ACIT(IT)-3(2)(2) MUMBAI, MUMBAI vs. MUNCHENER RUCKVERSICHERUNGS-GESELLSCHAFT AKTIENGESELLSCHAFT IN MUNCHEN, MUMBAI

AY 2020-21 - Assessee's Appeal

3. The assessee raised the following grounds of appeal:

“1.1. On the facts and circumstances of the case and in law, the Learned CIT has erred in upholding the addition 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 Insurance Regulatory and Development Authority of India ('IRDAI"). Further, no expenditure has been incurred, which is in violation of any statute, or which is not for the purpose of business of the Appellant. 2.4 The Learned CIT(A) erred in not considering the fact that the show-cause notice was issued by the learned Assessing Officer for disallowing the head 4833, 5094 & 5093/Mum/2024 Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen office expenditure under section 44C of the Act and that no disallowance been made in the impugned order under section 44C of the Act. Therefore, any addition made under other section for which show-cause was not issued is bad in law. 2.5 The Learned CIT(A) has failed to appreciate the fiction of independence of Branch as per the Article 7 of the India-Germany Tax Treaty that for the purpose of computation of taxable Income of the Branch, all the expenses are to be deducted from the income earned. 2.6 The Learned CIT(A) has further erred in not appreciating the fact that as per Clause 1(e) of the Protocol to Article 7 of the India-Germany Tax Treaty. The above-mentioned expenses are not covered by any exceptions provided under Protocol to Article 7 of the India-Germany Tax Treaty, and accordingly, entire amount ought to be allowed as an expenditure of the Branch as per the beneficial provision of India-Germany Tax Treaty. 2.7 The Learned CIT(A) also erred in not considering the ruling of Hon'ble Supreme Court in case of Commissioner of Income-tax, Meerut v. Hyundai Heavy Industries Co. Ltd. [2007] 161 Taxman 191 (SC) and ruling of Special Bench of Mumbai ITAT in the case of Sumitomo Mitsui Banking Corpn. v. Deputy Director of Income-tax (IT), Range-2(1), Mumbai [2012] 19 taxmann.com 364 (Mum.) (SB). 2.8 Without prejudice to the above, on the facts and circumstances of the case and in law, the Learned CIT(A) has not given appropriate rationale and explanation in its impugned order dated July 26, 2024 under section 250 of the Act with respect to the disallowance of expenses and has simply agreed to understanding created by the Learned Assessing Officer without detailed independent analysis of the case and provision of appropriate justification.

3. Erred in initiating penalty proceedings under section 270A of the Act. 3.1. On the facts and circumstances of the case and in law, the Learned CIT(A) erred confirming the Penalty proceedings under 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 4833, 5094 & 5093/Mum/2024 Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen 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 technical services, however the CIT(A) held the payment as not taxable in the hands of the Head Office by placing reliance on the decision of the Co-ordinate Bench in the case of BNP Paribas vs. ACIT (2023) 149 taxmann.com 56 (Mum Trib.). On the claim of the assessee that the payments made by the Indian Branch to Head Office being allowed as deduction under section 37 of the Act, the CIT(A) rejected the submissions of the assessee by holding that the nature of expenditure as per the claim of the assessee is incurred or paid from one's own pocket since the Head Office and the Indian Branch are one and the same entity. The CIT(A) by placing reliance on the decision of the Special Bench in the case of Sumitomo Mitsui Banking Corporation vs. DDIT (IT) (2012) 19 taxmann.com 364 (Mum. SB). Accordingly, the CIT(A) confirmed the disallowance made by the AO under section 37 of the Act.

4833, 5094 & 5093/Mum/2024 Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen 6. The ld. AR submitted that the HO provides IT support services which are standard services which are required for service delivery and support for its operations in India. The ld AR further submitted that HO performs certain management services such as finance & risk management, branding related activity, marketing strategy, accounting etc. The ld AR also submitted that the HO incurs certain expenditure at a global level for the purpose of their business operations and the costs are allocated to each of the branches. The ld AR argued that the revenue is not questioning the fact that payment made by the Indian Branch to Head Office is for the business purposes. The ld. AR further argued that the only reason for not allowing the deduction is that in the hands of the Head Office the receipt is not taxable as income on the principle of mutuality and therefore it is not allowable as deduction in the hands of the Indian Branch also. The ld. AR drew our attention to Article 7 of the DTAA between India and Germany to submit that for the profit attributable to the PE is to be determined which it might be expected to make, if it were a distinct and separate enterprise and that the expenses which are incurred for the purposes of the business of permanent establishment including executive and general administrative expenses is to be allowed as a deduction. The ld AR submitted that the fiction created under article 7(2) is for the limited purpose of treating the PE as a separate enterprise for 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 4833, 5094 & 5093/Mum/2024 Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen 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, the ld AR made a detailed submission which has been taken on record. The ld AR further submitted that though the CIT(A) confirmed that the payments are in the nature of FTS, held it as not taxable by placing the reliance on the decision of coordinate bench in the case of BNP Paribas, and that the revenue has not raised any contentions against the same. Accordingly the ld AR submitted that the only issue to be decided in assessee's appeal pertains to the allowability of the impugned payments as deduction in the hands of the Indian Branch of the assessee.

8. The ld. DR on the other hand relied on the order of the AO and the CIT(A).

9. We heard the parties and perused the material on record. During the year under consideration the Indian Branch of the assessee has made payments towards IT Support Services and Management Support Services to Head Office of the assessee. The assessee claimed the said payment as deduction under section 37 of the Act stating that the expenses are incurred wholly and exclusively for the purpose of business. On the contention of the AO that the payment is taxable as FTS in the hands of the assessee, the assessee submitted that the principle of mutuality is applicable and therefore the impugned payment cannot be taxed in the hands of the Head Office. The AO while concluding the assessment held that if the 4833, 5094 & 5093/Mum/2024 Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen principle of mutuality is to be applied then the same is applicable to the Indian Branch as well as the Head Office and therefore the expenses cannot be allowed as a deduction under section 37 in the hands of the Indian Branch. The CIT(A) held that the payments cannot be taxed as income in the hands of the Head Office by placing reliance on the decision of the Co-ordinate Bench in the case of BNP Paribas (supra) however the CIT(A) confirmed the disallowance under section 37 of the Act for the same reason that the principle of mutuality should be applied for the payment made by the Indian Branch to the Head Office also. So the limited issue for our consideration in this appeal is that whether the payments made by the Indian Branch towards IT Support Services and Management Support Services are allowable as a deduction in the hands of the Indian Branch.

10. From the perusal of the orders of the AO and the CIT(A), we notice that the genuineness and whether the expenses are incurred for the purpose of business are not questioned 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.

4833, 5094 & 5093/Mum/2024 Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen 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 which it might be expected to make, if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.

PROTOCOL The Republic of India and the Federal Republic of Germany have agreed at the signing at Bonn on 19th June, 1995 of the Agreement between the two States for the avoidance of double taxation with respect to taxes on income and capital upon the following provisions which shall form an integral part of the said Agreement. With reference to Article 7

(d) It is understood that the deductions in respect of the head office expenses as referred to in paragraph 3 of Article 7 shall in no case be less than those allowable under the Indian Income-tax Act as on the date of entry into force of this Agreement.

(e) No deduction shall be allowed in respect of amounts paid or charged (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of : (i) royalties, fees or other similar payments in return for the use of patents or other rights ; (ii) commission for specific services performed or for management ; and 4833, 5094 & 5093/Mum/2024 Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen (iii) interest on moneys lent to the permanent establishment except in case of a banking institution.

11. Article 7(2) of the DTAA between India and Germany creates fiction purpose of determination of the profits or income of the PE where the PE is to be treated as independent or separate entity from its HO. Article 7(3) provides for deduction of expenses which are incurred for the purposes of the business of PE including executive and general administrative expenses subject to the provisions of the Act. With regard to the allowability of the executive and general 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, provisions of section 44C are not invoked in the case of the assessee.

13. A combined perusal of the Article 7(2) and Paragraph 1(e) of the protocol means that the PE needs to be considered as an independent enterprise for the purpose computing the profit attributable and that there is no restriction to the PE claiming deduction towards payments made to HO unless the expenses fall within clause (i) to (iii) of Paragraph 1(e) of the Protocol. In assessee's case, the nature of expenditure being in the nature of IT support and management services do not fall within clause (i) to (iii) of the Protocol and therefore the restriction provided therein is not applicable. Accordingly in our considered view, the PE being considered as an independent enterprise is to be allowed the deduction towards expenses which are incurred for the purposes of the business of the PE. As regards the restrictions under the domestic law, for the purpose of section 37, the conditions for allowing the deduction are that the expenses should not be capital expenditure or Personal expenses and that the same should be incurred wholly and exclusively for the purpose of business. As already mentioned, the lower authorities have not questioned the genuineness or the business purpose of expenditure. Therefore, there is no reason to deny the assessee's claim towards IT support and management charges paid by Indian Branch to HO as a deduction while computing the profits of the Indian Branch to be taxed in India. We direct the AO to delete the disallowance made in this regard.

4833, 5094 & 5093/Mum/2024 Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen 14. With regard to the issue of impugned payments being in the nature of FTS and whether the same is taxable in India, we notice that the revenue has not contended the relief given by the CIT(A) by placing reliance on the 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

“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.

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 copyrighted article but it was sale of copyright relying upon the decision of CIT vs. synopsis International Ltd.

4. The Appellant prays that the order of the Ld.CIT(A) on the above ground(s) be set aside and that of Assessing Officer be restored.

Payments made to Munich Management Pte. Ltd., Singapore (MMPL)

Disallowance of payment made to Munich Holdings of Australasia Ltd. Sydney (‘MHA’)

“3. The term "royalties" in this Article means payments or credits, whether periodical or not, and however described or computed, to the extent to which they are made as consideration for:

(g) the rendering of any services (including those of technical or other personnel), which make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or design;”

Disallowance of provisions of Unexpired Risk in computation of Book Profit under section 115JB.

4833, 5094 & 5093/Mum/2024 Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen 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 further submitted that 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. The assessee also submitted that provision created is not an unascertained liability and therefore cannot be adjusted while computing the book profits under section 115JB of the Act. The AO did not accept the submissions of the assessee and held that as per clause-(c) of Explanation –(1) to section 115JB of the Act any amount of provision created towards making liability other than ascertained liability have to be added back to the book profits and accordingly made adjustment to the profits computed under section 115JB of the Act. On further appeal the CIT(A) gave relief to the assessee by placing reliance on the decision of the Co-ordinate Bench in assessee's own case for AY 2017-18.

4833, 5094 & 5093/Mum/2024 Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen 5. We deem it fit and appropriate to narrate the facts relevant for the issue in dispute and the basis of disallowance made by the ld. AO in respect of provision for unexpired risks and premium deficiency while computing the book profits u/s 115JB of the Act as under:- a) The ld. AO passed a draft assessment order making an adjustment of Rs. 14,13,00,000/- on account of provision for unexpired risk and premium deficiency reserve of Rs. 7,73,000/- totaling Rs. 14,20,95,000/- for the year under consideration for the purpose of calculating book profits u/s 115JB of the Act. b) The ld. AO in his draft assessment order relied on clause (b) of Explanation 1 to section 115JB(2) of the Act which provides that the amount carried to any reserves, by whatever name called, should be added and held that the entry passed in respect of the reserve for unexpired risk should be added for the purpose of computation of book profit. The ld. AO observed that the word 'any reserve’ in clause (b) of Explanation 1 to section 115JB(2) of the Act refers to all kinds of reserves and encompasses all types and categories and only excludes the reserve specified under section 33AC of the Act. c) The ld. AO observed that the assessee has deferred its income by creating 'the Reserve for Unexpired Risk' but has not deferred the expenditure incurred for earning the same during the year and is accumulating the premium over time by a reserve for unexpired risk without any taxation. The ld. AO observed that the accounting treatment of the assessee does not fulfil the matching concept of accounting. d) Further, the ld. AO while making the adjustment, considered the reserve for unexpired risks as an unascertained liability which is required to be added and included for the purpose of book profits u/s 115JB of the Act. The reliance placed by the assessee on Bharat Earth Movers v. CIT (2000) 245 ITR 428 (SC) was disregarded on the basis that it is in respect of actuarial valuation of leave encashment and not applicable to facts of the assessee.

4833, 5094 & 5093/Mum/2024 Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen 6. We find that the ld. AR submitted that the "Reserve 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 expenses which emerge from unexpired risks covered under insurance contract period. The reserve is calculated using statistical methods and is determined and certified by the actuaries using statistical methods. The certificate as per IRDAI Regulations, 2016 is provided in Form IRDAI-GI-TR, i.e., the statement of liabilities as on 31/03/2017 which is certified by the appointed actuary and statutory auditor of the assessee. Thus, it is submitted that insurance companies are required to provide for reserve for unexpired risk in the books of accounts while preparing financial statements for the year under consideration.

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4. The CIT(A) erred on the facts of the case and in law in holding the sum of Rs.1694500000 being the reserve created for unexpired risk should be considered as reserve for computing the Book Profit under section 115JB of the Income-tax Act." 11.3 The ld DR vehemently relied on the order of the ld AO. In response to this, the ld AR vehemently relied on the order of the ld CITA. 11.4 We have heard the rival submissions. We find that the ld CITA had dealt this issue very elaborately and had given proper finding that the reserve created for unexpired risk need not be added back for the purpose of computation of book profits u/s 115JB of the Act. The revenue was not able to controvert the findings of the ld CITA before us. Hence we find no infirmity in the order passed by the ld CITA in this regard. Accordingly, the Ground No. 4 raised by the revenue for Asst Year 2008-09 is dismissed.

10.1. We further find that this decision of Kolkata Tribunal has been subsequently affirmed by the Hon’ble Calcutta High Court in of 2019.

11. Before we conclude the issue, we would also like to address the issue in dispute that Rule 5 of the First Schedule of the Act specifies the computation mechanism of profits/gains arising from general insurance 4833, 5094 & 5093/Mum/2024 Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen 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 of section 115JB of the Act do not specifically provide for any adjustment in connection with the reserve for unexpired risk and no adjustment is permitted to such profits other than those listed in Explanation 1 to section 115JB of the Act. Reliance in this regard is rightly placed on the decision of Hon’ble Supreme Court in the case of Apollo Tyres Ltd reported in 255 ITR 273 (SC).

12. We further find that the premium deficiency of Rs 773000 has been allowed by the ld. AO under the normal provisions of the Act but the same has been added back while computing book profits u/s 115JB of the Act. As stated supra, this is not an item contemplated to be added in the Explanation 1 to section 115JB(2) of the Act. Hence the revenue grossly erred in adding back the same while computing book profits u/s 115JB of the Act.

4833, 5094 & 5093/Mum/2024 Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen 24. Since the facts pertaining to the year under consideration being identical respectfully following the above decision of the Co-ordinate Bench, we are not inclined to interfere with the decision of the CIT(A) in directing the AO to delete the addition made to the Book Profits computed under section 115JB of the Act.

Order pronounced in the open court on 15-04-2025.