2021 (7) TMI 1018 - AT - Income Tax

Taxability of income received from re-insurance business in India - whether SRSIPL constitutes a PE of the assessee in India so as to bring the business profit of the assessee to tax in India in terms of India-Switzerland DTAA? - HELD THAT - The issue whether SRSIPL can be considered as a PE of the assessee in India has arisen time and again before the Tribunal and the Tribunal has consistently decided in favour of the assessee. In fact the impugned direction of the learned DRP would reveal that though learned DRP was conscious of the fact that the Tribunal has decided the issue in favour of the assessee in assessment year 2010-11; however since the revenue has filed an appeal against the decision of the Tribunal learned DRP decided the issue against the assessee just for the sake of keeping it alive. We decide the issue in favour of the assessee by holding that since SRSIPL is not a PE of the assessee the profits earned from re5 insurance business cannot be brought to tax in India in terms of Article 7 of India Switzerland DTAA. Accordingly addition is deleted. These grounds are allowed Disallowance of long-term capital loss arising from sale of shares - HELD THAT - Undisputedly after applying the computational provisions of sections 48 and 49 of the Act to the sale transaction of shares of TTK long term capital loss arises. Therefore the assessee is entitled to claim such long term capital loss. As regards the allegation of the assessing officer that assessee had not valued the shares under rule 11UA we fully agree with the submissions of assessee that rule 11UA is application for valuation of assets specified under section 56(2)(vii) 56(2)(viia) and 56(2)(viid). Therefore rule 11UA cannot be applied for determining the value of unlisted equity shares for any purpose other than section 56(2) of the Act. In any case of the matter the assessee on its part has furnished valuation report of an expert determining the value of shares. Whereas no such valuation has been done by the assessing officer to counter assessee s valuation. Similarly the allegation of the assessing officer that the promoter of Vidal Healthcare Services Ltd Shri Girish Rao was linked to the assessee is wholly irrelevant. Undisputedly Vidal Healthcare Services Ltd is an independent corporate entity having its own separate identity. It is no way related to the assessee. Therefore even assuming that Shri Girish Rao at some point of time was an employee of the assessee or somehow related to TTK would not be enough to conclude that the assessee and Vidal Healthcare Services Ltd are related parties. As regards the allegation of the assessing officer that the assessee has invested in TTK at a premium and thereafter sold the shares at a loss to benefit Warren Buffet s Hathaway Berkshire in our view is totally irrelevant for deciding the issue in dispute. Rather these allegations vindicate that the assessing officer has allowed his decision making process to be clouded by irrelevant material presumption and surmises. In view of the aforesaid we hold that the assessee having incurred long term capital loss in course of a genuine transaction relating to sale of shares is eligible to claim set off and carry forward of such loss.

Summary

Issues Involved:
1. Taxability of income received from re-insurance business in India.
2. Disallowance of long-term capital loss arising from the sale of shares.

Detailed Analysis:

1. Taxability of Income from Re-Insurance Business:

The core issue is whether the Indian subsidiary (SRSIPL) of the Swiss-based assessee constitutes a Permanent Establishment (PE) in India, making the business profit taxable in India under the India-Switzerland Double Taxation Avoidance Agreement (DTAA).

- Facts and Arguments:
- The assessee, a Swiss company, received insurance premiums from Indian insurers through its Singapore branch.
- The Indian subsidiary, SRSIPL, provided services under an agreement and was remunerated at cost plus a 12% markup.
- The assessing officer argued that SRSIPL is a dependent agent PE under Article 5.5 of the India-Switzerland DTAA, making the re-insurance income taxable in India.
- The assessee contended that it had no business connection or PE in India as per Article 7 of the DTAA.

- Tribunal’s Findings:
- The Tribunal referred to previous decisions in the assessee’s favor for assessment years 2010-11, 2011-12, 2012-13, 2013-14, and 2015-16, where it was held that SRSIPL does not constitute a PE.
- The Tribunal noted that the Dispute Resolution Panel (DRP) upheld the assessing officer's decision despite being aware of the Tribunal's earlier rulings favoring the assessee.
- Following the consistent Tribunal decisions, it was concluded that SRSIPL is not a PE, and thus, the re-insurance income is not taxable in India under Article 7 of the DTAA.

2. Disallowance of Long-Term Capital Loss:

The issue revolves around whether the long-term capital loss claimed by the assessee from the sale of shares of TTK Healthcare Services Pvt Ltd (TTK) is genuine or artificially created.

- Facts and Arguments:
- The assessee acquired 12,34,476 shares of TTK at a high premium and sold them at a significant loss.
- The assessing officer questioned the rationale behind purchasing shares at a high premium and selling them at a low price, suspecting an artificial loss.
- The assessee provided valuation reports and regulatory approvals to justify the transactions.
- The assessing officer disallowed the loss, alleging it was created to set off against future capital gains.

- Tribunal’s Findings:
- The Tribunal found that the shares were acquired and sold in compliance with regulatory approvals from IRDA and RBI.
- The Tribunal noted that the valuation reports provided by the assessee were not countered by the assessing officer with independent valuations.
- The Tribunal rejected the assessing officer's allegations of artificial loss creation, emphasizing that the transactions were genuine and within legal frameworks.
- The Tribunal held that the computational provisions of sections 48 and 49 of the Income-tax Act apply, and the long-term capital loss is allowable.
- The Tribunal dismissed the relevance of the relationship between the assessee and Vidal Healthcare Services Ltd, the buyer of the shares.

Conclusion:

The Tribunal allowed the appeal, concluding that:
- The re-insurance income is not taxable in India as SRSIPL does not constitute a PE.
- The long-term capital loss from the sale of TTK shares is genuine and allowable for set-off and carry forward.

Order Pronounced:
The appeal is allowed, and the order was pronounced in the open court on 20/07/2021.