2025 (7) TMI 659 - AT - Income Tax

Reinsurance company avoids India tax liability as tribunal rules no permanent establishment under MLI provisions

RGA International Reinsurance Company Designated Activity Company, C/o Ernst & Young LLP Versus DCIT (IT) -4 (1) (1), Mumbai

RGA International Reinsurance Company Designated Activity Company, C/o Ernst & Young LLP Versus DCIT (IT) -4 (1) (1), Mumbai - TMI The core legal questions considered by the Tribunal in this appeal include:1. Whether the Assessing Officer (AO) erred in assessing the appellant's income at a substantial amount despite the appellant declaring nil income.2. Whether the final assessment order passed beyond the prescribed time limit under section 153 of the Income Tax Act, 1961, is valid or time-barred.3. Whether the appellant has a business connection in India under section 9(1)(i) of the Act based on income earned from India on a regular and continuous basis.4. Whether the associated enterprise in India, RGA Global Shared Services India Pvt. Ltd. (RGA Services), constitutes a fixed place permanent establishment (PE) of the appellant under Article 5(1) of the India-Ireland Double Taxation Avoidance Agreement (DTAA).5. Whether RGA Services constitutes a dependent agent permanent establishment (DAPE) of the appellant under Article 5(6) of the India-Ireland DTAA by virtue of exercising indirect authority to negotiate and conclude contracts on behalf of the appellant.6. Whether the support services rendered by RGA Services are preparatory or auxiliary in nature or core and crucial business activities relating to the reinsurance business.7. Whether there is an artificial segregation of work between the appellant and RGA Services, and whether the services are merely administrative and ancillary support.8. Whether Article 5(7) of the India-Ireland DTAA excludes a reinsurance company from constituting a PE in India where the agent collects premiums on behalf of the reinsurance company.9. Whether, assuming the existence of a PE, no further income can be attributed to the appellant's PE since remuneration paid to RGA Services is at arm's length price.10. Whether the AO erred in estimating profits attributable to Indian operations and applying an incorrect profit percentage and attribution ratio.11. Whether the AO erred in applying a 40% tax rate instead of the concessional 12.5% rate under section 115B applicable to life reinsurance business.12. Whether the AO erred in not following prior Tribunal decisions in the appellant's own case for earlier assessment years.13. Whether the levy of interest under section 234D was erroneous.14. Whether the order on interest under section 244A was erroneous.15. Whether penalty proceedings under section 270A were rightly initiated.Issue-wise Detailed Analysis:1. Assessment of Income and Business Connection under Section 9(1)(i)The appellant, a foreign company resident in Ireland engaged in reinsurance business, declared nil income for AY 2022-23. The AO, however, assessed income of over INR 42 crores, attributing profits to a PE in India. The appellant contended that it had no PE or business connection in India, and the income was not taxable in India.The AO relied on the existence of a PE through RGA Services, which provided vital business support services, and held that the appellant had a business connection under section 9(1)(i) as the income arose from India on a regular and continuous basis. The AO applied the principles from the Mumbai High Court decision in Blue Star Engineering Co., emphasizing that a business connection requires an intimate and continuous commercial relation contributing to profits.The Tribunal noted that the appellant's activities in India were limited to support services rendered by RGA Services, which did not assume risk or have regulatory approval to conduct reinsurance business in India. The core reinsurance activity-acceptance of risk-occurred outside India. The Tribunal relied on earlier coordinate bench decisions for prior years, which held that mere support services without control or risk assumption do not constitute a PE or business connection under section 9(1)(i).2. Existence of Fixed Place Permanent Establishment (PE) and Dependent Agent Permanent Establishment (DAPE)The AO held that RGA Services constituted a fixed place PE and a DAPE of the appellant based on the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) modifying the India-Ireland DTAA. The AO reasoned that RGA Services' activities were complementary and part of a cohesive business operation, thus negating the preparatory or auxiliary exemption.The Tribunal examined the MLI provisions, which prevent artificial avoidance of PE status by fragmenting cohesive business operations. However, the Tribunal found that the appellant did not have a fixed place of business in India, nor did it carry on business activities constituting complementary functions with RGA Services in India. The appellant lacked premises or office space for reinsurance business, and reinsurance contracts were signed outside India.Regarding DAPE, the AO alleged that RGA Services exercised indirect authority to negotiate and conclude contracts on behalf of the appellant. The Tribunal rejected this, noting that RGA Services acted independently, did not have authority to conclude contracts, and lacked regulatory licenses (IRDAI approval) to act as a reinsurer or broker in India. The Tribunal observed that RGA Services merely provided administrative and support functions and was remunerated on an arm's length basis.Thus, the Tribunal concluded that neither fixed place PE nor DAPE existed in India for the appellant.3. Nature of Services Rendered by RGA ServicesThe AO contended that RGA Services performed core and crucial business activities, not preparatory or auxiliary services. The appellant argued that RGA Services provided only preparatory and auxiliary services such as claims support, data synopsis, marketing research, and administrative assistance.The Tribunal agreed with the appellant, emphasizing that the core business of reinsurance-risk assumption-was undertaken outside India. The support services were ancillary and preparatory in nature, falling within the exclusions under the DTAA and MLI. The Tribunal also noted that RGA Services provided similar services to other group companies and was not economically dependent on the appellant.4. Attribution of Profits and Arm's Length RemunerationThe appellant argued that since remuneration paid to RGA Services was at arm's length, no further income could be attributed to the appellant's PE. The AO relied on the Supreme Court decision in Morgan Stanley & Co. Inc., which held that if arm's length price is paid to a dependent agent, no further profits are taxable in the hands of the foreign enterprise.The AO, however, pointed out that no transfer pricing determination of arm's length price was made by the Department, and no Functions-Assets-Risks (FAR) analysis was performed. The Tribunal noted that the Morgan Stanley decision requires comprehensive FAR analysis and transfer pricing documentation to conclude no further profit attribution. Since the appellant failed to provide India-specific profit and loss accounts or FAR analysis, the AO estimated profits at 10% of gross receipts attributable to India, applying a 50:50 split between India and Ireland.The Tribunal observed that the OECD Report on Attribution of Profits to Permanent Establishments rejects the 'single taxpayer approach' and supports attribution of profits beyond arm's length remuneration paid to a dependent agent. However, since the Tribunal found no PE or DAPE in India, the question of profit attribution did not arise.5. Application of MLI ProvisionsThe AO applied the MLI provisions effective from 1 April 2020 to deny preparatory or auxiliary exemptions and to establish PE. The Tribunal examined the scope and applicability of MLI, noting that it applies to taxable periods beginning on or after 1 April 2020.The Tribunal found that the appellant did not have a PE under the amended Article 5 of the India-Ireland DTAA as incorporated through MLI, since the appellant and RGA Services did not carry on complementary business activities constituting a cohesive business operation in India. The Tribunal relied on examples from the OECD BEPS Action 7 report and prior coordinate bench decisions, holding that the anti-fragmentation rule cannot be applied to the appellant's facts.6. Time Bar and Other GroundsThe appellant contended that the assessment order was barred by limitation under section 153. The Tribunal held this issue academic, as the appeal was allowed on merits.Grounds relating to interest under sections 234D and 244A and penalty under section 270A were treated as consequential. The Tribunal remitted the issue of interest under section 244A to the AO for fresh consideration in light of the findings.7. Precedent and Consistency with Earlier Tribunal DecisionsThe appellant relied heavily on prior Tribunal decisions for AYs 2015-16 through 2021-22, where similar issues were adjudicated in its favor. The Tribunal noted that the facts for AY 2022-23 were identical to AY 2021-22 and that the DRP had relied on its own order for AY 2021-22. Respectfully following the coordinate bench's consistent findings, the Tribunal allowed the appeal on grounds relating to PE and business connection.Significant Holdings:'Unless a particular place is at the disposal of the assessee, that place cannot be said to constitute the Permanent Establishment of the assessee.''The core reinsurance activity is the assumption of risk, and that assumption of risk has been done outside India. There is thus no occasion to attribute reinsurance profit attribution to RGA Services.''The activities carried out by RGA Services are preparatory or auxiliary in nature and fall in the exclusionary clause under the DTAA and MLI.''RGA Services does not have regulatory approval from IRDAI to act as a reinsurer or broker and cannot conclude contracts on behalf of the appellant. Therefore, it cannot constitute a dependent agent permanent establishment.''The 'single taxpayer approach' that no further profits can be attributed to the source country if arm's length remuneration is paid to the dependent agent is conceptually incorrect and rejected by the OECD Report.''The anti-fragmentation rule under MLI applies only where the non-resident enterprise or a closely related enterprise carries on complementary business activities constituting a cohesive business operation in the same state. This condition is not satisfied in the appellant's case.''The appellant did not have a fixed place PE or dependent agent PE in India; hence, the income earned by the appellant on account of reinsurance business has no tax implications in India.'Accordingly, the Tribunal allowed the appeal on grounds relating to business connection, PE, DAPE, profit attribution, and MLI applicability, directed deletion of the addition made by the AO, and remitted the interest under section 244A for fresh consideration. Other grounds became academic or consequential.