2023 (11) TMI 1045 - AT - Income Tax

Accrual of Income in India - Dependent Agent - PE in India or not? - Taxation of global income - reinsurance business - assumption of risk - business connection in India as per the provisions of section 9(1)(1) - whether assessee earning income from India on a regular and continuous basis? - assessee is a company incorporated in Ireland - as a part of RGA Group and undertakes reinsurance business with insurers globally including India HELD THAT - DR harping on the functions performed by the RGA Services 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. 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. 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 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. 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. RGA Services have performed various function in line of reinsurance business. However, has not taken any risk or invested any assets other than executing the various functions in line of reinsurance of which they were properly compensated by the assessee and transfer pricing assessment has accepted that position. 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.

Summary

Issues Involved:
1. Business Connection in India
2. Fixed Place Permanent Establishment (PE)
3. Dependent Agent Permanent Establishment (DAPE)
4. Nature of Services by RGA Services
5. Application of Multilateral Instrument (MLI)
6. Attribution of Income to PE
7. Estimation of Profits Attributable to Indian Operations
8. Applicable Tax Rate
9. Levy of Interest under Section 234B
10. Levy of Interest under Section 234A
11. Initiation of Penalty Proceedings under Section 270A

Summary:

1. Business Connection in India:
The assessee, a foreign company, claimed that it did not have a business connection in India. The Assessing Officer (AO) concluded that the assessee had a business connection in India as it earned income from Indian cedents on a regular and continuous basis.

2. Fixed Place Permanent Establishment (PE):
The AO argued that RGA Services, an Indian entity, constituted a Fixed Place PE of the assessee in India. The assessee contended that it did not have any place of business operations in India and that RGA Services provided only preparatory and auxiliary services. The Tribunal held that there was no fixed place PE as no premises in India were at the disposal of the assessee.

3. Dependent Agent Permanent Establishment (DAPE):
The AO held that RGA Services acted as a DAPE of the assessee. The Tribunal, however, noted that the existence of a DAPE is tax-neutral if the agent is remunerated at arm's length. Since RGA Services was compensated on a cost-plus basis, the Tribunal concluded that the DAPE issue was academic and did not need adjudication.

4. Nature of Services by RGA Services:
The AO argued that RGA Services performed core and crucial business activities for the assessee. The assessee contended that RGA Services provided only support services and did not have the authority to conclude contracts. The Tribunal observed that RGA Services did not assume any risk or invest assets in the reinsurance business and was properly compensated for its services.

5. Application of Multilateral Instrument (MLI):
The AO applied the provisions of the MLI to the definition of PE. The Tribunal noted that the MLI provisions were applicable from 1 April 2020 and did not apply to the current financial year.

6. Attribution of Income to PE:
The AO attributed 50% of the reinsurance premium to Indian operations and determined the profit attributable to the Indian DAPE as 10% of the 50% of the gross reinsurance premium. The Tribunal held that since the services rendered by RGA Services were compensated at arm's length, there could not be any further profit attribution.

7. Estimation of Profits Attributable to Indian Operations:
The AO estimated 10% of the gross receipts attributable to Indian operations as the profit generally made by a reinsurance company in India. The Tribunal found this estimation to be unfounded as the core reinsurance activity of assuming risk was done outside India.

8. Applicable Tax Rate:
The AO applied a tax rate of 40% instead of 12.5% applicable to life reinsurance business. The Tribunal did not specifically address this issue in the summary.

9. Levy of Interest under Section 234B:
The AO levied interest under Section 234B. The Tribunal did not specifically address this issue in the summary.

10. Levy of Interest under Section 234A:
The AO levied interest under Section 234A. The Tribunal did not specifically address this issue in the summary.

11. Initiation of Penalty Proceedings under Section 270A:
The AO initiated penalty proceedings under Section 270A. The Tribunal did not specifically address this issue in the summary.

Conclusion:
The Tribunal allowed the appeals filed by the assessee for the A.Y. 2018-19 and A.Y. 2019-20, holding that there was no fixed place PE, and the DAPE issue was tax-neutral. The issue of TDS credit for A.Y. 2019-20 was remitted back to the AO for verification.