TaxTMI 
TaxTMI 
2023 (11) TMI 1045
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....803/MUM/2022 (A.Y. 2018-19) 3. Brief facts of the case are, assessee filed its return of income declaring total income at Rs.. NIL on 26.10.2018. The case was selected for scrutiny assessment under CASS and notices u/s. 143(2) and 142(1) of Income-tax Act, 1961 (in short "Act") were issued and served on the assessee electronically. In response to the above notices, Authorised Representative of the assessee attended and submitted the relevant information as called for. 4. Assessee is a foreign company and a tax resident of the Ireland. Assessee is in the business of providing reinsurance services to insurers/ cedants. It is primarily involved in providing reinsurance services for life insurance. The assessee has entered into various reinsurance treaties with Indian Insurance Companies. For underwriting the risk, the assessee receives reinsurance premium, under the reinsurance treaties entered by it with Indian insurance companies. The Assessing Officer observed that assessee has received total premium amount of Rs.. 435,14,07,217/- during the year and assessee has claimed the same as business income of the assessee, and it does not have a Permanent Establishment in India and h....
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....agreement between RGA Services and the assessee. Further, in Para No.7.6 of the Assessment Order, the Assessing Officer observed that the business of the assessee is to provide reinsurance services to clients / cedants in India. In the course of such business, RGA Services an Indian company, a wholly-owned subsidiary of the assessee, acts as a Permanent Establishment of the assessee in India. In the present situation, RGA Services can be considered as Fixed Place Permanent Establishment of the assessee in India. The assessee has entered into a Reinsurance Support Services Agreement (RSSA) dated 01.04.2006 with RGA Services for obtaining risk assessment services, market intelligence and administrative support in India and in turn, remunerates/compensates RGA Services on a cost plus 12 percent margin basis. This agreement is updated by another Agreement dated 31.08.2010 between the assessee and its group entity RGA Americas Reinsurance Company Ltd., and RGA India. He observed that the type of services provided by RGA Services to its group entities are the same as per the agreement dated 31.08.2010 vis-a-vis agreement dated 01.04.2006. Further, Assessing Officer observed that the vari....
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....s, and also transfer the records to the assessee upon the termination of the agreement. 13. Further, he observed that assessee has remunerated RGA Services on cost-plus basis, accordingly, assessee as per agreement, reimburses cost plus a margin of 12%, by observing the above, the Assessing Officer opined that RGA Services is representative and related enterprise performing risk assessment, actuarial and underwriting services, collection of information in the reinsurance field and co-ordination with the cedants for reinsurance business gets substantially performed in India itself and thereafter not much critical functions remain to be performed outside India except for just signing the contract and observed that the final entry into contracts though undertaken de facto by the assessee on paper, in reality, is based on the vital inputs and functions performed by RGA Services in India. 14. Further, he rejected the claim of the assessee that Article 5(7) of DTAA makes the insurance company liable to tax if it collects insurance premiums in India and insures risks of Indian residents or their agents except in the case of reinsurance services, and the claim that the both the Gover....
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....the Appellant is earning income from India on a regular and continuous basis 2. Ground 2 The learned AO has, on the facts and circumstances of the case in law, and based on the directions of the Hon'ble DRP, erred in concluding that the Appellant has a fixed place permanent establishment (PE) in India as per Article 5(1) of the Double Taxation Avoidance Agreement entered between India and Ireland (India-Ireland Tax Treaty). 3. Ground 3 The learned AO has, on the facts and circumstances of the case in law, and based on the directions of the Hon'ble DRP, erred in concluding that RGA Services acts as a Dependent Agent PE of the Appellant in India as per Article 5(6) of the India-Ireland Tax Treaty. 4. Ground 4 The learned AO has, on the facts and circumstances of the case in law, and based on the directions of the Hon'ble DRP, erred in concluding that the support services performed by RGA Services are not in the nature of preparatory or auxiliary services but are core and crucial business activities in relation to reinsurance business. 5. Ground 5 The learned AO has, on the facts and circumstances of t....
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.... directions of the Hon'ble DRP, erred in levying interest under section 234A of the Act. 11. Ground 11 The learned AO has, on the facts and circumstances of the case and in law, and based on the directions of the Hon'ble DRP, erred in initiating penalty proceedings under section 270A of the Act." 19. At the time of hearing, Ld. AR of the assessee brought to our notice relevant facts of the case and filed its written submissions, for the sake of clarity it is reproduced below: - "A) Background of RGA International Reinsurance Company Designated Activity Company ('RIRC' or 'the Assessee') and operations undertaken from India perspective For the period from Financial Year 2003 to 31 March 2017 1. RIRC is a company incorporated in Ireland on 23 June 2003 and is a tax resident of Ireland. RIRC is a part of Reinsurance Group of America (RGA) and undertakes reinsurance business with insurers in Europe, United Kingdom and Asia (which includes India). In terms of its India business, RIRC undertakes reinsurance business with Indian life insurance companies (Indian Cedents) from the year 2003. 2. The key function....
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....nch in India. IRDAI granted approval on 21 December 2016 for setting-up its branch in India, i.e., RGA Canada India Branch. RGA Canada - India Branch received approval from IRDAI to commence its business with effect from 21 December 2016. This entity in Canada is different from the Assessee. 4. Pursuant to set up of RGA Canada - India Branch, the new reinsurance treaties with Indian Cedents were entered into by RGA Canada's India Branch. RIRC did not enter into any new treaties with Indian Cedents post set up of RGA Canada - India Branch with effect from 1 April 2017 (the India Branch, I.e., RGA Canada India Branch actually commenced business from this date). However, all the older reinsurance treaties (ie., treaties entered into by RIRC prior to commencement of business by RGA Canada - India Branch) between RIRC and the Indian Cedents remained with RIRC under which RIRC earns premiums from the Indian Cedents. 5. Further, 45 percent of the premiums earned by RGA Canada India Branch is retroceded to RIRC. B) Background of RGA Services India Private Limited (RGA Services) 6. RGA Services, subsidiary of Reinsurance Group of America, Inc. (United....
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....shared with RIRC who in turn takes the final decision to settle the claims or not. • The personnel of RGA Services do the data entry into the software tool provided by RIRC. Additionally, this team provides support in respect of certain underwriting tools used by the aforementioned third party Indian Cedents, c) Administration support and other ancillary services • This function includes keeping track of premiums received with respect to various re-insurance policies, amount of premium received during a particular period etc. • Further, these services also include other ancillary services like human resource support services, data entry accounting services to RIRC. 12. Thus, RGA Services is a back office entity which has only provided support services to RIRC and other group companies. RGA Services has provided services in the form of claims support, claim data synopsis and administration and other ancillary services in connection with RIRC's India business. Further, RGA Services has also not provided any marketing services in respect of RIRC's India Business during the year. RGA Services does not act as an agent and ....
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....nce RIRC carries on reinsurance business whereas RGA Services provides support services to RIRC and other RGA Group entities; • RGA Services is not licensed to undertake reinsurance activities and hence, is unable to provide any core re-insurance services. RGA Services does not have the requisite regulatory approval from IRDAI to undertake reinsurance business or even act as a broker; • RGA Services acts only as a communication channel between the Indian Cedents and RIRC. RGA Services only inputs the data into the system and final decisions of acceptance/rejections are always taken by RIRC from Ireland; and • Employees of RGA Services only provide services to RGA Services in the ordinary course of their employment with RGA Services. RIRC does not have any control or dominion over the functioning of such employees of RGA Services (i.e., the employees of RGA Services do not take direction from RIRC). 16. Thus, as can be evident from the said agreement referred above, RGA Services is not an agent of RIRC nor does it represent itself as the agent of RIRC to any cedent. It is also provided in the agreement that RGA services shall not act o....
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....ITA No. 7433/MUM/2018 dated 14 June 2019, wherein the ITAT held that where the Indian subsidiary does not have any authority to secure contracts or solicit business on behalf of the foreign enterprise in India and merely using brand name of the foreign enterprise while carrying out its activities in India cannot be a ground to say that there exists a dependent PE of the foreign enterprise in India. The ITAT also held that mere observations of the Department without any instances to show that the Indian subsidiary had concluded contract or secured orders on behalf of the foreign enterprise cannot be accepted to hold that a DAPE of foreign enterprise exists in India in the form of the Indian subsidiary. The burden of proof is to be discharged by the Department. We have reproduced the relevant extract of the judgment hereunder for ready reference: "20. So far as the case of the Revenue that there is a dependent PE in India is concerned, herein also, the Revenue has merely brushed aside the claim of the assessee that the Indian subsidiary does not have any authority to secure contracts or solicit business on its behalf in India independent of the assessee. According to the Rev....
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....e for the A.Y. 2017-18 by the Coordinate Bench in ITA.No. 1022/Mum/2021 dated 02.05.2023 (Copy of the order is placed on record). 21. On the other hand, Ld. DR submitted as under by expressing his objections to the submissions made by the AR of the Assessee:- "1. The primary controversy in this case is that when a foreign company i.e. RGA Ireland operates in India through a Dependent Agent (DA) and if arms' length remuneration is paid to the DA which is separately assessed to tax in India, on account of its "residential status", whether any tax becomes payable by foreign company on income attributable to its activities in India carried out through permanent establishment in the form of Dependent Agent Permanent Establishment on "source basis". 2. It is respectfully submitted that the earlier decisions have been given on the basis of the 'single taxpayer approach', holding that once an arm's length payment is made to a dependent agent PE, no further profits can be taxed in the hands of foreign enterprise. This 'single taxpayer entity approach' has been rejected in unequivocal terms by the OECD and India's DTAAS. 3. Furthermor....
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....mitted that the concept of DA and Dependent Agency PE is very well recognized internationally. Profits can be attributed to a Dependent Agent Permanent Establishment (DAPE) even if arms length price has been paid to a Dependant Agent who is a resident assessee in the 'source country' and assessable under the Indian Income Tax Act, i.e. the Act prevailing in the country of source of income. The assertion that 'once the Indian Dependent Agent is taxed on its own income nothing further would be taxable in the hands of the non resident foreign company' may not be the correct interpretation of law. If the espousal of this view is sustained, then it would lead to a situation where profits of a non- resident assessee from business carried out through a dependent agent in India (DAPE) can never be taxed in India. This will render the concept of agency permanent establishment (Agency PE) redundant. This will also have wider ramifications on similar cases of insurance companies, service industries, etc., with significant revenue effect and will seriously erode the 'source based' principle of taxation advanced by developing countries. 5. Firstly, the 'Depe....
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.... the enterprise on behalf of which it is acting) will be relevant to the taxation of such income or profits. On the other hand, the deemed permanent establishment of the enterprise will be attributed the assets and risks of the enterprise relating to the functions performed by the dependent agent on behalf of the enterprise (i.e. the activities that the dependent agent undertakes for that enterprise) together with sufficient capital to support those assets and risks. Profits will then be attributed to the deemed permanent establishment on the basis of those assets, risks and capital; these profits will be separate from, and will not include, the income or profits that are properly attributable to the dependent agent itself (see section D-5 of Part I of the Report "Attribution of Profits to Permanent Establishments")." The OECD emphasizes that profits attributable to the deemed PE are separate from the profits attributable to the dependent agent itself. 7. Secondly, the Hon'ble Supreme Court in DIT (International Taxation) V/s Morgan Stanley & Co. Inc. [2007 292 ITR 416] dt. 09.07.2007 has in fact, affirmed the principle of 'two point taxation' and has ....
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....on'ble Apex Court. Just because, 29% was held to be arm's length, does that mean that MSC is not required to pay tax in India? It is submitted that this is not the ratio of the judgment delivered by the Hon'ble Apex Court. In fact the reverse is true. The Hon'ble Court has held that the income of MSC is taxable and has provided guidelines for determining the said income as is evident from last lines of para 33 of the judgment (conclusion). 8.2 The Hon'ble Court in the concluding para 33 has clearly held as under: "33. As regards income attributable to the PE (MSAS) we hold that the Transactional Net Margin Method was the appropriate method for determination ofthe arm's length price in respect of transaction between MSCo and MSAS. We accept as correct the computation of the remuneration based on cost plus mark-up worked out at 29% on the operating costs of MSAS. As regards attribution of further profits to the PE of MSCo where the transaction between the two are held to be at arm's length, we hold that the ruling is correct in principle provided that an associated enterprise (that also constitutes a PE} is remunerated on arm'....
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....ous income and expenses must be allocated between Ireland Head Office and the Dependant Agent PE on some reasonable basis as mandated by Hon'ble Apex Court in last 5-6 lines of para 33 of the decision in the case of Morgan Stanley. 12. Since the India specific accounts and details of expenses have not been given, the Assessing Officer has computed the income applying Rule 10 of the Income tax Rules, 1962, and estimated profit of RGA Ireland attributable to its Indian operation at 10% of the receipts and 50% of the same has been attributed to the DAPE. 13. The Hon'ble Supreme Court, earlier in the case of Ishikawajma Harima Heavy Industries Ltd. v. DIT 4 (Appeal Civil No. 9 of 2007) dt. 04.01.2007 had held that - "the concept of territorial nexus was fundamental in determining the taxability of any income in India, and that income from the offshore supply of equipment and services by a foreign company out-side India would not be taxable in India merely because the equipment was supplied in relation to a turnkey project in India". In essence, the Hon'ble Court in this case also upheld the principal of double point taxation, if the territorial connection ....
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....5, 11.7, 12.3 & 12.4 of the final assessment order. A perusal of these clauses/terms clearly reveals that RGA India is not legally independent. 17.2 Dependent v. Independent agent • An agent will not constitute PE of its principal if it is an agent of independentstatus • "Independent" means not subject to authority or control of any person; free to act as one pleases, autonomous • Agent would be independent where he has control over his business, bears therisk of his business and receives reward through the use of his skills andknowledge • Independence has to be comprehensive i.e. both legal as well as economicindependence. • • 17.3 OECD Commentary: Relevant paras are reproduced here: "104. Whether a person acting as an agent is independent of the enterprise represented depends on the extent of the obligations which this person has vis-à-vis the enterprise. Where the person's commercial activities for the enterprise are subject to detailed instructions or to comprehensive control by it, such person cannot be regarded as independent of the enterprise. Another important c....
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.... on record, we observe from the assessment record that assessee is a company incorporated in Ireland and is a tax resident of Ireland. It is a part of RGA Group and undertakes reinsurance business with insurers globally including India. In terms of its business in India, assessee undertakes reinsurance business with India Life Insurance companies from the inception. From the submissions made before us, the key function in reinsurance is acceptance of risk that the insurance company transfers to reinsurer. The insurance of income accrues in the jurisdiction in which the reinsurer accepts the said risk. In this case assessee is a resident outside India and underwrites such risk based on its capital and assets both of which are outside of India. Further, it is brought to our notice that w.e.f. 01.04.2017 another group entity RGA Life reinsurance company of Canada (in short "RGA Canada"] which got approval from IRDAI on 20.12.2016 for setting up its branch in India. Even though RGA Canada is group entity, however, it is a different entity having branch in India. It is also brought to our notice that assessee did not enter into any new treaty with Indian cedants after setting up of RGAC....
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.... ground wise except for change in the quantum of addition: - "3. The assessee before us, RGA International Reinsurance Company (RIRC, in short), is a company incorporated in and fiscally domiciled in Ireland and is admittedly entitled to the benefits of the India Ireland Double Taxation Avoidance Agreement [(2002) 254 ITR (Stat) 245; Indo-Irish tax treaty, in short]. The assessee is engaged in the business of providing reinsurance services, amongst others, to its clients in India, and during the relevant previous year, the assessee has earned the reinsurance commission of Rs. 504,37,83,613 from India. What is in dispute before us is the tax implications of the income embedded in these receipts, in India. As we proceed to deal with the tax implications, in India, of the assessee's business of reinsurance, it will be useful to begin by taking a quick look at the nature of the reinsurance business. 4. Reinsurance is an insurance cover for insurance companies, and it constitutes insurance of the risk liability that an insurer has undertaken under a contract of insurance. Under a reinsurance arrangement, the reinsurer assumes, of course, for consideration (i.e. reinsur....
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....of the Reinsurance Group of America, and that RGA- India has provided a spectrum of vital and primary business functions, i.e. actuarial and underwriting services, which are key functions in the insurance business. It was also noted that the draft underwriting proposal is generated by the RGA India and that there is little decision-making involved post such underwriting activity. It was also noted that RGA India is performing all critical support activities, including marketing support services, claims support services, data synopsis services and other administrative services, and as such RGA India constitutes the fixed place permanent establishment of the assessee company. While the Assessing Officer also held that the RGA India constitutes a dependent agent permanent establishment of the assessee, we need not, for the reasons we will set out in a short while, go into that aspect of the matter in detail. Coming back to the fixed place permanent establishment case of the Assessing Officer, as put to the assessee in the draft assessment order, the assessee raised objection before the Dispute Resolution Panel. It was submitted by the assessee that the assessee does not have any place....
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....t business connection and the income of the Assessee is taxable in India in terms of section 9(1)(i) of the Act. • Further, the assessee is having a regular flow of income from India which further strength the argument that the Assessee has a clear-cut business connection in India. • Accordingly, the arguments of the Assessee on this account are flawed. In such a scenario, the contention that the assessee does not have any operations in India, is not correct since the business of the assessee is to provide reinsurance service to the Indian cedents. • 6.2 Further, based on the facts of the case, it is seen that RGA Services performs a spectrum of crucial business activities such as marketing support services, customer relationship management, claims support services, data synopsis services and other administrative support and ancillary services. These services are core business activities in the reinsurance business which gets substantially performed in India itself and thereafter, not much critical functions/ activities remain to be performed outside India except for just signing of the contract. Accordingly, given tha....
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....l test, in order to ascertain as to whether an establishment has a fixed place of business or not, is that such physically located premises have to be 'at the disposal' of the enterprise. For this purpose, it is not necessary that the premises are owned or even rented by the enterprise. It will be sufficient if the premises are put at the disposal of the enterprise. However, merely giving access to such a place to the enterprise for the purposes of the project would not suffice. The place would be treated as 'at the disposal' of the enterprise when the enterprise has right to use the said place and has control thereupon. ** ** ** 34. According to Philip Baker, the aforesaid illustrations confirm that the fixed place of business need not be owned or leased by the foreign enterprise, provided that is at the disposal of the enterprise in the sense of having some right to use the premises for the purposes of its business and not solely for the purposes of the project undertaken on behalf of the owner of the premises. 35. Interpreting the OECD Article 5 pertaining to PE, Klaus Vogel has remarked that insofar as the term 'business' is co....
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....ll as the object and purpose of Article 5 OECD and UN MC itself, in the light of which the term 'place' needs to be interpreted. This approach, which follows from the general rules on treaty interpretation, gives a certain leeway for including movable property in the understanding of 'place' and, therefore, we assume a PE once such property has been 'fixed' to the soil. For example, a work bench in a caravan, restaurants on permanently anchored river boats, steady oil rigs, or a transformator or generator on board a former railway wagon qualify as places (and may also be 'fixed'). In contrast, purely intangible property cannot qualify in any case. In particular, rights such as participations in a corporation, claims, bundles of claims (like bank accounts), any other type of intangible property (patents, software, trademarks etc.) or intangible economic assets (a regular clientele or the goodwill of an enterprise) do not in themselves constitute a PE. They can only form part of PE constituted otherwise. Likewise, an internet website (being a combination of software and other electronic data) does not constitute tangible property and,....
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....ds of control, are as under: "The degree of control depends on the type of business activity that the taxpayer carries on. It is therefore not necessary that the taxpayer is able to exclude others from entering or using the POB. The painter example in the OECD MC Comm. (no. 4.5 OECD MC Comm. on Article 5) (however questionable it might be with regard to the functional integration test) suggests that the type and extent of control need not exceed the level of what is required for the specific type of activity which is determined by the concrete business. By contrast, in the case of a self-employed engineer who had free access to his customer's premises to perform the services required by his contract, the Canadian Federal Court of Appeal ruled that the engineer had no control because he had access only during the customer's regular office hours and was not entitled to carry on businesses of his own on the premises. Similarly, a Special Bench of Delhi's Income Tax Appellate Tribunal denied the existence of a PE in the case of Ericsson. The Tribunal held that it was not sufficient that Ericsson's employees had access to the premises ....
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....ss". This definition, therefore, contains the following conditions: • the existence of a "place of business", i.e. a facility such as premises or, in certain instances, machinery or equipment; • this place of business must be "fixed", i.e. it must be established at a distinct place with a certain degree of permanence; • the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated.' 12. Thus, it is clear that there must exist a fixed place of business in India, whichis at the disposal of the US companies, through which they carry on their ownbusiness. There is, in fact, no specific finding in the assessment order or the appellate orders that applying the aforesaid tests, any fixed place of business has been put at the disposal of these companies 9. In the present case also, it has not even been the case of any of the authorities below that any particular premises were at the disposal of the assessee. The DR....
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....APE or not, the taxation is only of the agent's remuneration which is taxed anyway de hors the existence of a DAPE. Such an approach may sound somewhat incongruous from an academic point of view inasmuch as what was considered to be a threshold limit for source taxation ceases to have any relevance for source taxation, and as, on a conceptual note, PE, whether a fixed base PE, DAPE or any other type of PE, provides for threshold limits to trigger taxation in the source state, but then if as a result of a DAPE, no additional profits, other than agent's remuneration in the source country - which is taxable in the source state anyway de hors the existence of PE, become taxable in the source state, the very approach to the DAPE profit attribution may seem incompatible with the underlying scheme of taxation of cross border business profits under the tax treaties, but that cannot come in the way of the binding force of judicial precedents from Hon'ble Courts above. The SLP against this decision is said to pending before Hon'ble Supreme Court but that does not, in any way, dilute binding nature of this binding judicial precedent. In all fairness to the learned Departmental....
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....muneration paid to the Indian agent is not an arm's length remuneration for the services rendered by the agents concerned. There is no material whatsoever before us to show, or even indicate, that the remuneration paid to the agents is not arm's length remuneration. Under these circumstances, we see no reasons to remit the matter to the file of the Assessing Officer, for fresh round of ALP ascertainment proceedings, as prayed by the learned Departmental Representative. The plea of the assessee, as raised in the cross objections, therefore, merits acceptance. Whether there is a DAPE or not, there are no additional profits to be brought to tax as a result of the existence of the DAPE, and, therefore, the question about existence of a DAPE on the facts of this case is wholly academic. 16. Once we hold, as we have held above, that in the light of the present legal position, existence of dependent agency permanent establishment in wholly tax neutral, unless it is shown that the agent has not been paid an arm's length remuneration, and when it is not the case of the Assessing Officer, as we have noted earlier, that the agents have not been paid an arm's length re....
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....case. with regard to issue of dependent agency permanent establishment (DAPE), they relied on the decision of ADIT v. Asia Today Ltd [(2021) 129 taxmann.com 35 (Mum)] and held that it is wholly tax-neutral and does not, therefore, need their adjudication. Accordingly, they held that the DAPE is wholly academic in the sense and the existence of DAPE is whole tax neutral in India. From the above decision, we observe that the Coordinate Bench has considered the issue of non-existence of Fixed Place Permanent Establishment and however, not given a clear finding on DAPE. 27. However, before us, Ld. DR made an elaborate submissions and submitted that the earlier decisions have been given on the basis of the 'single taxpayer approach', holding that once an arm's length payment is made to a dependent agent PE, no further profits can be taxed in the hands of foreign enterprise. By relying on the decision of the DIT (International Taxation) v. Morgan Stanley & Co. Inc. (supra) he submitted that there are two taxpayers in the source country which are Dependent agent enterprise and Dependent agent permanent establishment (DAPE). He raised certain issues that the dependent agent ....
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....ess which may include claim support, actuarial services, administration and other support services and settlement services which may be part and parcel of the whole insurance business. 31. Ld. DR is of the view that the RGA Services not only provides services but also shares the assets and risk which were not being considering in the TP analyses. We are finding it difficult on this line of argument that the main functions of a reinsurance business is assuming the risk which the main insurer transfers. The whole object of assuming risk is the main business of the reinsurer. From the record we observe that RGA Services offers all sorts of functions and services relating to execution of the reinsurances processes without assuming any risk. Even the tax authorities including Ld. DR has not brought on record any material to show that RGA Services has assumed any risk or invested any assets in executing the reinsurance functions. 32. Further, we observe that the RGA Services does not have any license from IRDAI to undertake reinsurance business or even to act as a reinsurance broker. It shows that RGA Services can never be allowed to function as a reinsurer or broker in India. It c....