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2019 (6) TMI 1668 - AT - Income TaxIncome accrued in India - determination of a PE in India - scope of business connection in India as per the provisions of section 9(1)(i) - India-Germany tax treaty - dependent PE in India - assessee pointed out that the activities of the Indian subsidiary do not involve any actuarial or underwriting services, but it is providing only administrative support services in relation to the actuarial and underwriting functions carried out by the assessee thus contended that the Assessing Officer has grossly misunderstood the use of Electronic Underwriting Software by the Indian subsidiary - scope of operations of the Indian subsidiary, which have indeed been carried out from India - HELD THAT - 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. 2016 (2) TMI 47 - DELHI HIGH COURT LO merely acts as a channel of communication between the Head office and the parties in India and cannot undertake any commercial, trading or industrial activity, and thus, the activities of the LO cannot give rise to a business connection within the meaning of Sec. 9(1)(i) of the Act or a PE of the assessee in India, considering that the activities are compliant with the approval granted by IRDA. 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 ? - There is no factual support for the stand of the Assessing Officer, as there is nothing either as per the Service agreement or any material to say that the Indian subsidiary has provided actuarial and risk underwriting services, which are core and crucial activities of the reinsurance business. Even the use of Electronic Underwriting Software by the Indian subsidiary is a misnomer. The software is a standard tool which is used by global entities of the group for entering the data in respect of the reinsurance transactions of the assessee. The software is owned by the assessee and not the Indian subsidiary, and the software is used by the Indian subsidiary to enter the data of the Indian insurance companies, but no further recommendations are made by the Indian subsidiary. It is only the assessee through its own personnel who examines the proposal and negotiates the terms and conditions of the reinsurance contracts. There is nothing to dispute the assertions of the assessee that the infrastructure, personnel and approvals to carry out reinsurance activities are from outside India. Thus, there is nothing to suggest that the core activities of the reinsurance business of the assessee are carried out in or from India by the Indian subsidiary. 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 - 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 2017 (10) TMI 1011 - SUPREME COURT in the present case too, the arguments of the Revenue do not deserve any indulgence. Accordingly, the same are rejected. Dependent PE in India - 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 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. Thus 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.
Issues Involved:
1. Business connection in India under Section 9(1)(i) of the Income Tax Act. 2. Permanent Establishment (PE) in India under Article 5(1) of the India-Germany Double Taxation Avoidance Agreement (India-Germany tax treaty). 3. Dependent Agent PE under Article 5(6) of the India-Germany tax treaty. 4. Nature of support services performed by the Indian subsidiary. 5. Attribution of income to the alleged PE. 6. Estimation of taxable profits using Rule 10 of the Income-tax Rules, 1962. 7. Determination of taxable profits attributable to Indian operations. 8. Applicable tax rate for life reinsurance business. 9. Levy of interest under Section 234B of the Act. 10. Initiation of penalty proceedings under Section 271(1)(c) of the Act. Detailed Analysis: 1. Business Connection in India under Section 9(1)(i) of the Act: The appellant, a foreign company, argued that its reinsurance premiums from Indian insurance companies should not be taxed in India due to the absence of a business connection. The Revenue contended that the technical and key functions of the reinsurance business were enabled by the Indian subsidiary, thereby establishing a business connection. The Tribunal found that the Indian subsidiary provided only support services and did not carry out core reinsurance functions. The Tribunal concluded that there was no business connection in India as per Section 9(1)(i) of the Act. 2. Permanent Establishment (PE) in India under Article 5(1) of the India-Germany Tax Treaty: The Revenue argued that the Indian subsidiary constituted a PE of the appellant in India. The Tribunal examined the Master Service Agreement and found that the Indian subsidiary was providing only support services. The Tribunal emphasized that the Indian subsidiary did not have the authority to execute contracts or settle claims on behalf of the appellant. Therefore, the Tribunal concluded that the Indian subsidiary did not constitute a PE in India under Article 5(1) of the India-Germany Tax Treaty. 3. Dependent Agent PE under Article 5(6) of the India-Germany Tax Treaty: The Revenue claimed that the Indian subsidiary acted as a dependent agent PE. The Tribunal found no evidence that the Indian subsidiary had the authority to secure contracts or solicit business on behalf of the appellant. The Tribunal noted that the Indian subsidiary's use of the appellant's brand name did not establish a dependent agent PE. Consequently, the Tribunal concluded that the Indian subsidiary did not constitute a dependent agent PE under Article 5(6) of the India-Germany Tax Treaty. 4. Nature of Support Services Performed by the Indian Subsidiary: The Tribunal reviewed the Master Service Agreement and Addendum, which outlined the support services provided by the Indian subsidiary, such as collecting and verifying data, inputting data into pre-approved models, and providing administrative support. The Tribunal concluded that these activities were preparatory or auxiliary in nature and did not involve core reinsurance functions. 5. Attribution of Income to the Alleged PE: The appellant contended that no further income could be attributed to the alleged PE since the remuneration paid to the Indian subsidiary was at arm's length. The Tribunal, having concluded that there was no PE in India, found this issue to be academic and did not adjudicate it. 6. Estimation of Taxable Profits Using Rule 10 of the Income-tax Rules, 1962: The Assessing Officer estimated taxable profits by attributing 50% of the gross receipts to Indian operations and applying a profit rate of 10%. The Tribunal, having concluded that there was no PE in India, found this issue to be academic and did not adjudicate it. 7. Determination of Taxable Profits Attributable to Indian Operations: The Tribunal found that the Revenue did not use any scientific method to determine the profits attributable to Indian operations. However, since the Tribunal concluded that there was no PE in India, this issue was rendered academic. 8. Applicable Tax Rate for Life Reinsurance Business: The appellant argued that the applicable tax rate should be 12.5% instead of 40%. The Tribunal, having concluded that there was no PE in India, found this issue to be academic and did not adjudicate it. 9. Levy of Interest under Section 234B of the Act: The Tribunal noted that the levy of interest under Section 234B of the Act was consequential in nature and did not require separate adjudication. 10. Initiation of Penalty Proceedings under Section 271(1)(c) of the Act: The Tribunal did not specifically address the initiation of penalty proceedings under Section 271(1)(c) of the Act, as the primary issues were resolved in favor of the appellant. Conclusion: The Tribunal allowed the appeal of the appellant, concluding that there was no business connection or PE in India under the relevant provisions of the Income Tax Act and the India-Germany Tax Treaty. Consequently, the reinsurance premiums earned by the appellant were not taxable in India. The issues related to the attribution of income, estimation of taxable profits, applicable tax rate, and levy of interest were rendered academic and were not adjudicated.
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