TaxTMI 
TaxTMI 
2025 (4) TMI 2118
X X X X Extracts X X X X
X X X X Extracts X X X X
....gn company incorporated under the laws of Germany and is engaged in providing reinsurance services. The assessee has obtained the necessary registration from Insurance Regulatory and Development Authority of India (IRDAI) for setting up in India to carry on reinsurance business. For the AY 2020-21 the assessee filed the return of income on 13.02.2021 declaring a total loss at Rs. 5,99,02,462/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The Assessing Officer (AO) during the course of assessment noticed that the Indian Branch that is assessed to tax as PE in India has made certain payments to Head Office and has claimed the same as deduction. The AO called on the assessee to explain the nature of payment and whether the same was within the limit prescribed as per section 44C of the Income Tax Act, 1961 (the Act). The assessee made a detailed submission before the AO explaining the nature of services which included IT support services and availing of Head Office Management Services. The assessee further submitted that the expenses are incurred wholly and exclusively for the purpose of business of the Indian Branches and therefore th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dition made in relation to services received from the Head Office by the learned Assessing Officer amounting to total of INR 15,57,23,552, under normal provisions of the Act. 2. Erroneous Disallowance of Payment made to Head Office with respect to IT Support Services and Managerial Services. 2.1 The Learned CIT(A) erred in upholding the disallowance of Head Office Expenditure incurred by the Appellant during the year, amounting to Rs. 3,77,94,734 for Information Technology (IT) support services and Rs. 11,79,28,818 for managerial services. 2.2 The Learned CIT(A) has failed to appreciate the nature of the Head Office expenditure and made the disallowance of the same under section 37 of the Act, without considering the fact that the said expenditure is incurred wholly and exclusively for the purpose of Branch's business in India and the said expenditure is not covered by any exceptions under section 37 of the Act. 2.3 The Learned CIT(A), further, erred in not appreciate the fact that the Appellant is a regulated entity and is a bona fide taxpayer and that all the expenditures incurred by the Appellant are reported to its primary regulator Insur....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r Section 270A of the Act on the Appellant for underreporting the particulars of income." Payments made by Indian Branch to Head Office for IT support services and managerial services 4. The assessee contended before the AO that the payments towards IT support services and management services are made by the Indian Branch in the normal course of business and therefore should be allowed as a deduction under section 37 of the Act. On the taxability of the said payments as income in the hands of the Head Office, the assessee submitted that the principle of mutuality would be applicable and therefore cannot be brought to tax in India. The AO held that the assessee cannot claim the payment as a deduction if the contention of mutuality is to be applied and accordingly denied the deduction under section 37. Though the AO held that the payments made by the assessee towards IT support services and management services are in the nature of fees for technical services in the hands of the Head Office, the AO did not make any addition towards the same in the assessment order. 5. The CIT(A) held that the payments made by the Indian Branch to Head Office are in the nature of fees for tech....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... determining its profits and therefore even a payment made to the head office would have to be allowed as a deduction. The ld AR further submitted that in order to compute the taxable profits of a PE, it is essential to take into consideration the expenses incurred by the PE for the purpose of its business irrespective of the place where they are incurred. The ld AR also submitted that the Hon'ble Supreme Court in case of Commissioner of Income-tax, Meerut v. Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482 (SC) has held that income of a foreign enterprise can be taxed in India only qua such portion of income accruing and arising to such a foreign enterprise from profits attributable in India and that a method is to be found to ascertain the profits arising in India and only way to do so is by treating the Indian PE as a separate profit centre vis-à-vis the foreign enterprise. The ld AR argued that the Hon'ble Supreme Court in paragraph 8 held that unless the PE is treated as a separate profit centre, it is not possible to ascertain the profits of the PE. 7. With regard to the treatment of the impugned payments as fees for technical services in the hands of the HO....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ioned by the revenue. The only reason for denying the deduction is that these expenses are payment to self and cannot be allowed. However, for the purpose of computing the profits attributable to the Indian Branch, which is the PE of the assessee, the provisions of the DTAA between India and Germany are to be looked into. The relevant clauses of the Article 7 which deals with Business Profits and the provisions of the Protocol are extracted below - ARTICLE 7 BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ral administrative expenses, Paragraph 1(d) and (e) of the Protocol, provides for certain restrictions. Paragraph (d) provides that the Head Office expenses which are in the nature of executive and administrative expenses shall be subject to the restrictions as per section 44C of the Act. It is relevant to mention here that the AO / CIT(A) have held that the expenses claimed by the assessee in this case are not in the nature of expenses to which the provisions of section 44C is applicable. The relevant findings of the AO in this regard is extracted below - 2.10 As per another argument taken by the assessee, the said expenditure shall not be covered u/s 44C as the provisions of section 44C are not applicable to the assessee as the assessee is in re-insurance business is factually incorrect. First of all, the provisions of section 44C are related to expenditures by any branch office to the head office and the same is in the nature of executive and general administration expenditure. However, from the nature of the expenditure claimed by the assessee, they are for specific services and not in the nature of executive and general administration expenditure. Therefore, provision....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... decision of the coordinate bench in the case of BNP Paribas. Therefore the detailed argument of the ld AR through written submissions have become academic and left open accordingly. AY 2020-21 - Revenue's appeal 15. The grounds raised by the Revenue are as under: "1. Ground Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating the fact that the Assessing Officer has rightly held that payment received from sale of software as royalty income taxable under section 9(1)(vi) of the Act and Article 12(3) of the Tax Treaty. 2. Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) has erred in not appreciating that the Assessing Officer has rightly held that payment received for software were royalty income taxable under section 9(1)(vi) of the Act especially considering Explanation 4 inserted by Finance Act 2012. 3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating the fact that the Assessing Officer has rightly held that the sale of software by the assessee to Maquet India was not sale of copyrigh....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... As per Article 12 of the IndiaSingapore DTAA the payment made to MMPL can be categorised as FTS only if it makes available technical knowledge, skill, experience, know-how etc. Clause 4(b) of Article 12 (Royalties and Fees for Technical Services) of the India - Singapore DTAA defines the term 'fees for technical services' to include payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services make available technical knowledge, experience, skill, know-how or processes which enables the person acquiring the services to apply the technology contained therein. The technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available to the person purchasing the service, within the meaning of paragraph 4(b). In assessee's case from the perusal of the nature of services rendered by MMPL we notice tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d, (iii) SQL Server support. The AO held that income received by MHA has been received for services rendered in India and hence income has arisen in India and taxable under section 5 of the Act. The AO held that services are in the nature of FTS as per Article 9(1)(vii) of the Act and as per Article 12 of the India-Australia DTAA since according to the AO the services provided made available technical knowledge, experience, skill and know-how to enable the assessee to use the services for its business purpose in India. Accordingly the AO made a disallowance under section 40(a)(ia) of the Act for payment made to MHA of Rs. 3,71,16,254/- for non deduction of TDS under section 195 of the Act. 19. The CIT(A) after considering the submissions of the assessee held that the services provided by MHA do not make available any technical knowledge, skill, expertise etc to the assessee and therefore the receipts were not in the nature of FTS as per the India-Australia DTAA and there was no obligation to deduct TDS under section 195 of the Act in respect of payments made to MHA. Accordingly the CIT(A) deleted the disallowance made by the AO. 20. We heard the parties and perused the materi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....The assessee maintains its regular books of accounts by preparing a policyholders account (called revenue account) and shareholders account (profit and loss account) separately and a balance sheet as a whole which is mandated by IRDAI. The assessee is also audited under the regulation of IRDAI. The creation of reserves, accounting of liabilities, etc. is determined by the actuary in accordance with the Insurance Regulatory and Development Authority of India Act, 1999 ('IRDA Act') and its regulations related thereto. During the assessment proceedings the AO observed that the assessee has disallowed an amount of Rs. 457,88,87,000/- in respect of "reserve for unexpired risk" while computing the tax under the normal provisions of the Act and that while computing its book profits for the purpose of section 115JB of the Act no adjustment was made in respect thereof. The assessee submitted that the "reserve for unexpired risk" is an amount calculated using statistical method for covering risks which have not expired on the reporting date but the premium for which is received during the year under consideration and it reflected the same as a reduction from the premium earned. The assessee ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 4. We find that the expenditure and "reserves" are created as per IRDAI guidelines and one such entry booked by the assessee pertains to "reserve for unexpired risk". The "reserve for unexpired risk" is an amount calculated using statistical method for covering risks which have not expired on the reporting date but the premium for which is received during the year under consideration and it reflected the same as a reduction from the premium earned. Hence, the reserve for unexpired risk is not ad-hoc but a sum created statistically to cover the risk of reinsurance policies underwritten by the assessee. We find that the assessee has claimed a deduction for the "reserve for unexpired risk" to the extent of Rs. 5,24,000/- in accordance with Rule 6E while computing its total income under the normal provisions of the Act. However, while computing its book profits u/s 115JB of the Act, no adjustment was made in respect thereof as it would not fall within any of the items specified in clause (a) to (k) of Explanation 1 to section 115JB(2) of the Act. However, the ld. AO restricted the allowance in terms of rule 6E to Rs. 8,75,44,500 as evident from page 15 of the assessment order.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e for Unexpired Risk" represents that part of net premium which is attributable to and set aside for subsequent risks to be borne by the assessee under contractual obligations on contract period basis or risk period basis. Premium deficiency is recognised if the ultimate amount of expected net claim costs, related expenses and maintenance costs exceeds the sum of related premium carried forward to the subsequent accounting period as the reserve for unexpired risk. The reserve for unexpired risk is provided as determined by the actuary and the expected claim costs is also calculated and duly certified by the actuary. It was submitted that the premium received in advance which is not related to a particular accounting period is separately disclosed in the financial statements of the assessee and is reduced from the total premium received during the accounting period by way of creation of a 'Reserve for Unexpired Risk'. The Unexpired Risk Reserve is created to cover expected claims and expenses arising from active portfolio of the insurer. Reserve for Unexpired Risk is defined as a prospective assessment of amount that needs to be set aside in order to provide for claims and e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eived and there is no debit to the profit and loss account at any point of time. It is elementary that the provisions of section 115JB of the Act require an amount referred to in clause (a) to (k) to be debited to the profit and loss account. Since, there is no debit to the profit and loss account, there is no need to make an addition to the provision for unexpired risk and premium deficiency. 8. Further, the ld. AR also drew our attention to the Companies Act, 1956 and also relied on certain decisions of Hon'ble Supreme Court to cull out the meanings of "provision" and "reserve" as understood by the courts. We do not deem it fit to get into the same as we would like to address the entire issue in dispute on first principle itself as above. 9. We find that the assessee has prepared the financial statements as per the principles and guidelines prescribed by IRDAI. The expenditure claimed by the reinsurer are calculated and certified by the actuary and the computation of expenditure like reserve for unexpired risk and premium deficiency reserve is certified by the actuary and filed with IRDAI. Further, the statutory auditor in IRDAI-GI-TR has stated that liabilities....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing the Book Profit u/s. 115JB of the Act for the purpose of MAT, the ld AO considered a sum of Rs. 169,45,00,000/- being the Reserve for Unexpired Risk created as per the requirement of law, as allegedly required to be added back. The ld AO added back the aforesaid sum of Rs. 169,45,00,000/- in computing the Book profit. The assessee submitted that as per the Insurance Act, 1938, in case of an Insurance Company carrying on General Insurance business, Premium is recognised as income over the contract period or the period of risk, whichever is appropriate. Premium received in advance which represents Premium Income not relating to that particular accounting period in which the said Premium has been received, is separately disclosed in the Financial Statements of an Insurance Company. That part of income which is attributable to the succeeding accounting period or periods is reduced from the total Premiums received during an accounting period by way of creation of a Reserve for Unexpired Risk in accordance with Section 64V(l)(ii)(b) of the Insurance Act, 1938. The aforesaid Reserve is to be created for a minimum amount as prescribed under the above mentioned section. Appreciating the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....profit u/s 115JB of the Act. 11.1 The ld CITA observed that the provisions contained in Rule 6E of the Income-tax Rules, 1962 has also been considered. Section 115JB(2)- Explanation (1)(b) requires increasing "the amounts carried to any reserve, by whatever name called, other than a reserve specified u/s 33AC" if such amount is debited to the Profit & Loss Account. It is held that the Reserve for Unexpired Risk has not been debited in the Profit & Loss account at any point of time, therefore Explanation 1 to sub-section 2 of section 115JB is not applicable in the peculiar facts of the general insurance business carried out by the assessee. In the assessee's case, firstly the concerned reserve for Unexpired Risk has not been created through any debit entry made in the Profit & Loss Account. The reserve has been created in accordance with the relevant provisions of the Insurance Act, 1938, by way of debiting the premium received for adjusting the amount of premium that may be related to future year or years. It is noted that Rule 5 of the First Schedule of the Income-tax Act, 1961, which specifies the procedure to be followed for computing the business income of a Genera....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pecifies the computation mechanism of profits/gains arising from general insurance business and specifically allows deduction for reserve for unexpired risk while computing taxable income for the year under consideration. Rule 6E of the Income-tax Rules, 1962 prescribes certain percentage of the net premium for creating reserve for unexpired risks which is allowed as a deduction. Accordingly, in view of the special nature of insurance business, the Act prescribes special procedure for computation of total Income of an Insurance Company. The creation of a reserve for unexpired risk out of the premium received during the year, is a statutory requirement and the same is duly recognised by the provisions of the Act. Accordingly, it can be inferred that the intent of the law has been to allow the said reserve for unexpired risk created by the insurance companies to the extent of specified limits which is derived as a percentage of net premium. Therefore, in our considered opinion, making an addition of reserve for unexpired risk u/s 115JB of the Act would defeat the purpose of the Act which allows deduction of the said reserve to the extent of prescribed limits. Further, the provisions ....