ROYAL SUNDARAM ALLIANCE INSURANCE COMPANY LIMITED,CHENNAI vs. DCIT, CHENNAI

आदेश /O R D E R

PER G. MANJUNATHA, ACCOUNTANT MEMBER: This bunch of 6 appeals filed by the assessee and one appeal by the Revenue are directed against the separate, but identical orders of the Commissioner of Income Tax, LTU (Appeals), Chennai and pertains to assessment years 2005-06 to 2010-11. Since, facts and issues are common, for the sake of convenience these appeals were heard together and are being disposed off, by this consolidated order.

:-3-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014

:-4-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 having PE in India because in some cases, the appellant assessee had made payments through reinsurance brokers which constitutes agency PE. The relevant findings of the AO are as under:

“The assesses has filed the return of income on 30.10.2005 by declaring NIL income as per the normal provisions of the Income-tax and shown Book Profit of Rs.5,34,68,536/-. The return was processed u/s.143(1)of the Income-tax Act and subsequently the return was selected for scrutiny under CASS. Notice u/s.143(2) was issued on 19.10.2006 and duly served on the assessee. Since, the case has been notified to the Large Tax Payer Unit, Chennai, the assessee has been given necessary opportunity of being heard by way of issuance of notices u/s142(1) & 143(2) of the Income-tax Act. In response to the same, assessee's representative Shri S. Venugopalan, Assistant Vice President Finance and Shri T.S. Rangarajan, Assistant Manager Taxation, appeared and produced the details called for.

Based on the details submitted by the assesses, the assessment is completed as under

:-5-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 Thus, the income of a non-resident is taxable in India if the income accrues, arises or received in India or if it is deemed to accrue, arise or received in India. In case of deemed accrual or arisen of business income, such part of the income that is attributable to the operations carried out in India would be taxable. Hence, the assessee has been showcaused why the reinsurance ceded to the NonResident Insurers can not be disallowed as per the provisions of section 40(a)(i) of the income tax act. In response to which, the assessee has replied as under, "Section 195 is invoked only if the amount payable is subject to tax under the Indian Income Tax Act 1961. Reinsurance payment made to foreign reinsurers is not subject to tax in India due to the following: No Permanent Establishment Status: As per the Double Taxation Treaty agreement entered into with foreign countries, 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. For eg. The OTTA with Germany consist of the following: "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 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." As per section 90 of the Income tax Act, provisions of OTTA would prevail over the Act provisions and hence no tax needs to be deducted on the reinsurance premium.

[(2) Where the Central Government has entered into an agreement with the Government of any country ciside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assesses to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. Remittances to country with which OTAA is in force - In the case of remittance to a country with which a Double Taxation Avoidance 'Agreement 'is in force, the tax should be deducted at the rate provided

:-6-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 in the Finance Act of the relevant year or at the rate provided in the DTAA, whichever is more beneficial to the assessee Thus no income can deem to have accrued or arises in India to these foreign Re-insurers and hence not subject to TDS under section 195. Also, by any reason, a reinsurer cannot be 'deemed to have permanent establishment'. In some of OTTA agreements insurance enterprise in regard to reinsurance is not deemed to have permanent establishment in the contracting state (eg. Swiss). No principal agent Relationship: As regards the principal agent relationship, it would be worthwhile to mention that the two contracts ie., one between the insured/customer and the insurance company and the second between the insurance company and the reinsurers are mutually exclusive contracts. For example, in the event of claim the customer will claim against the insurance company and has no recourse against the reinsurer directly. Only the insurance company, by virtue of its reinsurance contract can claim against the reinsurance company. Thus it must be emphasized before the authorities that these are not back to back arrangements and reinsurance is at the discretion of the insurance company. Hence, the question of the insurance company being treated as an agent of the reinsurer cannot arise". The above reply furnished by the assessee has been carefully considered. In the case of the Reinsurance income of the Non Resident, in the light of the legal position as per the income tax act, the issue of when and where the income accrues or arises is discussed as under: Time of accrual: The reinsurance transaction between the Indian Insurer (II) and the non-resident Reinsurer (NR) is governed by a contract, usually called a 'Cover Note'. As per the terms of the contract, the NR becomes entitled to receive a part of the original insurance premium due to the Insurer, the 'cedant' by way of reinsurance premium. The contract provides that the liability to pay the reinsurance premium by the II to the NR arises as and when the II sells an insurance policy to the person insured in India. Thus, the reinsurance income accrues to the NR as and when the insurance premium income from insurance policies in India accrues to the Insurer. Place of Accrual:

:-7-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 The event of selling the insurance policy by the Insurer takes place in India. This event causes the Reinsurance income to accrue or arise in India. In many cases, even the Reinsurance payments are made in Indian Rupees only. The Broker who receives them, in turn remits the money to the concerned reinsurers. Any liability/loss claim on those Reinsurance transactions also arise in India such claims are made on the reinsurers through the Brokers arranging the transaction. In fact, in most of the Treaty type transactions, what is remitted abroad periodically is the net amount of premium after deducting the claim, commissions, profit commissions etc. Thus, the payments received for granting such reinsurance benefits have accrued or arisen in India only. Hence, they are liable to charge of Income-tax in India. Receipt of Income in India; In the assessee's case, the entire reinsurance premium has been received by the broker located in India on behalf of the NR. The brokers are paid commission by the· NRs in respect of the reinsurance treaties signed by the Indian Insurance companies. The reinsurance transactions are regular and recurring, undertaken by the broker on behalf of the NRs. The payment by the Insurers of the reinsurance premium is made in India to the broker on behalf of the NR. The Brokers settle the claim if any, arising out of such reinsurance contracts and also deduct their commission from the sum so received before remitting the net sum to the foreign reinsurer. Thus, it amounts to constructive receipt of income in India and hence liable to tax here. Hence, it is held for the purpose of sec.5(2) of the Act that the reinsurer income of a NR from Insurer in India; a)accrues and arises in India only; and b)is also received in India wherever the Broker is located in India. Liability of Insurers to withhold tax from Reinsurance Payments paid abroad: Any person responsible for making a payment to a non-resident any sum chargeable to tax under the IT Act shall deduct tax at source at the specified rates. Sub-section (2) of Sec.4, provides that in respect of income chargeable under sub-section (1), income-tax shall be deducted at source where it is so deductible under any provision of the Act. Section 195 of the I.T. Act deals with the deduction of tax in cases where payment is to be made to a non-resident which, inter alia, provides that:

:-8-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 (a) Any person responsible for paying to a non-resident, any interest, or any sum chargeable under the provisions of this Act (other than interest on securities and salary) shall at the time of payment, deduct income-tax thereon at the rate in time. (b) Where the person responsible for paying any sum chargeable under the Act to a nonresident considers that the whole of such sum would not be chargeable in the case of the recipients, he may make an application to the Assessing Officer to determine 'the appropriate proportion of such sums so chargeable' upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable. (c) Sub-section (3) provides that any person entitled to receive any interest or other sum on which income tax is to be deducted under sub- section (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorizing him to receive such interest or other sum without deduction of tax under the subsection. (d) Further, sec.197 provides that the recipient can file an application to the Assessing Officer for a certificate that the total income of the recipient justifies the deduction of income-tax at any lower rates or no deduction of income-tax and the Assessing Officer is satisfied, can grant such certificate as may be appropriate. In the scheme sub-section (1), (2) & (3) of Sec.195 and Sec.197, the expression "any other sum chargeable under the provisions of this Act" would mean "sum" on which income-tax is leviable. In other words, the said sum of chargeable to tax and could be assessed to tax under the Act. That sum may be income or income hidden or otherwise embedded therein. The scheme of tax deduction at source applies not only to the amount paid which wholly bears "income" character but also to gross sums, the whole of which may not be income or profits of the recipient such as payments to contractors and sub-contractors and the payment of reinsurance premium. If so, tax is required to be deducted on the said sum. The purpose of sub-section (1) of sec.195 is to see that where the sum to be paid to a non-resident is chargeable under section 4 of the Act for levy and collection of income-tax, the payer should deduct income-tax thereon at the rates in force. This provision is for tentative deduction of income-tax thereon which is subject to a regular assessment later on. By the deduction of income-tax, the rights of the parties are not in any manner, adversely affected. The Honorable Calcutta High Court in the case of PC.Roy and Co. lnida P Ltd vs ITO reported in 86 ITR 365 had held that the analogous Sec.18(38) of the I.T. Act 1922 contemplated not merely amounts, the whole of which was taxable without deduction, but amounts of a mixed

:-9-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 composition, a part of which only might turn out to be taxable income, as well; and the disbursements, which were of the nature of gross revenue receipts, were yet sums chargeable under the provisions of the Income-tax Act and came within the ambit of section 18(38) of the Act. The rights of the payee or recipient are fully safeguarded under sections 195(2), 195(3) and 197. The only thing which is required to be done by them is to file an applicable for determination by the Assessing Officer that such sum would not be chargeable to tax in the case of the recipient, or for determination of the appropriate proportion of such sum so chargeable, or for grant of certificate authorizing the recipient to receive the amount without deduction of tax, or deduction of income tax at any lower rates or no deduction. On such determination, tax at the appropriate rate could be deducted at the source. If so such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such 'sum' to deduct tax thereon before making payment. He has to discharge the obligation of tax deducted at source'. Following the provisions of sec.195, production of a no objection certificate from Incometax Authorities was required by the Reserve Bank of India for making remittance to a nonresident. As the volume of remittances out of India increased, issuing NOC for every payment became cumbersome. Hence, an alternative solution to this requirement was provided.

The Central Board of Direct Taxes issued Circular No.759 dated 18 November 1997, to dispense with the requirement of a no objection certificate from Income-tax Authorities provided the person making the remittance furnished an undertaking in duplicate accompanied by a certificate from a Chartered Accountant.

The proforma of the undertaking to be given by the remitter and the certificate to be issued by a Chartered Accountant were reconsidered and new formats were prescribed by the Circular No.10/2002 dated 9 October 2002. The persons making the remittances shall have to submit the undertaking and certificates prescribed to the Reserve Bank of India/authorized dealer banks, who shall in turn forward the same to the Assessing Officer mentioned in the undertaking. In the present case, the insurance company did not approach the Income tax Department u/s.195 (2) before remitting the payments to non-residents. Nor they filed the prescribed undertaking along with the certificate from an accountant while making the remittances. This is not in accordance with the existing law.

:-10-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 Further, during the course of the assessment proceedings, the assessee has further emphasized that, the provisions of section 195 shall not be attracted since, the reinsurance premium ceded outside shall not be chargeable to tax in India and there is no Permanent Establishment for the NRs in India. The above submission of the assessee can not be accepted due to the following facts, The Chargeability of any sum paid outside India must be decided by the department and not by the assessee itself: a. It is clear from the provisions of section 195 & section 9 of the income tax act that, eventhough the above sum is chargeable in India; the taxability of the sum paid outside India is subject to the existence of the PE. It is essential to note that, the section 195 of the act concerns only the chargeability of the sum paid and not on the taxability of the entire sum paid to the Non residents outside India. It has been established in the above paragraphs that the reinsurance premium ceded outside India is chargeable to tax as per the provisions of section 195 of the act. Hence, it is mandatory on the part of the assessee to seek permission of the department as per the provisions of Section 195(2) of the Act for the non deduction or lesser deduction of tax, because the chargeability of sum paid is different from the taxability of the above sum. b. Further, as per the decision of Honourable Delhi Tribunal in the case of Van Oordac Jet India P Ltd., Vs ACIT reported in 112 ITD 79, has clearly stated that the assessee can not step into the shoes of the assessing Officer for the purpose of determining the chargeability on the non-resident payments. Hence, it is the obligation on the part of the assessee to deduct the tax at source as per the section 195 of the act & above cited decision of the Hon'ble Delhi Tribunal is squarely applicable in the instant case.

c. It has been established in the earlier paragraphs discussed that the reinsurance premium ceded outside India to NRs by the assessee are chargeable to tax under sec.195 of the act. The Apex Court of the country, in the case of Transmission Corporation of Andhra Pradesh Vs CIT (239 ITR 587) has held that a person making a payment to a non- resident is duty bound under section 195(2) to file an application to the Income-tax Authority, if the payment is not chargeable to tax or a smaller amount is chargeable to tax. If no such application has been

:-11-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 filed, then tax has to be withheld on the whole of such sum. This is a statutory obligation of the remitter. d. Further the following decisions of the Honorable ITAT Chennai are in favour of the department:- (a) Frontier Offshore Exploration India Limited Vs DCIT (ITA No.2037/Mds/06) for A.Y. 2003-04, ITAT Chennai. (b) Poompuhar Shipping Corporation Limited Vs. ITO (109 ITD 226). (c) West Asia Maritime Limted vs ITO Hon’ble ITAT-Chennai. e. Further, it is essential to note that, the Hon'ble Authority for Advance Ruling in the case of Raj iv Malhotra (in Re) reported in 284 ITR 564, has held that even though the services are rendered outside India the remittances shall be taxable based on the facts and circumstances of the case. Hence, it is clear that, if there is no specific circular has been issued by the department to exclude certain specific payments from the purview of the section 195 of the act, it is mandatory on the part of the assessee to deduct tax at source as per section 195(1) of the Act, otherwise, it should seek permission of the department as per the provisions of Section 195(2) of the Act. f. During the assessment proceedings, the assessee representative himself has stated that some of the DTAAs of India specifically excludes the reinsurance remittances which is not chargeable in India. Which indirectly means that, the reinsurance remittances for the other non resident countries shall be chargeable in the source country (India) subject to the provisions of DTAA. Hence, it is mandatory on the part of the assessee to seek permission of the department as per the provisions of Section 195(2) of the Act. Based on the above facts, Reinsurance premium ceded to the non- resident companies either directly or through brokers (Resident Brokers and non-resident Brokers), eventhough there are double taxation avoidance agreements exists between India and other non-resident countries, it is mandatory on the part of the assessee to approach before the department u/s 195(2) of the income tax act to decide the chargeability of the reinsurance remittance , otherwise, the entire remittances shall be disallowed as per the provisions of section 40(a)(i) of the income tax act. Notwithstanding to the above facts, the remittances of reinsurance premium through the reinsurance Brokers constitutes Agent PE of the Non-resident insurance company based on the following facts, It has been observed from the insurance business that,

:-12-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 a) The main advantage of ceding the reinsurance premium through the insurance broker is that the Indian Insurance Broker are known for their skills, knowledge in the insurance business and they have the global network for the purpose of the reinsurance business which benefits the non-resident insurer. b) Since, the non-resident insurers do not having the technical knowledge in the local business (Indian business), the Indian Broker is being acting as an informal agent to help the nonresident to understand the business in India and to get confidence while underwriting. c) Normally, the Indian Insurer remits the entire reinsurance premium to the Indian Insurance Broker who in turn distributes to various non- resident re insurers. Further, as per the IRDA Regulations once the insurance premium is remitted to the Indian Broker, the liability of the Indian Insurer is considered to be discharged. The corresponding IRDA Notification dated 16.10.2002 is reproduced as under,

"23. Segregation of insurance money- (1) The provisions of section 64VB of the Act shall continue to determine the question of assumption of risk by an insurer.

(2) In the case of reinsurance contracts, it may be agreed between the parties specifically or as part of international market practices that the licensed reinsurance broker or composite broker can collect the premium and remit to the reinsurer and/or collect the claims due from the reinsurer to be passed on to the insured. In these circumstances the money collected by the licensed insurance broker shall be dealt with in the following manner:

he shall act as the trustee of the insurance money that he is required to handle in order to discharge his function as a reinsurance broker and for the purposes of this regulation it shall be deemed that a payment made to the reinsurance broker shall be considered as payment made to the reinsurer;"

d) Generally, during the course of making any claim, the insurance broker receive proposal of claims from the Indian insurer and the above claims are being examined by the technical expertise team with the Indian insurance broker and the same will be forwarded to the non resident insurer and based on the above report of the Indian insurance Broker, the non-resident insurer will settle the claim to the Indian Insurer. Hence, in all most all the treaty insurance cases, the proposal given by the Indian insurance Broker will be invariably accepted by the nonresident insurer and only in the facultative resinurance business,

:-13-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 the non-resident insurer will verify the claim of Indian insurer with their technical expertise team. Based on the above facts, the above issue is being concluded as under:

i) As per the decision of the Hon'ble Supreme Court in the case of Commissioner Of Income-Tax, Punjab.Vs R. D. Aggarwal And Company And Another (56 ITR 20) has held that if there is an element of continuity between the business of non-resident and the activity in the taxable territories can be considered as a business connection which is otherwise the permanent establishment in India. In the instant case, the reinsurance transactions are regular and recurring, undertaken by the broker on behalf of the NRs. Thus, the broker in India constitutes an agent of such NRs.

ii) As per the Circular No.23 of 1969, it has clearly stated that "where, however, there is a regular agency established in India for the purpose of purchase of entire raw materials required for manufacture and sale abroad and the agent chosen by reasons of his skill/representation and experience in the line of trade it can be said that there is a business connection in India". The above circular is squarely applicable in the instant case, since the reinsurance brokers are known for their skill, representation and experience in the line of reinsurance trade.

Further, once the reinsurance premium is paid to the Indian insurance Broker, the liability of the Indian Insurer is discharged and during the course of claim, the proposal submitted by the Indian Broker are being examined by the technical expertise team with the Indian insurance broker and the same will be forwarded to the non-resident insurer and based on the above report of the Indian insurance Broker, the non- resident insurer will settle the claim to the Indian Insurer. Which means that the Indian insurance broker is being acting as a agent of the Non resident insurer. Hence, from the above facts, it is clear that the circular No: 23 of 1969 is squarely applicable in the instant case. iii) Further, the reinsurance broker is the person who has signed the cover note of the insurance business can not be simply brush aside with the reason that the same is for the purpose of receipt of commission because, the Insurance broker is being mainly involved in collection of the premium from the Indian insurer and also have a major role in the settlement of the claim. Also, it can be considered that the non resident re insurers are being

:-14-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 using the Indian insurance brokers as a colourable device to circumvent/avoid their presence in India. iv) It is also essential to note that, the reinsurance brokers (agents) in India have been receiving commission for the above purpose from the Non resident reinsurer, which again proves that there is existence of the Principal & agent relationship between the reinsurance agents & the Non resident reinsurer. Further, it is essential to note that the assessee has state by its letter dated 11.09.2008 that, it has ceded an amount of Rs.56,47.745/- to XL Re Ltd, Bermuda during the current year. There is no DTAA exists between India & Bermuda. As per the decision of learned CIT(A) LTU, Chennai in the case of M/s. Cholamandalam MS General Insurance Company Limited vide ITA No.70/2007-08/LTU(A) dtd. 29.8.2008 has held that the reinsurance premium ceded to the NonDTAA countries shall not be allowed, if the same was not subject to the TDS as per the provisions of section 195 of the income tax act. Based on the above facts, it is clear that, the assessee has failed to deduct TDS on the above payments as per the Section 195 of Income tax Act. Further, it did not approach the Income tax Department u/s.195 (2) before remitting the payments to non-residents. Nor they filed the prescribed undertaking along with the certificate from an accountant while making the remittances. In the above circumstances, the entire payment to Non- resident insurers in the form of reinsurance fee for which the TDS has not been made will be disallowed as per Section 40(a)(i) of Income tax Act. Accordingly, the above payment of Rs.30,01,98,343-made by the assessee in contravention to the provisions of section 40(a)(i) is being disallowed and added to the Total Income of the current year.”

:-15-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 reinsurer are not permitted to carry out their business in India as per the provisions of Insurance Act, 1938 and rules made by the IRDAI there under and thus, when they are not permitted to carry out their business in India it cannot be held that non-resident reinsurer is having PE in India and consequently income of non- resident reinsurer is liable to tax in India. Since, income of NRRI is not liable to tax in India either under the Indian Income Tax Act, 1961 or under DTAA between India and respective contracting states, the question of withholding TDS on said payments u/s. 195 of the Act does not arise and consequently payments made to non- resident insurer towards reinsurance premium cannot be disallowed u/s. 40(a)(i) of the Act.

:-16-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 ceded to them, the AO has rightly invoked provisions of section 40(a)(i) of the Act and disallowed the same. He further observed that as regards attribution of profits to NRRI, by taking into account operating margin earned by GIC Re for relevant assessment years opined that it is reasonable to estimate the income of the NRRI at 15% of gross receipts and accordingly directed the AO to re- compute the income of the appellant by estimating 15% profit on total reinsurance premium ceded to the NRRI, except the NRRIs where the relevant DTAA have specifically excluded the taxation of reinsurance premium in India. Being aggrieved by the CIT(A), the assessee as well as the Revenue are in appeal before us.

:-17-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 deduction of TDS u/s. 195, arguments made in the case of M/s. Cholamandalam MS General Insurance Company Ltd is equally applicable to this case as well. Therefore, he has supported arguments of the Ld. Sr. Counsel Shri. Percy J Pardiwalla and submitted that the issue may be decided in light of various arguments advanced by the Ld. Counsel for the assessee and also plethora of judicial precedent cited in support of their arguments.

:-18-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 Re-insurance does not affect the relationship between the insured and the direct insurer, in particular the liability of the insurer (United India Insurance Company Limited ) to indemnify the insured (Client of United India Insurance Company Limited). In the event of any insurer failing to honour the reinsurance contract, the insurer cannot escape from his liability to the direct insured. Conversely, the insured (Client of insurer) normally has no recourse against any reinsurer in the event of the default of the insurer. In fact, most of the time, the insured may not be aware of the existence of reinsurance as the contract of reinsurance is between the insurer and the reinsurer and the insured is not privy to the contract. Reinsurance transactions are done in following 2 ways; (a) Direct Writers - directly with Reinsurance companies situated throughout the world; (b) Through Brokers - brokers act as a conduit pipe in arranging reinsurance between the primary insurers and reinsurers; Reinsurance is done in different methods and ways depending upon the nature of the risk or portfolio of the risk to be reinsured. In India, the IRDA Regulation requires an insurance company to finalize and file with them the reinsurance programme for the next financial year 45 days before the beginning of that FY.

In the present case the Assessee has 3 category of Re- Insurance premium paid (i) NRR's Where DTAA exist (ii) NRR's where DTAA does not exist (iii) Direct Indian

:-19-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 receivable and quantum of commission receivable, etc. If there is no claim from the clients, at the end of the covering period the assessee shall be eligible for-profit commission as per the treaty which has been entered originally with the non-resident.

:-20-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 India, if it is received in order. India. 2 The facts of the case is In the instant case, the entire chartered facilities together insurance premium has been with the entire catch of the received by the Indian Insurer fish were brought to the based on the Rules and Indian Port, the catch was Regulations of the IRDA in India. certified for the human Subsequently the relevant consumption, value and percentage of reinsurance after customs and port premium has been ceded to the clearance the NR received non-resident reinsurer as per the 85% of the catch. terms of the agreement made with the Indian reinsurer. 3 To constitute income the As long as the premium was recipient must have control apportioned and ceded to the over it. So long as the catch nonresident the entire premium was not apportioned, the belonged to the Indian insurer entire catch belonged to the and the non-resident reinsurer tax payer and the NR did not did not have any control over it. It have any control over it. It was only after the ceding of the was only after apportionment premium, the said income in it of the catch, did the property vests with the non-resident in it vest with the NR and the reinsurer and the NR had control NR had control over it. over it. Therefore, the non- Therefore, the NR effectively resident reinsurer effectively received 85% of the catch in received the relevant percentage India, this being the first of the reinsurance premium in receipt in the eye of law and, India. This being the first receipt hence, taxable in India. in the eye of law and hence taxable in India. 4 The NR having received the The non-resident reinsurer charter fee in the form of having received the reinsurance 85% of the catch m India, its premium on a specific subsequent sale and percentage as per the terms of realization outside India does the agreement made m India, its not change the conclusion of subsequent accounting does not its first receipt being in India. change the conclusion of its first receipt being in India. 5 In the facts of the present The non-resident received case, the NR received the reinsurance premium in India at charter fee m India m the specific percentage as per the form of 85% of the catch terms and conditions of the after its valuation, over which agreement over which it alone it alone had control and, had control and therefore was therefore was taxable in taxable in India. India.

:-21-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 6 Since the transaction was Since the transaction was taxable and the Tax payer taxable under law, the tax payer was liable to withhold taxes was liable to withhold tax as per under the provisions of the the provision of Indian Income Indian Tax Law, and not Tax Law and not having done so, having done so, it was rightly the same has to be disallowed u/ assessed as an assessee in s 40(a)(i) of the Act. default.

Therefore, it is clear that under the provisions of the Income Tax Act, 1961, receipt of income in India attracts tax, irrespective of whether the Income accrued or arose in India or outside India. The present Honorable SC ruling provides guidance on taxability of income received in India by a non-resident.

9, As per the decision of the Hon'ble Supreme Court in the case of Commissioner of Income Tax, Punjab Vs RD. Aggarwal & Company And another (56 ITR 20) has held that if there is an element of continuity between the business of non-resident and the activity in the taxable territories can be considered as a business connection which is otherwise the permanent establishment in India. In the instant case, the re-insurance transactions are regular and recurring, undertaken by the broker on behalf of the NRs. Thus, the broker in India constitutes an agent of such NRs. The above circular is squarely applicable in the instant case, since the reinsurance brokers are known for their skill, representation and experience in the line of reinsurance trade.

:-22-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 Insurance broker is being acting as an agent of the Non-resident insurer. 11. Further, the reinsurance broker is the person who has signed the cover note of the insurance business cannot be simply brush aside with the reason that the same is for the purpose of receipt of commission because, the Insurance broker is being mainly involved in collection of the premium from the Indian Insurer and also have a major role in the settlement of the claim. Also, it can be considered that, the non-resident reinsurers are using the Indian Insurance brokers as a colorable device to circumvent / avoid their presence in India. 12. It is also essential to note that the reinsurance brokers (agents) in India have been receiving commission for the above purpose from the Nonresident re-insurer, which again proves that there is existence of the Principal & Agent relationship between the reinsurance agents & the Nonresident re-insurer. Based on the above facts, it is clear that, the assessee has failed to deduct TDS on the above payments as per the Section 195 of Income Tax Act. Also, it did not approach the Income Tax Department u/ s 195 (2) before remitting the payments to non-residents. Nor they filed the prescribed undertaking along with the certificate from an accountant while making the remittance. In the above circumstances, the entire payment to Non-resident insurers in the form of reinsurance fee for which the TDS has not been made will be disallowed as per Section 40(a)(i) of Income Tax Act.”

:-23-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 two separate and distinct contracts. The reinsurance contract is completely independent of contract of insurance between insured and insurer. The term ‘reinsurance’ was not defined under the Insurance Act, 1938 until 2015. However, by Insurance Laws (Amendment) Act, 2015, definition of term ‘reinsurance’ was inserted in the Insurance Act, 1938. As per which, the term ‘reinsurance’ means insurance of part of one insurer’s risk by another insurer, who accepts risk for mutually acceptable premium. Therefore, the assessee being in general insurance business as part of their strategy has taken reinsurance policy with reinsurance companies. Further, every insurance company in India has to place their reinsurance program 45 days prior to commencement of financial year before the IRDAI in terms of para 3.4 of IRDAI (General insurance, Reinsurance) Regulation, 2000, and within 30 days of commencement of the financial year, every insurance company has to file reinsurance treaty slips with IRDAI in terms of para 3.5 of IRDAI (General insurance, Reinsurance) Regulation, 2000. As per IRDAI Regulation, 2000, the insurance companies in India have to mandatorily reinsure with the Indian reinsurer being General Insurance Corporation (GIC). However, over and above specified percentage of reinsurance, general insurance companies in India can have their reinsurance arrangement with foreign reinsurer

:-24-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 in terms of para 3.7 of said regulations. In this case, there is no dispute with regard to fact that the assessee has complied with provisions of Insurance Act, 1938 and regulations made there under by the IRDAI. In fact, the Assessing Officer has accepted fact that the assessee has complied with reinsurance regulations by taking required percentage of reinsurance contract with General Insurance Corporation of India. But disputed reinsurance premium ceded to non-resident reinsurer companies. In the earlier round of litigation, the Tribunal had discussed the issue of payments made to non- resident reinsurer, in light of provisions of section Insurance Act, 1938 and IRDAI Regulations on reinsurance and concluded that the assessee has violated provisions of Insurance Act, 1938 and consequently, reinsurance premium ceded to NRRI is not deductible u/s.37 (1) Of the Income Tax Act, 1961. The matter travelled to the Hon’ble High Court of Madras and the Hon’ble High Court has remanded the issue back to the Tribunal and directed the Tribunal to decide the issue on three points:-

i) Whether the Assessing Officer was right in disallowing reinsurance premium u/s.40(a)(i) of the Act; ii) Whether the CIT(A) was right in rejecting partially the appeal filed by the assessee; &

:-25-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 iii) Whether the CIT(A) was justified in restricting claim of the assessee to 15% instead of confirming order passed by the Assessing Officer. The Hon'ble High Court of Madras also observed that the Tribunal shall decide above questions alone and nothing more and decision shall be taken based on the available material and the assessee & the Revenue are not entitled to place any fresh materials before the Tribunal so as to enable the Tribunal to take decision. Therefore, from the above, it is very clear that controversy with regard non- compliance with provisions of Insurance Act, 1938 and regulations made there under by the IRDAi is put to rest by the Hon'ble High Court and the Tribunal does not have power to examine legality or otherwise of payment made by the assessee to non-resident reinsurance companies. Therefore, issue on hand should be decided only in the context of payment made by the assessee to NRRI in light of provisions of Income Tax Act, 1961, and relevant DTAA between India and other contracting States.

:-26-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 Assessing Officer, income of NRRI are accrued or arose in India and or deemed to have accrued or arose in India, because they have business connection in India in respect of reinsurance business. Therefore, the Assessing Officer held that wherever there is no DTAA between India and other contracting States, to whom the assessee has ceded reinsurance premium, question of examining case with reference to DTAA and more particularly, concept of PE does not arise. Therefore, the Assessing Officer held that in respect of reinsurance premium ceded to NRRI, where there is no DTAA between India and other contracting States, sum paid by the assessee to NRRI is taxable in India in terms of section 5 read with section 9(1) of the Income Tax Act, 1961, and consequently, the assessee is liable to deduct TDS u/s.195 of the Income Tax Act, 1961. As regards REINSURANCE PREMIUM ceded to NRRI where there is DTAA between India and other contracting States, the Assessing Officer was of the opinion that there is agency PE of NRRI in India, because of availing services of insurance brokers by the non-resident insurer companies in India. The Assessing Officer had also taken support from the decision of the Hon'ble Supreme Court in the case of Transmission Corporation of Andhra Pradesh Vs CIT (1999) 239 ITR 587 and observed that a person making payment to non-resident is duty bound under section 195(2) of the Income Tax

:-27-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 Act, 1961 to file an application to the income-tax authority, if payment is not chargeable to tax or smaller amount is chargeable to tax. If no such application is filed, then tax has to be withheld on whole of such sum. The sum and substance of observations of the Assessing Officer is that income of NRRI is taxable in India and thus, the assessee is liable to deduct tax at source u/s.195 of the Act. Since, the assessee has failed to deduct TDS u/s.195 of the Income Tax Act, 1961, the Assessing Officer has disallowed reinsurance premium ceded to NRRI u/s.40(a)(i) of the Income Tax Act, 1961.

:-28-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 received or deemed to have been received or income accrues or is deemed to accrue in India. Further, wherever DTAA applies, income chargeable to tax has to be additionally considered under terms of relevant DTAA. In the present case, reinsurance premium ceded to non-resident reinsurers is not chargeable to tax in India under the Income Tax Act, 1961, because income is not received in India, which is evident from fact that except for payment to Indian brokers in few cases, all other payments of reinsurance premium to NRRI have been paid outside India to non-resident brokers or NRRI bank account. Further, payment to brokers in India would not tantamount to receipt in India, having regard to ratio of the judgment of the Hon'ble Supreme Court in the case of Toshoku Ltd. Vs. CIT (1980) 125 ITR 525 (SC), where it was held that amounts credited in favour of non-resident were not at the disposal or control of statutory agent and therefore, cannot be charged to tax on the basis of receipt of income, actual or constructive in the taxable countries. Further, even assuming for a moment, payment to resident brokers is treated as received in India, but one can avail provisions of the DTAA which are more beneficial whereby premium would be taxed in India only in case PE to foreign enterprise is situated in India. Further, income of NRRI does not accrue or arise in India, because accrual of income is said to take place in country,

:-29-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 where revenue generating functions are carried on. Thus, in respect of sale, it is place where sale takes place, and in case of rendering service, place where service is rendered and in case of interest, where the money is lent etc. In this case, foreign reinsurers do not carry out their business functions in India, in fact, during the relevant assessment years they were statutorily prohibited from doing so. The reinsurance premium they receive is recompensated for risk there may be exposed in which event insurer makes a claim on them, in which event assets of the reinsurer that are situated outside India that were utilized to make good the claim and thus premium accrues where their funds and assets are situated, which is outside India. The source of income of NRRI is also outside India. Therefore, in our considered view observations of the Assessing Officer regarding taxability of reinsurance premium ceded to NRRI in India is absolutely contrary to facts and also well settled law. Further, only activity in reinsurance contract is bearing of risk and activity of indemnifying an Indian insurance company by foreign reinsurer takes place overseas and hence, foreign re- insurers bears risk abroad. Therefore, reinsurance premium paid to NRRI cannot be said to accrue or arise in India. Insofar as observations of the Assessing Officer with regard to reinsurance contracts were signed in India is not relevant as held by the Hon'ble

:-30-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. Vs. DIT (2007) 288 ITR 408 (SC), where it was observed that contract signed in India is of no material consequence, since all activities in connection with off shore supply were outside India and therefore, cannot be deemed to have accrued or arose in India. Further, income may accrue not at place where asset or property is located or where insurer is resident, but where risk is borne. In the present case, the risk is borne where the non-resident reinsurer resides or where he has funds to make good loss. Therefore, insurance premium cannot be said to accrue in India.

:-31-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 the Assessing Officer has heavily based his finding in light of reinsurance brokers insofar as with NRRI, but fact remains that brokers are merely acting as facilitator or communication channel and do not engage themselves in negotiation of terms or finalize percentage of reinsurance contract. The brokers act in their independent capacity as service provider and are neither agents of the assessee nor agents of the NRRI. The Revenue has not brought any material on record to show that brokers are agents of the NRRI. Although, allegations were made that brokers sign treaty, settle accounts and verify claim, but nothing was brought on record by way of evidence before us to justify their stand. Therefore, in our considered view, findings of the learned CIT(A) and Assessing Officer that brokers are agents of NRRI is sans any evidence. Further, brokers have also declared that they merely act as facilitator and do not have any authority to conclude contract. Even the IRDAI (Insurance Brokers) Regulations, 2002, makes it clear that reinsurance agent / broker merely acts as facilitator and do not have authority to conclude contracts on behalf of the NRRI. This apart, amount collected by reinsurance broker in India is only as trustee of insurance money and same is to be held in separate bank account. Therefore, in our considered view, in absence of any authority to conclude contracts on behalf of foreign reinsurer,

:-32-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 brokers cannot constitute business connection of foreign reinsurer in India in terms of Explanation 2 to section 9(1)(i) of the Income Tax Act, 1961.

:-33-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 cannot be said to have any business in India. The reinsurance arrangements between Indian insurer and NRRI are on principal to principal basis and in such scenario; there is no question of any business connection in India. Although, the Assessing Officer observed that place of signing of agreement is material to decide business connection, but it was categorically held by the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. Vs. DIT, 288 ITR 408 (SC) that contract signed in India is of no material consequence. In the present case, signing of reinsurance treaty is either in India or outside India cannot be a ground that income has deemed to accrue or arise in India.

:-34-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 reinsurance premium to various NRR. In some cases, NRR are resident of countries where India is having DTAA and in some cases, NRR are resident of country, where India does not have DTAA with other countries. In case of DTAA with Switzerland, Thailand, Malaysia, Qatar and Kuwait, it excludes reinsurance premium paid to non-resident insurer from the scope of chargeability, as there is no permanent establishment (PE) of non-resident insurer in India. In fact, the learned CIT(A) has deleted disallowance in cases, where there is specific exclusion in the DTAA and the Department has not appealed against order of the learned CIT(A) for all assessment years, except assessment year 2009-10. In our considered view the view taken by the CIT(A) is perfectly in order, because, in those DTAAs there is specific exclusion of reinsurance premium from the ambit of business profits and thus, reinsurance premium ceded to NRRs where there is specific exclusion, same cannot be taxed in India and thus, provisions of section 195 is not applicable while making payments and consequently, the assessee is not required to deduct TDS. In other cases, where there is no specific exclusion of reinsurance premium, said amount can be taxed in India only if foreign reinsurance companies have PE in India. It is the allegation of the Assessing Officer that reinsurer had fixed place of PE or an agency PE or service PE in India. Most of the DTAAs define PE to

:-35-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 mean fixed place of business, through which business of the enterprises is wholly and partly carried on and includes branch, office, factory, workshop etc. In the case of foreign reinsurers to whom the assessee has remitted reinsurance premium during the subject assessment years do not have any fixed place of PE in India and thus, question of fixed place of PE in India within the meaning of Article 5 of the DTAA does not arise. In fact, the assessee has obtained declaration from foreign reinsurers which are part of paper book filed by the assessee. Thus, in our considered view there is not fixed place of PE of NRRs.

:-36-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 considered view that there cannot be said to constitute business connection for agency PE for foreign reinsurers in India. The Revenue has also not placed any material on record to demonstrate that reinsurance brokers constitute agency PE for NRRI under DTAA. Therefore, in our considered view, foreign reinsurers do not have PE or business connection in India under relevant DTAA or the I.T. Act, 1961. Therefore, payments are not chargeable to tax in India and are not liable to deduct tax at source u/s.195 of the Act. Consequently, disallowance u/s.40(a)(i) of the Act is wholly unwarranted. Further, the IRDAI which is regulatory authority of Insurance companies has also written letter dated 07.05.2008 to CBDT stating that NRR having reinsurance arrangements with Indian insurers do not have PE or branch in India. In respect of reinsurance arrangements with brokers, IRDAI has stated that brokers are not agents of NRR and carry out transaction on principal to principal basis. Therefore, even as per understanding of the regulator, reinsurance arrangements with NRR are not chargeable to tax in India. Since, payments made to NRR are not chargeable to tax in India, question of application u/s.195(2) of the Income Tax Act, 1961, does not arise and this principle is explained by the Hon'ble Supreme Court in the case of M/s. G.E.India Technology Centre Pvt. Ltd., 327 ITR 456 (SC), where it was held that

:-37-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 application to deduct TDS arises only if income of non-resident is chargeable to tax in India. The Hon'ble Supreme Court has held that expression ‘chargeable’ under the provisions u/s.195(1) of the Act says that remittance has got to be treated as receipt, whole or part of which is liable to tax in India, if tax is not assessable there is no question of tax at source being deducted. In our considered view, the basis for the Assessing Officer to take support from section 195(2) on the issue of non filing of application to income tax authority to allege that the assessee is liable to deduct TDS on impugned payment is incorrect.

Swiss Re-Insurance Company Ltd vs DDIT – ITA No.1667/Mum/2014 dt .13.02.2015. Summary: In the case of NRRI (Swiss Reinsurance Co. Ltd., Switzerland) the AO sought to tax the NRRI on the ground that it had business connection in India as it received income from providing reinsurance to various insurers in India. The Mumbai Bench of the Tribunal reversing the decision of the AO held as follows:

:-38-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 (a) The subsidiary of the NRRI in India does not constitute PE of its holding company (b) Conditions specified in cl (a) to (c) of Explanation 2 to section Section 9(1)(i) of the Act are not satisfied, therefore, the NRRI does not have any business connection in India. (c) Reinsurance is specifically excluded from the ambit of PE in India-Switzerland DTAA, therefore, there is no PE in India. (d) The services rendered by the subsidiary of NRRI does not constitute a Service PE or Agency PE of the NRRI in India.

Thus, the Tribunal held that the reinsurance premium received by the NRRI from Indian reinsurer is not taxable in India both under the Act and the DTAA.

(ii) DCIT ICICI Lombard General Insurance Co. Ltd. - ITA No. 2769 Mum, 2011 dt. 30/08/20133

Summary: :In the case of the Indian insurer (ICICI Lombard General Insurance Co. Ltd) the AO disallowed a sum of Rs. 5.84 crores paid to the NRRI in respect of reinsurance premium as no tax was deducted under section 195 and the same could not be considered as business expenditure. The CIT(A) held that the payment made to the NRRI was not taxable in India. On appeal by the Revenue, the Mumbai Tribunal, confirmed the order of the CIT(A) and held that the NRRI did not have any PE in India and, therefore, the reinsurance premium was not taxable in India.

(iii) ICICI Lombard General Insurance Co. Ltd. v ACIT- ITA No. 5777/Mum/2011 dt. 14/11/201414

Summary: In the case of Indian insurer (ICICI Lombard General Insurance Co. Ltd) the CIT invoked provisions of section 263 to disallow a sum of Rs. 16.85 crores under

:-39-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 section 40(a)(i) in respect of reinsurance premium paid to NRRI. The Mumbai Bench of the Tribunal following the order of the co-ordinate bench in assessee's own case held that the action of the CIT under section 263 was unwarranted.

(iv) Bajaj Allianz General Insurance Co. Ltd. v DCIT - ITA No. 2560/PN/2012 dt. 03/02/20165

Summary: In the case of Indian insurer (Bajaj Allianz General Insurance Co. Ltd.) the AO disallowed a sum of Rs. 62.67 crores under section 40(a)(i) in respect of reinsurance premium paid to NRRI. The Pune Bench of the Tribunal reversing the disallowance held as follows:

(a) Under re-insurance arrangements, the re-insurer enters into a reinsurance arrangement for a specific reason and the same is an independent contract

(b) Following the decision in Swiss Reinsurance and ICICI Lombard General Insurance Co. Ltd., it was held that the NRRI does not have a PE in India (c) The Tribunal also took into consideration that the NRRI who is JV partner of the assessee, therein, the assessee was not held to be a FE of the NRRI.

ADIT vs AON Global Insurance Service Ltd. - ITA No. 5184- 5186 Mum 2009 dt. 30/11/2015

Summnary :In the case of resident broker (AON Global Insurance Service Ltd) , the Mumbai Bench of the Tribunal held that insurance broker is an independent broker and not an agent. It also held that insurance broker does not carry out any activity on behalf of anyone in India and has no authority to enter into any contract in India . The Tribunal examined the

:-40-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 scope of section 9(l)(i) and the DTAA and held that the insurance agent has no business activity on behalf of the NRRI.

(vi) General Reinsurance AG v DCIT - ITA No. 7433/Mum/2018

Summary: In the case of NRRI (General Reinsurance AG, Germany) the AO sought to tax the NRRI on the ground that it had a business connection and PE in India. The AO in this case held that the reinsurance proposals are procured from the insurance companies or brokers in India, which is a regular and continuous activity, therefore there is business connection. The Mumbai Bench of the Tribunal reversing the decision of the AO held as follows:

(a) The onus is on the AO to establish that the foreign company has a business connection or PE in India. (b) Subsidiary of a foreign company would not be conclusive to say that there exists a PE in India.

(c) Activities of Liaison Office which are in nature of preparatory and auxiliary cannot be construed to be the existence of business connection in India within the meaning of section 9(1)(i) or PE under the DTAA.

(d) The Tribunal rejected the argument of the AO that there is business connection on account of regular and continuous activity. (e) Activities of subsidiary which are merely in nature of support services do not constitute PE of the NRRI. It also found that the subsidiary had no authority to conclude contract or settle claims on its own or on behalf of the NRRI.

:-41-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 (f) The Tribunal also found that in reinsurance arrangements the privity of contract is between the Indian Insurer and the NRRI

(g) The Tribunal also held that the manner and mode of carrying on of the transaction is not the proper test to determine whether there exists a fixed place of business or not.

(h) The Tribunal concurred with views expressed by co- ordinate benches in the case of Swiss Reinsurance Co. Ltd., Bajaj Allianz General Insurance Co. Ltd. and Bharati AXA Life Insurance Co. Ltd.

Therefore, on all counts the foreign reinsurance company earning reinsurance premium from Indian Insurance companies was not liable for tax in India.

(vii) ITO v Bharti AXA Life Insurance Co. Ltd. - ITA No. 4805 4808/Mum/2015 dt. 5/07/2017.

Summary: In the case of Indian insurer (Bharti AXA Life Insurance Co. Ltd.) the AO treated the assessee as assessee in default under section 201 for not withholding tax under section 195 for remittance of reinsurance premium made NRRI. The CIT(A) relying on the decision of the co-ordinate Bench of the Tribunal in case of Swiss Reinsurance Co. Ltd. decided in favour of assessee. On appeal before the Tribunal by the Department, the same was dismissed by following the decision in Swiss Reinsurance Co. Ltd.

14.2. The above decisions of various benches of the Tribunal unequivocally hold that the reinsurance premium paid by

:-42-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 Indian insurers to NRRI is not taxable under the Act as well as the DTAA. Therefore, in respect of all categories of reinsurance premium paid to NRRI, income is not chargeable to tax under the Act.

(i) M/s. Tata AIG General Insurance Company Ltd. Vs. DCIT in ITA No.1718/Mum/2020 dated 25.04.2022: 3.17. Let us now examine the applicability of provisions of Section 40(a)(i) of the Act in respect of reinsurance premium paid to foreign reinsurers. We find that the ld. CIT(A) had placed reliance on the decision of Chennai Tribunal in the case of Cholamandalam MS General Insurance Co. Ltd to drive home the point that the said payment shall be liable for deduction of tax at source in terms of Section 40(a)(i) of the Act. We find that though the Hon‟ble Madras High Court in para 26 had held that Chennai Tribunal decision in confirming the action of the ld. AO in invoking provisions of Section 40(a)(i) of the Income Tax Act was not supported with any reasons, finally in para 28, the Hon‟ble Madras High Court had remanded this question to the Tribunal to decide whether the ld. AO was right in disallowing the reinsurance premium u/s. 40(a)(i) of the Act. Hence, that question needs to be decided by the Tribunal. Accordingly, the issue of applicability of provisions of section 40(a)(i) of the Act is adjudicated by us independently. We find that the Co-ordinate Bench of this Mumbai Tribunal in the case of DCIT vs. ICICI Lombard General Insurance Co. Pvt. Ltd., in ITA Nos. 6837 & 6832/Mum/2014 for A.Y. 2005-06 and 2009-10 vide order dated 04/10/2016 had adjudicated the very same issue in respect of payments made to M/s. Odyssey America Reinsurance Corporation, Singapore for providing reinsurance business, without deduction of tax at source and applicability of provisions of Section 40(a)(i) of the Act. We find that the Tribunal in the aforesaid case placed reliance in assessee‟s own case for A.Y.2004-05 reported in 152 ITD 855 and also in yet another case rendered in the context of revision proceedings u/s.263

:-43-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 of the Act in ITA No.5777/Mum/2011, had quashed the revision proceedings u/s.263 of the Act by observing as under:- ―2.3. Thus, the Tribunal by the aforesaid order held that invocation of revisional jurisdiction was not valid. In view of this uncontroverted factual matrix, the appeal of the Revenue is dismissed as infructuous.‖ 3.18. We further find that the Co-ordinate Bench of this Tribunal in the case of General Reinsurance AG, General Reinsurance AG India Branch vs. DCIT in ITA No.7433/Mum/2018 for A.Y.2015-16 dated 14/06/2019 had an occasion to address the same issue from the perspective of the recipient foreign company. In the said Tribunal order dated 14/06/2019, in para 5, this Tribunal had categorically stated that assessee company in that case had challenged the decision of the income tax authorities in treating the receipt of reinsurance premium as taxable in India. Hence, the question that was raised before Mumbai Tribunal in that said case was from the perspective of foreign reinsurance company. The decision rendered thereon could be made applicable to the assessee‟s case before us also by drawing the same analogy. The relevant operative portion of the judgement is reproduced hereinbelow:- ―11. We have carefully considered the rival submissions and perused the relevant material and record. As our discussion in the earlier paras show, the substantive dispute in this appeal relates to the taxability or otherwise in India of the reinsurance premium earned by the non- resident foreign assessee by underwriting the risks of various Indian insurance companies. It is not in dispute that the appellant before us is an entity incorporated in Germany and is a tax resident of Germany. The manner in which the reinsurance premium is earned by the assessee is also not in dispute. But to recapitulate, we may note that the appellant is a global re-insurance company which has entered into re-insurance contracts with various Indian insurance companies. For underwriting the risks of the Indian insurance companies, assessee earns reinsurance premiums, which is the subject-matter of dispute before us. So far as the nature of receipts in question is concerned, there is a convergence between the

:-44-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 assessee and the Revenue that the same are in the nature of business receipts. It is quite well understood that in such like cases where the foreign company earns business income, the same can be taxed in India only if it has a PE in India or 'business connection' so as to fall within the scope of Indian tax laws. At the outset, it has been asserted by the appellant before us that in such situations, the onus is on the Revenue to establish that the foreign company has a 'business connection' or a PE in India so as to invite any tax liability under the Indian tax laws. Ostensibly, the aforesaid is supported by the judgment of the Hon'ble Supreme Court in the case of E funds IT Solution Inc vs ADIT, (2017) 86 taxmann.com 240. Therefore, in this background, we may now examine the facts of the instant case as to whether such an onus has been discharged by the Revenue or not.” 17. It has been asserted before us that the instant year is the first year when the assessee has filed a return of income as it had some taxable income, while in the past years there was no taxable income. In the past, there was no income other than premium on reinsurance business, yet the existence of LO since 2007 is in the knowledge of the assessing authority and no steps have been taken in any of the earlier years to construe the activities of the LO as constituting a 'business connection' or a PE of assessee in India. The learned representative asserted that it is only in this year that the function of the LO (for part of the year) has been understood by the Assessing Officer to be giving rise to a 'business connection' or existence of PE in India so as to hold that the income from the premium on reinsurance earned by the assessee is taxable in India. In our considered opinion, factually as well as on point of law, we do not find any merit in the stand of the Revenue that the activities of the LO of assessee generate any scope for treating it as a PE of assessee in India or a 'business connection' in India. We say so for the reason that the conditions under which the LO has been allowed to operate clearly bring out that the activities were preparatory or auxiliary in nature and the same cannot lead to determination of a PE in India, considering the provisions of Article 5(4)(e) of the India-Germany

:-45-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 Tax Treaty. As per the statement made by the learned representative at the Bar, the LO has complied with the conditions imposed by IRDA and there is no adverse view determined by IRDA. Thus, on facts we do not find any force in the plea of the Revenue; and, even on the point of law, as has been brought out by the Hon'ble Delhi High Court in the case of National Petroleum Construction Co. (supra), the LO merely acts as a channel of communication between the Head office and the parties in India and cannot undertake any commercial, trading or industrial activity, and thus, the activities of the LO cannot give rise to a 'business connection' within the meaning of Sec. 9(1)(i) of the Act or a PE of the assessee in India, considering that the activities are compliant with the approval granted by IRDA. 18. We may now address the point as to whether the operations of the Indian subsidiary, which have indeed been carried out from India, can be construed as enabling invoking of 'business connection' of the assessee as envisaged under Section 9(1)(i) of the Act or whether the Indian subsidiary constitutes a PE of assessee in India. Article 5(1) of the India- Germany Tax Treaty provides that PE means a fixed place of business through which the business or enterprise is wholly or partially carried on. On this aspect, the case set-up by the Revenue is that the key functions of reinsurance business, namely, actuarial services and underwriting services are provided by the Indian subsidiary. Such discussion is contained in paras 9.7.2 to 9.8 of the final order of the Assessing Officer. On this aspect, we have carefully examined the contentions put forth by the Revenue as well as the material on record, namely, the Master Service Agreement and the Addendum to the Master Service agreement between assessee and the Indian subsidiary and find that the approach of the Assessing Officer is quite misdirected. In fact, the services that have been provided by the Indian subsidiary are support services in the field of actuarial and underwriting functions undertaken by the assessee and not services of actuarial or underwriting of insurance risks per se. We have already quite succinctly noted the nature and scope of the services rendered by the Indian subsidiary in the earlier

:-46-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 paras 12 and 13 above. In fact, the Assessing Officer is grossly wrong in holding in para 9.7.8 of his order that all the functions with respect to the claim settlement are carried out by the Indian subsidiary itself; rather, it is a case where the Indian subsidiary provides support functions and assists the assessee in such matters. The privity of contract is between the assessee and the Indian insurance companies and, it is abundantly clear from the terms of engagement between the assessee and the Indian subsidiary that the Indian subsidiary is not authorised to execute any contract or settle claims on its own or on behalf of the assessee. In fact, there is no factual support for the stand of the Assessing Officer, as there is nothing either as per the Service agreement or any material to say that the Indian subsidiary has provided actuarial and risk underwriting services, which are core and crucial activities of the reinsurance business. Even the use of 'Electronic Underwriting Software' by the Indian subsidiary is a misnomer. The software is a standard tool which is used by global entities of the group for entering the data in respect of the reinsurance transactions of the assessee. The software is owned by the assessee and not the Indian subsidiary, and the software is used by the Indian subsidiary to enter the data of the Indian insurance companies, but no further recommendations are made by the Indian subsidiary. It is only the assessee through its own personnel who examines the proposal and negotiates the terms and conditions of the reinsurance contracts. There is nothing to dispute the assertions of the assessee that the infrastructure, personnel and approvals to carry out reinsurance activities are from outside India. Thus, there is nothing to suggest that the core activities of the reinsurance business of the assessee are carried out in or from India by the Indian subsidiary. 19. Moreover, in the context of Article 5(1) of the India-Germany Tax Treaty, what is essential is to examine whether there exists an assessee's fixed place of business in India or not. Factually or legally speaking, the place of business of Indian subsidiary per-se can in no way be equated to mean the fixed place of business of the assessee

:-47-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 in India. In fact, in this connection, the observations of the Hon'ble Supreme Court in the case of E funds IT Solution Inc (supra) are very apt. In para 12 of its order, the Hon'ble Supreme Court has dealt with in detail, by making reference to the findings of the Hon'ble High Court, and concluded that there was no fixed place PE of the assessee before it on the facts of the case before it.One of the points noted by the Hon'ble High Court was that the foreign company was dependent on the Indian subsidiary for earning its income. This aspect was specifically negated and held not to be a relevant criteria to determine whether there existed a fixed place PE or not. Similarly, the manner and mode of carrying on of transaction was also not found to be a proper test to determine as to whether there existed a fixed place of business or not. Taking a cue from the reasoning approved by the Hon'ble Supreme Court, in the present case too, the mere rendering of support services in connection with actuarial or underwriting services cannot be a ground to say that there exists a fixed place or a PE of the assessee in India. Therefore, on parity of reasoning which prevailed with the Hon'ble Supreme Court in the case of E funds IT Solution Inc (supra), in the present case too, the arguments of the Revenue do not deserve any indulgence. Accordingly, the same are rejected. 20. So far as the case of the Revenue that there is a dependent PE in India is concerned, herein also, the Revenue has merely brushed aside the claim of the assessee that the Indian subsidiary does not have any authority to secure contracts or solicit business on its behalf in India independent of the assessee. According to the Revenue, the Indian subsidiary uses brand name of the assessee while carrying out its activities in India. In our view, the same cannot be a ground to say that there existed a dependent PE in India. In fact, a point which has been emphasised before us is that the assertions of the Revenue that the Indian subsidiary has a decision making authority is a mere bald assertion and is devoid of any factual support. We have perused the order of the Assessing Officer as well as of the DRP and find that the assertions of the assessee in this regard have been completely

:-48-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 brushed aside. The income- tax authorities have not referred to any particular arrangement or agreement or any other piece of evidence to show that the Indian subsidiary could enter into contracts or was authorised to enter into any business in India on behalf of the assessee. Considering that it was imperative for the Revenue to bring out instances where the Indian subsidiary had concluded contract or secured orders on behalf of the assessee, we find that such burden has not been discharged by the Revenue. In fact, at the time of hearing, the learned representative for the assessee referred to an illustrative agreement placed at pages 28 to 102 of the Paper Book, which is a reinsurance arrangement with SBI Group Life, which has been entered into by assessee and the Indian insurance company, i.e. SBI Group Life directly. Therefore, factually also, we find no support for the case of the Revenue that the Indian subsidiary constitutes a dependent PE of assessee in India. 21. Before we conclude, we may also refer to some of the precedents which have been cited before us in order to establish that in somewhat similar situations, foreign companies engaged in reinsurance business have not been found to be having a fixed PE or an agency PE in India in the form of an Indian subsidiary.

(ii) In this context, reference has been invited to the decision of the Mumbai Bench of the Tribunal in the case of Swiss reInsurance Co. Ltd. vs DDIT(IT), [2015] 55 taxmann.com 520 (Mumbai - Trib.), which according to the learned representative, is directly on the point. We have perused the said decision and find that the factual matrix which prevails in the instant case before us is similar to what has been considered in the case of Swiss re-Insurance Co. Ltd. (supra). In para 2.1 of the order, the relevant facts have been noted and the discussion reveals that the facts before us are quite similar to the case before our co-ordinate Bench. It was the case of a reinsurance company based in Switzerland which was receiving income for providing reinsurance to various insurance companies in

:-49-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 India. Swiss re-Insurance company had a wholly owned subsidiary in India which was rendering administrative, market intelligence and other risk assessment services, which is quite similar to the services being rendered to assessee before us by its Indian subsidiary. Therein also, the appellant was remunerating its Indian subsidiary on the basis of cost plus mark-up. Therein also, the Assessing Officer had sought to tax the income by invoking 'business connection' in terms of Sec. 9(1)(i) of the Act as well as treating the Indian subsidiary as a PE in India. In nutshell, the facts as well as the dispute before our co-ordinate Bench in the case of Swiss re- Insurance Co. Ltd. (supra) stood on a similar footing as is the case before us. Our co- ordinate Bench considered the provisions of Explanation-2 to Sec. 9(1) of the Act as well as the provisions of IndiaSwitzerland DTAA, which was the subject matter before it, and concluded that the foreign company therein did not have any 'business connection' in India or a PE in India. The aforesaid precedent fully supports the inference which has been drawn by us in the earlier paras. Similarly, in the context of Sections 201/201(1A) of the Act proceedings in the ITA Nos. 4805 to 4808/Mum/2015 dated 05.07.2017 in the case of M/s. Bharti-AXA Life Insurance Co. Ltd., the foreign company in India was held not to be liable for tax in India on its reinsurance premium earned from the Indian insurance companies. In fact, our co-ordinate Bench in the case of M/s. Bharti- AXA Life Insurance Co. Ltd. (supra) followed the earlier decision in the case of Swiss re-Insurance Co. Ltd. (supra).

Similar was the situation in the case of Bajaj Allianz General Insurance Co. Ltd., ITA No. 2560/PN/2012 dated 03.02.2016 wherein also, payments by Indian concerns to the foreign reinsurance company was disallowed on the ground of failure to deduct the requisite tax at source. Our co-ordinate Bench held that the foreign reinsurance company earning reinsurance premium from the Indian concerns was not liable for tax in India and, therefore, the

:-50-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 action of the Assessing Officer was set aside. 22. All these decisions as well as our discussion aforesaid enables us to come to a conclusion that the income-tax authorities have erred in holding that there exists a 'business connection' in India under Section 9(1)(i) of the Act and also that there exists a PE in India within the meaning of Article 5(1) and/or 5(4) of the India-Germany Tax Treaty. In view of the aforesaid discussion, we hereby set-aside the order of Assessing Officer and uphold the stand of the assessee. As a consequence, so far as Ground of appeal nos. 1 to 4 are concerned, the same are treated as allowed. 3.19.

Similar view was taken by the Co-ordinate Bench of Pune Tribunal in the case of Bajaj Alliance General Insurance Co. Ltd. ,vs. DCIT in ITA No.2560/PN/2012 for A.Y.2008-09 dated 03/02/2016 vide paras 26- 43. For the sake of brevity, the relevant operative portion of that Pune Tribunal order is not reproduced herein. 3.20. It is a fact that in the impugned case of the assessee before us, i.e. Tata AIG Insurance, it is not in dispute that foreign reinsurer does not have any place of business or branch or any business connection or permanent establishment in India. Hence, the payments made by the assessee company to the said foreign insurer is not chargeable to tax in India in the hands of the foreign reinsurer in terms of Section 195(1) of the Income Tax Act. Hence, there is no obligation on the part of the assessee payer to deduct tax at source thereon. Reliance in this regard is placed on the decision of the Hon‟ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd., vs CIT reported in 327 ITR 456. Accordingly, the provisions of Section 40(a)(i) of the Act would not come into operation at all. Moreover, these decisions were duly quoted by the assessee before the ld. CIT(A) vide its submission dated 25/02/2020 which was completely ignored by the ld. CIT(A) while adjudicating the issue. 3.21. We further find that the Co-ordinate Bench decision of this Tribunal in Swiss Reinsurance Co. Ltd., vs. DDIT International Taxation, Mumbai reported in 55

:-51-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 taxmann.com 520 (Mumbai Trib.) dated 13/02/2015 for A.Y.2010-11 had also addressed the very same issue. The relevant operative portion of the said order is reproduced hereunder:- “5.3 Assuming that conditions of (i) & (ii) mentioned herein above are fulfilled, we do not find that the employees of SRSIPL are providing services to the assessee as if they were the employees of the assessee. Therefore, condition laid down under Article-5 of the Treaty are also not fulfilled to treat SRSIPL as PE of the assessee. Article 5(4) of the Treaty reads as under:- "Notwithstanding the preceding provisions of this Article, an insurance enterprise of Contracting State shall, except in regard to re-insurance, be deemed to have a permanent establishment in other Contracting State if it collects premiums in the territory of that other State or insures risks situated therein through a person other than an agent of an independent status to whom paragraph 6 applies." 3.22. From the perusal of the relevant clause of Article 5(4) of the treaty reproduced supra, it could be concluded that the said Article is not at all applicable for reinsurer. This is relevant in view of the observations made by the ld. CIT(A) in 4.2.6 as under:- As per the appellant there are certain treaties which provides that insurance business except reinsurance business would be deemed to be a PE of the non resident in the other contracting state. AO has allowed reinsurance premium ceded to such non resident where there is a specific exclusion for the insurance companies from the purview of PE. As a corollary implies that where there is no specific exclusion, the reinsurance business would be deemed to be a PE in the other contracting state.‖ (Underlining provided by this Tribunal) 3.23. We hold that the aforesaid observation of the ld. CIT(A) is incorrect in view of the aforesaid decision of Mumbai Tribunal dated 13/02/2015 and in view of the fact that Article 5(4) of the treaty does not apply to reinsurer. Moreover, the ld. CIT(A) accepts the existence of independent brokers involved and if it is so, it cannot constitute a PE. 3.24. Hence, the entire observations of the lower authorities had been duly addressed in the aforesaid findings by us. At the cost of repetition,

:-52-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 we would like to reiterate the fact that there is absolutely no dispute that the foreign reinsurers does not have any place of business in India / permanent establishment in India / branch established in India / Liaison office in India. Hence, any payment made by the assessee company to such foreign insurers would not be chargeable to tax in the hands of the foreign reinsurers in India in terms of Section 195(1) of the Act. Accordingly, as stated earlier, there would be no obligation on the part of the assessee, being a payer, to deduct tax at source and consequently there cannot be any disallowance u/s.40(a)(i) of the Act. Accordingly, assessee succeeds on this ground also.”

:-53-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 case of Vodafone International Holdings and thus, basis of the CIT(A) to rest his decision on basis of said judgment is no longer justifiable. As regards decision of the Hon'ble Supreme Court in the case of Kanjanganga, we find that facts of the said case is completely distinguishable and only issue which was decided therein was whether there was receipt of income in India which gave rise to a charge. In this case, it was clearly held that sum paid by the assessee to NRR is not taxable in India under the Act as well as DTAA between India and respective countries and thus, case laws relied upon by the Assessing Officer on the issue is incorrect.

:-54-: ITA. No:1356 /Chny/2013, 1626, 1628, 1629, 1630 & 1666/Chny/2011 & 2310/Chny/2014 delete additions made towards disallowance of reinsurance premium ceded to NRRs.

Order pronounced in the court on 26th August, 2022 at Chennai.

Sd/- Sd/- (जी. मंजुनाथ) (वी दुगा� राव) (MANJUNATHA.G) (V. DURGA RAO) लेखासद�य/Accountant Member �या�यकसद�य/Judicial Member

चे�ई/Chennai, �दनांक/Dated, the 26th August, 2022 JPV आदेश की �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकर आयु� (अपील)/CIT(A) 4. आयकर आयु�/CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF