TaxTMI 
TaxTMI 
2023 (6) TMI 1446
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....e disallowance u/s. sec 40(a)(i) to 15%. 2.3 The Ld. CIT(A) failed to appreciate that such arbitrary estimation of profit element, is a clear violation of the principles laid down by Hon'ble Supreme Court in the case of G.E India Technology Centre Pvt. Ltd.,(327 ITR 456). 2.4 The Ld. CIT(A) ought to have appreciated that in the above cited case, the Supreme Court has clearly laid down that in cases where the payment made is a composite payment in which certain proportion of payment has an element of Income' chargeable to tax in India and if the assessee is not sure as to what is the taxable portion of the sum paid, he is required to make an application to the ITO (TDS) for determining the amount. 2.5 The CIT(A) ought to have appreciated that the issue involved in the case of the G.E India technology centre Pvt. Ltd is not re-insurance premium but related to royalty component in the software purchased and does not squarely apply to the facts of the assessee's case. 3.1. The CIT(A) erred in deleting the profit on sale of investments from the total income. 3.2. The CIT(A) ought to have appreciated that as per Rule 5 of the First Schedule, the assessee has to offe....
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....ection 14A would still be applicable. 5.4 The CIT(A) erred in not following the decision of Kerala High Court in the case of Leena Ramachandran ITA No. 1784 of 2009 dated 14.6.2010 wherein it was held that in respect of acquisition of shares in the form of investment, where the only benefit derived is dividend income which is not assessable under the Act, disallowance u/s. 14A is squarely attracted. 5.5 The CIT(A) ought to have appreciated that Section 14A supersedes the principle of law that in the case of a composite business expenditure incurred towards tax free income, the same could not be disallowed and incorporates an implicit theory of apportionment of expenditure between taxable and non-taxable income. 5.6 The CIT(A) failed to appreciate that once a proximate cause for disallowance was established - which is the relationship of the expenditure with income which does not form part of the total income- a disallowance u/s. 14A of the Act has to be effected and ought to have held that where Rule 8D does not apply, the Assessing Officer will have to determine the quantum of disallowable expenditure by a reasonable method having regard to all facts and circumstances. 5.7....
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....anent establishment in India in view of their presence and business connection, and thus, reinsurance premium paid to NRRs, is taxable in India, and accordingly, the assessee ought to have deducted TDS u/s. 195 of the Act, on the said payment. Since, the assessee has failed to deduct TDS u/s. 195 of the Act, on reinsurance premium paid to NRRs, the AO has rightly disallowed reinsurance premium paid to NRRs u/s. 40(a)(i) of the Act, and their orders should be upheld. 6. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. We find that an identical issue has been considered by the Tribunal in the assessee's own case in ITA Nos. 1673, 1688, 1689, 1691/Chny/2011 for AYs 2003-04, 2004-05, 2005-06, 2006-07, order dated 26.08.2022, and after considering relevant facts held that reinsurance premium ceded to NRRs, is not taxable in India under the Income Tax Act, 1961 or under DTAA between India and respective countries, where the NRRs are tax residents, and thus, reinsurance premium cannot be disallowed u/s. 40(a)(i) of the Act, for non-deduction of TDS u/s. 195 of the Act. The relevant findings of the Tribunal are as ....
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....on of India. But disputed reinsurance premium ceded to non-resident reinsurer companies. In the earlier round of litigation, the Tribunal had discussed the issue of payments made to non-resident reinsurer, in light of provisions of section Insurance Act, 1938 and IRDAI Regulations on reinsurance and concluded that the assessee has violated provisions of Insurance Act, 1938 and consequently, reinsurance premium ceded to NRRI is not deductible u/s. 37 (1) Of the Income Tax Act, 1961. The matter travelled to the Hon'ble High Court of Madras and the Hon'ble High Court has remanded the issue back to the Tribunal and directed the Tribunal to decide the issue on three points:- i) Whether the Assessing Officer was right in disallowing reinsurance premium u/s. 40(a)(i) of the Act; ii) Whether the CIT(A) was right in rejecting partially the appeal filed by the assessee; & iii) Whether the CIT(A) was justified in restricting claim of the assessee to 15% instead of confirming order passed by the Assessing Officer. The Hon'ble High Court of Madras also observed that the Tribunal shall decide above questions alone and nothing more and decision shall be taken based on the available ma....
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....ra Pradesh Vs CIT (1999) 239 ITR 587 and observed that a person making payment to non-resident is duty bound under section 195(2) of the Income Tax Act, 1961 to file an application to the income-tax authority, if payment is not chargeable to tax or smaller amount is chargeable to tax. If no such application is filed, then tax has to be withheld on whole of such sum. The sum and substance of observations of the Assessing Officer is that income of NRRI is taxable in India and thus, the assessee is liable to deduct tax at source u/s. 195 of the Act. Since, the assessee has failed to deduct TDS u/s. 195 of the Income Tax Act, 1961, the Assessing Officer has disallowed reinsurance premium ceded to NRRI u/s. 40(a)(i) of the Income Tax Act, 1961. 12. We have given our thoughtful consideration to the reasons given by the Assessing Officer in light of arguments advanced by the learned counsel for the assessee as well as ld. Sr. standing counsel for the department and we ourselves do not subscribe to the reasons given by the Assessing Officer for simple reason that provisions of section 195 of the Act will be applicable only in a case where income is actually chargeable to tax in India. In....
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....rues where their funds and assets are situated, which is outside India. The source of income of NRRI is also outside India. Therefore, in our considered view observations of the Assessing Officer regarding taxability of reinsurance premium ceded to NRRI in India is absolutely contrary to facts and also well settled law. Further, only activity in reinsurance contract is bearing of risk and activity of indemnifying an Indian insurance company by foreign reinsurer takes place overseas and hence, foreign re-insurers bears risk abroad. Therefore, reinsurance premium paid to NRRI cannot be said to accrue or arise in India. Insofar as observations of the Assessing Officer with regard to reinsurance contracts were signed in India is not relevant as held by the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. Vs. DIT (2007) 288 ITR 408 (SC), where it was observed that contract signed in India is of no material consequence, since all activities in connection with off shore supply were outside India and therefore, cannot be deemed to have accrued or arose in India. Further, income may accrue not at place where asset or property is located or where insurer is ....
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....connection of foreign reinsurer in India in terms of Explanation 2 to section 9(1)(i) of the Income Tax Act, 1961. 14. At this point, we would like to take support from decision of the co-ordinate Bench of Mumbai Tribunal in the case of ADIT Vs. AON Global Insurance Service Ltd. in ITA Nos. 5184 to 5186/Mum/2009 dated 30.11.2015, where it has been held that insurance broker is an independent broker and not an agent. Therefore, in our considered view reinsurance premium paid to NRRI, where India is having DTAA with other countries without specific exclusion and reinsurance premium paid to NRRI where there is no DTAA with other countries through resident brokers, no income is chargeable to tax in India in the hands of nonresident reinsurers and consequently, no disallowance can be made u/s. 40 (a)(i) of the Income Tax Act, 1961. Further, the NRR do not have any business connection in India in any form whatsoever, irrespective of fact whether reinsurance payments are made directly or through resident brokers or non-resident brokers. The NRR being non-resident reinsurance company is expressly prohibited to carry on business in India under the Insurance Act, 1938. Therefore, NRR canno....
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....er cases, where there is no specific exclusion of reinsurance premium, said amount can be taxed in India only if foreign reinsurance companies have PE in India. It is the allegation of the Assessing Officer that reinsurer had fixed place of PE or an agency PE or service PE in India. Most of the DTAAs define PE to mean fixed place of business, through which business of the enterprises is wholly and partly carried on and includes branch, office, factory, workshop etc. In the case of foreign reinsurers to whom the assessee has remitted reinsurance premium during the subject assessment years do not have any fixed place of PE in India and thus, question of fixed place of PE in India within the meaning of Article 5 of the DTAA does not arise. In fact, the assessee has obtained declaration from foreign reinsurers which are part of paper book filed by the assessee. Thus, in our considered view there is not fixed place of PE of NRRs. 16. The Assessing Officer alleged that there is agency PE of NRRI in India on the basis of availing services of reinsurance brokers. During the subject assessment years, the assessee has remitted reinsurance premium through non-resident brokers outside India.....
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.... is liable to deduct TDS on impugned payment is incorrect. 17. Coming back to various case laws relied upon by the assessee. The assessee has relied upon various decisions of co-ordinate Bench of the Tribunal in the case of Insurance companies in support of their arguments. The relevant cases laws relied upon by the assessee are reproduced as under:- Swiss Re-Insurance Company Ltd vs DDIT - ITA No. 1667/Mum/2014 dt .13.02.2015. Summary: In the case of NRRI (Swiss Reinsurance Co. Ltd., Switzerland) the AO sought to tax the NRRI on the ground that it had business connection in India as it received income from providing reinsurance to various insurers in India. The Mumbai Bench of the Tribunal reversing the decision of the AO held as follows: (a) The subsidiary of the NRRI in India does not constitute PE of its holding company (b) Conditions specified in cl (a) to (c) of Explanation 2 to section Section 9(1)(i) of the Act are not satisfied, therefore, the NRRI does not have any business connection in India. (c) Reinsurance is specifically excluded from the ambit of PE in India Switzerland DTAA, therefore, there is no PE in India. (d) The services rendered by the subsidia....
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....ch of the Tribunal held that insurance broker is an independent broker and not an agent. It also held that insurance broker does not carry out any activity on behalf of anyone in India and has no authority to enter into any contract in India . The Tribunal examined the scope of section 9(l)(i) and the DTAA and held that the insurance agent has no business activity on behalf of the NRRI. (vi) General Reinsurance AG v DCIT - ITA No. 7433/Mum/2018 Summary: In the case of NRRI (General Reinsurance AG, Germany) the AO sought to tax the NRRI on the ground that it had a business connection and PE in India. The AO in this case held that the reinsurance proposals are procured from the insurance companies or brokers in India, which is a regular and continuous activity, therefore there is business connection. The Mumbai Bench of the Tribunal reversing the decision of the AO held as follows: (a) The onus is on the AO to establish that the foreign company has a business connection or PE in India. (b) Subsidiary of a foreign company would not be conclusive to say that there exists a PE in India. (c) Activities of Liaison Office which are in nature of preparatory and auxiliary cannot ....
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....nai Tribunal in the case of Cholamandalam MS General Insurance Co. Ltd to drive home the point that the said payment shall be liable for deduction of tax at source in terms of Section 40(a)(i) of the Act. We find that though the Hon'ble Madras High Court in para 26 had held that Chennai Tribunal decision in confirming the action of the ld. AO in invoking provisions of Section 40(a)(i) of the Income Tax Act was not supported with any reasons, finally in para 28, the Hon'ble Madras High Court had remanded this question to the Tribunal to decide whether the ld. AO was right in disallowing the reinsurance premium u/s. 40(a)(i) of the Act. Hence, that question needs to be decided by the Tribunal. Accordingly, the issue of applicability of provisions of section 40(a)(i) of the Act is adjudicated by us independently. We find that the Co-ordinate Bench of this Mumbai Tribunal in the case of DCIT vs. ICICI Lombard General Insurance Co. Pvt. Ltd., in ITA Nos. 6837 & 6832/Mum/2014 for A.Y. 2005-06 and 2009-10 vide order dated 04/10/2016 had adjudicated the very same issue in respect of payments made to M/s. Odyssey America Reinsurance Corporation, Singapore for providing reinsurance business,....
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....which is the subject-matter of dispute before us. So far as the nature of receipts in question is concerned, there is a convergence between the assessee and the Revenue that the same are in the nature of business receipts. It is quite well understood that in such like cases where the foreign company earns business income, the same can be taxed in India only if it has a PE in India or 'business connection' so as to fall within the scope of Indian tax laws. At the outset, it has been asserted by the appellant before us that in such situations, the onus is on the Revenue to establish that the foreign company has a 'business connection' or a PE in India so as to invite any tax liability under the Indian tax laws. Ostensibly, the aforesaid is supported by the judgment of the Hon'ble Supreme Court in the case of E funds IT Solution Inc vs ADIT, (2017) 86 taxmann.com 240. Therefore, in this background, we may now examine the facts of the instant case as to whether such an onus has been discharged by the Revenue or not." 17. It has been asserted before us that the instant year is the first year when the assessee has filed a return of income as it had some taxable inco....
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....r the Indian subsidiary constitutes a PE of assessee in India. Article 5(1) of the India- Germany Tax Treaty provides that PE means a fixed place of business through which the business or enterprise is wholly or partially carried on. On this aspect, the case set-up by the Revenue is that the key functions of reinsurance business, namely, actuarial services and underwriting services are provided by the Indian subsidiary. Such discussion is contained in paras 9.7.2 to 9.8 of the final order of the Assessing Officer. On this aspect, we have carefully examined the contentions put forth by the Revenue as well as the material on record, namely, the Master Service Agreement and the Addendum to the Master Service agreement between assessee and the Indian subsidiary and find that the approach of the Assessing Officer is quite misdirected. In fact, the services that have been provided by the Indian subsidiary are support services in the field of actuarial and underwriting functions undertaken by the assessee and not services of actuarial or underwriting of insurance risks per se. We have already quite succinctly noted the nature and scope of the services rendered by the Indian subsidiary in ....
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....s IT Solution Inc (supra) are very apt. In para 12 of its order, the Hon'ble Supreme Court has dealt with in detail, by making reference to the findings of the Hon'ble High Court, and concluded that there was no fixed place PE of the assessee before it on the facts of the case before it. One of the points noted by the Hon'ble High Court was that the foreign company was dependent on the Indian subsidiary for earning its income. This aspect was specifically negated and held not to be a relevant criteria to determine whether there existed a fixed place PE or not. Similarly, the manner and mode of carrying on of transaction was also not found to be a proper test to determine as to whether there existed a fixed place of business or not. Taking a cue from the reasoning approved by the Hon'ble Supreme Court, in the present case too, the mere rendering of support services in connection with actuarial or underwriting services cannot be a ground to say that there exists a fixed place or a PE of the assessee in India. Therefore, on parity of reasoning which prevailed with the Hon'ble Supreme Court in the case of E funds IT Solution Inc (supra), in the present case too, the....
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.... case of Swiss re-Insurance Co. Ltd. vs DDIT(IT), [2015] 55 taxmann.com 520 (Mumbai - Trib.), which according to the learned representative, is directly on the point. We have perused the said decision and find that the factual matrix which prevails in the instant case before us is similar to what has been considered in the case of Swiss re-Insurance Co. Ltd. (supra). In para 2.1 of the order, the relevant facts have been noted and the discussion reveals that the facts before us are quite similar to the case before our co-ordinate Bench. It was the case of a reinsurance company based in Switzerland which was receiving income for providing reinsurance to various insurance companies in India. Swiss re-Insurance company had a wholly owned subsidiary in India which was rendering administrative, market intelligence and other risk assessment services, which is quite similar to the services being rendered to assessee before us by its Indian subsidiary. Therein also, the appellant was remunerating its Indian subsidiary on the basis of cost plus mark-up. Therein also, the Assessing Officer had sought to tax the income by invoking 'business connection' in terms of Sec. 9(1)(i) of the ....
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..../2012 for A.Y. 2008-09 dated 03/02/2016 vide paras 26-43. For the sake of brevity, the relevant operative portion of that Pune Tribunal order is not reproduced herein. 3.20. It is a fact that in the impugned case of the assessee before us, i.e. Tata AIG Insurance, it is not in dispute that foreign reinsurer does not have any place of business or branch or any business connection or permanent establishment in India. Hence, the payments made by the assessee company to the said foreign insurer is not chargeable to tax in India in the hands of the foreign reinsurer in terms of Section 195(1) of the Income Tax Act. Hence, there is no obligation on the part of the assessee payer to deduct tax at source thereon. Reliance in this regard is placed on the decision of the Hon'ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd., vs CIT reported in 327 ITR 456. Accordingly, the provisions of Section 40(a)(i) of the Act would not come into operation at all. Moreover, these decisions were duly quoted by the assessee before the ld. CIT(A) vide its submission dated 25/02/2020 which was completely ignored by the ld. CIT(A) while adjudicating the issue. 3.21. We further find tha....
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....f repetition, we would like to reiterate the fact that there is absolutely no dispute that the foreign reinsurers does not have any place of business in India / permanent establishment in India / branch established in India / Liaison office in India. Hence, any payment made by the assessee company to such foreign insurers would not be chargeable to tax in the hands of the foreign reinsurers in India in terms of Section 195(1) of the Act. Accordingly, as stated earlier, there would be no obligation on the part of the assessee, being a payer, to deduct tax at source and consequently there cannot be any disallowance u/s. 40(a)(i) of the Act. Accordingly, assessee succeeds on this ground also." 18. Insofar as case laws relied upon by the learned CIT(A), of the Hon'ble Bombay High Court in case of Vodafone International Holdings (329 ITR 126), in upholding action of the AO of subjecting reinsurance premium to tax in India, we find that the Hon'ble Supreme Court has subsequently overruled this decision and same has been reported in 341 ITR 1 (SC) and thus, entire basis for the decision of the CIT(A) for the assessment year 2007-08 has no legs to stand. Further, the learned CIT(A) for t....