ACIT, CHENNAI vs. M/S. UNITED INDIA INSURANCE CO. LTD., CHENNAI

PER MANJUNATHA.G, ACCOUNTANT MEMBER:

These appeals filed by the Revenue are directed against separate, but identical orders of the Commissioner of Income Tax,

:-2-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 LTU (Appeals), Chennai and pertain to assessment years 2003-04 to 2006-07 and 2008-09 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:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 branches/divisional offices for which they collect premium from the insuring public. The reinsurance is not given by one insurer to the other insurer on the basis of specific solicited action or otherwise, rather it is on the basis of framework of insurance business. As per the Insurance Regulatory and Development Authority of India (IRDAI) regulations, an Indian insurance company is required to take as much as risk on its own account as is possible having regard to its financial strength and volume of business. To the extent an insurance company unable to retain the risk, that portion is reinsured with Reinsurance Companies. As a part of its business strategy, the assessee has taken reinsurance cover with non- resident reinsurer (NRRI) over and above the specific percentage of reinsurance business to be taken with General Insurance Corporation of India in terms of IRDAI regulations. Further, based on the current year business and budget in the next financial year, the assessee decides its reinsurance premium for various lines of business and files a program of reinsurance with the IRDAI, within 45 days before the commencement of the next financial year. The assessee has ceded reinsurance premium to non-resident reinsurer without deduction of tax at source u/s. 195 of the Income Tax Act, 1961.

:-4-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 4. During the course of assessment proceedings, the AO on the basis of details filed by the assessee noticed that the assessee has ceded reinsurance premium to non-resident reinsurer without deduction of tax at source u/s. 195 of the Act and thus, disallowed payments made to NRRI u/s. 40(a)(i) of the Act on the ground that reinsurance premium paid to the NRRI becomes income of the NRRI and held to be accruing and arising in India and therefore chargeable to tax u/s. 5(2)(b) of the Act. The AO further held that the liability cast u/s. 195(1) of the Act, can be discharged by way of deducting tax, or only by taking recourse to sub-section (2) or sub- section (3) of section 195 and not applying to the Assessing Officer. Therefore, the AO opined that income of non-resident reinsurer is taxable in India and consequently, the assessee is liable to deduct TDS as required u/s. 195 of the Act. Since, the assessee has failed to deduct TDS, total reinsurance premium ceded to non-resident reinsurer has been disallowed u/s. 40(a)(i) of the Act.

:-5-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 where the non-resident reinsurers are carrying on their business. The assessee further contended that re-insurance premium is a business profit assessable as business income in the hands of non- resident reinsurers. Further, in certain DTAA between Indian and contracting states there is a specific exclusion of reinsurance premium from the definition of business profits. In some cases, though there is no specific exclusion income of non-resident cannot be taxed in India, unless there is a permanent establishment in India and further the business of the non-residents are carried out from the place where the permanent establishment is there. In absence of any permanent establishment, the business profits cannot be taxed in India in terms of DTAA between India and respective countries.

:-6-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 resident reinsurer has business connection in India and income has deemed to accrue or arise in India in terms of section 5(2) of the Act r.w.s. 9(1)(i) of the Act. The CIT(A) further held that reinsurance is a continuation of the primary insurance and therefore the Indian insurer should be considered as continuation of insurance between primary insurer and insured or sharing insurance risk by the non-resident reinsurers. Therefore, the CIT(A) was of the opinion that the profit and loss from reinsurance is nothing but its share of profit of insurance business and thus, CIT(A) held that income of NRRI is liable to be taxed in India under the Indian Income Tax Act, 1961, 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 Act, the Assessing Officer had rightly disallowed reinsurance premium ceded to NRRI u/s 40(a)(i) of the Act. Being aggrieved by the CIT(A) order, the assessee is in appeal before us.

:-7-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 consequently for failure to deduct TDS u/s. 195, the AO has rightly disallowed reinsurance premium ceded to NRRs u/s. 40(a)(i) of the Act without appreciating fact that the non-resident reinsurer is not allowed to carry out their business in India and further, there is a probation under the Insurance Act, 1938, for the non-resident reinsurer to carry out business in India. The Ld. AR for the assessee further submitted that reinsurance premium ceded to NRR is neither taxable in terms of 5(2)(b) of the Act, nor taxable under the DTAA between India and other contracting states. The provision of section 5(2) of the Act is not applicable, because income of non- resident reinsurer does not accrue or arise in India because they are carrying out their business outside India. The assessee has paid insurance premium to non-resident outside india, because the NRRI does not have any business operations in India, because of specific probation from the Insurance Act, 1938. Therefore, it cannot be said that income of NRRI is accrued and deemed to accrue in India. The Ld. AR further submitted that the income of non-resident reinsurer is not liable to tax in India u/s. 9(1)(i) of the Act, because in absence of any business connection in India income of the non- resident cannot be taxed u/s. 9 of the Act. The NRRI could not be hit by the deeming provisions of section 9(1)(i) of the Act, as clause (a) of sub-section (1) of section 9 provides that in the case of

:-8-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 business of which all operations are not carried out in India, the income of the business deemed under the clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. If no operations of business are carried out in India, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India. In the present case, as per IRDAI regulations, none of the NRRIs should have a business presence in India either directly or indirectly. This is amply evidenced by the IRDAI letter to the CBDT dated 07.05.2008. Therefore in absence of any business connection, question of income deemed to accrue or arise in India in terms of section 9(1)(i) of the Act does not arise.

:-9-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 taxable in India as business profits under Article 7, only if the NRR has a permanent establishment in India. The ambit of what constitutes a permanent establishment is defined in Article 5 as per which it is only the fixed place PE, agency PE and service PE becomes PE of enterprise. In the present case, as per IRDAI regulations, since the foreign re-insurance company is prohibited to carry on business in India, the question of permanent establishment existing in the form of a branch or an office in India does not arise. Further, nowhere in the assessment order, the Assessing Officer has concluded that a PE existing for any of the NRRI to whom the assessee has ceded the re-insurance premium. As regards, the observations of the AO with regard to the agency PE, the Ld. Counsel for the assessee submitted that the question of agency PE does not arise in India, because reinsurance brokers are independent brokers, and they are not dependent either on assessee or the NRRI. Therefore, the question of constitute of assessee PE does not arise. Therefore, in absence of any PE in India, business profits of NRRI cannot be taxed in India and thus, assessee is not liable to deduct TDS u/s. 195 of the Act. Since, the assessee is not required to deduct TDS u/s. 195 of the Act, the question of disallowance of such payment u/s. 40(a)(i) of the Act does not arise. The AO as well as ld. CIT(A) without appreciating

:-10-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 above facts simply sustained disallowance of reinsurance premium ceded to NRRI u/s. 40(a)(i) of the Act. In this regard, the Ld. Counsel for the assessee has filed a detailed written submission which has been reproduced as under: “7. The business of a general insurance is to cover various properties against various covered perils. The policies are issued by various branches/divisional offices for which they collect premium from the insuring public. The premium received on such insurance policy belongs to the insurance company. Insurance is the business of covering risks. 8. Reinsurance business is not given by one insurer to the other insurer on the basis of any specific solicited Action or otherwise, rather it is on the basis of the frame work of Insurance business. 9. As per the Insurance Regulatory and Development Authority (IRDA) regulations an Indian insurance company is required to take as much risk on its own account as is possible having regard to its financial strength and volume of business. To the extent an insurance company is unable to retain the risk, that portion is reinsured with a reinsurance company (situated in India or overseas). In respect of risks accepted by it where the liability is likely to be higher than its capacity to pay, reinsurance arrangement is made in India with other companies and/or with companies abroad carrying on reinsurance business. Thus, the principle of reinsurance is to distribute the risks in such a manner that there is a global spread of risks thereby ensuring that in the event of a large loss, one individual company is not drained and continuity of operations are maintained. It has been the practice worldwide that the reinsurance arrangements are entered into by every company to mitigate the losses beyond one's ability to pay. With the continuing advancement in science and technology, the insurers today are faced with risks more complex in nature, with substantially high values and demanding special types of covers. In the event of any major loss, in order that the insurance company's financial position is not affected, it always enters into reinsurance arrangements with various reinsurance companies (Indian and foreign) with a view to spread the risk amongst the reinsurers so that its share of losses will be within its capacity. The period from the date of occurrence of the accident to final settlement of the claim often extends to number of years. In addition, it is impossible to judge with any accurate degree the maximum probable loss in advance in dealing with risks which has possibility for high aggregation

:-11-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 of limits for total indemnity. As its own protection, therefore, an original Insurer arranges reinsurance with a reinsurer who accepts part of the risk of loss. The reinsurer may be another insurer who either accepts reinsurances in addition to his direct insurance underwriting or he may be a specialist company who only transacts reinsurance business. The Insurer makes the reinsurance arrangement either directly with the reinsurance company or through an intermediary (a reinsurance broker). The increased business all the more requires the need for reinsurance protection which out of necessity had to be arranged in foreign markets. The transfer of risk and consequent remittance of premium to foreign insurers is not a commercial operation in a true sense but, a risk management operation with the sole purpose of ensuring entity's survival and continuity and also to avoid extreme swing in the operational results. Thus, by resorting to reinsurance operations, the insurer brings about stability in its bottom line. 10. In other words, re-insurance is an arrangement whereby an insurer having accepted a risk, transfers partially to another Company called Reinsurer, in order to reduce its own liability in the event of a loss or damage to the risk. Reinsurer has the same economic objective as insurance generally, i.e. the transfer and consequent elimination or reduction of risk by creation of a wider spread of exposure. Insurance of insured risk is called Reinsurance.

:-12-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 companies and/or with companies abroad carrying on reinsurance business. The principle of reinsurance is to distribute the risks in such a manner that there is a global spread of risks thereby ensuring that in the event of a large loss, one individual company is not drained, and continuity of operations are maintained. Process followed by the assessee with regard to payment of reinsurance premium: 15. Based on the current year business and the budget for the next financial year, the assessee decides its reinsurance program for various lines of businesses and places the same before its Board of Directors for their approval. Depending upon various factors, the Reinsurance Program is finalized by the assessee subject to the approval of the IRDA, who require the assessee to finalize and file with them the reinsurance program for the next Financial Year 45 days before the beginning of that Financial Year. The main factors that are taken into consideration are Probable Maximum Loss for a particular risk, the sums insured for different types of risks, the capacity of the relevant insurer to bear the loss that may arise from any risk, etc. Reinsurance is done in different methods and ways depending upon the nature of the risk or portfolio of the risk to be reinsured. The assessee being a 100% Government owned company, the Indian Government's interest is truly and fully protected and also ensured that the reinsurance program is in line with the policy of the Government of India. 16. The reinsurance business is placed automatically as soon as the stipulated retention capacity of any insurer is exhausted and the insurer has to cede the rest portion as may be specified by the Authority in accordance with the provisions of Part IVA of the Insurance Act, 1938.

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:-14-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 India; and (d) the reinsurance contract is signed outside India by the foreign reinsurer. 26. The salient features of a reinsurance contract and the place of taxability is given in Annexure 6 (page 8). It is submitted that: a.Risk can be taken by a person who is credit worthy. The credit worthiness of a reinsurer depends upon his material worth/financial standing which in the case of a Non-Resident Reinsurer is - admittedly outside India. As the ability to take risk is in a place outside India and any income arising out of such risk undertaken, cannot be said by any stretch of imagination, to be arising in India. b.reinsurance contracts does not affect the relationship between the insured and the direct insurer for the agreement entered between the insured and the cedant does not involve the reinsurer; c.The insurer picks up the risk and he (the insurer) may or may not choose to reinsure it with the reinsurer. d.the contract between the cedant and the insured cannot be linked with the contract which the cedant enters with the reinsurer. e.As the contracts are different which are distinct from each other, in the event of any reinsurer failing to honor the reinsurance contract, the insurer cannot escape from his liability to the direct insured i.e. the liability of the insurer to indemnify the insured is absolute and is not based on reimbursement by the reinsurer for the insurer (the cedant) while accepting an insurance policy is not acting on behalf of the reinsurer but in his own capacity. f.Conversely, the insured has no recourse against any reinsurer in the event of the default of the insurer. In fact, 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 and vice versa. g.Location of the assets to which the primary insurance policy relates to or where the insured perils takes place is not relevant in the contract of reinsurance as the contract of reinsurance is independent to the primary contract of insurance (which is between the insured and the Insurance Company. 27. Reinsurances are done in accordance with the provisions of the Insurance Act, 1938, the Insurance Regulatory and Development Authority (General Insurance - Reinsurance) Regulations 2000 and IRDA guidelines. There does not arise any question of solicitation or procurement of business in regard to the reinsurance given by one insurer to another insurer. Thus, it is a worldwide practice that the reinsurance arrangements are entered into by every company to mitigate the losses beyond one's ability to pay.

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:-16-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 in India (ither through representative offices/Branch Offices/subsidiaries) nor have license from IRDA to operate in India. b. Reinsurance is a contract of risk and neither of goods nor of services and hence does not require rendering of any service or delivery of goods. The NRR can take risks only based on his credit worthiness. The credit worthiness of the NRR depends upon his material worth/financial standing- neither of which is in India. Therefore, the income of the business accrues at the reinsurer's office outside India and he can have no liability to pay Indian income tax on the remittance of reinsurance premium. c.The ability to take risk is in a place outside India and any income arising out of such risk undertaken cannot be said to be arising out of a source in India. d.No activities of the NRR are in India as they are pricing risk/reinsuring outside India and therefore none of their activities are carried in India. e. The payment of claim to the insured is not withstanding the receipt of monies the NRRs clearly amplifies the fact that the payment of claims by the assessee and reimbursement by the NRRs is totally independent. f. The premium accrues to the NRR only when the assessee enters into a contract of reinsurance and not when the primary insurance contract is entered by the assessee. g. The AO's contention that the NRRs would have no income if the assets are not insured is not correct for the NRRs would not have any income only if the assessee does not reinsure its risks.

Taxability of Reinsurance premium in the hands of the NRRs u/s 5 of the Act:

:-17-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 assessee and the NRR and confused the same with the insurance business conducted by the assessee within India. 35. The Assessing Officer and the CIT(A) failed to appreciate that only after having assumed the risk on accepting the insurance policies, the assessee at its option mitigates the same by reinsuring with the NRR and therefore, the point of time when the right to receive premium is vested in the cedant on accepting insurance is certainly not the same for the NRR as the NRR is nowhere in picture at the time of entering the original contract between the Insured and Insurer (assessee).

:-18-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 existence of these assets is real and intimate relation between the business activity of the NRR and the activity within India. 42. The assessee submits that the AO has failed to appreciate that this intimacy of relationship of the assets would hold good only in the case of direct insurance contracts entered between the insured. 43. Non-residents are liable on income deemed to accrue or arise in India under section 9 of the Act. Section 9(1)(i) deems broadly the following income to be income accruing or arising in India: "(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situated in India."

:-19-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 47. The NRR could not be hit by the deeming provisions contained in section 9(1)(i) of the Act, as clause {a) of (i) of subsection (1) of section 9 provides that in the case of a business of which all operations are not carried out in India, the income of the business deemed under the clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. If no operations of business are carried out in India, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India. In the present case: a.As per IRDAI regulations none of the NRRs should have a business presence in India either directly or indirectly. This is amply evidenced by the letter of the IRDAI to the CBDT dated 7 May 2008- copy enclosed in Annexure 10 (pages 14 to 17); b.It is also not the case of the income tax department that the NRRs have operations in India.

Under the Double Taxation Avoidance Agreement (DTAA): 48. Sections 5, 9 and 90 of the Act if read in conjunction, it becomes clear that in the absence of a DTAA between India and another country, taxability of a non resident will be decided in accordance with section 5 and/ or section 9 of the Act and in case of a country with which India has a DTAA it will be decided as per the provisions of the specific DTAA to the extent the DTAA is more beneficial than the provisions of the Act.

:-20-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 52. Further, nowhere in the Assessment order, the Assessing Officer has concluded that a PE exists for any of the NRRs to whom the assessee has ceded reinsurance premium.

Issue of applicability of provisions relating to Tax Deducted at Source (TDS): 55. The AO has made the disallowance u/s 40(a)(i) of the Act because tax has not been deducted on the payments made to the NRRs as per section 195 of the Act.

:-21-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 banks and the CBDT informed RBI that the requirement of obtaining NOC would no more be insisted upon. The RBI was advised that it would be sufficient if, in substitution of NOC from Income-tax department, the remitter furnished to the concerned bank a certificate obtained from a Chartered Accountant (CA). Circular No. 10 of 2002 dated 09 October 2002 issued by CBDT revised the format of undertaking and certificate. In its Circular No. 10, the CBDT clarified that the revision in the format of the undertaking was with a view to streamline the procedure of obtaining the requisite information at the threshold and for the purpose of ensuring correct deduction of tax at source. The CBDT Circular No.4 of 2009 dated 29th June 2009 (Copy enclosed in Annexure 11 (pages 18 to 19)) issued after the new procedure for remittance, effective from 1 July 2009 is also relevant whereby the person making payment can follow the procedure prescribed in the said Circular for making remittance after withholding tax, if any, at the rate specified in the CA certificate. The procedure envisages the contingency of withholding tax being NIL. Thus, it is amply clear from the above that the law makers themselves did not intend the tax payer to go to the Assessing Officer whenever he wanted to make the payment to a person outside India but made it optional on the tax payer to go to the Assessing Officer only in case of doubt on the part of tax payer. This view has been upheld by the Special Bench of the Chennai Tribunal in the case of ITO v. M/s. Prasad Productions Ltd (I.T.A. No.663/Mds/2003 Special Bench).

Whether income is attributable to a business connection- Judgments: 58. The scope of the expression "business connection" has been explained by the Supreme Court in CIT v. R.D. Aggarwal and Co. (1965) 56 ITR 20. The Apex Court held that expression "business connection" means something more than a business and it presupposes an element of continuity between the business of the non-resident and the activity in the taxable territory. Business connection may take several forms; it may include carrying on a part of the main business or activity incidental to the non-resident through an agent or it may merely be a relation between the business of the non-resident and the activity in the taxable territory which facilitates or assists the carrying on of that business. A relation to be a "business connection" must be real and intimate and through or from which income must accrue or arise whether directly or indirectly to the non-resident.

:-22-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 out by the assessee in India as contemplated by clause "a" of the explanation to sec. 9(1)(i) of the Income tax Act, 1961 and hence the income earned by the nonresident assessee could not be deemed to be incomes which had either accrued or arisen in India.

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:-24-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 and Gains from Business". To be more precise, in the case of a payment to a NRR who is a resident of a country with whom India has a DTAA the taxability or otherwise will depend on whether the recipient of the money is having a PE in India through whom it has earned that money. Therefore, even assuming that the profits of the NRRs are to be deemed to have accrued or arisen in India by virtue of section 9 of the Act, the terms of DTAAs will prevail over section 9 of the Act. In effect, the commercial profits, if any of the NRRs are not liable to tax under section 9 of the Act except to the extent permitted by DTAAs. By virtue of section 2C of Insurance Act, only an Indian insurance or reinsurance company holding a valid license can operate in India. Foreign insurers cannot set up an insurance/reinsurance venture in the country. Thus, no foreign insurer has/can be said to have a PE or a branch as stipulated under the Act. Hence taxability of the reinsurance premium in India in the hands of the NRRs does not arise. 65. The applicability of TDS provisions is only in respect of income chargeable to tax has been explained in the judgments of the Supreme Court of India in the cases of Commissioner of Income-Tax v. Eli Lilly & Co. (India) P Ltd (312 ITR 225); GE India Technology Centre Private Ltd Vs CIT (2010-TII-07-SC-INTL) and Vijay Ship Breaking Corporation v. CIT (314 ITR 309). In the aforesaid cases, the Supreme Court has held that taxes would need to be withheld only if the sum payable is chargeable to tax under the provisions of the Act. As in this case it is the contention of the assessee that no portion of payment is liable to tax, the question of application of section 195(2) does not arise because, as the section itself categorically provides that it comes in to play "where the person responsible for paying any sum chargeable under this Act (other than salary to a non-resident) considers that whole of such sum would not be chargeable in the case of the recipient. It would thus follow that for invoking section 195(2) of the Act, the sum that is being paid to the non-resident should be 'chargeable under the provisions of this Act', i.e. whether fully or partly, i.e., the entire sum or the income hidden or embedded therein. 66. In the case of Swiss Re-Insurance Company Ltd v. DDIT (2015- 111-22-1TAT-MUM-INTL), the assessee, a company incorporated in Switzerland received income from providing reinsurance to various cedants in India. It had claimed the re-insurance premium as business income and further claimed that in absence of any Permanent Establishment (PE) in India the entire business income was not taxable in India. During assessment, the AO observed that the assessee through its Singapore Branch had entered into service agreement with SRSIPL for obtaining risk assessment services, market insurance and administrative support in India and in turn remunerate/compensate SRSIPL on a cost+ 12% margin. The AO held that the Indian subsidiary

:-25-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 SRSIPL provides technical and core reinsurance services, therefore, Dependent Agency Permanent Establishment (DAPE) comes into play and since the income of the assessee was being earned from India on a regular and continuous basis, the income was taxable in India in terms of section 9(1)(i). The Mumbai ITAT held that considering the services rendered by SRSIPL in the light of the OECD commentary, SRSIPL cannot be considered as PE of the assessee. To sum up, the assessee does not have any business connection in India in the light of Explanation 2 to section 9(1) of the Act. The assessee does not have any PE in India. The facts on record show that there is neither Service PE nor Agency PE in the form of SRSIPL. Considering the facts in totality in light of the relevant provisions of the law, the DTAA and the judicial decisions, the ITAT set-aside the assessment order and directed the AO not to treat the income of the assessee as taxable under the Act.

International examples as to taxation of Non-Resident Insurance companies:

:-26-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 an independent status to whom paragraph 7 applies". This UN Model provision leading to a permanent establishment for insurance companies collecting premiums in a state is present in 137 of the DTAAs out of the about 800 DTAAs in existence.

Other Submissions: 74. Even assuming but not admitting that the NRR's are liable to be taxed in India on their income u/s 5(2) of the Income Tax Act, 1961 as business income in India, then only net income after deducting

:-27-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 expenses incurred for earning such reinsurance premium income can be taxed in India, i.e. after deducting commission payable to the Indian Insurance Company out of premiums, brokerage payable to Brokers through whom the business is placed (wherever applicable) and claims on account of the said reinsurance business which is retained by them while paying the premium. The books of the assessee clearly reflects underwriting loss year-onyear and hence by the same logic the reinsurer does not make any profits with respect to reinsurance contracts. The details of loss from the insurance operations of the assessee for the assessment years 2003-04 to 2013-14 are given in Annexure 12 (page 20)

:-28-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 9. The Ld. Sr. Standing Counsel Shri. M. Swaminathan appeared for the Revenue, on the other hand, submitted that income of non- resident reinsurer accrue and arise in India in terms of provisions of section 5(2)(b) of the Act, because there is a direct nexus between insurance and reinsurance. In this regard, Ld. Sr. standing counsel filed a detailed written submission which is reproduced as under: “The background to the entire reinsurance transaction can be enumerated as follows; Re-insurance is an arrangement whereby an insurer (untied India Insurance Company Limited) having accepted a risk, transfers either fully or partially to another Company called Reinsurer, in order to reduce its own liability in the event of a loss or damage to the risk. Reinsurer has the same economic objective as insurance generally, i.e. the transfer and consequent elimination or reduction of risk by creation of a wider spread of exposure. Insurance of insured risk is called Reinsurance. The Insurer issues policies covering the risks of its clients (insured) in their own name and not in the name of the re-insurance companies. 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.

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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

:-30-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 6. Further, section 9 of the Income Tax Act, applies to all assessee irrespective of their residential status and place of business. However, where income is actually received or accrued in India resort to the deeming provisions u/s 9 is not warranted, in such case, the provisions contained in Section 5(2) is sufficient to create a charge in respect of non-residents income. Reliance is placed on the decision of Hon'ble MR in the case of Mushtaq Ahmed [176 Taxman 65].

:-31-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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. 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.

:-32-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 irrespective of whether the income accrued or arose in India or outside India, the receipt of such income is taxable in India as per the provisions of Indian Income Tax Law.

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.

:-33-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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.”

:-34-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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 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,

:-35-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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; & 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

:-36-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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.

:-37-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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. Therefore, the Assessing Officer opined that there is service PE and income of NRRI is liable to be taxed in India and consequently, the assessee is liable to deduct TDS u/s.195 of the Income Tax Act, 1961. 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 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

:-38-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 has disallowed reinsurance premium ceded to NRRI u/s.40(a)(i) of the Income Tax Act, 1961.

:-39-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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, 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

:-40-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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 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

:-41-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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.

:-42-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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, 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.

:-43-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 5186/Mum/2009 dated 30.11.2015, where it has been held that insurance broker is an independent broker and not an agent. Therefore, in our considered view reinsurance premium paid to NRRI, where India is having DTAA with other countries without specific exclusion and reinsurance premium paid to NRRI where there is no DTAA with other countries through resident brokers, no income is chargeable to tax in India in the hands of nonresident reinsurers and consequently, no disallowance can be made u/s.40 (a)(i) of the Income Tax Act, 1961. Further, the NRR do not have any business connection in India in any form whatsoever, irrespective of fact whether reinsurance payments are made directly or through resident brokers or non-resident brokers. The NRR being non-resident reinsurance company is expressly prohibited to carry on business in India under the Insurance Act, 1938. Therefore, NRR 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

:-44-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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.

:-45-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 appealed against order of the learned CIT(A) for all assessment years. 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 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

:-46-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 book filed by the assessee. Thus, in our considered view there is not fixed place of PE of NRRs.

:-47-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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 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

:-48-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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: (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.

:-49-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014

(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 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:

:-50-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014

(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 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.

:-51-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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.

(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.

:-52-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014

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 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

:-53-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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 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

:-54-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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 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

:-55-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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 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)

:-56-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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 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

:-57-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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 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,

:-58-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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 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

:-59-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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 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-

:-60-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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 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.

:-61-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014

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 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

:-62-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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, 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

:-63-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 disallowance u/s.40(a)(i) of the Act. Accordingly, assessee succeeds on this ground also.”

:-64-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 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.

:-65-: ITA. No:1673, 1688, 1689, 1691 & 1693/Chny/2011 & 36 7 696/Chny/2014 Order pronounced in the court on 26th August, 2022 at Chennai.

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