Director Of Income Tax v. Guy Carpenter & Co. Ltd

THE HIGH COURT OF DELHI AT NEW DELHI %Judgment delivered on: 23.04.2012 +ITA No. 202/2012 DIRECTOR OF INCOME TAX … Appellant versus GUY CARPENTER & CO. LTD. ... Respondent Advocates who appeared in this case:For the Appellant: Mr Sanjeev Sabharwal, Sr. Standing CounselFor the Respondent: Counsel for the respondent. CORAM:-HON’BLE MR JUSTICE BADAR DURREZ AHMEDHON’BLE MR JUSTICE V.K. JAIN JUDGMENT BADAR DURREZ AHMED, J (ORAL) 1.The Revenue is in appeal before us being aggrieved by the orderdated 30.09.2011 passed in ITA No. 2443/Del/2011 pertaining to theassessment year 2006-07.The Revenue has proposed that the followingquestions are substantial question of law which ought to be considered byus:- “1. Whether payments received by the assessee inconsideration of services rendered to insurance Co. inIndia in the process of re-insurance of the risk placed byIndian Insurance Co. with international re-insuracnecompanies is amounted to “fees for technical services”within the meaning of the same under the DTAAbetween India and U.K?consideration of services rendered to insurance Co. inIndia in the process of re-insurance of the risk placed byIndian Insurance Co. with international re-insuracnecompanies is amounted to “fees for technical services”within the meaning of the same under the DTAAbetween India and U.K? 2.Whether learned ITAT erred in holding that the paymentreceived by the assessee from Indian Insurance Co. in theprocess of reinsurance risk placed by Indian Insurance Co.with International reinsurance companies is not taxable inIndia as “fees for technical services”? 3. Whether nature of reinsurance brokerage/commissionwhich is assessable as fees for Technical Services within themeaning of section 9(1)(vii) of the Act and/or Article 13 ofthe India United Kingdom (U.K.) Double Tax AvoidanceAgreement (DTAA)? 4. Whether the services provided by the assessee areconsultancy in nature and the payments fall within thedefinition of fees for technical services within the meaningof Sec. 9 (1) (vii) of the Act?” 2.At the outset we would like to state that none of the above questions,according to us, are substantial question of law and the only issues whicharise are factual in nature which has already been determined by the IncomeTax Appellate Tribunal, being the final fact finding authority insofar as thescheme under the Income Tax Act, 1961 (hereinafter referred to as ‘the saidAct’) is concerned. Unless and until some perversity in a finding of factreturned by the Tribunal is pointed out, there is no scope for interference bythis court under section 260A of the said Act. The reasons for us arriving atthis conclusion are indicated below. 3.Before the Tribunal the issue which arose for consideration waswhether the nature of reinsurance brokerage/commission which was paid byInsurance Companies operating in India to the assessee was assessable as ‘fees for technical services’ within the meaning of section 9 (1) (vii) of thesaid Act read with article 13 of the India-United Kingdom (U.K.) DoubleTax Avoidance Agreement (hereinafter referred to as the ‘DTAA’).Theassessee company had filed its return of income in respect of the saidassessment year showing its taxable income at Nil. The case was picked upfor scrutiny and a notice under section 143 (2) of the said Act was issued.Thereafter, regular assessment proceedings ensued. The Assessing Officerhad noticed that the assessee had received commission from severalinsurance companies operating in India such as the New India AssuranceCo. Ltd., Tata AIG General Ins. Co. Ltd., General Insurance Corp. of India,Agriculture Ins. Co. of India Ltd., HDFC CHUBB General Ins. Co. Ltd.,IFFCO Tokio General Ins. Co. Ltd., and Oriental Insurance Company Ltd. 4.The Assessing Officer required the assessee to submit a copy of theagreement with New India Assurance Co. Ltd. The agreement was enteredin conjunction with J.B. Boda Reinsurance Brokers Pvt. Ltd. and M.B. Bodaand Alsford Page and Gems Ltd. The type of insurance was ‘catastrophicexcess of loss’. In the case of New India Assurance Co. Ltd., the reinsurerswereHannoverRuckversicherungAG,CCR,Lloyd’sUnderwriterSyndicate, Swiss Re and Wurttembergische London.In response to theAssessing Officer’s query with regard to the process by which clients wereselected, the assessee submitted the following information, pertaining to,New India Assurance Co. Ltd:- “Key Steps (a) Originating insurer in India (New India) contacts JBBoda/MB Boda for placing identified risks/ class of riskswith international reinsurers.Boda/MB Boda for placing identified risks/ class of riskswith international reinsurers. (b)JB Boda contacts one or more international firms ofreinsurancebrokersoutsideIndiarequestingforproposals from international reinsurers/syndicates.reinsurancebrokersoutsideIndiarequestingforproposals from international reinsurers/syndicates. (c) International reinsurance brokers like Guy Carpentercontact other primary brokers and various syndicates inthe Lloyds market for competitive proposals.contact other primary brokers and various syndicates inthe Lloyds market for competitive proposals. (d)Based on the various offers received JB Boda presentsthe various options to New India which makes the finaldecisions.Based on the decisions made by New Indiathe policy terms are agreed and the risk is placed with theLloyds market. Further, as per normal industry practicethe reinsurance premium net of brokerage of 10% as perthe policy contract is remitted to Guy Carpenter foronward transmission to the reinsurers in the Lloydsmarket.the various options to New India which makes the finaldecisions.Based on the decisions made by New Indiathe policy terms are agreed and the risk is placed with theLloyds market. Further, as per normal industry practicethe reinsurance premium net of brokerage of 10% as perthe policy contract is remitted to Guy Carpenter foronward transmission to the reinsurers in the Lloydsmarket. (e) Separately the intermediation fee (brokerage) is remittedby New India to JB Boda, Guy Carpenter and otherIndian and overseas intermediaries based on a mutuallyagreed ratio which accounts for their relative contributionin the reinsurance process.Typically however, theIndian and overseas reinsurance intermediaries wouldshare the total brokerage income equally.It mayhowever, be noted that in any reinsurance transactionmore than one insurance intermediary may be involved atthe India and overseas level. For e.g. in the illustrativetransaction the Indian brokers involved were JB Bodaand MB Boda and international brokers involved are GuyCarpenter & Alsford Page and Gems Ltd.”by New India to JB Boda, Guy Carpenter and otherIndian and overseas intermediaries based on a mutuallyagreed ratio which accounts for their relative contributionin the reinsurance process.Typically however, theIndian and overseas reinsurance intermediaries wouldshare the total brokerage income equally.It mayhowever, be noted that in any reinsurance transactionmore than one insurance intermediary may be involved atthe India and overseas level. For e.g. in the illustrativetransaction the Indian brokers involved were JB Bodaand MB Boda and international brokers involved are GuyCarpenter & Alsford Page and Gems Ltd.” 5.It was also made clear by the assessee that there were occasionalbusiness visits by two or three persons from the assessee company to Indiato maintain general business awareness and to reinforce business contacts/relationship in India for 15 calendar days in a year which according to themdid not meet the time threshold provided in Article 5(2)(k) of the India U.K.tax treaty. The Assessing Officer also collected certain information fromthe website of the assessee company. 5.It was also made clear by the assessee that there were occasionalbusiness visits by two or three persons from the assessee company to Indiato maintain general business awareness and to reinforce business contacts/relationship in India for 15 calendar days in a year which according to themdid not meet the time threshold provided in Article 5(2)(k) of the India U.K.tax treaty. The Assessing Officer also collected certain information fromthe website of the assessee company. 6.According to the Assessing Officer the receipts of commission by theassessee from the said insurance companies operating in India amounted to“fees for technical services” as defined under section 9 (1) (vii) of the saidAct and also under article 13(4)(c) of DTAA.In the course of theassessment proceedings, the Assessing Officer had also issued a noticeunder section 133(6) to New India Assurance Company Ltd. to providecertain information with regard to the nature of the transaction betweenNew India Assurance Company Ltd. and the assessee.The followinginformation was submitted by New India Assurance Company Ltd.:- “(1) “Officials from Guy Carpenter visit our officeoccasionally. Normally they visit us alongwith ForeignInsurers/Reinsurers who are transacting business with usthrough Guy Carpenter.occasionally. Normally they visit us alongwith ForeignInsurers/Reinsurers who are transacting business with usthrough Guy Carpenter. (2)They do not make any presentations during themeetings but the proposals for reinsurance is donethrough the broker (Guy Carpenter) who places businesswith the reinsurer for the ceding company.Theseproposals are sent through post/mail. (3)Accounts are received through the broker and therelated correspondence is done only with the broker. Thecorrespondence/accounts for the last six month would bevery voluminous and it will take us some time to extractthe information. (4)TheproposalpresentationsfromBrokers/Reinsurers always help in better understanding the natureof business, international market, trends and the impactof global phenomena.(5)Normally the payments are done from our ForeignCurrency bank account in London/New York if thepayments are done directly to Guy Carpenter.If thebusiness is co-broked by JB Boda payment is done toJ.B. Boda.” However, despite the above information, as pointed out above, theAssessing Officer came to the conclusion that the nature of paymentreceived by the assessee came within the definition of fees for technicalservices as defined under the said Act as also under article 13(4)(c) of theDTAA. 7.The Commissioner of Income Tax (Appeals) also concurred with theview taken by the Assessing Officer. Being aggrieved thereby, the assessee preferred an appeal before the Income Tax Appellate Tribunal whichultimately decided in favour of the assessee by virtue of the impugnedorder. 8.Before we go on to examine the findings of the Tribunal it would be pertinent to refer to article 13 of the DTAA to the extent it is relevant:- “ARTICLE 13- Royalties and fees for technical services- 1. Royalties and fees for technical services arising in aContracting State and paid to a resident of the otherContracting State may be taxed in that other State.Contracting State and paid to a resident of the otherContracting State may be taxed in that other State. 2. However, suchroyaltiesandfeesfor technicalservices may also be taxed in the Contracting State inwhich they arise and according to the law of thatState; but if the beneficial owner of the royalties orfees for technical services is a resident of the otherContracting State, the tax so charged shall not exceed:services may also be taxed in the Contracting State inwhich they arise and according to the law of thatState; but if the beneficial owner of the royalties orfees for technical services is a resident of the otherContracting State, the tax so charged shall not exceed: 2. However, suchroyaltiesandfeesfor technicalservices may also be taxed in the Contracting State inwhich they arise and according to the law of thatState; but if the beneficial owner of the royalties orfees for technical services is a resident of the otherContracting State, the tax so charged shall not exceed:services may also be taxed in the Contracting State inwhich they arise and according to the law of thatState; but if the beneficial owner of the royalties orfees for technical services is a resident of the otherContracting State, the tax so charged shall not exceed: (a) In the case of royalties within paragraph 3 (a) ofthis Articles, and fees for technical services withinparagraphs 4 (a) and (c) of this Article,-this Articles, and fees for technical services withinparagraphs 4 (a) and (c) of this Article,- (i)during the first five years for which thisConvention has effect; (aa)15% of the gross amount of such royalties orfees for technical services when the payer of theroyalties or fees for technical services is theGovernment of the first mentioned ContractingState or a political sub-division of that State, and (bb) 20% of the gross amount of such royalties orfees for technical services in all other cases; and (ii) during subsequent years, 15% of the grossamount of such royalties or fees for technicalservices; and (b) in the case of royalties within paragraph 3(b) ofthis Article and fees for technical services definedin paragraph 4(b) of this Article, 10% of the grossamount of such royalties and fees for technicalservices. (3)xxxx (4)For the purposes of paragraph 2 of this Article, andsubject to paragraph 5, of this Article, the term “feesfor technical services” means payments of any kind ofany person in consideration for the rendering of anytechnicalorconsultancy services(includingtheprovision of services of a technical or other personnel)which:subject to paragraph 5, of this Article, the term “feesfor technical services” means payments of any kind ofany person in consideration for the rendering of anytechnicalorconsultancy services(includingtheprovision of services of a technical or other personnel)which: (a) are ancillary and subsidiary to the application ofenjoyment of the right, property or informationfor which a payment described in paragraph 3(a)of this article is received; orenjoyment of the right, property or informationfor which a payment described in paragraph 3(a)of this article is received; or (b) are ancillary and subsidiary to the enjoyment ofthe property for which a payment described inparagraph 3(b) of this Article is received; orthe property for which a payment described inparagraph 3(b) of this Article is received; or (c) Make available technical knowledge, experience,skill, know-how or processes, or consist of thedevelopment and transfer of a technical plan ortechnical design.skill, know-how or processes, or consist of thedevelopment and transfer of a technical plan ortechnical design. 5. The definition of fees for technical services inparagraph 4 of this Article shall not include amountspaid:paragraph 4 of this Article shall not include amountspaid: (a)for services that are ancillary and subsidiary,as well as inextricable and essentially linked, to thesale of property, other than property described inparagraph 3 (a) of this Article; (b)For services that are ancillary and subsidiaryto the rental of ships, aircraft, containers or otherequipment used in connection with the operationof ships, or aircraft in international traffic; (c)Forteachinginorbyeducationalinstitutions; (d)For services for the private use of theindividual or individuals making the payment; or (e)To an employee of the person making thepayments or to any individual or partnership forprofessional services as defined in Article 15(Independentpersonalservices)ofthisConvention. (6)xxxxxx (7)xxxxxx (8)xxxxxxx (9)xxxxxxx” (a)for services that are ancillary and subsidiary,as well as inextricable and essentially linked, to thesale of property, other than property described inparagraph 3 (a) of this Article; (b)For services that are ancillary and subsidiaryto the rental of ships, aircraft, containers or otherequipment used in connection with the operationof ships, or aircraft in international traffic; (c)Forteachinginorbyeducationalinstitutions; (d)For services for the private use of theindividual or individuals making the payment; or (e)To an employee of the person making thepayments or to any individual or partnership forprofessional services as defined in Article 15(Independentpersonalservices)ofthisConvention. (6)xxxxxx (7)xxxxxx (8)xxxxxxx (9)xxxxxxx” 9.A plain reading of Article 13(4)(c) of the DTAA indicates that ‘feesfor technical services’ would mean payments of any kind to any person inconsideration for the rendering of any technical or consultancy serviceswhich, inter alia, “makes available” technical knowledge, experience, skill,know-how or processes, or consist of the development and transfer of atechnical plan or technical design. According to the Tribunal this “makeavailable” condition has not been satisfied inasmuch as no technicalknowledge, experience, skill, know-how, processes, have been madeavailable by the assessee to the insurance companies operating in India. Italso does not consist of the development and transfer of any technical planor technical design. 10.The Tribunal examined the evidence available on record in order toreturn a finding on the issue as to whether the payments received by theassessee from the insurance companies operating in India would fall withinthe expression ‘fees for technical services’ as appearing in article 13(4)(c)of the DTAA read with section 9(1)(vii) of the said Act. While doing so theTribunal, inter alia, found that the assessee company was an internationalreinsurance intermediary (broker) and was a tax resident of UnitedKingdom. Further, that it was a recognized broker by the financial services authority of United Kingdom.It was also an admitted position that theassessee did not maintain any office in India and that it had a referralrelationship with J.B. Boda reinsurance (Broker) Pvt. Ltd of Mumbai andthat J.B. Boda was duly licenced by the Insurance Regulatory &Development Authority to transact reinsurance business in India. 11.The Tribunal also observed as under:- “27.In the illustrative transaction, New India Insurance Co.Ltd. in India has entered into an agreement to reinsure on anExcess Loss basis the catastrophe risk arising from itsprimary insurance cover in conjunction with J.B. Boda andAlsford Page and gems Ltd. (the reinsurance brokers).Theterms of the agreement specifies that the assessee inconjunction with J.B. Boda are recognized as intermediary,through whom all communications relating to this agreementshall pass. The terms of the agreement further provides thattheassesseewillprovideallthedetailsofagreedendorsements to the reinsurers by e-mail or facsimile andshall submit the slip policy to XIS (Lloyd’s processingmarket) for signing.The assessee will act as a claimadministrator and will submit claims advices to relevantmarket systems. For the services rendered, the assessee alongwith the other reinsurance brokers acting as an intermediaryin the reinsurance process for New India Assurance Co. willbe entitled to 10% brokerage. From the role played by theassessee in the reinsurance process as discussed above, it isevidenttousthattheassesseewasrenderingonlyintermediaryserviceswhileactingasanintermediary/facilitator in getting the reinsurance cover forNew India Insurance Co. There exists no material or basis onthe basis of which, it would be said that the assessee wasrendering any kind of technical/consultancy service within themeaning of Article 13 of Indo-UK treaty.The considerationreceived by the assessee acting as an intermediary in the reinsurance process cannot, by any stretch of imagination, bequalified as a consideration received for rendering anyfinancial analysis related consultancy services, rating agencyadvisory services, risk based capital analysis etc. as allegedby the A.O.” The Tribunal also noted the process by which the transaction takes place. Ithas been pointed out that the originating insurer in India would contact J.B.Boda/ M.B. Boda for placing identified risks/ class of risks withinternational reinsurers.J.B. Boda, in turn, would contact one or moreinternational firm(s) of reinsurance broker(s) like the assessee forcompetitive proposals from the internationalreinsurer.Then, theinternational reinsurance brokers like the assessee would contact otherprimary brokers and various syndicates in the Lloyds market forcompetitive proposals. Based on the various offers or proposals given bythe international reinsurance brokers, like the assessee, to J.B. Boda, thelatter would present various options to the originating insurer in India,which would take a final decision in the matter. Based on the decision ofthe originating insurer in India, the policy terms would then be agreed uponand the risk would be placed with the international reinsurer. It was alsopointed out that as per the normal industry practice, the reinsurancepremium net of brokerage of 10% as per the policy contract is remitted to the assessee, i.e., reinsurance brokers, for onward transmission tointernational reinsurers. The intermediation fee which is another word forbrokerage is paid separately by the originating insurance in India to J.B.Boda, the international reinsurance brokers like the assessee and otherintermediaries, based on a mutually agreed ratio which accounts for theirrelative contribution in the reinsurance process. 12.Based on this manner of transacting, the Tribunal came to aconclusion that the payment received by the assessee could not be regardedas ‘fees for technical services’. Further, more, the Tribunal also held thatsuch receipts would not amount to fees for technical services as the “makeavailable” clause contained in article 13(4)(c) had not been satisfied in thefacts and circumstances of the present case. 13.In our view, the Tribunal has arrived at these conclusions purely onassessing the factual matrix of the case at hand. The findings are in thenature of factual findings and, therefore, according to us, no substantialquestion of law arises for our consideration, particularly, because thelearned counsel for the Revenue was unable to point out any perversity inthe recording of such findings.As such no substantial question of law arises for our consideration. The appeal is dismissed.There shall be no order as to costs. BADAR DURREZ AHMED, J V.K. JAIN, J APRIL 23, 2012kb