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Facts
The assessee, a foreign company resident in Ireland, provides reinsurance services. It has an associated enterprise in India, RGA Services, which provides support services. The AO determined that RGA Services constituted a Permanent Establishment (PE) in India, making the assessee's income taxable in India. The assessee contended it had no PE and its income was not taxable in India.
Held
The Tribunal held that the assessee did not have a Fixed Place PE or a Dependent Agent PE in India. The activities of RGA Services were considered preparatory or auxiliary, and not part of a cohesive business operation that would constitute a PE under the MLI. Consequently, the income was not taxable in India.
Key Issues
Whether RGA Services constitutes a Permanent Establishment (PE) in India, making the assessee's income taxable in India, considering the India-Ireland Double Taxation Avoidance Agreement and the Multilateral Convention (MLI).
Sections Cited
143(3), 144C(13), 153, 9(1)(i), 5(1), 5(6), 234D, 244A, 270A, 115B, 10(i)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI RAJ KUMAR CHAUHAN, JM
(Assessment Year: 2022-23) RGA International Reinsurance DCIT(IT)-4(1)(1), Company Designated Activity Kautilya Bhavan, C-41 to C-43, Company, G Block, Bandra Kurla Complex, C/o Ernst & Young LLP, 17th Floor, Vs. Mumbai-400051. The Ruby, 29, Senapati Bapat Marg, Dadar (West), Mumbai-400028. PAN: AADCR1226K Appellant) : Respondent) : Shri Anish Thacker, AR Appellant /Assessee by : Shri Satya Pal Kumar, CIT-DR Revenue / Respondent by Date of Hearing : 19.06.2025 Date of Pronouncement : 25.06.2025 O R D E R
Per Padmavathy S, AM:
This appeal by the assessee is against the final order of assessment of the Deputy Commissioner of Income Tax, International Circle-4(1)(1), Mumbai [In short 'AO'] passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the Act) dated 10.12.2024 for AY 2022-23. The assessee raised the following grounds of appeal:
RGA International Reinsurance Company Designated Activity Company “1. Ground 1 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 assessing the Appellant's income at INR 42,10,44,380 instead of the returned income of INR Nil.
2. Ground 2 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 not passing the final assessment order within the time limit prescribed under section 153 of the Act, which is the outer time limit for passing the final assessment order and hence, the final assessment order issued under section 143(3) read with section 144C(13) of the Act on 10 December 2024 which is passed after 31 March 2024 (being the time limit prescribed under section 153 of the Act) is time barred and liable to be quashed
Ground 3 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 concluding that the Appellant has a business connection in India as per the provisions of section 9(1)(i) of the Act on the basis that the Appellant is earning income from India on a regular and continuous basis.
4. Ground 4 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 concluding that the Appellant's group concern, viz., RGA Global Shared Services India Private Limited (RGA Services) constitutes a fixed place permanent establishment (PE) in India in terms of Article 5(1) of the Double Taxation Avoidance Agreement entered between India and Ireland (India-Ireland Tax Treaty).
5. Ground 5 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 concluding that RGA Services constitutes a Dependent Agent Permanent Establishment of the Appellant in India in terms of Article 5(6) of the India-Ireland Tax Treaty by alleging that RGA Services is an agent which exercises indirect authority to negotiate and enter into contracts for and on behalf of the Appellant for which it habitually secures orders;
6. Ground 6 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 RGA International Reinsurance Company Designated Activity Company 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.
7. Ground 7 Without prejudice to the above, the learned AO has, on the facts and circumstances of the case and in law, failed to appreciate the fact that there is no artificial segregation of work between the Appellant and RGA Services, and that the services provided by RGA Services are merely in the nature of administrative and ancillary support services,
Ground 8 Without prejudice to the above, the learned AO also failed to appreciate the fact that Article 5(7) of India-Ireland Tax Treaty specifically excludes a reinsurance company from constituting PE in India where the agent collects premium on behalf of the reinsurance company in India.
Ground 9 Without prejudice to grounds 3 to 6, 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, failed to appreciate that no further income can be attributed to the Appellant's alleged PE, since remuneration paid to RGA Services is at arm's length price.
10. Ground 10 Without prejudice to grounds 3 to 6, the learned AO has, on the facts and in the circurnstances of the case and in law, erred in estimating 10 percent of the gross receipts attributable to the Indian operations to be the profit generally made by a reinsurance company in India and in estimating 50 percent of the profit determined above to be attributable to the Appellant in India.
11. Ground 11 Without prejudice to grounds 3 to 6, 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 applying a tax rate of 40 percent instead of 12.5 percent (plus applicable surcharge and education cess) applicable in case of life reinsurance business as per section 115B of the Act.
12. Ground 12 The learned AO has, on the facts and circumstances of the case, erred in not following the decision of Hon'ble Income-tax Appellate Tribunal's decision in the Appellant's own case for Assessment Year 2015-16, Assessment Year 2017-18. Assessment Year 2018-19, Assessment Year 2019-20, Assessment Year 2020-21 and RGA International Reinsurance Company Designated Activity Company Assessment Year 2021-22 wherein, on similar facts and circumstances, the grounds of appeal have been adjudicated in favour of the Appellant
13. Ground 13 The learned AO has, on the facts and circumstances of the case and in law, erred in levying interest under section 234D of the Act
14. Ground 14 The learned AO has, consequentially, on the facts and circumstances of the case and in law, erred in granting short interest under section 244A of the Act.
15. Ground 15 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.
The above grounds of objections are all independent and without prejudice to one another.”
Brief facts with regard to the operations of the assessee are that M/s. RGA International Reinsurance Company Designated Activity Company (assessee) is a foreign company and a tax resident of the Ireland. The 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 assessee has also signed a reinsurance support services agreement dated 01.04.2006 with its associated enterprise in India RGA Services India Pvt. Ltd. (RGA Services) by which the Indian entity provides business support underwriting and actuarial support, risk profiling, data synopsis and suggestions for underwriting proposals along with marketing support- marketing research, customer relationship management and administrative assistance to the assessee.
RGA International Reinsurance Company Designated Activity Company 3. The assessee filed the return of income for AY 2022-23 declaring total income of Nil. The case was selected for scrutiny and the statutory notices were served on the assessee. During the year under consideration the assessee has received a sum of Rs. 8,42,08,87,590/- as premium and the assessee claimed the said receipts as not taxable in India for the reason that the assessee does not have a Permanent Establishment (PE) in India. The summary of submission made by the assessee before the AO is as under:
“1. The agreement with RGA Services is on a principal to principal basis. It performs its activities in an independent manner and under limited control and supervision of the assessee.
2. RGA Services renders services to other associated enterprises within RGA Group and hence it is not economically dependent on the assesse, 3. RGA Services does not conclude the terms of the reinsurance treaties or enter into any contracts with any insurance companies.
4. RGA Services does not secure contracts for and on behalf of assessee 5. The reinsurance treaties are signed in Ireland 6. RGA Services does not negotiate on the fee and terms and conditions of the reinsurance treaties 7. The terms and conditions are agreed and concluded between the assessee and Indian insurance companies 8. RGA Services does not decide the price to be quoted to the Indian Insurer 9. The activities carried out by RGA Services are preparatory / auxiliary in nature 10. Assessee remunerates RGA Services on arms length basis (cost mark up) 11. Automatic renewal of treaties with Indian insurers does not constitute PE/business connection RGA International Reinsurance Company Designated Activity Company 12. RGA India has not entered into any new agreements with the Indian Cedents.”
The AO after considering the submissions of the assessee in the draft assessment order held that the services rendered by RGA services are vital and primary business functions and are not in the nature of auxiliary or preparatory. The AO further held that assessee is taking the necessary decisions on reinsurance based on the support activities carried on by RGA Services and therefore the activities gives rise to creation of Fixed PE to the assessee in the form of RGA services. The AO also held that RGA Services is DAPE of the assessee for the reason that the operations of RGA services cannot be said to have an independent status. Further the AO held that the as per the modified definition of PE as per multilateral convention to implement tax treaty related measure to prevent base erosion and profit shifting (MLI) between India and Ireland RGA Services would become the PE of the assessee since the services rendered by RGA Services constitute complementary functions that are part of a cohesive business operation. The relevant findings of the AO in this regard are extracted below:
“22.1 As per Multilateral Convention to implement tax treaty related measures to prevent Base Erosion and Profit Shifting (MLI), the DTAA between India and Ireland has been modified. The MLI provisions take effect with respect to all taxes withheld at source on amounts paid or credited to non-residents, where the event giving rise to such taxes occurs on or after 01.04.2020 in India. Hence, the current assessment proceedings have to take in to consideration the changes in definition to PE in Article 5 as under. The following paragraph 4 of the Article 13 of the MLI applies to paragraph 5 of Article 5 of the convention: ARTICLE 13 OF THE MLI-ARTIFICIAL AVOIDANCE OF PERMANENT ESTABLISHMENT STATUS THROUGH THE SPECIFIC ACTIVITY EXEMPTIONS [Paragraph 5 of Article 5 of the Convention] shall not apply to a fixed place of business that is used or maintained by an enterprise if the same enterprise RGA International Reinsurance Company Designated Activity Company or a closely related enterprise carries on business activities at the same place or at another place in the same [Contracting State) and: (a) That place or other place constitutes a permanent establishment for the enterprise or the closely related enterprise under the provisions of [Article 5 of the Convention]; or (b) The overall activity resulting from the combination of the activities carried on by the two enterprise at the same place, or by the same enterprise or a closely related enterprise at the two places, is not of a preparatory or auxiliary character, provided that business activities carried on by two enterprise at the same place or by the same enterprise or a closely related enterprise at the two places, constitute complementary functions that are part of a cohesive business operation 22.2 These provisions specifically deal with scenarios wherein two associated enterprises carry on a combination of activities which constitute complimentary functions that are part of a cohesive business operations. Hence these provisions ensure there is no erosion of taxable base in a country wherein there is artificial segregation of work between two entities to artificially avoids establishment of PE. Hence these changes further supports department's stand that RGA services India Pvt Ltd constituted a PE of RIRC in India, and RIRC's business income was taxable in India.
Further, reliance is placed on the Hon'ble Mumbai High Court held in Blue Star Engineering Co. (Bombay) (P.) Ltd. v. Commissioner of Income- Tax, [1968 SCC OnLine Bom 133: (1969) 73 ITR 283] "It would thus be seen that in order to constitute a "business connection" as contemplated by section 42, there must be an activity of the non-resident in the taxable territories having an intimate and real relation of a continuous character with the business of the non-resident and contributing to the eaming of profits by the non-resident in his business. The business connection must undoubtedly be a commercial connection but all commercial connections will not necessarily constitute business connection within the meaning of the concept unless the commercial connection is really and intimately connected with the business activity of the non-resident in the taxable territories and is contributory to the earning of profits in the said trading activity." From the above facts, it is clear that provisions of MLI, the factual and legal matrix makes it amply clear that the assessees PE is established in India. In light of the above discussion, it is hereby held that due to the presence of P.E. of the assessee in India, as well as income arising through business RGA International Reinsurance Company Designated Activity Company connections from India, the re-insurance premia are liable to tax in India in the hands of the assessee on a net income basis under the India-Ireland DTAA as well as the Indian Income Tax Act, 1961.
Computation of Taxable Income and Attribution of Profits: 24.1 The assessee has contended that where a PE is remunerated at an arm's- length, nothing further can be attributed to the PE. In this connection, the assessee has relied upon the Hon'ble Supreme Court decision in case of Morgan Stanley and Co Inc [2007] 292 ITR 416 (SC) wherein it has been held that if the correct arms-length price ('ALP') is applied and paid to the dependent agent then nothing further would be left to be taxed in the hands of the foreign enterprise having a dependent agency PE ('DAPE') in India. In other words, payment of ALP to the dependent agent would extinguish the tax liability of a foreign company having a DAPE in India. 24.2 However, in this case, the ALP of the payments made to RGA Services have not been determined through Departmental transfer pricing proceedings. Therefore, it cannot be held that an arm's-length relationship between the assessee, a foreign entity and its PE in India in order to absolve the assessee from any tax liability in India. No Functions-Assets-Risk (FAR) analysis has been done in the case of assessee. 24.3 Therefore, it cannot be argued that additional profits could not be attributed to assessee's P.E. over and above the remuneration to RGA Services (The P.E.) at Arm's length. The case of Morgan Stanley Co. Inc. [Supreme Court] envisages that compensation to P.E. has to be based on FAR analysis and adequate transfer pricing documentation. The assessee's case does not comply with the conditions laid down by the Apex court in Morgan Stanley case, as no F.A.R. analysis of the enterprise as a whole has been performed by the assessee to establish that no compensation/profits accrued to assessee for other functions performed by the Agent which have gone unremunerated. 24.4 The arguments that if remuneration is paid to the dependent agent in the 'source state' on arm's length price, then no further profits can be attributed to the 'source country is conceptually wrong. This has been discussed in detail by the Report on the Attribution of profits to the Permanent Establishment dated 17 July 2008, available on the website of OECD. The argument that no further profits can be attributed to the 'source country' has been identified by the Report as 'single taxpayer approach. A number of basic conceptual problems have been identified with this approach in the OECD Report. The most significant impact of the acceptance of single taxpayer approach' by the global community would be that Article 5(6) would become redundant.
RGA International Reinsurance Company Designated Activity Company Accordingly, even if it is held that an enterprise carries on business in the 'source state through a significant presence of 'dependent agent', no further profits can be attributed to the 'source state'. Accordingly, through the above Report, a consensus has been arrived at internationally that if arms' length remuneration is paid to dependent agent, even in those cases, further profits can be attributed to the 'source state'. 24.5 The Report further discusses how much profits can be attributed to the dependent agent over and above the arms' length remuneration. The relevant extracts are reproduced as under: "Where a dependent agent PE is found to exist under Article 5(5), the question arises as to how to attribute profits to the PE. The answer is to follow the same principles as used for other types of PEs. As a first step, the activities that the dependent agent undertakes for the enterprise will be identified through a functional and factual analysis that will determine the functions undertaken by the dependent agent both on its own account and on behalf of the enterprise. The dependent agent and the enterprise on behalf of which it is acting constitute two potential taxpayers. On one hand, the dependent agent will derive its own income or profits from the activities that it performs on its own account for the enterprise; if the agent is itself a resident of either Contracting State, the provisions of the Convention (including Article 9 if that agent is an enterprise associated to 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 attributable to the dependent agent itself". 24.6 It is also seen that in business of this nature, demand side factors play a crucial role in determining the profitability of the enterprise. All the cedants are based in India, the support services rendered by RGA Services is being done in India. It is already discussed above that RGA Services is performing the core functions. Hence, demand side factors become very crucial.
RGA International Reinsurance Company Designated Activity Company 25. In view of the above mentioned report of the OECD and as per the above discussion, the contention of the assessee that if the arms' length remuneration has been paid to its agent in India, no further profits can be attributed to the assessee is not acceptable.
26. During the course of assessment proceedings, the AR of the assessee has not submitted India-specific profit and loss account so that its income from operations in India can be determined and proper allocation may be made to profits attributable to Indian operations. In absence of the same, it is necessary to estimate the taxable profits of the assessee as per Rule 10 of the Income Tax Rules.
The re-insurance companies world over eam their income primarily from treasury operations by investing huge funds at their disposal for a substantial period of time. In these circumstances and in absence of details from the side of the assessee with respect to the profitability from Indian operations, it is reasonable to estimate the taxable profits for purposes of Rule 10(i) of the Income-tax Rules at 10% of the gross receipts. Further, since some parts of the operations have been carried out in the respective country of residence (Ireland), it is also reasonable to estimate that the residence and source country (India) have a 50:50 right over the income so received by the assessee. Hence, 50% of income is attributable to India. Since the gross premium received by the assessee is Rs. 8,42,08,87,590/-, 50% of it is found to be from business performed through the PE in India/attributable to operations in India which is Rs. 4,21,04,43,795/-. Further, 10% profitability is applied to arrive at profits of Rs. 42,10,44,380/-. This business income is taxable at the rate of 40% along with surcharge and cess, as per the domestic law. Penalty u/s 270A is initiated for under reporting of income.
From the above mentioned discussion, the computation of total income of the assessee is computed as under: Particulars Amount-Rs. GROSS PREMIUM RECEIVED (AS PER 8,42,08,87,590/- 26AS) TOTAL INCOME (50% PE IN INDIA) 4,21,04,43,795/- 10% PROFITABILITY APPLIED 42,10,44,380/- TOTAL INCOME u/s 143(3) r.w.s. 144C(1) 42,10,44,380/- (Taxable @ 40%)
Penalty proceedings u/s 270A are separately initiated for under reporting of income.”
Accordingly the AO treated 50% of the income attributable to India amounting to Rs. 4,21,04,43,795/- and applying 10% profitability on the said amount made an addition of Rs. 42,10,44,380/- as income of the assessee taxable in India. The assessee raised further objections before the DRP. The DRP relied on its own order for AY 2021-22 and upheld the addition made by the AO. The assessee is in appeal before the Tribunal against the final order of assessment passed by the AO pursuant to the directions of the DRP.
The ld. AR at the outset submitted that the issue in the present appeal is covered by the decision of the Co-ordinate Bench in assessee's own case for AY 2021-22 (ITA No. 4693/Mum/2023 dated 22.05.2024). The ld. AR further submitted that the DRP has upheld the addition made by the AO by relying on its own order for AY 2021-22 which substantiates that the facts pertaining to the year under consideration and AY 2021-22 are identical. The ld. AR also submitted that RGA India has not entered into any new agreement with Indian Cedents which fact has not been disputed by the AO. The ld. AR accordingly submitted that the decision of the Co-ordinate Bench in assessee's own case for AY 2021-22 is applicable for the year under consideration also.
We heard the parties and perused the material on record. We notice that the Co-ordinate Bench while considering a similar addition made by the AO for Ay 2021-22 has held that “8. We have heard the parties and perused the material available on record. We noticed that for the year under consideration the revenue has held the income earned by the assessee as taxable in India on three count viz., (i) that the assessee is having a fixed PE in India (ii) that RGA Services is the DAPE of the assessee (iii) as per the modified definition of PE under the MLI between India and Ireland RGA Services should be considered as the PE of the assessee. The first two contentions of RGA International Reinsurance Company Designated Activity Company the Revenue have already been considered by the co-ordinate bench of the Tribunal in assessee's own case for the immediately preceding assessment year i.e. AY 2020- 21 (ITA No. 3254/Mum/2023 dated 31.01.2024) where it has been held that “9. We have heard both the parties and also perused the observation and finding of the ld. AO and ld. DRP as well as Tribunal orders for earlier years. First of all the reason as to why there is no business connection in terms of Section 9(1)(1) of the Act is that- RGA Services performs its activities in an independent manner RGA Services render services not only to the assessee but also to other Companies within the RGA Group and hence, it is not economically dependent on the assessee. Further, the assessee remunerates RGA Services on an arm's length basis and RGA Services only acts as interface between Indian Cedents and assessee. Even otherwise this aspect is wholly irrelevant since in a case in which a double taxation avoidance agreement comes into play, such as the present case, the provisions of the Act cannot be pressed into service unless these provisions are more beneficial.
10. In so far as assessee RGA services does not constitute a fixed place PE in India as per Clause 5 of the treaty on account of the following reasons:- ► RGA Ireland does not conduct any insurance business in India. RGA Ireland does not have any premises or office space for undertaking reinsurance business activity in India. RGA Services does have an office in india, but the Appellant has no control over the said office. No employee of RGA Ireland visited India in the year under appeal. ► The reinsurance treaties are signed by the Appellant outside India. RGA Services does not negotiate the fee and terms and conditions of the reinsurance treaties. The terms and conditions for the treaties are agreed and concluded between the Appellant and the Indian Cedents. RGA Services does not decide the price to be quoted to the Indian Cedents. Additionally, activities carried out by RGA Services are preparatory/ auxiliary in nature. The Appellant remunerates RGA Services on an arms-length basis (i.e cost mark up of 18%) RGA Services is a separate legal entity having its own personnel. The premises of RGA Services are used for conducting its business operations of rendering marketing and support services from which it derives revenue. RGA Services does not have the regulatory approvals from IRDAI to accept reinsurance, nor does it have the required infrastructure or personnel to undertake reinsurance RGA International Reinsurance Company Designated Activity Company business. Further RGA Ireland also accepts reinsurance from other jurisdictions as well Further, only activities in the form of administrative and ancillary support services was provided by RGA Services to RGA Ireland which are provided below a. Claims Support RGA Services acts as a communication channel between RGA Ireland and Indian Cedents (w.r.t existing treaties) to obtain and provide clarifications requested by the Indian Cedents from time to time Third party Indian Cedents may approach RGA Ireland for claims settlement (with respect to their existing arrangements) RGA Ireland in turn approaches RGA Services for its assistance with respect to evaluation of the claim settlement request of its clients. RGA Services evaluates the proposal from a medical and a financial perspective. The personnel of RGA Services reviews the documents regarding the medical history of the life reinsured, death records and other claim documents. If required, they could also request for additional documents. b. Data Synopsis and ancillary support services. The data collected by RGA Services are synopsized for claims request and for facultative underwriting request. Such synopsis is shared with RGA Ireland who in turn takes the final decision to settle claims. Further, the function also includes monitoring of premiums received with respect to various re-insurance policies, amount of premium received during a particular period etc. ►Additionally, it may be noted that the core business activities of RGA Ireland are not undertaken in India through any fixed place. The core business is the bearing of the re-insurance risk. The risk is borne by RGA Ireland which is based on the capital of RGA Ireland which lies in Ireland, i.e., risk is borne outside India and not in India. RGA Ireland has the infrastructure, personnel and capital to carry out reinsurance activities from outside India. Accordingly, the core activity of the Appellant (reinsurance business) cannot be said to be carried out in or from India ► Further, based on the above facts and the definition of preparatory and auxiliary services provided in the Treaty it is submitted that as per the nature of services rendered by RGA Services to RGA Ireland the same qualify to be preparatory and auxiliary services and thus fall in the exclusionary clause for the following reasons. ►RGA Services acts as a communication channel between the Indian Cedents and RGA Ireland RGA Services collects synopsizes and processes the claims information and forwards the same to RGA Ireland. From an Indian regulatory RGA International Reinsurance Company Designated Activity Company perspective, Roy Services is not permitted to undertake the core activities i.e reinsurance business in India.
11. Lastly, with regard to RGA services do not constitute DAPE of RGA IRELAND on account of the following:- ► The agreement between RGA services and RGA Ireland is on a principal-to principal basis where the role performed by RGA Services is different from RGA Ireland RGA Services renders services to other associated enterprises within RGA Group and hence, it is not economically dependent on the Appellant ► RGA Services does not conclude the terms of the reinsurance treaties or enter into any contracts with any insurance companies RGA Services does not secure contracts for and on behalf of the assessee. The terms and conditions for the treaties are agreed and concluded between the Appellant and the Indian Cedents. RGA Services does not decide the price to be quoted to the Indian Cedents. The activities carried out by RGA Services are preparatory/ auxiliary in nature The Appellant remunerates RGA Services on arms-length basis (ie cost mark up of 18%) RGA Services does not undertake and is not permitted by the IRDAI to undertake reinsurance activities. RGA Services does not undertake core and primary reinsurance services like riskassessment. Further, RGA Services is not a dependent agent of RGA Ireland ►RGA Services acts only as a communication channel between the Indian Cedents and RGA Ireland RGA Services only inputs the data into the system and final decisions of acceptance/ rejections is taken by the assessee. RGA Services does not procure any orders on behalf of RGA Ireland in India. The assessee does not give any detailed instructions or exercise any control on RGA Services with respect to RGA Service's business, and all the contracts are signed by the assessee outside India and by its employees In no circumstances are the contracts signed in India, and RGA Services does not have any authority to conclude any contracts on behalf of the assessee nor does it secure any orders for the assessee.
This contention of the assessee has been accepted by the Tribunal and adjudicated in assessee’s own case in the following manner:- ►AY 2018-19 and 2019-20 in and 2330/Mum./2022 dated 6 September 2023 (enclosed at page nos. 56 to 109) wherein it has been held as under 25. This is not the first time revenue has raised this issue. However, in the previous Assessment Years also the similar issues were raised and the Coordinate Bench has considered the issue under consideration and decided the issue in favour of the assessee in for AY 2017-18 by following the decision in RGA International Reinsurance Company Designated Activity Company assessee's own case for the A. Y 2015- 16, for the sake of clarity it is reproduced below 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 DRP has referred to the existence of business connection under section 9(1) of the Indian Income Tax Act 1961, but then that aspect of the matter is wholly irrelevant because in a case in which a double taxation avoidance agreement comes into play, as admittedly, in this case, the provisions of the Income Tax Act 1961 cannot be pressed into service unless these provisions are more beneficial to the assessee The DRP has simply observed that since the core business activities are conducted by RGA India, RGA India constitutes the fixed place PE As we we have seen above, unless a particular place is at the disposal of the assessee, that place cannot be said to constitute the PE of the assessee. In any case, 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 India Whatever activities are carried out by RGA India have been duly paid for by the asseseee, and the transfer pricing assessment has accepted that position. Once that position is accepted, there cannot be any further profit attribution for services rendered by the RGA In view of these discussions, and bearing in mind the entirety of the case, we disapprove the stand of the authorities below, and hold that there was no fixed place permanent establishment on the facts of this case. As regards the existence of the dependent agency permanent establishment, that aspect of the matter, In the light of the coordinate bench decision in the case of ADIT Vs Asia Today Ltd [(2021) 129 taxmann.com 35 (Mum)], is wholly tax-neutral and does not, therefore, need our adjudication.
10. In view of these discussions, we hold that the assessee did not have a fixed place permanent establishment in India, that the question of assessee having a dependent agency PE is wholly academic in the sense that, as the law stands now, the existence of the DAPE is wholly tax neutral in India. Accordingly, the business profits eamed by the assessee on account of the reinsurance business have no tax implications in India. In view of these findings, all other issues raised in the appeal are academic and call for no adjudication as of now"
In the above decision, the Coordinate Bench have considered the issue of existence of business connection u/s. 9(1) of the Act and addressed the issue of Fixed Place Permanent Establishment and held that unless a particular place is at the disposal of the assessee that place cannot be said to constitute Permanent Establishment of the assessee. Further, they observed that the core reinsurance activity is assumption of risk and that assumption of risk has been done outside India hence there is no occasion to attribute reinsurance profit attribution to RGA RGA International Reinsurance Company Designated Activity Company Services. Whatever activities are carried out by RGA Services have been duly paid for by the assessee, and the transfer pricing assessment has accepted that position. Once that position is accepted, there cannot be any further profit attribution for services rendered by the RGA Services and they held that there was no fixed place permanent establishment on the facts of this 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 taxneutral 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 performs certain functions on behalf of the foreign principal that cause attribution of risks or assets of foreign principal to host country, Le, country of source country besides performing its own functions for which it is otherwise taxable in India. The Dependent agent is performing additional functions for and on behalf of the foreign company which are not part of its profile and for which it is not being remunerated by the foreign company. He also raised issue of profits/losses may be attributed to the DAPE by host country based on those assets used, risks assumed and functions performed and the DAPE is entitled to deduction in host country for arm's length compensation/remuneration paid to dependent agent enterprise 28. Ld. DR submitted that Profits can be attributed to DAPE even if arm's length price has been paid to a Dependent Agent. He objected to 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' He is of the view that the functions performed by the RGA Services are intertwined in the various functions of reinsurance activities which has standalone services offered by the RGA Services which was already compensated. However, as per the OECD commentary on Article 7(2) which requires a total factual analysis on the basis of functions performed, assets used and risk assumed. He submitted that OECD emphasis that profit attributable to the DAPE are separate from the profits attributable to the dependent agent itself RGA International Reinsurance Company Designated Activity Company 29. Further, he relied on the decision of DIT (International Taxation) v Morgan Stanley & Co. Inc. (supra) to submit that associated enterprise (also constitutes a PE) is remunerated on arm's length basis taking into account all the risk-taking functions of the multinational enterprise. In the risks assumed by the enterprise, in such a case, there would be need to attribute profits to the PE for those functions/hisks that have not been considered.
From the above submissions, we observe that Ld DR harping on the functions performed by the RGA Servers which may be integral part of the reinsurance business wherein the reinsurer may analyse various functions before or after taking reinsurance business 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.
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 could only offer various functions in the line of reinsurance business. What is relevant to be an agent is the agent should be in a position to replace the principle in executing any contract and should be having the similar level playing role or rights in execution of such contracts, the issue of dependent or independent is different aspect of analysis. First, the other person is eligible to function as an agent or not as a broker, in the given case RGA Services does not have any recognition in India to conclude any contract in line of reinsurance. Therefore, it can never be allowed to act as an agent in India, not even assume or conclude contract on behalf of the principal i.e. the assessee.
Further, we observe that even Ld. DR has not brought on any material to show that RGA Services has utilized its assets or assumed any risk in this line of reinsurance business. Merely because its whole functions are depend on the services which will be utilized by the Foreign principal does not make it as an dependent agent.
As discussed above, RGA Services is not capable to act as an agent considering the fact they do not have the licence to function as a reinsurance or broker from the IRDAI and also the reinsurance agreements were signed outside India. The provisions of DAPE does not apply to the present case. The various arguments made by the Ld. DR fails in this case, considering the fact that nowhere it is brought on record to show that RGA Services has invested any assets or assumed any risk. Therefore, we are inclined to reject the various submissions made by Ld. DR and allow the grounds raised
by the assessee.
36. In the result, appeal filed by the assessee is allowed."
13. In so far as ground No.10 is concerned, non-application of MIL, it has been upheld by the ld. AO, we find that said provisions are applicable from 1st April 2020 i.e. F.Y.2020-21 and not for the year under consideration which has been clearly stated in the MIL notification in the following manner:- Unless it is stated otherwise elsewhere in this document, the provisions of the MLI have effect with respect to the Convention. • In India: With respect to taxes withheld at source on amounts paid or credited to nonresidents, where the event giving rise to such taxes occurs on or after 1 April 2020; and With respect to all other taxes levied by India, for taxes levied with respect to taxable periods beginning on or after 1 April 2020.”
9. The alternate contention of the revenue is that the assessee is having a PE as per the modified definition in the MLI between India and Ireland which is applicable from 01.04.2021. Therefore before proceeding further we understand the changes brought into the definition of PE brought in through MLI between various countries including India. The OECD BEPS project included Action 7 which recommended the development of changes to the PE definition in Article 5 of the OECD Model Tax Convention (MTC) and these changes were applied under a new treaty or through the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI), potentially under an existing treaty. The changes aimed to prevent the artificial avoidance of PE status, including through the specific activity exemptions of Article 5(4) in certain circumstances. The OECD specifically wanted to clarify that it is not possible to avoid PE status by fragmenting a cohesive operating business into several small operations in order to argue that each part merely is engaged in preparatory or auxiliary activities. The 2017 OECD Model Tax Convention includes an updated Article 5 within which countries can opt to include additional paragraph 4.1 which would, if implemented, deny the specific RGA International Reinsurance Company Designated Activity Company activity exemptions. Pursuant to the said recommendation India and Ireland opted to include additional paragraph to Article 5 in the MLI between India and Ireland and the revised Article reads as under – 5. Not withstanding the previous provisions of this Article, the term “permanent establishment” shall be deemed not to include: (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; (f) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. The following paragraph 4 of Article 13 of the MLI applies to paragraph 5 of Article 5 of this Convention: RTICLE 13 OF THE MLI – ARTIFICIAL AVOIDANCE OF PERMANENT ESTABLISHMENT STATUS THROUGH THE SPECIFIC ACTIVITY EXEMPTIONS Paragraph 5 of Article 5 of this Convention shall not apply to a fixed place of business that is used or maintained by an enterprise if the same enterprise or a closely related enterprise carries on business activities at the same place or at another place in the same Contracting State and: a) that place or other place constitutes a permanent establishment for the enterprise or the closely related enterprise under the provisions of Article 5 of this Convention; or b) the overall activity resulting from the combination of the activities carried on by the two enterprises at the same place, or by the same enterprise or closely related enterprises at the two places, is not of a preparatory or auxiliary character, provided that the business activities carried on by the two enterprises at the same place, or by the same enterprise or closely related enterprises at the two RGA International Reinsurance Company Designated Activity Company places, constitute complementary functions that are part of a cohesive business operation.
10. Paragraph 5 of Article 5 contains exceptions to the definition of PE to a list of activities that have a “preparatory and auxiliary” character. A new paragraph is introduced to Article 5 in order to prevent an enterprise or a group of closely related enterprises from fragmenting a cohesive business operation into several small operations in order to argue that each is merely engaged in a preparatory or auxiliary activity. The newly inserted paragraph applies two types of cases - First, it applies where the non-resident enterprise or a closely related enterprise already has a PE in the source country, and the activities in question constitute complementary functions that are part of a cohesive business operation. The second type of case to which it applies is a case where there is no pre-existing PE but the combination of activities in the source country by the non-resident enterprise and closely related non-resident enterprises results in a cohesive business operation that is not merely preparatory or auxiliary in nature. OECD (2015) Preventing the Artificial Avoidance of Permanent Establishment Status, Action 7 - 2015 Final Report has elaborated the above two scenarios with an example as given below – 30.4 The following examples illustrate the application of paragraph 4.1: Example A: RCO, a bank resident of State R, has a number of which constitute permanent establishments. It also has a separate office in State S where a few employees verify information provided by clients that have made loan applications at these different branches. The results of the verifications done by the employees are forwarded to the headquarters of RCO in State R where other employees analyse the information included in the loan applications and provide reports to the branches where the decisions to grant the loans are made. In that case, the exceptions of paragraph 4 will not apply to the office because another place (i.e. any of the other branches where the loan applications are made) constitutes a permanent establishment of RCO in State S and the business activities carried on by RCO at the office and at the relevant branch constitute complementary functions that are part of a cohesive business operation (i.e. providing loans to clients in State S). Example B: RCO, a company resident of State R, manufactures appliances. SCO, a resident of State S that is a wholly owned subsidiary of RCO, owns a store where it sells appliances that it acquires from RCO. RCO also owns a small warehouse in State S where it stores a few large items that are identical to some of those displayed in the store owned by SCO. When a customer buys such a large item from SCO, SCO employees go to the warehouse where they take possession of the item before delivering it to the customer; the ownership RGA International Reinsurance Company Designated Activity Company of the item is only acquired by SCO from RCO when the item leaves the warehouse. In this case, paragraph 4.1 prevents the application of the exceptions of paragraph 4 to the warehouse and it will not be necessary, therefore, to determine whether paragraph 4, and in particular subparagraph 4 a), applies to the warehouse. The conditions for the application of paragraph 4.1 are met because SCO and RCO are closely related enterprises; SCO’s store constitutes a permanent establishment of SCO (the definition of permanent establishment is not limited to situations where a resident of one Contracting State uses or maintains a fixed place of business in the other State; it applies equally where an enterprise of one State uses or maintains a fixed place of business in that same State); and The business activities carried on by RCO at its warehouse and by SCO at its store constitute complementary functions that are part of a cohesive business operation (i.e. storing goods in one place for the purpose of delivering these goods as part of the obligations resulting from the sale of these goods through another place in the same State).
Given this background we will now look at the facts pertaining to assessee's case. Since the assessee does not already have a PE, it is to be analysed whether assessee's case would fall within the second leg of the modified definition i.e. the second type of case as stated above. The contention of the revenue is that even if the operations of RGA services considered as preparatory in nature even then the exception would not apply since the services rendered / the activities constitute complementary functions that are part of a cohesive business operation of the assessee and therefore the assessee is having a PE in India. The argument of the assessee is that that all the factors in the definition need to be considered for the purpose of holding whether RGA services can be held to be the PE of the assessee and not just complementary functions that are part of a cohesive business operation. In this regard we notice that the first condition for an enterprise to enter into the non-exemption category is to have a fixed place of business used or maintained by an enterprise, in the same place / other place in the same state where the enterprise or its closely related enterprises carries on business activities. In other words for the purpose of a case to fall under the above definition, the assessee and the closely related enterprise need to carry on business activities in the same country i.e. India and that the activities should result in cohesive business operation. This view is further strengthened by the examples given in the Final Report as extracted in the earlier part of this order, where in the non-resident enterprise is having a business activity (owning of warehouse in the example) which otherwise would have been claimed to be exempt as a preparatory activity cannot be held so since its activities are complementary to the activity carried on by a closely related enterprise towards a cohesive business operation.
12. In assessee's case if the same analogy is to be applied, it is an established fact that the assessee which is into reinsurance business does not have business operations in India for the reason that the acceptance of risk which is the key function of reinsurance business is assumed outside India by the assessee. Further during the course of hearing the ld AR also drew our attention to the drew our attention to the Director's Report on the Financial Statement of the assessee (page 93 of paper book) where the details of countries in which the assessee is having branches to submit that the assessee does not have a branch in India. It was also submitted that the assessee does not have any premises or office space for undertaking reinsurance business activity in India. Therefore in our considered view the assessee and RGS Services, which according to the revenue is a closely related enterprise, are not carrying on business activities which constitute complementary functions that are part of a cohesive business operation in the same state / country i.e. India. Accordingly the anti-fragmentation rule brought in through MLI to prevent the preparatory or auxiliary exemptions under Article 5 from applying to a fixed place of business maintained by an enterprise cannot be applied to assessee's case. In the light of the above discussion we hold that the assessee is not having a PE in India even as per the amended Article 5 of the MLI between India and Ireland and therefore the income cannot be taxed in India.” 8. On perusal of the facts for the year under consideration we notice that they are identical to AY 2021-22 and that the DRP has relied on its own order for AY 2021-22 while upholding the addition made by the AO. Therefore, respectfully following the above decision of the Co-ordinate Bench, we direct the AO to delete the addition made. Ground No.3 to 12 raised by the assessee in this regard are allowed.
9. Ground No.1 is general. Ground No.2 pertaining to the legal contention that the order of the AO is barred by limitation has become academic and left open since we have allowed the issue considering the merits. Ground No.13 on the issue of interest under section 234D and Ground No.15 on levy of penalty under section 270A are consequential not warranting any separate adjudication. Ground No.14 pertaining to 244A interest is remitted back to the AO with a direction to allow the RGA International Reinsurance Company Designated Activity Company interest after taking into consideration our decision in this order and as per law. It is ordered accordingly.
In result appeal of the assessee is partly allowed.