India: Insurance Compensation Outside India For Loss Of Interest In Indian Subsidiary Not Taxable In India, Holds Delhi ITAT

Last Updated: 9 August 2019
Article by Daksha Baxi and Rahul Mantri

In M/s Adidas India Marketing (P.) Ltd. v. Income Tax Officer,[1] the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) held that the insurance compensation received by the foreign parent due to loss of financial interest in its Indian subsidiary is not the subsidiary's income as alleged by the tax officer and, therefore, is not taxable in India.

Facts

Adidas India Marketing (P.) Ltd. (Assessee) is an Indian company engaged in the business of sourcing, distributing and marketing products of the brand 'Adidas'. Nearly all (98.99 %) of the Assessee's equity is held by another Indian company, Adidas India Private Ltd. (Adidas India), which, in turn, is a subsidiary of a German company, Adidas AG, Germany (Adidas Germany).

The Assessee had taken out an insurance policy with Bajaj Allianz General Insurance (Bajaj Allianz) to cover loss caused by fire to its stock-in-trade and fixed assets. Upon suffering loss to its stock-in-trade and fixed assets due to fire in its premises, the Assessee recovered a claim of approximately INR 47 crores for stock-in-trade and INR 1.5 crore for fixed assets.

Separately, Adidas Germany had also taken a Global Insurance Policy (GIP) with Zurich Insurance against the "loss of financial interest due to erosion of economic value of subsidiaries". On account of the loss of financial interest caused by the fire at the Assessee's premises, Adidas Germany made a claim on its GIP and received compensation of approximately INR 91 crores from Zurich Insurance, after subtracting the amount that the Assessee had received from Bajaj Allianz.

The Assessing Officer (AO) in his scrutiny raised several issues in relation to transfer pricing and Advertising, Marketing and Publicity (AMP) expenses, and in relation to the insurance claim received by Adidas Germany. The AO alleged that:

  • The Assessee was entitled to receive reimbursement from Adidas Germany for significant expenditure on AMP, etc.
  • The insurance claim received by Adidas Germany in respect of the diminution in its financial interest in the Indian subsidiary for the loss suffered by the subsidiary due to fire should be treated as the income of the Assessee and be taxed in the hands of the Assessee.

Aggrieved by the final assessment orders, the Assessee appealed before the ITAT. The ITAT set aside the orders of the lower authorities with respect to issue (a) and restored it to the file of the AO, or Transfer Pricing Officer, and gave its opinion on issue (b) after analysing it threadbare.

Arguments by the AO and the Assessee

 

(a)AO

The AO argued that the income received by Adidas Germany was income accrued to the Assessee under Section 5 of the Income Tax Act, 1961 (IT Act) as the insurance is in respect of the stock-in-trade of the Assessee. He substantiated this submission, referring to the correspondence between the Assessee and Adidas Germany in which they were trying to discern ways to infuse the compensation amount into the Assessee.

AO also claimed that the income is deemed to be accrued due to Adidas Germany's business connection in India under Section 9(1)(i) of the IT Act as the compensation received was due to the loss caused by fire to the stock.

(b)Assessee

The Assessee argued that the income received by Adidas Germany arose out of a separate and distinct insurance contract between the foreign insurance company and Adidas Germany. The Assessee was not a party to this contract. Also, the subject matter of the contract was the loss of financial interest due to erosion of economic value of subsidiaries, and not for loss caused by fire.

On the alleged accrual or deemed accrual, the Assessee argued that the term "accrual" means having an enforceable right, but in the present case, the Assessee did not have any right over the amount and, therefore, there was no accrual.

Further, it was also argued that Section 25 of the General Insurance Business Act, 1972, prohibits having an insurance with an insurer located outside India. The insurance contract entered into by Adidas Germany clearly read that the contract did not cover group entities of Adidas Germany, which are residents of those countries that prohibit entering into contract with insurers from Zurich. Therefore, the Assessee could not have been covered by that contract.

Considerations and Ruling of the ITAT

The ITAT opined that the Assessee's insurance was against the loss in respect of stock-in-trade and fixed assets, which are tangible assets. On the other hand, the insurance by Adidas Germany was against loss of financial interest due to erosion of economic value of subsidiaries, which is an intangible asset. Accordingly, the ITAT held that the two insurance policies were separate and distinct. This was substantiated by the fact that the insurance contract entered into by Adidas Germany clearly mentioned that "the subsidiary companies are neither entitled nor obligated by this part of the contract and are not additionally insured companies." Therefore, the insurance claim received by Adidas Germany was held not to be the income of the Assessee and, therefore, was not taxable.

The ITAT rejected the Assessing Officer's reliance on the correspondence between the Assessee and Adidas Germany for bringing the compensation to tax in India. It opined that this correspondence only explored the mode of transfer of money because Adidas Germany wanted to restore the loss that was caused to the Assessee. The ITAT also held that if such an amount was sent to the Assessee, it was the application of the compensation received by Adidas Germany after it had paid German taxes on the compensation received. The ITAT rejected AO's allegations that the two separate policies were entered into to avoid tax in India.

CAM Comment

This is a very welcome decision dealing with several tricky issues and providing guidance on their interpretation:

  • When income is said to be 'accrued' or 'deemed accrued', there must exist a "right to receive that income or income must vest" in someone.[2] Therefore the fact that a particular receipt may have connection with something that happens in India does not automatically result in that receipt being accrued to an Indian resident. The contracts, and the intention and manner of dealing with the transaction, would all contribute to determining such accrual.
  • Every contract and arrangement between parent and subsidiary that has the impact of either reducing tax in India or not attracting a receipt to tax in India, cannot be regarded to be a subterfuge or device entered into for avoiding tax. The facts and circumstances must be carefully examined.

Footnotes

1 M/s Adidas India Marketing (P.) Ltd. v. Income Tax Officer, ITA No. 1431/Del/2015 (July 29, 2019).

2 ED Sassoon & Co. Ltd. v. CIT, 26 ITR 27 (SC).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions