No Indian tax payable on payment of brokerage fee to offshore reinsurer
In a recent ruling, in the case of Director of Income Tax v. Guy Carpenter & Co Ltd.,1 the Delhi High Court has confirmed that the payment of commission in the form of brokerage to an offshore insurance broker does not qualify as ‘fees for technical services’ under Article 13 (4) of the India UK Double Tax Avoidance Agreement (“DTAA”)2.
In this case, the taxpayer, an international insurance broker, incorporated in London, had acted as an intermediary by assisting Indian insurance companies, including New India Assurance Co. Ltd (“Insurance Co”), to seek reinsurance from reinsurers abroad. As a consideration for these services, the taxpayer was paid certain brokerage fee by the Insurance Co. The tax officer held that the commission/brokerage paid to the taxpayer are in the nature of “fees for technical services” under section 9 (1) (vii) of the Income Tax Act, 1961 (“Act”) and Article 13 of the DTAA and hence chargeable to income tax in India. The matter went up in appeal to the Income Tax Appellate Tribunal, Delhi (“Tribunal”), which held in favour of the taxpayer and stated that payment of commission could not be construed as “fees for technical services” under Article 13 (4) of the DTAA. The revenue appealed to the Delhi High Court against the order of the Tribunal. The High Court dismissed the appeal and confirmed key aspects of the ruling of the Tribunal, while observing that the issues raised before it were questions of fact and not law, in respect of which the Tribunal would be the final fact finding authority under the Act.
Points of Argument
The key issue was whether payment received by the taxpayer in the form of commission/brokerage amounted to “fees for technical services” taxable under the DTAA read with section 9 (1) (vii) of the Act? The revenue argued that since the advice and services provided by the assessee, as a broker, helped insurance companies to understand the complexities involved in the reinsurance industry, the services of the assessee would fall under the category of ‘consultancy services’ under Section 9 (1)(vii) of the Act3 and would therefore be liable to tax. It was further argued that, by providing the ‘consultancy services’, the taxpayer had made available necessary skills, knowledge and experience to the Insurance Co, thereby satisfying the ‘make available’ criteria under Article 13 (4) (c) of the DTAA4. Rebutting the arguments of the revenue, and relying extensively upon the ruling in Raymond v. DCIT5 (“Raymond Case”), the taxpayer contended that commission/ brokerage amounts cannot constitute “fee for technical services” as the taxpayer, as a broker, is not engaged in the business of providing managerial or technical consultancy.
The characterization of payments was examined in detail by the Tribunal which analyzed the scope of the terms technical or consultancy services under the DTAA, in the process of which it relied extensively upon the ruling in the Raymond case. The Tribunal held that for any payment to qualify as “fees for technical services” under Article 13 (4) (c) of the DTAA, mere rendering of services is not sufficient, and the payer must be able to perform the technical function independently in future without any further assistance from the payee. In this case, even if the brokerage services provided by the taxpayer were to constitute “consultancy” services in terms of the definition contained in section 9(1)(vii) of the Act, there was no evidence to indicate that the Insurance Co was rendered capable of performing such brokerage services independently.
Accordingly, it was held by the Tribunal, in confirmation of the well-established principle on the concept of “make available” that, “the consideration received by the assessee, acting as an intermediary in the reinsurance process, cannot be…qualified as a consideration received for rendering any financial analysis related consultancy services…payment of consideration would be regarded as fee for technical services only if the twin test of rendering services and making technical knowledge available at the same time is satisfied.” The Tribunal also considered the scope and ambit of the terms “technical” and “consultancy” under Article 13 (4) (c) of the DTAA, and held correctly that brokering business should not qualify as technical or consultancy services.
The Delhi High Court examined the ruling of the Tribunal in detail, and finally arrived at the conclusion that the ruling of the Tribunal was good in law and that there were no substantial questions of law that required to be examined. Accordingly, the revenue’s appeal stood dismissed.
Observation and Analysis
This case is one of a growing number of cases which have examined the ambiguity of classification of payments in the category of fee for technical services, or royalty, which are subject to a withholding tax of 10% in India, unlike other service fee which may not be taxable in India in the absence of a permanent establishment in India. Having said this, it is relevant to keep in mind that the scope of taxability for service fee under the relevant treaty may be significantly narrower than taxability under the Act. The ruling of the Delhi High Court should provide comfort and clarity to non-residents engaging with the insurance and reinsurance industries, in its confirmation of the non-taxability of their brokerage and commission amounts.
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1 ITA No 202/2012
2 Agreement for avoidance of double taxation and prevention of fiscal evasion with United Kingdom of Great Britain and Northern Ireland
3 Explanation 2 to section 9(1) (vii) of the Act- For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”.
4 The term “fees for technical services” means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which:
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received; or
(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; or
(c) make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design.
5 86 ITD 791 (Mum)