Is compensation of employees to the residents of Japan working in Indian embassy in Japan included/excluded in domestic income of India?

Yes,

It will be included in the domestic factor income as the Indian Embassy is a part of the domestic territory of India.

Explanation:-

The profits earned by the residents and non-residents (foreign companies) within the domestic territory of India is included in the domestic income.

All incomes and profits generated by all within the domestic territory of India will be included in the domestic income of India.