Sections 5 and 9 of the Act – As insurance compensation received by foreign parent company from foreign insurer was for protection of its financial interest in Indian subsidiary, it was not taxable in hands of the Indian subsidiary, although compensation was paid pursuant to fire damage to assets and stock of the Indian subsidiary

21. 
TS-439-ITAT-2019 (Del.) M/s. Adidas India Marketing vs. IT Officer
(P) Ltd. ITA No.: 1431/Del/2015 A.Y.: 2011-12 Date of order: 2^nd July, 2019;

Sections 5 and 9 of the Act – As insurance
compensation received by foreign parent company from foreign insurer was for
protection of its financial interest in Indian subsidiary, it was not taxable
in hands of the Indian subsidiary, although compensation was paid pursuant to
fire damage to assets and stock of the Indian subsidiary

FACTS

The assessee was an Indian company engaged
in the business of sourcing, distribution and marketing of products in India
under a brand name owned by its overseas group company. A German company (F Co)
was the ultimate parent / holding company of the assessee. The assessee had
insured its fixed assets and stocks with an Indian insurer. F Co had insured
its financial interest in its worldwide subsidiary companies (including in
India) under a global insurance policy (GIP) with a foreign insurer. The
assessee had a fire incident against which it received compensation from the
Indian insurer during the relevant year. In respect of loss incurred by the
assessee, F Co also received insurance compensation under GIP in Germany from
the foreign insurer towards loss in economic value of its financial interest in
the assessee. The compensation received was reduced by the amount of
compensation received by the assessee from the Indian insurer. Further, F Co
had paid taxes in Germany on the compensation received under GIP.

The AO contended that the insurance
compensation received by F Co was in respect of loss of stock of the assessee
and that the email correspondence between the assessee and F Co indicated that
all receipts from insurance, relating to physical loss, business interruption
and mitigation cost, belonged to the assessee. Thus, overseas compensation
received by F Co had a direct business relationship with the business
activities of the assessee and hence the same should be taxed in India in the
hands of the assessee.

The DRP also
held that insurance compensation was taxable in the hands of the assessee as
the profit foregone on the lost stock and the loss suffered on other assets
were part and parcel of the business of the assessee in India.

The assessee had contended that

The insurance compensation received by the
assessee and F Co were under two separate and distinct contracts of insurance.
The contracts were with unrelated third-party insurers. The respective insured
persons (claimants) had separately paid the premium without any cross-charge.

While the insurance policy taken by the
assessee exclusively covered risk arising out of loss of stock and fixed assets
owned by it, the GIP exclusively covered the financial interest of F Co in the
assessee.

The privity of the insurance contract of the
Indian insurer was with the assessee and that of the foreign insurer was with F
Co. Further, the assessee was not a contracting party to the GIP.

Income ‘accrues’ to the assessee only when
the assessee acquires the right to receive it. Since there was no actual or
constructive receipt by the assessee, compensation could not be taxed in India
in its hands. Moreover, no income accrued to the assessee as the assessee had
not acquired any unconditional and absolute right to receive claim of
compensation under GIP.

F Co had undertaken the GIP with the foreign
insurer for all its investments worldwide, including in India.

HELD

Insurance policy between the assessee and
the Indian insurer was to secure stock-in-trade, which is a tangible asset.
However, GIP between F Co and foreign insurer was for securing investment made,
or financial interest, in subsidiaries which is an intangible asset. Thus, the
interest insured by the assessee and that by F Co were two different interests.

The insurance contracts entered by the
assessee and F Co were separate and independent since: (i) there were two
different claimants; (ii) claimants had separately paid the premium; (iii) no
part of the premium on GIP was allocated to the assessee; and (iv) the privity
of contract was with different parties.

As the assessee did not have any right or
obligation in the GIP and it was not a party to it, the assessee did not have
any right to receive the claim of insurance. The same was also not vested in
the assessee to be regarded as having accrued in the hands of the assessee.
Reliance was placed on the Supreme Court’s decision in the case of ED
Sassoon [26 ITR 27 (SC)].

The claim under GIP was in respect of
insured financial interest of F Co in its worldwide subsidiaries. The foreign
insurer had paid compensation for diminution in financial interest. Merely
because the computation of the claim was with reference to loss by fire of the
stock, or profit that could have been earned if such stock was sold, cannot be
construed to mean that the claim was in respect of loss of tangible property in
the form of stock of the assessee. The claim was in respect of the intangible
asset in the form of financial interest of F Co. Hence, the claim cannot be
said to have any ‘business connection’ in India.

The insured interest of F Co cannot be said
to be through or from any property in India or through or from any asset or
source of income in India. F Co had entered into a contract in Germany for
insuring the intangible assets in the form of financial interest in its
subsidiaries. This was quite distinct from the physical stock-in-trade of the
assessee that was lost in fire. Thus, the claim received by F Co could not be
treated as income deemed to accrue or arise in the hands of the assessee in
India.Further, the email correspondence was merely to explore the modes of
transfer of money from F Co to the assessee for restoring the financial
interest of F Co in the assessee. The same cannot determine the tax liability.
Such correspondence was related to application of money but did not indicate in
whose hands the money was taxable.

The GIP was taken to cover the contingent
losses that may or may not arise in future. Further, as F Co had actually paid
premium in respect of GIP from time to time and also paid tax in Germany in
relation to the insurance claim, there was no colourable device adopted by the
assessee for evading taxes in India.