RGA International Reinsurance Company Ltd Vs ACIT (International Taxation) (ITAT Mumbai)
ITAT Mumbai held that business profits earned by the assessee (non-resident) on account of the reinsurance business have no tax implications in India and existence of dependent agency permanent establishment is wholly tax neutral in India.
Facts-
The assessee is a company incorporated in and fiscally domiciled in Ireland and is admittedly entitled to the benefits of India Ireland Double Taxation Avoidance Agreement. The assessee is engaged in the business of providing reinsurance services to its clients in India.
What is in dispute before us is the tax implications of the income embedded in these receipts, in India.
The short case of the assessee is that since it does not have any permanent establishment in India, and, therefore, in terms of the provisions of Indo-Irish tax treaty, its business profits, embedded in the reinsurance premium received from Indian entities, are not taxable in India.
Revenue holds that since the core business activities are conducted by RGA India Services Pvt. Ltd., It constitutes the fixed place PE.
Conclusion-
Held 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.
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 earned by the assessee on account of the reinsurance business have no tax implications in India.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. By way of this appeal, the assessee-appellant has challenged the correctness of the order dated 8th October 2018 in the matter of assessment under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961, for the assessment year 2015-16.
2. Grievances raised before us are as follows:
1. Ground 1
The learned AO has, on the facts and circumstances of the case in law, and based on the directions of the Hon’ble DRP, erred in concluding that the Appellant has a business connection in India as per the provisions of section 9(1)(i) of the Act on the basis that the Appellant is earning income from India on a regular and continuous basis.
2. Ground 2
The learned AO has, on the facts and circumstances of the case in law, and based on the directions of the Hon’ble DRP, erred in concluding that the Appellant has a fixed place permanent establishment (PE) in India as per Article 5(1) of the India-Ireland Double Taxation Avoidance Agreement (India-Ireland tax treaty).
While concluding a fixed place PE, the learned AO erred in holding that
2.1 RGA Services India Private Limited (RGA Services) provides technical and core reinsurance business services in the form of actuarial, underwriting and risk assessment services which are crucial in performance of the Appellant’s reinsurance business in India.
2.2 In alleging that the Appellant has developed a standardised software called Automated Underwriting and Risk Analysis (AURA), and once the draft underwriting proposal is generated with the help of AURA software, there is very little decision making left to be done in Ireland.
3. Ground 3
The learned AO has, on the facts and circumstances of the case in law, and based on the directions of the Hon’ble DRP, erred in concluding that RGA Services acts as a Dependent Agent PE of the Appellant in India as per Article 5(6) of the India-Ireland tax treaty.
The learned AO erred in holding that
3.1 RGA Services habitually secures orders for and on behalf of the Appellant. Further, the relationship between RGA Services and the Appellant is that of principal and agent and not that of principal to principal.
3.2 In holding that the employees of RGA Services perform functions like de facto employees of the Appellant. The learned AO also held that even though the employees remain on the payroll of RGA Services the domain and control over the functioning of such employees is of the Appellant.
3.3 In holding that RGA Services exercises the authority to significantly influence the decisions leading to signing of the contract by the Appellant outside India without requiring any further substantial inputs from outside India.
4. Ground 4
The learned AO has, on the facts and circumstances of the case in law, and based on the directions of the Hon’ble DRP, erred in concluding that the support services performed by RGA Services are not in the nature of preparatory or auxiliary services but are core and crucial business activities in relation to reinsurance business.
5. Ground 5
The learned AO has, on the facts and circumstances of the case and in law, and based on the directions of the Hon’ble DRP, erred in not considering the Appellant’s claim that no further income can be attributed to the Appellant’s alleged PE, on the fact that remuneration paid to RGA Services is at arm’s length price.
Ground 6
The learned AO has on an adhoc basis held 50 percent of gross premium received to be attributable to the Indian operations.
7. Ground 7
The learned AO has erred in using Rule 10 of the Income-tax Rules, 1962 while attributing profits to the alleged PE of the Appellant in India.
8. Ground 8
The learned AO has, on the facts and circumstances of the case and in law, and based on the directions of the Hon’ble DRP, erred in applying a tax rate of 40 per cent instead of 12.5 per cent (plus applicable surcharge and education cess) in case of life reinsurance business as per section 115B of the Act.
9. Ground 9
The learned AO has, on the facts and circumstances of the case and in law, and based on the directions of the Hon’ble DRP, erred in levying interest under section 234B of the Act.
10. Ground 10
The learned AO has, on the facts and circumstances of the case and in law, and based on the directions of the Hon’ble DRP, erred in initiating penalty proceedings under section 271(1)(c) of the Act.
The above grounds of objections are all independent and without prejudice to one another.
3. The assessee before us, RGA International Reinsurance Company (RIRC, in short), is a company incorporated in and fiscally domiciled in Ireland and is admittedly entitled to the benefits of the India Ireland Double Taxation Avoidance Agreement [(2002) 254 ITR (Stat) 245; Indo-Irish tax treaty, in short]. The assessee is engaged in the business of providing reinsurance services, amongst others, to its clients in India, and during the relevant previous year, the assessee has earned the reinsurance commission of Rs 504,37,83,613 from India. What is in dispute before us is the tax implications of the income embedded in these receipts, in India. As we proceed to deal with the tax implications, in India, of the assessee’s business of reinsurance, it will be useful to begin by taking a quick look at the nature of the reinsurance business.
4. Reinsurance is an insurance cover for insurance companies, and it constitutes insurance of the risk liability that an insurer has undertaken under a contract of insurance. Under a reinsurance arrangement, the reinsurer assumes, of course, for consideration (i.e. reinsurance premium), the risk, as a whole or in part, covered under a policy issued by an insurance company. The fundamental presumption under which the insurance business functions is that only a fraction of the policies issued would result in claims and the premiums collected on all the insurance policies by an insurance company will be far in excess of such claims, and it is this fundamental presumption because of which the total sum insured by an insurance company is often several times the capacity of the insurance company to pay, and even far in excess of the net worth of the insurance companies. Presumptions, no matter how valid and how realistic, are presumptions nevertheless, and there is a possibility that in a bad year, such a presumption will turn out to be incorrect and the total value of insurance claims may be much more than the premium collected, and if the losses are of a very large magnitude, even the net worth of the company would be wiped out. That is the risk that reinsurance contracts cover, but there can also be situations in which the insurance companies take the support of reinsurers when they do not have the capacity, or the inclination, to provide an insurance cover entirely on their own. The persons taking such reinsurance are called cedants. The reinsurance of the former category, broadly speaking, is treaty reinsurance, and the reinsurance of the latter category is generally referred to as facultative reinsurance. To protect the interests of the end consumers taking insurance covers from the insurance companies, the regulatory bodies, such as the Insurance Regulatory and Development Authority of India (IDRA), put certain conditions with respect to taking, in a timely and organized manner, such reinsurance coverage, and that is what offers a market to the reinsurance companies in a jurisdiction like India.
5. The short case of the assessee is that since it does not have any permanent establishment in India, and, therefore, in terms of the provisions of Indo-Irish tax treaty, its business profits, embedded in the reinsurance premium received from Indian entities, are not taxable in India. That claim, however, has not found favour with the authorities below. The Assessing Officer has noted that the assessee company has a group entity in India by the name of RGA India Services Pvt Ltd (RGA-India, in short), which is a subsidiary of the Reinsurance Group of America, and that RGA-India has provided a spectrum of vital and primary business functions, i.e. actuarial and underwriting services, which are key functions in the insurance business. It was also noted that the draft underwriting proposal is generated by the RGA India and that there is little decision-making involved post such underwriting activity. It was also noted that RGA India is performing all critical support activities, including marketing support services, claims support services, data synopsis services and other administrative services, and as such RGA India constitutes the fixed place permanent establishment of the assessee company. While the Assessing Officer also held that the RGA India constitutes a dependent agent permanent establishment of the assessee, we need not, for the reasons we will set out in a short while, go into that aspect of the matter in detail. Coming back to the fixed place permanent establishment case of the Assessing Officer, as put to the assessee in the draft assessment order, the assessee raised objection before the Dispute Resolution Panel. It was submitted by the assessee that the assessee does not have any place of business operations in India and that the assessee does not have any premises at its disposal. It was also pointed out that RGA India is a separate legal entity having its own personnel, and the services rendered by RGA India are preparatory and auxiliary in nature, rather than core reinsurance services. It was also pointed out that whatever services are rendered by RGA India to the assessee have been remunerated at an arm’s length price as such, and that position has been accepted in the transfer pricing assessment. It was also explained that the services rendered by the RGA India and the assessee company are distinct in nature inasmuch as while the former renders support services, the later provides reinsurance services. As regards the software said to be generating a reinsurance proposal, it was explained by the assessee that the assessee does not own that software, nor is its server even located in India. The assessee also placed its reliance on a number of judicial precedents, including E Funds IT Solutions Inc Vs ADIT [(2017) 86 Taxman 240 (SC)], Formulae One World Championship Ltd Vs CIT [(2017) 394 ITR 80 (SC)] Abode Systems Inc Vs ADIT [(2016) 69 taxmann.com 228 (Del)] and DITV s Galileo International Inc [(2009) 336 ITR 264 (Del)]. None of these submissions, however, impressed the Dispute Resolution Panel which confirmed the stand of the Assessing Officer by observing as follows:
6.1 We have considered the facts of the case, the written submissions and arguments of the assessee. The assessee submitted that it does not have a PE in India and the assessee is eligible for beneficial treatment under the IR Treaty. However, on perusal of the facts and circumstances of the case, it emerges that the arguments of the assessee are not tenable on account of the following reasons:
