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TMI Blog2023 (5) TMI 1275X X X X Extracts X X X X X X X X Extracts X X X X ..... artment : Ms. Surabhi Sharma. ORDER PER S. RIFAUR RAHMAN (AM) 1. This appeal is filed by the assessee against directions of CIT(DRP)-2, Mumbai-1 [hereinafter in short Ld. DRP ] dated 17.03.2021 for the A.Y. 2017-18, passed u/s. 144C(5) of Income-tax Act, 1961 (in short Act ). 2. Assessee has raised following grounds in its appeal: - 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 Double Taxation Avoidance Agreement entered between India and Ireland (India-Ireland tax treaty). While concluding a fixed place PE, the learned AO erred in holding that 2.1 RGA Global Shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and in the circumstances of the case and in law, erred in estimating 10 percent of the gross receipts attributable to the Indian operations to be the profit generally made by a reinsurance company in India and in estimating 50 percent of the profit determined above to be attributable to the Appellant in India 7 Ground 7 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. 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 levying interest under section 234B of the Act. 9. Ground 9 The learned AO has, on the facts and circumstances of the case and in law, erred in short grant of TDS credit of Rs 2,81,984 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ract 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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... just signing of the contract. Accordingly, given that core business activities of reinsurance business of the assessee in connection to Indian region are performed through the premises of RGA Services, RGA Services constitute a Fixed Place PE of the Assessee as per Article 5(1) of the IR Treaty. In view of the above, the objection of assessee is rejected. 6. It is thus the view of the Assessing Officer, which has been approved by the Dispute Resolution Panel, that this subsidiary constitutes a dependent agency permanent establishment (DA-PE) as also fixed place permanent establishment (FP-PE) of the assessee in India. Consequently, in the view of the authorities below, the assessee is liable to be taxed in respect of the business profits, arising out of the reinsurance premium received from the Indian insurance companies, in India. The Assessing Officer has computed 50% of the reinsurance revenue so generated as attributable to the operations in India, and treated its taxability @ 10% of the gross reinsurance revenue. The action so taken by the Assessing Officer has also been confirmed by the DRP, and, accordingly, the Assessing Officer has proceeded to bring the reins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm 'business' is concerned, it is broad, vague and of little relevance for the PE definition. According to him, the crucial element is the term 'place'. Importance of the term 'place' is explained by him in the following manner: In conjunction with the attribute 'fixed', the requirement of a place reflects the strong link between the land and the taxing powers of the State. This territorial link serves as the basis not only for the distributive rules which are tied to the existence of PE but also for a considerable number of other distributive rules and, above all, for the assignment of a person to either Contracting State on the basis of residence (Article 1, read in conjunction with Article 4 OECD and UN MC). 36. We would also like to extract below the definition to the expression 'place' by Vogel, which is as under: A place is a certain amount of space within the soil or on the soil. This understanding of place as a three dimensional zone rather than a single point on the earth can be derived from the French Version ('installation fixe') as well as the term 'establishment'. As a rule, this zone is based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, therefore, does not constitute a PE. Neither does the mere incorporation of a company in a Contracting State in itself constitute a PE of the company in that State. Where a company has its seat, according to its by-laws and/or registration, in State A while the POEM is situated in State B, this company will usually be liable to tax on the basis of its worldwide income in both Contracting States under their respective domestic tax law. Under the A-B treaty, however, the company will be regarded as a resident of State B only (Article 4(3) OECD and UN MC). In the absence of both actual facilities and a dependent agent in State A, income of this company will be taxable only in State B under the 1st sentence of Article 7(1) OECD and UN MC. There is no minimum size of the piece of land. Where the qualifying business activities consist (in full or in part) of human activities by the taxpayer, his employees or representatives, the mere space needed for the physical presence of these individuals is not sufficient (if it were sufficient, Article 5(5) OECD MC and Article 5(5)(a) UN MC and the notion of agent PEs were superfluous). This can be illustrated by the example of a sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one providers to deliver the hardware, software and know-how required for operating a network. By contrast, in the case of a competing enterprise, the Bench did assume an Indian PE because the employees of that enterprise (unlike Ericsson's) had exercised other businesses of their employer. The OECD view can hardly be reconciled with the two court cases. All three examples do indeed shed some light onto the method how the relative standards for the control threshold should be designed. While the OECD MC Comm. suggests that it is sufficient to require not more than the type and extent of control necessary for the specific business activity which the taxpayer wants to exercise in the source State, the Canadian and Indian decisions advocate for stricter standards for the control threshold. The OECD MC shows a paramount tendency (though no strict rule) that PEs should be treated like subsidiaries (cf. Article 24(3) OECD and UN MC), and that facilities of a subsidiary would rarely been unusable outside the office hours of one of its customers (i.e. a third person), the view of the two courts is still more convincing. Along these lines, a POB will usually exist only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 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 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. In view of these discussions, and bearing in mind the entirety of the case, we disapprove the stand of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision in the case of Delmas France v. ADIT [(2012) 17 taxmann.com 91 (Mum)], to the effect, Similarly, before accepting DAPE profit neutrality theory, we will still have to deal with learned Departmental Representative's plea that as per the law laid down by Hon'ble Supreme Court in the case of DIT v. Morgan Stanley Co Inc. [2007] 162 Taxman 165 (SC), the arm's length remuneration paid to the PE must take into account 'all the risks of the foreign enterprise as assumed by the PE', but then in an agency PE situation, unlike a service PE situation which was the case before the Hon'ble Supreme Court, a DAPE assumes the entrepreneurship risk in respect of which agent can never be compensated because even as DAPE inherently assumes the entrepreneurship risk, an agent cannot assume that entrepreneurship risk. To this extent, there may clearly be a subtle line of demarcation between the dependent agent and the dependent agency permanent establishment. The tax neutrality theory, on account of existence of DAPE, may not indeed be wholly unqualified- at least on a conceptual note . However, in the present case, successive coordinate benches in assessee's ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . under article 5(4), is a wholly academic question. We humbly bow to the law laid down by Hon'ble Courts above. The limited argument before us is that here is a case of dependent agency permanent establishment, and existence of a DAPE, in the light of these discussions, is wholly tax neutral- particularly in the light of the legal position regarding profit attribution to the DAPE. We need not, therefore, deal with the question about existence of a DAPE, as it is an academic exercise with no tax effect involved. The related grounds of appeal are thus infructuous. 10. 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 earned 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. 6. Since the issue is exactly similar and grounds as well as the f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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