Insurance claim received by foreign parent for erosion of financial interest in Indian subsidiary not taxable in India

Facts of the case

  • The taxpayer, an Indian resident company, was engaged in the business of sourcing, distribution and marketing of certain branded products in India.
  • During survey at the taxpayer’s premises, it was observed taxpayer had lost stock of Rs 72 crore and some fixed assets in a fire accident.
  • The taxpayer had received a fire claim of Rs 48.25 crore from an Indian insurer.
  • Taxpayer ultimate holding company was resident of Germany which had received Rs 91 crore under Global Insurance Policy (GIP) with its overseas insurer.
  • The AO held that GIP was in respect of taxpayer’s stock and insurance claim received abroad by holding company should have been offered to tax in India.
  • Dispute Resolution Panel (DRP) concluded that amount received abroad is inseparably connected with taxpayer’s assets and chargeable to tax in India.

Taxpayer’s contention

  • GIP was taken by parent company to cover loss of financial interest due to erosion of value of its subsidiaries globally.
  • GIP was taken for covering risk in investment in subsidiaries across the globe and was not particularly with Indian subsidiary. Entire cost of GIP was borne by parent company and there was no cross-charged of cost to the taxpayer.
  • Disputed income didn’t accrue or arise in India and taxpayer didn’t have any right to claim compensation under the GIP.

Tribunal observations and order

  • Insurance Policy taken by taxpayer was to secure stock in trade and GIP taken by parent company was for securing investment in subsidiaries.
  • Contract of GIP was between the parent company and overseas insurer without a taxpayer being party to it. Parent company was prohibited by Germany law to directly insure the assets of the subsidiaries in India.
  • It accepted the taxpayer’s reliance on SC decision to hold that for income to accrue or arise in India, taxpayer should have acquired a right to receive the income, which was absent in the instant case.
  • Insured interest of the parent company in its subsidiary in India cannot be said on account of business connection in India or through or from any property in India or from any asset or source of income in India.
  • Thus, the compensation received abroad didn’t accrue or arise in India.

Adidas India Marketing Pvt Ltd vs ITO

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