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

For the purpose of adjudication we will consider the appeal filed for AY 2020-21 by the assessee and the revenue as lead cases. The assessee is a foreign 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 Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen 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 the same is allowable under section 37 of the Act. The assessee further submitted that the amount received by the Head Office is also not taxable in India on the fundamental principle of one cannot make profit from oneself. The AO did not accept the submissions of the assessee and held that the amount paid by the Indian Branch to Head Office cannot be allowed as a deduction if the principle of mutuality as contended by the assessee when it comes to taxability in the hands of the Head Office is to be allowed. The AO further held that the payments made by the Indian Branch to Head Office are in the nature of Fees for Technical Services and is taxable as per the provisions of section 9(1)(vii) of the Act as well as under the provisions of the DTAA between India and Germany. The AO also held that considering the nature of expenditure towards which the Indian Branch has made payments to Head Office provisions of section 44C of the Act are not applicable. Accordingly the AO disallowed the payments made by the Indian Branch to Head Office under section 37 of the Act. Though the AO has discussed the taxability of the impugned receipts in the hands of the Head Office, the AO did not treat the same as taxable in the order of assessment. The AO also disallowed under section 40(a)(i) of the Act, the payments made by the assessee to Munich Management Pte. Ltd., Singapore and Munich Holdings of Australia Ltd., Sydney for the reason that the said payments are taxable in the hands of these entities in India and that the assessee has failed to deduct tax on the said payments. The AO while computing the book profits of the assessee added the amount of provision for unexpired risk which the assessee has disallowed while computing the income under the normal provisions. Aggrieved the assessee filed further Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen appeal before the CIT(A). The CIT(A) confirmed the disallowance made by the AO towards payments made by the Indian Branch to the Head Office. The CIT(A) deleted the disallowance made under section 40(a)(i) of the Act and the addition made to the book profits under section 115JB of the Act. Both the assessee and the revenue are in appeal against the order of the CIT(A).

The assessee raised the following grounds of appeal:

Erroneous Disallowance of Payment made to Head Office with respect to IT Support Services and Managerial Services.

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 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.

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.

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 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.

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.

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.

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).

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.

Erred in initiating penalty proceedings under section 270A of the Act.

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.”

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. 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 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.

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.

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

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 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.

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 –

(a ) to (c) ****

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 –

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.

Therefore it is not the case of the revenue that the expenses claimed by the assessee are subject to the restrictions of section 44C and therefore, it may not necessary to examine the impugned expenditure in the light of Paragraph (d) of the Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen Protocol. Now coming to Paragraph 1(e) which specifically deals with payments made by PE to HO, we notice that the payments towards Royalties, fees of similar nature, Commission and interest are not to be claimed as a deduction. The exception in this regard is given to the reimbursements and the interest paid by the PE to HO in the case of banking institution.

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. 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.

The grounds raised by the Revenue are as under:

The assessee submitted before the AO that the services availed from Munich Management Pte. Ltd. is in the nature of Regional Support Services, Consultancy Services, IT Support Services and Back Office Support Services and that the services availed from Munich Holdings of Australia Pty Ltd., Sydney is towards IT Support Services. The assessee further submitted that these services are not taxable in India under the Act and since the service providers do not make available the technical knowledge, experience, skill, know-how, etc. even under the DTAA the services rendered by these entities are not taxable in India. The assessee also submitted that these entities do not have a PE in India and accordingly the impugned payments cannot be taxed in India. The AO did not accept the submissions and held that the services rendered by both the entities are in the nature of fees for technical services and therefore taxable in India. The AO disallowed the payments made by the assessee under section 40(a)(i) of the Act for the reason that the assessee did not deduct tax at source. On further appeal the CIT(A) deleted the disallowance by placing reliance on the various decisions of the Co-ordinate Bench and by holding that the condition for taxability as FTS is not applicable considering the nature of services rendered by the enterprises. The CIT(A) further held that the receipts are not taxable as business income in the hands of these entities since they do not have any PE in India.

We heard the parties and perused the material on record. From the perusal of the nature of services rendered by these enterprises to the assessee, we notice that prima-facie they fall under the ambit of fees for technical services involving rendering of technical and consultancy services under section 9(1)(vii) of the Act. However, in order to tax the said payments in India, it is necessary examine Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen whether it is taxable under the DTAA also. As per Article 12 of the India- Singapore 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 that MMPL while providing Managerial support services to the assessee does not make available any technical knowledge, experience or skill to the assessee as MMPL is a regional office providing services to various group entities on a year-to-year basis for the efficient operation of its reinsurance business in their respective juri ictions. It is further noticed that constant support from MMPL to the assessee is required with human intervention and MMPL does not make available any technical knowledge, experience or skill through which the assessee can avail the benefit independently. The ld AR during the course of hearing drew our attention to the decision of the Hon'ble Bombay High Court in Shell India Markets (P.) Ltd v. UOI (2024) 463 ITR 222 (Bom HC) where in the context of the India-UK DTAA it has been held that the consultancy service availed could not be said to be technical services and Article 13 was Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen inapplicable in absence of making available technical knowledge etc and Article 13(4)(c) restricts the services which make available technical knowledge or consist of development and transfer of technical plan or technical design. In view of these discussion and considering the various judicial pronouncements we see merit in the contention of the assessee that impugned payments cannot be considered as FTS and not taxable in India. Accordingly we hold that the assessee is not required to deduct tax at source under section 195 of the Act and that no disallowance under section 40(a)(i) is warranted for non deduction of TDS. We therefore see no reason to interfere with the decision of the CIT(A) in this regard.

MHA is company domiciled and incorporated in Australia. MHA is a Regional Centre for IT support services for the Munich Re group. In India, MHA predominantly provides IT Support services to its group companies which undertake Reinsurance business. The assessee has availed IT support services from MHA which typically include coordination of the use of general software; technical infrastructure support and any other technical support services. The assessee made payment towards IT support services to MHA. The services provided by MHA were (i) APAC IT Hub Infrastructure Support, (ii) ITSC Sydney IT Consulting, managed application and application development, and, (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 Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen 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.

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.

We heard the parties and perused the material on record. Considering the nature of services rendered by MHA, the same would fall within the definition of FTS under the Act. While examining the taxability of the said services under the DTAA between India and Australia we notice that the DTAA does not specifically provide for an article on FTS but Article 12 – Royalties inter alia refers to FTS which reads as under:-

From the plain reading of the above it is clear that only if the services make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen therein, it would fall under Article 12 of the India-Australia DTAA. In the given case, it is submitted that MHA has been providing IT support services to the assessee and it does not make available any technical knowledge, experience or skill to the assessee. It is further submitted that the assessee has been availing these services since the year 2017 on a recurring basis. Accordingly it is argied that had there been any make available of knowledge, experience, know-how etc., the assessee would not need to depend on MHA for IT support services. From the perusal of the facts and in our considered view the MHA does not make available any technical knowledge, experience or skill through which the assessee can avail the benefit independently. Therefore there is merit in the submission that MHA does not make available any technical knowledge, experience or skill to the assessee and accordingly the amount received by MHA towards rendering of these services are not taxable in India. Therefore we see no infirmity in the order of CIT(A) in deleting the disallowance made by the AO under section 40(a)(i) of the Act.

The assessee is regulated by the IRDAI and it maintains books of account as per the IRDAI guidelines. 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. 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. 23. We heard the parties and perused the material on record. Both the parties fairly conceded that the issue is covered by the decision of the Co-ordinate Bench in assessee's own case where it has been held that “3. We have heard the rival submissions and perused the materials available on record. We find that the assessee is a German re-insurance company Munchener Ruckversichrungs Gesellschaft Aktiengesellschaft in Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen Munchen (Munich Re) which provides re-insurance solutions worldwide and operates in three segments namely, non-life reinsurance, life insurance and health solutions. The assessee is registered with Insurance Regulatory and Development Authority of India ('IRDAI') from 01/02/2017 and carries on various activities through its Indian Branch including receipts of premium on re-insurance treaties and purchase / sale of investment as per IRDAI guidelines. The assessee is regulated by the IRDAI and it maintains books of account as per the IRDAI guidelines. 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.

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. The ld. DRP deleted the addition of Rs. 5,32,31,500/- made by the ld. AO under the normal provisions of the Act. This has been accepted by both the assessee as well as the revenue and no appeal is preferred before this Tribunal on the same. 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.

We find that the aforesaid facts and submissions made by the ld. AR remain undisputed and hence the same are not reiterated for the sake of brevity. From the perusal of the above, in our considered opinion, the reserve for unexpired risk does not fall under clause (b) of Explanation 1 to section 115JB(2) of the Act as the premium is recognized 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 the particular accounting period in which the said premium has been received, is separately disclosed in the financial statements. Hence logically that part of income which is attributable to the succeeding Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen accounting period is reduced from the total premiums received during an accounting period by way of creation of a reserve for unexpired risk which is in accordance with the Insurance Act, 1938. In this regard, the ld. AR also submitted that every year adjustments are made to the existing reserve for unexpired risk by way of crediting or debiting the amount of difference between the reserve created in the immediately preceding year and the reserve required to be credited during the current accounting year. Accordingly, we hold that it cannot be considered as any "amount carried to any reserve" debited to the Profit & Loss Account, but it represents that part of premium income which does not relate to the current accounting period. Hence, in our considered opinion, the creation of a reserve for unexpired risk cannot be considered to be similar to those "reserves" which have been referred to in clause (b) of Explanation (1) to section 115JB(2) of the Act. The amount of provision for unexpired risk has been reduced from the net premium received 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.

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.

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 of the assessee have been determined in the manner prescribed in IRDAI Regulations, 2016 and the amount of liabilities are fair and reasonable. Further, the statutory auditor has also certified that the outstanding claims reserves are estimated using statistical methods determined by the Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen actuaries. Based on the above, it is submitted that the regulatory requirement for creation of a reserve for unexpired risk is created using statistical methods under the IRDAI guidelines and certified by the statutory auditor and actuary and, therefore, it is an ascertained liability and it cannot be construed as an adhoc or contingent liability. Hence the same would not fall under clause (c ) of Explanation 1 to section 115JB(2) of the Act also under the category of unascertained liability. We find that the Hon’ble Supreme Court in the case of Bharat Earth Movers reported in 245 ITR 428 (SC) has held that the provision for leave encashment based on actuarial valuation is allowed although the liability may have to be quantified and discharged at a future date. The fact that it is capable of being estimated with reasonable certainty although actual quantification may not be possible and such liability cannot be a contingent one. This decision would be squarely applicable for the reserve for unexpired risk and premium deficiency made by the assessee in the instant case as they are not only estimated but are also derived based on statistical method and the same has been duly certified by the actuary and the auditors of the assessee. Hence we hold that the same should be excluded for the purpose of computing book profit.

Our aforesaid view is also fortified by the decision of Co-ordinate Bench fo Kolkata Tribunal in the case of DC1T v. National Insurance Co.Ltd reported in 72 taxmann.com 116, wherein it was held that a reserve created for unexpired risk in case of general insurance business cannot be added back for the purpose of computation of book profits u/s 115JB of the Act as it does not fall in the category of reserves specified in clause (b) of Explanation 1 to section 115JB(2) of the Act. The relevant facts and the adjudication thereon by the Kolkata Tribunal are reproduced hereunder for the sake of convenience:-

Addition towards Reserve created for Unexpired risk u/s 115JB of the Act The brief facts of this issue is that while computing 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 Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen 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 special nature of the Insurance Business, the Lawmakers prescribed special procedure for Computation of Total Income of an Insurance Company carrying on Business of Insurance other than Life Insurance which are to be found in Rule 5 of the First Schedule to the Income- tax Act, 1961, read with Rule 6E, of the Income-tax Rules, 1962. This particular procedure has to be mandatorily complied with in making the assessment for Income-tax purposes. Every year adjustments are made to the existing Reserve for Unexpired Risk by way of crediting or debiting by the amount of difference between the Reserve created in the immediate preceding year and the Reserve required to be credited during the current accounting year. This cannot be considered as any alleged "Amount carried to any Reserve" debited to the Profit & Loss Account, but it should be appreciated that this Reserve represents that part of Premium Income which does not relate to the current accounting period. It must be appreciated that as per the Mercantile System of accounting, it is only that Income/Expenditure which relate to the current accounting period, should find places in 'the Revenue/Profit & Loss Account of the year. Hence it was submitted that in case of an Insurance Company (carrying on General Insurance Business), the creation of "Reserve for Unexpired Risk" cannot be considered to be similar to those "Reserves" which have been referred to in Clause (b) of Explanation (1) to Section 115JB(2). It may also be appreciated Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen that the "Reserve for Unexpired Risk" can, in any case, not be considered as any provision made for meeting liabilities, other than ascertained liabilities as referred to in Clause(c) of Explanation (1) to Section 115JB(2). On the basis of the above facts it may kindly be appreciated that there has not been any requirement to add back any sum in relation to the "Reserve for Unexpired Risk" while computing "Book Profit" u/s.115JB(2) for the Assessment Year 2008-09. Accordingly, the assessee submitted that the "Reserve for Unexpired Risks" not being of the nature as specified in clause (b) of Explanation 1 to section 115JB(2), the action of the ld AO in making an addition of such Reserve should be held as unjustified. Hence, the assessee submitted that the ld AO may kindly be directed to delete the addition of Rs.169,45,00,000/-made by him in computing the Book 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 section115JB 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 General Insurance business, specifically allows deduction for reserve carried over for Unexpired Risk and Rule 6E of the Income-tax Rules, 1962 provides that such deduction will be allowed to the maximum extent of 50% of the net premium received during the relevant year. Hence, this creation of reserve out of the premium Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen received during the year, is a statutory requirement and the same is duly recognised by the Income-tax Act/Rules. As already mentioned hereinabove, this particular reserve does not fall in the category of those reserves which have been specified in Explanation 1 (b) to section 115JB(2). Therefore, this reserve viz., the reserve for Unexpired Risk in the case of a General Insurance business, should not be added back for the purpose of computation of Book Profit u/s. 115JB(2) for MAT purposes. On the basis of this observation, it was held that the ld AO's action in adding back a sum of Rs.169,45,00,000/- being reserve created for Unexpired Risk, was not in accordance with the relevant provisions of the Income-tax Act, 1961 and accordingly deleted the addition. 11.2 Aggrieved, the revenue is in appeal before us on the following ground:— "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.

1. We further find that this decision of Kolkata Tribunal has been subsequently affirmed by the Hon’ble Calcutta High Court in ITA No. 76 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 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).

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.

In view of the aforesaid observations and respectfully following the judicial precedents relied upon hereinabove, we direct the ld. AO to delete the addition made in respect of reserve for unexpired risk and premium deficiency while computing the book profits u/s 115JB of the Act. Accordingly, the grounds raised by the assessee are allowed. ” 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.

We notice that the Facts pertaining to AY 2021-22 are identical and that the AO has made similar additions for the year under consideration also which is partially deleted by the CIT(A). Considering the facts we are of the view that our decision in AY 2020-21 with respect to both the assesee's and the revenue's appeal will be mutatis mutandis applicable to assessee's and revenue's appeal in AY 2021- 22 also.

In result the appeals of the assessee for both AY 2020-21 & 2021-22 are allowed and the appeals of the Revenue for AY 2020-21 & 2021-22 are dismissed.