in the case of M/s. Gold crest Exports Vs. ITO [2010-TII-124-1TAT-MUM-INTL] held that compensation payable for breach of contract to a foreign company would not be taxable in the hands of the foreign company in the absence of a permanent establishment (“PE”) of the foreign company in India. The Tribunal further held that interest included in compensation merges with and partakes the character of compensation itself, and hence, would not be taxable under the tax treaty between India and UK (tax treaty). Therefore, deduction claimed by the assessee for compensation including interest cannot be disallowed on account of non-withholding of taxes therefrom.
Facts
- The assessee was engaged in the business of export and import and was also trading in different commodities.
- The assessee had entered into a contract with a foreign company through a broker for supply of commodities. It repudiated the contract on the grounds that the contract was signed only by the broker and not by the buyer.
- The foreign company claimed compensation from the assessee through arbitration proceedings. The arbitrator passed the award against the assessee, requiring the assessee to pay compensation including interest.
- The Assessing Officer (“AO”) disallowed the compensation paid to the foreign company on the ground that the assessee had not withheld taxes in terms of provisions of section 195(1) of the Income-tax Act, 1961 (“the Act”).
- The Commissioner of Income-tax (“CIT(A)”) upheld the AO’s order.
Issue- Whether compensation including interest paid under an arbitral award to a foreign company not having a PE in India would be allowable as a deduction even where tax is not withheld under section 195(1) of the Act.
Assessee’s contentions:-The assessee contended that:
