Article 5 of India-Switzerland DTAA – Income from re-insurance business not taxable in India in the absence of a business connection or a PE in India; Subsidiary performing outsourced functions does not create a PE in India
Facts:
The Taxpayer, a Swiss company engaged in the reinsurance business, earned income from various cedents in India. Further, an Indian Company (I Co), wholly owned subsidiary of Taxpayer, entered into a service agreement with the Singapore branch of the Taxpayer, for obtaining risk assessment services, marketing of insurance and administrative support in India and was remunerated at cost plus basis.
The Taxpayer contended that in the absence of a PE, income from re-insurance business is not taxable in India. However, the Tax Authority contended that taxpayer had a business connection in India owing to its regular and continuous stream of income in India. Further since I Co renders core and technical reinsurance services to the Taxpayer, it would constitute a Dependent Agent PE (DAPE) for the Taxpayer in India. Alternatively as the Taxpayer remunerated ICo on cost plus basis, I Co’s employees were de-facto employees of the Taxpayer.
The tax authority’s contentions were upheld by the Dispute resolution Panel (DRP). Aggrieved, the Taxpayer appealed before the Tribunal.
Held:
Under the Act
A business connection is defined to include any business activity carried on by a NR through a person who habitually concludes contracts in India on behalf of the NR, maintains stock in India and regularly delivers goods on behalf of the NR or secures orders in India for the NR.
On the facts of the case, I Co does not carry on any such activity on behalf of the Taxpayer in India. Thus there is no business connection in India.
Under the DTAA
Establishing a subsidiary in the other treaty country would not, in itself, result in creating and establishing a PE of a foreign holding company in the said country. Reliance in this regard was placed on the Delhi High Court ruling in E-Funds IT Services (266 CTR 1)
Further, to create a Service PE in India, the Taxpayer has to furnish services through employees or other personnel in India. Additionally, such services must be furnished to third parties on behalf of the Taxpayer and not to the Taxpayer itself to create a Service PE. The employees of ICo are not rendering services as if they were employees of the Taxpayer and hence the above condition is also not satisfied.
Moreover, reinsurance is specifically excluded from the ambit of the PE definition under DTAA. Accordingly, the income from re-insurance service is not taxable in India.
