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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI ANIKESH BANERJEE, JM &
IN THE INCOME TAX APPELLATE TRIBUNAL “I” BENCH, MUMBAI BEFORE SHRI ANIKESH BANERJEE, JM & MS PADMAVATHY S, AM I.T.A. No. 4693/Mum/2023 (Assessment Year: 2021-22)
RGA International Reinsurance DCIT (International Taxation)- Company Designated Activity 4(1)(1) Room No. 1712, 17th Floor, Company, Ireland, C/o Ernst & Young LLP, 17th Floor, Vs. Air India Building, The Ruby, 29 Senapati Bapat Marg, Nariman Point, Dadar (West)-400028 Mumbai-400021 PAN : AADCR1226K. Appellant) : Respondent) Appellant/Assessee by : Shri Anish Thacker a/w Pranay Gandhi & Lekh Mehta, CA : Shri Anil Sant, Sr. DR Revenue/Respondent by Date of Hearing : 13.05.2024 Date of Pronouncement : 22.05.2024 O R D E R Per Padmavathy S, AM: This appeal is against the final order of assessment passed by the Dy. Commissioner of Income Tax, International Tax Circle-4(1)(1), Mumbai [for short 'the AO] dated 31.10.2023 for the AY 2021-22. The only issue contended in this appeal through various grounds raised by the assessee is that its operation does not constitute business connection in India and that neither it has a fixed place
2 ITA No.4693/Mum/2023 RGA International Reinsurance Company Designated Activity Company, Ireland permanent Establishment (PE) nor dependent agent PE in India (DAPE) and therefore, the income earned in India cannot be taxed.
Brief facts with regard to the operations of the assessee are that M/s. RGA International Reinsurance Company Designated Activity Company (assessee) is a foreign company and a tax resident of the Ireland. The assessee is in the business of providing reinsurance services to insurers/ cedants. It is primarily involved in providing reinsurance services for life insurance. The assessee has entered into various reinsurance treaties with Indian insurance companies for underwriting the risk. The assessee receives reinsurance premium, under the reinsurance treaties entered by it with Indian insurance companies. The assessee has also signed a reinsurance support services agreement dated 01.04.2006 with its associated enterprise in India RGA Services India Pvt. Ltd. (RGA Services) by which the Indian entity provides business support underwriting and actuarial support, risk profiling, data synopsis and suggestions for underwriting proposals along with marketing support- marketing research, customer relationship management and administrative assistance to the assessee.
The assessee filed a return of income for AY 2021-22 on 13.03.2022 declaring a total income of Rs. Nil. The case is selected for scrutiny and statutory notices were duly served on the assessee. During the course of assessment proceedings the assessee was requested to submit the details of total receipts during the year under consideration from the reinsurance business and the assessee submitted that that the total premium amount received stands at Rs. 411,39,70,648/. The AO subsequently issued a notice to the assessee to show-cause as to why it should not be held that the assessee has a business connection / PE in India and accordingly business income from India we held to be taxable in India.
3 ITA No.4693/Mum/2023 RGA International Reinsurance Company Designated Activity Company, Ireland The assessee contended that it neither has a business connection nor fixed place PE nor a Dependant Agent PE (DAPE) nor PE under Article-5(7) of the DTAA between India and Ireland. The summary of submissions made by the assessee as extracted from the order of the AO is given below:
“1. The agreement with RGA Services is on a principal to principal basis. It performs its activities in an independent manner and under limited control and supervision of the assessee, 2. RGA Services renders services to other associated enterprises within RGA Group and hence it is not economically dependent on the assessee, 3. RGA Services does not conclude the terms of the reinsurance treaties or enter into any contracts with any insurance companies. 4. RGA Services does not secure contracts for and on behalf of assessee 5. The reinsurance treaties are signed in Ireland 6. RGA Services does not negotiate on the fee and terms and conditions of the reinsurance treaties 7. The terms and conditions are agreed and concluded between the assessee and Indian insurance companies 8. RGA Services does not decide the price to be quoted to the Indian Insurer 9. The activities carried out by RGA Services are preparatory / auxiliary in nature 10. Assessee remunerates RGA Services on arms length basis (cost mark up) 11. Automatic renewal of treaties with Indian insurers does not constitute PE/ business connection” 4. The AO after considering the submissions of the assessee in the draft assessment order held that the services rendered by RGA Services are vital and primary business functions and are not in the nature of auxiliary or preparatory.
4 ITA No.4693/Mum/2023 RGA International Reinsurance Company Designated Activity Company, Ireland The AO further held that assessee is taking the necessary decisions on reinsurance based on the support activities carried on by RGA Services and therefore the activities gives rise to creation of Fixed PE to the assessee in the form of RGA services. The AO also held that RGA Services is DAPE of the assessee for the reason that the operations of RGA services cannot be said to have an independent status. Further the AO held that the as per the modified definition of PE as per multilateral convention to implement tax treaty related measure to prevent base erosion and profit shifting (MLI) between India and Ireland RGA Services would become the PE of the assessee since the services rendered by RGA Services constitute complementary functions that are part of a cohesive business operation. The relevant findings of the AO in draft assessment order are extracted below:
“22.1 As per Multilateral Convention to implement tax treaty related measures to prevent Base Erosion and Profit Shifting(MLI), the DTAA between India and Ireland has been modified. The MLI provisions take effect with respect to all taxes withheld at source on amounts paid or credited to non-residents, where the event giving rise to such taxes occurs on or after 01.04.2020 in India. Hence, the current assessment proceedings have to take in to consideration the changes in definition to PE in Article 5 as under: The following paragraph 4 of the Article 13 of the MLI applies to paragraph 5 of Article 5 of the convention: ARTICLE 13 OF THE MLI-ARTIFICIAL AVOIDANCE OF PERMANENT ESTABLISHMENT STATUS THROUGH THE SPECIFIC ACTIVITY EXEMPTIONS [Paragraph 5 of Article 5 of the Convention] shall not apply to a fixed place of business that is used or maintained by an enterprise if the same enterprise or a closely related enterprise carries on business activities at the same place or at another place in the same [Contracting State] and: (a) That place or other place constitutes a permanent establishment for the enterprise or the closely related enterprise under the provisions of [Article 5 of the
5 ITA No.4693/Mum/2023 RGA International Reinsurance Company Designated Activity Company, Ireland Convention]; or (b) The overall activity resulting from the combination of the activities carried on by the two enterprise at the same place, or by the same enterprise or a closely related enterprise at the two places, is not of a preparatory or auxiliary character, provided that business activities carried on by two enterprise at the same place or by the same enterprise or a closely related enterprise at the two places, constitute complementary functions that are part of a cohesive business operation. 22.2 These provisions specifically deal with scenarios wherein two associated enterprises carry on a combination of activities which constitute complimentary functions that are part of a cohesive business operations. Hence these provisions ensure there is no erosion of taxable base in a country wherein there is artificial segregation of work between two entities to artificially avoids establishment of PE. Hence these changes further supports department's stand that RGA services India Pvt. Ltd constituted a PE of RIRC in India, and RIRC's business income was taxable in India. 23. Further, reliance is placed on the Hon'ble Mumbai High Court held in Blue Star Engineering Co. (Bombay) (P.) Ltd. v. Commissioner of Income-Tax, [1968 SCC OnLine Bom 133: (1969) 73 ITR 283] "It would thus be seen that in order to constitute a "business connection" as contemplated by section 42, there must be an activity of the non-resident in the taxable territories having an intimate and real relation of a continuous character with the business of the non-resident and contributing to the earning of profits by the non-resident in his business. The business connection must undoubtedly be a commercial connection but all commercial connections will not necessarily constitute business connection within the meaning of the concept unless the commercial connection is really and intimately connected with the business activity of the non-resident in the taxable territories and is contributory to the earning of profits in the said trading activity." From the above facts, it is clear that provisions of MLI, the factual and legal matrix makes it amply clear that the assessees PE is established in India. In light of the above discussion, it is hereby held that due to the presence of P.E. of the assessee in India, as well as income arising through business connections from India, the re-insurance premia are liable to tax in India in the hands of the
6 ITA No.4693/Mum/2023 RGA International Reinsurance Company Designated Activity Company, Ireland assessee on a net income basis under the India-Ireland DTAA as well as the Indian Income Tax Act, 1961.”
Accordingly, the AO treated 50% of theincome attributable to India amounting to Rs. 205,59,85,324/- and applying 10% profitability on the same amounting to Rs. 20,56,98,532/- as taxable business income in the hands of the assessee. Aggrieved the assessee raised objections before the DRP. The DRP rejected the objections on the various contentions raised by the assessee and upheld that RGA Services is to be considered as the PE of the assessee and accordingly the income of the assessee is to be taxed in India. The assessee is in appeal against the final order of assessment passed pursuant to the directions of the DRP.
The ld. AR submitted that the revenue has been holding that the income from reinsurance business of the assessee is taxable in India for the reason that the assessee has a fixed PE / DAPE from AY 2015-16 and that the co-ordinate bench has held the issue in favour of the assessee holding that the assessee neither has a fixed PE nor a DAPE in India. The ld. AR further submitted that the contention of the Revenue that whether the modified definition of PE as per the MLI would result in assessee having a PE in India is unique to the year under consideration and needs fresh adjudication. The ld. AR submitted that the reason for holding that the assessee is having a PE in India is that RGA Services which rendering back office support services to the assessee would constitute complementary functions that are part of a cohesive business operation and therefore fall within the definition of PE . The ld. AR further submitted that a careful reading of the relevant Article would mean that they should be in the first place a PE which in assessee's case is not there. The ld. AR also submitted that the assessee does not have a place of business in India since the assumption of risk in the reinsurance
7 ITA No.4693/Mum/2023 RGA International Reinsurance Company Designated Activity Company, Ireland business is outside India. The ld. AR further submitted that for the two Enterprises to fall within the definition of PE as per the said Article they have to carry out complementary functions that are part of a cohesive business operation and that in assessee's case, the assessee and RGA Services are not engaged in the same business i.e. cohesive business operations. The ld. AR also drew our attention to Article-7 of the PLI with respect to insurance business where reinsurance business is exempted for establishing a PE as an Enterprise which collects premiums in the contracting state towards insuring the risk in the other contracting state. The ld. AR therefore, submitted that even on that count it cannot be held that the assessee is having a PE in India.
The ld. DR made a detailed written submission in support of the order of the lower authorities and the same is taken on record.
We have heard the parties and perused the material available on record. We noticed that for the year under consideration the revenue has held the income earned by the assessee as taxable in India on three count viz., (i) that the assessee is having a fixed PE in India (ii) that RGA Services is the DAPE of the assessee (iii) as per the modified definition of PE under the MLI between India and Ireland RGA Services should be considered as the PE of the assessee. The first two contentions of the Revenue have already been considered by the co-ordinate bench of the Tribunal in assessee's own case for the immediately preceding assessment year i.e. AY 2020-21 (ITA No. 3254/Mum/2023 dated 31.01.2024) where it has been held that
“9. We have heard both the parties and also perused the observation and finding of the ld. AO and ld. DRP as well as Tribunal orders for earlier years. First of all the
8 ITA No.4693/Mum/2023 RGA International Reinsurance Company Designated Activity Company, Ireland reason as to why there is no business connection in terms of Section 9(1)(1) of the Act is that-
RGA Services performs its activities in an independent manner RGA Services render services not only to the assessee but also to other Companies within the RGA Group and hence, it is not economically dependent on the assessee. Further, the assessee remunerates RGA Services on an arm's length basis and RGA Services only acts as interface between Indian Cedents and assessee.
Even otherwise this aspect is wholly irrelevant since in a case in which a double taxation avoidance agreement comes into play, such as the present case, the provisions of the Act cannot be pressed into service unless these provisions are more beneficial.
In so far as assessee RGA services does not constitute a fixed place PE in India as per Clause 5 of the treaty on account of the following reasons:-
► RGA Ireland does not conduct any insurance business in India. RGA Ireland does not have any premises or office space for undertaking reinsurance business activity in India. RGA Services does have an office in india, but the Appellant has no control over the said office. No employee of RGA Ireland visited India in the year under appeal.
► The reinsurance treaties are signed by the Appellant outside India. RGA Services does not negotiate the fee and terms and conditions of the reinsurance treaties. The terms and conditions for the treaties are agreed and concluded between the Appellant and the Indian Cedents. RGA Services does not decide the price to be quoted to the Indian Cedents.
Additionally, activities carried out by RGA Services are preparatory/ auxiliary in nature. The Appellant remunerates RGA Services on an arms-length basis (i.e cost mark up of 18%) RGA Services is a separate legal entity having its own personnel. The premises of RGA Services are used for conducting its business operations of rendering marketing and support services from which it derives revenue. RGA Services does not have the regulatory approvals from IRDAI to accept reinsurance, nor does it have the required infrastructure or personnel to undertake reinsurance business. Further RGA Ireland also accepts reinsurance from other jurisdictions as well
9 ITA No.4693/Mum/2023 RGA International Reinsurance Company Designated Activity Company, Ireland Further, only activities in the form of administrative and ancillary support services was provided by RGA Services to RGA Ireland which are provided below
a. Claims Support
RGA Services acts as a communication channel between RGA Ireland and Indian Cedents (w.r.t existing treaties) to obtain and provide clarifications requested by the Indian Cedents from time to time Third party Indian Cedents may approach RGA Ireland for claims settlement (with respect to their existing arrangements) RGA Ireland in turn approaches RGA Services for its assistance with respect to evaluation of the claim settlement request of its clients. RGA Services evaluates the proposal from a medical and a financial perspective. The personnel of RGA Services reviews the documents regarding the medical history of the life reinsured, death records and other claim documents. If required, they could also request for additional documents.
b. Data Synopsis and ancillary support services
The data collected by RGA Services are synopsized for claims request and for facultative underwriting request. Such synopsis is shared with RGA Ireland who in turn takes the final decision to settle claims. Further, the function also includes monitoring of premiums received with respect to various re-insurance policies, amount of premium received during a particular period etc.
►Additionally, it may be noted that the core business activities of RGA Ireland are not undertaken in India through any fixed place. The core business is the bearing of the re-insurance risk. The risk is borne by RGA Ireland which is based on the capital of RGA Ireland which lies in Ireland, i.e., risk is borne outside India and not in India. RGA Ireland has the infrastructure, personnel and capital to carry out reinsurance activities from outside India. Accordingly, the core activity of the Appellant (reinsurance business) cannot be said to be carried out in or from India
► Further, based on the above facts and the definition of preparatory and auxiliary services provided in the Treaty it is submitted that as per the nature of services rendered by RGA Services to RGA Ireland the same qualify to be preparatory and auxiliary services and thus fall in the exclusionary clause for the following reasons.
►RGA Services acts as a communication channel between the Indian Cedents and RGA Ireland RGA Services collects synopsizes and processes the claims information and forwards the same to RGA Ireland. From an Indian regulatory
10 ITA No.4693/Mum/2023 RGA International Reinsurance Company Designated Activity Company, Ireland perspective, Roy Services is not permitted to undertake the core activities i.e reinsurance business in India.
Lastly, with regard to RGA services do not constitute DAPE of RGA IRELAND on account of the following:-
► The agreement between RGA services and RGA Ireland is on a principal-to- principal basis where the role performed by RGA Services is different from RGA Ireland RGA Services renders services to other associated enterprises within RGA Group and hence, it is not economically dependent on the Appellant
► RGA Services does not conclude the terms of the reinsurance treaties or enter into any contracts with any insurance companies RGA Services does not secure contracts for and on behalf of the assessee. The terms and conditions for the treaties are agreed and concluded between the Appellant and the Indian Cedents. RGA Services does not decide the price to be quoted to the Indian Cedents. The activities carried out by RGA Services are preparatory/ auxiliary in nature The Appellant remunerates RGA Services on arms-length basis (ie cost mark up of 18%) RGA Services does not undertake and is not permitted by the IRDAI to undertake reinsurance activities. RGA Services does not undertake core and primary reinsurance services like riskassessment. Further, RGA Services is not a dependent agent of RGA Ireland
►RGA Services acts only as a communication channel between the Indian Cedents and RGA Ireland RGA Services only inputs the data into the system and final decisions of acceptance/ rejections is taken by the assessee. RGA Services does not procure any orders on behalf of RGA Ireland in India. The assessee does not give any detailed instructions or exercise any control on RGA Services with respect to RGA Service's business, and all the contracts are signed by the assessee outside India and by its employees In no circumstances are the contracts signed in India, and RGA Services does not have any authority to conclude any contracts on behalf of the assessee nor does it secure any orders for the assessee.
This contention of the assessee has been accepted by the Tribunal and adjudicated in assessee’s own case in the following manner:-
►AY 2018-19 and 2019-20 in ITA No. 803 and 2330/Mum./2022 dated 6 September 2023 (enclosed at page nos. 56 to 109) wherein it has been held as under
This is not the first time revenue has raised this issue. However, in the previous Assessment Years also the similar issues were raised and the Coordinate Bench has
11 ITA No.4693/Mum/2023 RGA International Reinsurance Company Designated Activity Company, Ireland considered the issue under consideration and decided the issue in favour of the assessee in ITA. No. 1022/Mum/2021 for AY 2017-18 by following the decision in assessee's own case for the A. Y 2015- 16, for the sake of clarity it is reproduced below
In the present case also, it has not even been the case of any of the authorities below that any particular premises were at the disposal of the assessee The DRP has referred to the existence of business connection under section 9(1) of the Indian Income Tax Act 1961, but then that aspect of the matter is wholly irrelevant because in a case in which a double taxation avoidance agreement comes into play, as admittedly, in this case, the provisions of the Income Tax Act 1961 cannot be pressed into service unless these provisions are more beneficial to the assessee The DRP has simply observed that since the core business activities are conducted by RGA India, RGA India constitutes the fixed place PE As we we have seen above, unless a particular place is at the disposal of the assessee, that place cannot be said to constitute the PE of the assessee. In any case, the core reinsurance activity is the assumption of risk, and that assumption of risk has been done outside India. There is thus no occasion to attribute reinsurance profit attribution to RGA India Whatever activities are carried out by RGA India have been duly paid for by the asseseee, and the transfer pricing assessment has accepted that position. Once that position is accepted, there cannot be any further profit attribution for services rendered by the RGA In view of these discussions, and bearing in mind the entirety of the case, we disapprove the stand of the authorities below, and hold that there was no fixed place permanent establishment on the facts of this case. As regards the existence of the dependent agency permanent establishment, that aspect of the matter, In the light of the coordinate bench decision in the case of ADIT Vs Asia Today Ltd [(2021) 129 taxmann.com 35 (Mum)], is wholly tax-neutral and does not, therefore, need our adjudication.
In view of these discussions, we hold that the assessee did not have a fixed place permanent establishment in India, that the question of assessee having a dependent agency PE is wholly academic in the sense that, as the law stands now, the existence of the DAPE is wholly tax neutral in India. Accordingly, the business profits eamed by the assessee on account of the reinsurance business have no tax implications in India. In view of these findings, all other issues raised in the appeal are academic and call for no adjudication as of now"
In the above decision, the Coordinate Bench have considered the issue of existence of business connection u/s. 9(1) of the Act and addressed the issue of
12 ITA No.4693/Mum/2023 RGA International Reinsurance Company Designated Activity Company, Ireland Fixed Place Permanent Establishment and held that unless a particular place is at the disposal of the assessee that place cannot be said to constitute Permanent Establishment of the assessee. Further, they observed that the core reinsurance activity is assumption of risk and that assumption of risk has been done outside India hence there is no occasion to attribute reinsurance profit attribution to RGA Services. Whatever activities are carried out by RGA Services have been duly paid for by the assessee, and the transfer pricing assessment has accepted that position. Once that position is accepted, there cannot be any further profit attribution for services rendered by the RGA Services and they held that there was no fixed place permanent establishment on the facts of this case, with regard to issue of dependent agency permanent establishment (DAPE), they relied on the decision of ADIT v Asia Today Ltd [(2021) 129 taxmann.com 35 (Mum)] and held that it is wholly taxneutral and does not, therefore, need their adjudication Accordingly, they held that the DAPE is wholly academic in the sense and the existence of DAPE is whole tax neutral in India. From the above decision, we observe that the Coordinate Bench has considered the issue of non-existence of Fixed Place Permanent Establishment and however, not given a clear finding on DAPE
However, before us, Ld DR made an elaborate submissions and submitted that the earlier decisions have been given on the basis of the 'single taxpayer approach', holding that once an arm's length payment is made to a dependent agent PE, no further profits can be taxed in the hands of foreign enterprise. By relying on the decision of the DIT (International Taxation) v Morgan Stanley & Co. Inc. (supra) he submitted that there are two taxpayers in the source country which are Dependent agent enterprise and Dependent agent permanent establishment (DAPE). He raised certain issues that the dependent agent performs certain functions on behalf of the foreign principal that cause attribution of risks or assets of foreign principal to host country, Le, country of source country besides performing its own functions for which it is otherwise taxable in India. The Dependent agent is performing additional functions for and on behalf of the foreign company which are not part of its profile and for which it is not being remunerated by the foreign company. He also raised issue of profits/losses may be attributed to the DAPE by host country based on those assets used, risks assumed and functions performed and the DAPE is entitled to deduction in host country for arm's length compensation/remuneration paid to dependent agent enterprise
Ld. DR submitted that Profits can be attributed to DAPE even if arm's length price has been paid to a Dependent Agent. He objected to assertion that 'once the Indian Dependent Agent is taxed on its own income nothing further would be taxable in the hands of the non-resident foreign company' He is of the view that the
13 ITA No.4693/Mum/2023 RGA International Reinsurance Company Designated Activity Company, Ireland functions performed by the RGA Services are intertwined in the various functions of reinsurance activities which has standalone services offered by the RGA Services which was already compensated. However, as per the OECD commentary on Article 7(2) which requires a total factual analysis on the basis of functions performed, assets used and risk assumed. He submitted that OECD emphasis that profit attributable to the DAPE are separate from the profits attributable to the dependent agent itself
Further, he relied on the decision of DIT (International Taxation) v Morgan Stanley & Co. Inc. (supra) to submit that associated enterprise (also constitutes a PE) is remunerated on arm's length basis taking into account all the risk-taking functions of the multinational enterprise. In the risks assumed by the enterprise, in such a case, there would be need to attribute profits to the PE for those functions/hisks that have not been considered.
From the above submissions, we observe that Ld DR harping on the functions performed by the RGA Servers which may be integral part of the reinsurance business wherein the reinsurer may analyse various functions before or after taking reinsurance business which may include claim support, actuarial services, administration and other support services and settlement services which may be part and parcel of the whole insurance business
Ld. DR is of the view that the RGA Services not only provides services but also shares the assets and risk which were not being considering in the TP analyses. We are finding it difficult on this line of argument that the main functions of a reinsurance business is assuming the risk which the main insurer transfers. The whole object of assuming risk is the main business of the reinsurer. From the record we observe that RGA Services offers all sorts of functions and services relating to execution of the reinsurances processes without assuming any risk. Even the tax authorities including Ld. DR has not brought on record any material to show that RGA Services has assumed any risk or invested any assets in executing the reinsurance functions.
Further, we observe that the RGA Services does not have any license from IRDAI to undertake reinsurance business or even to act as a reinsurance broker. It shows that RGA Services can never be allowed to function as a reinsurer or broker in India. It could only offer various functions in the line of reinsurance business. What is relevant to be an agent is the agent should be in a position to replace the principle in executing any contract and should be having the similar level playing role or rights in execution of such contracts, the issue of dependent or independent is
14 ITA No.4693/Mum/2023 RGA International Reinsurance Company Designated Activity Company, Ireland different aspect of analysis. First, the other person is eligible to function as an agent or not as a broker, in the given case RGA Services does not have any recognition in India to conclude any contract in line of reinsurance. Therefore, it can never be allowed to act as an agent in India, not even assume or conclude contract on behalf of the principal i.e. the assessee.
Further, we observe that even Ld. DR has not brought on any material to show that RGA Services has utilized its assets or assumed any risk in this line of reinsurance business. Merely because its whole functions are depend on the services which will be utilized by the Foreign principal does not make it as an dependent agent.
As discussed above, RGA Services is not capable to act as an agent considering the fact they do not have the licence to function as a reinsurance or broker from the IRDAI and also the reinsurance agreements were signed outside India. The provisions of DAPE does not apply to the present case. The various arguments made by the Ld. DR fails in this case, considering the fact that nowhere it is brought on record to show that RGA Services has invested any assets or assumed any risk. Therefore, we are inclined to reject the various submissions made by Ld. DR and allow the grounds raised by the assessee.
In the result, appeal filed by the assessee is allowed."
In so far as ground No.10 is concerned, non-application of MIL, it has been upheld by the ld. AO, we find that said provisions are applicable from 1st April 2020 i.e. F.Y.2020-21 and not for the year under consideration which has been clearly stated in the MIL notification in the following manner:-
Unless it is stated otherwise elsewhere in this document, the provisions of the MLI have effect with respect to the Convention.
• In India:
With respect to taxes withheld at source on amounts paid or credited to non- residents, where the event giving rise to such taxes occurs on or after 1 April 2020; and With respect to all other taxes levied by India, for taxes levied with respect to taxable periods beginning on or after 1 April 2020.”
15 ITA No.4693/Mum/2023 RGA International Reinsurance Company Designated Activity Company, Ireland 9. The alternate contention of the revenue is that the assessee is having a PE as per the modified definition in the MLI between India and Ireland which is applicable from 01.04.2021. Therefore before proceeding further we understand the changes brought into the definition of PE brought in through MLI between various countries including India. The OECD BEPS project included Action 7 which recommended the development of changes to the PE definition in Article 5 of the OECD Model Tax Convention (MTC) and these changes were applied under a new treaty or through the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI), potentially under an existing treaty. The changes aimed to prevent the artificial avoidance of PE status, including through the specific activity exemptions of Article 5(4) in certain circumstances. The OECD specifically wanted to clarify that it is not possible to avoid PE status by fragmenting a cohesive operating business into several small operations in order to argue that each part merely is engaged in preparatory or auxiliary activities. The 2017 OECD Model Tax Convention includes an updated Article 5 within which countries can opt to include additional paragraph 4.1 which would, if implemented, deny the specific activity exemptions. Pursuant to the said recommendation India and Ireland opted to include additional paragraph to Article 5 in the MLI between India and Ireland and the revised Article reads as under –
Not withstanding the previous provisions of this Article, the term “permanent establishment” shall be deemed not to include: (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;
16 ITA No.4693/Mum/2023 RGA International Reinsurance Company Designated Activity Company, Ireland (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; (f) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.
The following paragraph 4 of Article 13 of the MLI applies to paragraph 5 of Article 5 of this Convention: ARTICLE 13 OF THE MLI – ARTIFICIAL AVOIDANCE OF PERMANENT ESTABLISHMENT STATUS THROUGH THE SPECIFIC ACTIVITY EXEMPTIONS Paragraph 5 of Article 5 of this Convention shall not apply to a fixed place of business that is used or maintained by an enterprise if the same enterprise or a closely related enterprise carries on business activities at the same place or at another place in the same Contracting State and: a) that place or other place constitutes a permanent establishment for the enterprise or the closely related enterprise under the provisions of Article 5 of this Convention; or b) the overall activity resulting from the combination of the activities carried on by the two enterprises at the same place, or by the same enterprise or closely related enterprises at the two places, is not of a preparatory or auxiliary character, provided that the business activities carried on by the two enterprises at the same place, or by the same enterprise or closely related enterprises at the two places, constitute complementary functions that are part of a cohesive business operation.
Paragraph 5 of Article 5 contains exceptions to the definition of PE to a list of activities that have a “preparatory and auxiliary” character. A new paragraph is introduced to Article 5 in order to prevent an enterprise or a group of closely related enterprises from fragmenting a cohesive business operation into several
17 ITA No.4693/Mum/2023 RGA International Reinsurance Company Designated Activity Company, Ireland small operations in order to argue that each is merely engaged in a preparatory or auxiliary activity. The newly inserted paragraph applies two types of cases - First, it applies where the non-resident enterprise or a closely related enterprise already has a PE in the source country, and the activities in question constitute complementary functions that are part of a cohesive business operation. The second type of case to which it applies is a case where there is no pre-existing PE but the combination of activities in the source country by the non-resident enterprise and closely related non-resident enterprises results in a cohesive business operation that is not merely preparatory or auxiliary in nature. OECD (2015) Preventing the Artificial Avoidance of Permanent Establishment Status, Action 7 - 2015 Final Report has elaborated the above two scenarios with an example as given below – 30.4 The following examples illustrate the application of paragraph 4.1: Example A: RCO, a bank resident of State R, has a number of branches in State S which constitute permanent establishments. It also has a separate office in State S where a few employees verify information provided by clients that have made loan applications at these different branches. The results of the verifications done by the employees are forwarded to the headquarters of RCO in State R where other employees analyse the information included in the loan applications and provide reports to the branches where the decisions to grant the loans are made. In that case, the exceptions of paragraph 4 will not apply to the office because another place (i.e. any of the other branches where the loan applications are made) constitutes a permanent establishment of RCO in State S and the business activities carried on by RCO at the office and at the relevant branch constitute complementary functions that are part of a cohesive business operation (i.e. providing loans to clients in State S). Example B: RCO, a company resident of State R, manufactures and sells appliances. SCO, a resident of State S that is a wholly owned subsidiary of RCO, owns a store where it sells appliances that it acquires from RCO. RCO also owns a small warehouse in State S where it stores a few large items that are identical to some of those displayed in the store owned by SCO. When a customer buys such a large item from SCO, SCO employees go to the warehouse where they take possession of the item before delivering it to the customer; the ownership of the item
18 ITA No.4693/Mum/2023 RGA International Reinsurance Company Designated Activity Company, Ireland is only acquired by SCO from RCO when the item leaves the warehouse. In this case, paragraph 4.1 prevents the application of the exceptions of paragraph 4 to the warehouse and it will not be necessary, therefore, to determine whether paragraph 4, and in particular subparagraph 4 a), applies to the warehouse. The conditions for the application of paragraph 4.1 are met because SCO and RCO are closely related enterprises; SCO’s store constitutes a permanent establishment of SCO (the definition of permanent establishment is not limited to situations where a resident of one Contracting State uses or maintains a fixed place of business in the other State; it applies equally where an enterprise of one State uses or maintains a fixed place of business in that same State); and The business activities carried on by RCO at its warehouse and by SCO at its store constitute complementary functions that are part of a cohesive business operation (i.e. storing goods in one place for the purpose of delivering these goods as part of the obligations resulting from the sale of these goods through another place in the same State).
Given this background we will now look at the facts pertaining to assessee's case. Since the assessee does not already have a PE, it is to be analysed whether assessee's case would fall within the second leg of the modified definition i.e. the second type of case as stated above. The contention of the revenue is that even if the operations of RGA services considered as preparatory in nature even then the exception would not apply since the services rendered / the activities constitute complementary functions that are part of a cohesive business operation of the assessee and therefore the assessee is having a PE in India. The argument of the assessee is that that all the factors in the definition need to be considered for the purpose of holding whether RGA services can be held to be the PE of the assessee and not just complementary functions that are part of a cohesive business operation. In this regard we notice that the first condition for an enterprise to enter into the non-exemption category is to have a fixed place of business used or maintained by an enterprise, in the same place / other place in the same state where the enterprise or its closely related enterprises carries on business activities. In
19 ITA No.4693/Mum/2023 RGA International Reinsurance Company Designated Activity Company, Ireland other words for the purpose of a case to fall under the above definition, the assessee and the closely related enterprise need to carry on business activities in the same country i.e. India and that the activities should result in cohesive business operation. This view is further strengthened by the examples given in the Final Report as extracted in the earlier part of this order, where in the non-resident enterprise is having a business activity (owning of warehouse in the example) which otherwise would have been claimed to be exempt as a preparatory activity cannot be held so since its activities are complementary to the activity carried on by a closely related enterprise towards a cohesive business operation.
In assessee's case if the same analogy is to be applied, it is an established fact that the assessee which is into reinsurance business does not have business operations in India for the reason that the acceptance of risk which is the key function of reinsurance business is assumed outside India by the assessee. Further during the course of hearing the ld AR also drew our attention to the drew our attention to the Director's Report on the Financial Statement of the assessee (page 93 of paper book) where the details of countries in which the assessee is having branches to submit that the assessee does not have a branch in India. It was also submitted that the assessee does not have any premises or office space for undertaking reinsurance business activity in India. Therefore in our considered view the assessee and RGS Services, which according to the revenue is a closely related enterprise, are not carrying on business activities which constitute complementary functions that are part of a cohesive business operation in the same state / country i.e. India. Accordingly the anti-fragmentation rule brought in through MLI to prevent the preparatory or auxiliary exemptions under Article 5 from applying to a fixed place of business maintained by an enterprise cannot be applied to assessee's case. In the light of the above discussion we hold that the
20 ITA No.4693/Mum/2023 RGA International Reinsurance Company Designated Activity Company, Ireland assessee is not having a PE in India even as per the amended Article 5 of the MLI between India and Ireland and therefore the income cannot be taxed in India.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 22-05-2024.
Sd/- Sd/- (ANIKESH BANERJEE) (PADMAVATHY S) Judicial Member Accountant Member *SK, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. Guard File 5. CIT BY ORDER,
(Dy./Asstt. Registrar) ITAT, Mumbai
21 ITA No.4693/Mum/2023 RGA International Reinsurance Company Designated Activity Company, Ireland
Sr. No. Details Date Initial Designation 1 Draft dictated on PC 13.05.2024 Sr.PS/PS 2 Draft Placed before author 13.05.2024 Sr.PS/PS 3 Draft proposed & placed before Sr.PS/PS the Second Member 4 Draft discussed/approved by JM/AM Second Member 5 Approved Draft comes to the JM/AM Sr.PS/PS 6 Order pronouncement on Sr.PS/PS 7 File sent to the Bench Clerk Sr.PS/PS 8 Date on which the file goes to the Sr.PS/PS Head clerk 9 Date on which file goes to the AR 10 Date of Dispatch of order