No Withholding Tax on foreign arbitral awards: Delhi High Court
The Delhi High Court (“Court”) in the case of Glencore International AG v. Dalmia Cement (Bharat) Limited held that no withholding tax will be levied on foreign arbitral awards.
In the present case Glencore International AG, a swiss multi-national commodity trading and mining company (“Glencore”) filed an execution petition in the Court seeking to enforce an arbitral award of about USD 4.5 million passed in its favour. Dalmia Cement (“Dalmia”) objected the enforcement of arbitral award under Section 48 of the Arbitration and Conciliation Act, 1996 (“Act”), claiming that it is contrary to the public policy of India. However, the Court rejected Dalmia’s claim. Dalmia appealed in the Supreme Court of India, which was also rejected. Therefore, the foreign arbitral award would now be deemed to be a decree of the Court, after it allowed the contentions of Glencore.
With respect to the amount of the arbitral award, Dalmia claimed that there would be incidence of tax and proposed to deduct withholding tax before remitting the amounts under the decree. The Court sought assistance from the Income Tax Department (“IT Department”) on the matter. The IT Department stated that the income from the award is in the nature of windfall gain and therefore is an income taxable in the contracting state in which it has arisen, as per Article 22(3) of the Double Taxation Avoidance Agreement between India and Switzerland and proposed 42% withholding tax on the award.
Glencore argued that as per Section 49 of the Act, once the foreign arbitral award is recognised as enforceable by the court of law, then it is to be executed as a decree of the court and the award becomes judgment debt. Once the award becomes judgment debt, it is no longer considered to be income and hence, there cannot be any deductions from it.
The Court agreed with the arguments made by Glencore and noted that once the foreign arbitral award is treated as a judgment debt, only such adjustments or deductions can be made to it which are permissible under the Code of Civil Procedure, 1908. The Court further noted that a decree should be executed according to its tenor unless modified by a statute.
The Court directed the Registry to release the entire decretal amount along with the accrued interest without deducting any withholding tax.
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This is an important judgment as the Delhi High Court clarified that the foreign arbitral awards shall be deemed as decree once they are considered to be executable by the court. The Court while noting that that the decretal amount is considered to be a judgment debt after passing of the decree, settled the position that such decretal amount also includes the foreign arbitral award and no deductions are permissible from such judgment debt. This judgment takes a pro foreign-investor stand, making it easier for the foreign investors to enforce their foreign arbitral award in India.
Disclaimer: This post has been prepared for informational purposes only. The information/or observations contained in this post does not constitute legal advice and should not be acted upon in any specific situation without seeking proper legal advice from a practicing attorney.