Withholding tax on foreign arbitral awards – Delhi High Court settles the conundrum

The Delhi High Court’s judgment in Glencore International AG v. Dalmia Cement (Bharat) Limited reinforces the pro-enforcement stand adopted by the Indian Courts in recent times. The Court’s decision on tax implications, if any, on a foreign arbitral award would assist several foreign stakeholders seeking to enforce their foreign arbitral awards in India.

. The proceedings before the Delhi High Court emanated from an execution petition filed by Glencore International AG ( Glencore ) seeking to enforce and execute of a London seated award of about USD 4.5 million.

. Dalmia Cement (Bharat) Limited ( Dalmia ) filed its objections under Section 48 of the Arbitration and Conciliation Act, 1996 ( Act ) on various grounds including enforcement of the award would be contrary to the public policy of India.

. By judgment dated 3 July 2017, the Delhi High Court was pleased to dismiss Dalmia’s objections. Dalmia’s appeal to the Supreme Court was also dismissed. Therefore, the judgment dated 3 July 2017 attained finality and the award was deemed to be a decree of the Court.

. When the entire decretal amount was lying deposited in Court and the Court was proceeding in accordance with Section 49 of the Act, Dalmia averred that there will be an incidence of tax on the amounts under the foreign award and therefore, proposed to deduct withholding tax before remitting the amounts under the decree.

. In order to adjudicate this issue, the Court sought the assistance of the Income Tax Department. The Income Tax Department sought to artificially separate the decree into constituent parts and proposed deductions on account of withholding tax as high as 42%.

. On the issue of the tax implication, the parties made their submissions below:-

. Brief submissions on behalf of the Income Tax Department

. Income from the award (damages for breach of contract) is, in the nature of windfall gain and therefore, it is an income taxable in the contracting state in which it has arisen under Article 22(3) of the Double Taxation Avoidance Agreement (DTAA) between India and Switzerland; . All the judgments dealing with the proposition that decretal amount is a judgment debt and therefore, no deductions are permissible therefrom, were dealing with a domestic context and not enforcement of a foreign award. Therefore, these are inapplicable, and interests of the state’s revenue should be considered; . That the cost of the arbitration proceedings and the legal costs would be deemed to be taxed under fees for technical services under the provisions of the Income Tax Act, 1961 as well as DTAA; . As regards, taxability qua interest, it would be a subject matter of Article 22(3) of the DTAA which deals with income in the form of lotteries, crossword puzzles, races, gambling or betting. . Brief submissions on behalf of Glencore International AG:

. That, the foreign award which has been recognized as enforceable, is to be executed as a decree of the court. Accordingly, the awarded amount is a Judgment Debt and no deductions therefrom are permissible; . In execution of a foreign arbitral award, it is not permissible to go behind the decree and artificially break it into its constituent parts. The awarded amount loses its character of an income once it becomes a decree and the same is a judgment debt; . Under Section 49 of the Act, the award shall be deemed to be a decree of that Court. In view of the language of Section 49, the deeming clause/ the legal fiction should be given full effect and carried to its logical conclusion. Accordingly, the foreign award is deemed to be a decree of the Court; . The rule that the decree must be executed according to its tenor has not been modified by any statutory provision under the Income Tax Act; . Under the provisions of the Income Tax Act, the payer is bound to deduct tax at source only if the tax is assessable in India. If tax is not assessable, there is no question of tax at source being deducted. In the present case, no part of the decretal amount can be deemed to have accrued or arisen in India in terms of Section 195 of the Income Tax Act. Therefore, tax thereon is not assessable in India at all. . After considering the parties submissions at length, the Court observed that once a claim merges into a decree of the Court it transcends into a judgment debt. Therefore, only those adjustments and deductions can be made which are permissible under the Code of Civil Procedure, 1908. A series of judgments cited by Glencore’s counsel encapsulate the theme that a decree should be executed according to its tenor unless modified by a statute such as the 1961 Act.

. Accordingly, the Delhi High Court was pleased to direct release of the entire decretal amount along with accrued interest without deducting any sum towards withholding tax.

. The present judgment may very well pave the way for foreign stakeholders to experience intention of achieving ease of doing business in India envisaged by the upper echelons of the legislature.

. Gourab Banerji , Senior Counsel instructed by Sumeet Lall , Partner and Sidhant Kapoor , Associate, CSL Chambers acted for Glencore International AG before the Delhi High Court

. Hatty Sumption , Partner, Clyde & Co LLP, represented Glencore International AG before the Arbitral Tribunal in London.

. Dalmia was represented by Ashish Dholakia and Abhimanu Mahajhan .

. [Read the Delhi High Court judgment in Glencore International AG v. Dalmia Cement (Bharat) Limited dated July 31, 2019]

. [Read the Delhi High Court’s modification order in Glencore International AG v. Dalmia Cement (Bharat) Limited dated September 9, 2019]

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