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TMI Blog2023 (6) TMI 1430X X X X Extracts X X X X X X X X Extracts X X X X ..... 387 - MADRAS HIGH COURT ] and further, from the decision of Cholamandalam MS General Insurance Co. [ 2021 (11) TMI 1200 - MADRAS HIGH COURT] where it has been held that income from profit on sale of investment by insurance companies is not taxable after deletion of sub-rule (b) of Rule 5 of first schedule to Income Tax Rules, 1962. Decided in favour of assessee. - SHRI V. DURGA RAO, HON BLE JUDICIAL MEMBER AND SHRI MANJUNATHA. G, HON BLE ACCOUNTANT MEMBER For the Department :Mr. M. Swaminathan, Sr. St. Counsel For the Assessee :Mr. Sandeep Bagmar, Adv. ORDER PER MANJUNATHA.G, AM: This bunch of four appeals filed by the assessee are directed against separate, but identical orders of the Commissioner of Income Tax (Appeals), LTU, Chennai, dated 29.07.2011 26.03.2013, and pertains to assessment years 2006-07 to 2008-09 2009-10 respectively. Since, the facts are identical and issues are common, for the sake of convenience, these appeals are being heard together and disposed off, by this consolidated order. 2. The Revenue has, more or less, raised common grounds of appeal for all the four assessment years. Therefore, for the sake of brevity, grounds of appeal filed for the AY 2006-07 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised in 3.1 to 3.4, in ease the issue of taxability of profit on sale of investment is decided against the revenue, the Assessing Officer's stand regarding the disallowance u/s.14A should be upheld. 4.2. CIT(A), failed to appreciate that the expenditure relating to exempt income is basically not allowable as per the provisions of section 37 of the Act and ought to have quantified disallowance as per the provisions of the section 14A. 5.1. The CIT(A) erred in deleting the disallowance of provisions towards solatium Fund in the computation of income under normal provisions. 5.2. The CIT(A) ought to have appreciated that the said provision is an unascertained liability, made on estimated basis, in a routine manner at 0.1% of the gross premium from Motor Vehicle Insurance and therefore liable to be disallowed in the computation of income under normal provisions. 6.1. The CIT(A) erred in deleting the disallowance u/s,40(a)(i) made in respect of reimbursement of expenditure to Mr.RW Ciarke, Royal Sons Alliance amounting to Rs.3,22,2757- and payment of survey fees to M/s. Royal Sons Alliance PLC Rs.18,49,458/- 6.2. The CIT(A) failed to appreciate that as per Board's circular No.71 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailed to appreciate that as per explanation 1(b) of sec. 115JB, the amount carried to any reserve, by whatever name called, otherwise than a reserve specified u/s. 35AC, shall be added back to book profits and ought to have held that the entire amount of reserve for unexpired risk should be added back while computing book profits u/s 115JB. 9.3 The CIT(A) failed to appreciate that the provisions of section 115JB does not allow any pro-rata apportionment and ought to have held that the reserve for un-expired risk created has to be added entirely while computing the book profit. 9.4 The CIT(A) erred in holding that the reserve for unexpired risk represents premium received in advance. 9.5 Assuming but not admitting that the reserve for unexpired risk is only a premium received in advance, such a pre-receipt would still be liable to be added in the computation of book profit because it can, at best, be treated as a liability which is neither quantified nor ascertained. 10. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored. 3. The brief facts of the case a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have heard both the parties, perused the materials available on record and gone through orders of the authorities below. We find that an identical issue has been considered by the Tribunal in the assessee s own case for earlier assessment years in ITA Nos.1356/Chny/2013, 1626/Chny/2011 2310/Chny/2014 and ITA Nos.1628, 1629 1630/Chny/2011 and ITA No.1666/Chny/2011 order dated 26.08.2022, where the Tribunal by considering relevant facts and also by following certain judicial precedents held that reinsurance premium paid to non- resident reinsurers is not taxable in India under the Income Tax Act, 1961 or under DTAA between India and respective countries, where the NRRs are tax residents, and thus, payment to NRRs without deduction of TDS cannot be disallowed u/s.40(a)(i) of the Act. The relevant findings of the Tribunal are as under: 8. We have heard both the parties, perused material available on record and gone through orders of the authorities below. The assessee is an insurance company engaged in the business in General insurance in terms of IRDAI regulations and Insurance Act, 1938. The business of the assessee is regulated by IRDAI through various regulations. All the insuranc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1938 and consequently, reinsurance premium ceded to NRRI is not deductible u/s.37 (1) Of the Income Tax Act, 1961. The matter travelled to the Hon ble High Court of Madras and the Hon ble High Court has remanded the issue back to the Tribunal and directed the Tribunal to decide the issue on three points:- i) Whether the Assessing Officer was right in disallowing reinsurance premium u/s.40(a)(i) of the Act; ii) Whether the CIT(A) was right in rejecting partially the appeal filed by the assessee; iii) Whether the CIT(A) was justified in restricting claim of the assessee to 15% instead of confirming order passed by the Assessing Officer. The Hon'ble High Court of Madras also observed that the Tribunal shall decide above questions alone and nothing more and decision shall be taken based on the available material and the assessee the Revenue are not entitled to place any fresh materials before the Tribunal so as to enable the Tribunal to take decision. Therefore, from the above, it is very clear that controversy with regard non-compliance with provisions of Insurance Act, 1938 and regulations made there under by the IRDAi is put to rest by the Hon'ble High Court and the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S u/s.195 of the Income Tax Act, 1961, the Assessing Officer has disallowed reinsurance premium ceded to NRRI u/s.40(a)(i) of the Income Tax Act, 1961. 10. We have given our thoughtful consideration to the reasons given by the Assessing Officer in light of arguments advanced by the learned counsel for the assessee as well as ld. Sr. standing counsel for the department and we ourselves do not subscribe to the reasons given by the Assessing Officer for simple reason that provisions of section 195 of the Act will be applicable only in a case where income is actually chargeable to tax in India. In order that there is obligation to deduct TDS, the revenue must establish that income was chargeable to tax in India both in terms of Act as well as in terms of relevant DTAA. If the recipients are non-residents, income was chargeable u/s.5 r.w.s. 9(1) of the Act, only if income is received or deemed to have been received or income accrues or is deemed to accrue in India. Further, wherever DTAA applies, income chargeable to tax has to be additionally considered under terms of relevant DTAA. In the present case, reinsurance premium ceded to non-resident reinsurers is not chargeable to tax in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accrue or arise in India. Insofar as observations of the Assessing Officer with regard to reinsurance contracts were signed in India is not relevant as held by the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. Vs. DIT (2007) 288 ITR 408 (SC), where it was observed that contract signed in India is of no material consequence, since all activities in connection with off shore supply were outside India and therefore, cannot be deemed to have accrued or arose in India. Further, income may accrue not at place where asset or property is located or where insurer is resident, but where risk is borne. In the present case, the risk is borne where the non-resident reinsurer resides or where he has funds to make good loss. Therefore, insurance premium cannot be said to accrue in India. 11. We, further, noted that income of NRRI are not deemed to accrue or arise in India, because reinsurance premium ceded to non-resident foreign insurers are raising in India only where the same arises out of business connection in India and even if, exists business connection, the business operations are carried out in India. In the present case, nor do foreign insurers have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here is no DTAA with other countries through resident brokers, no income is chargeable to tax in India in the hands of nonresident reinsurers and consequently, no disallowance can be made u/s.40 (a)(i) of the Income Tax Act, 1961. Further, the NRR do not have any business connection in India in any form whatsoever, irrespective of fact whether reinsurance payments are made directly or through resident brokers or non-resident brokers. The NRR being non-resident reinsurance company is expressly prohibited to carry on business in India under the Insurance Act, 1938. Therefore, NRR cannot be said to have any business in India. The reinsurance arrangements between Indian insurer and NRRI are on principal to principal basis and in such scenario; there is no question of any business connection in India. Although, the Assessing Officer observed that place of signing of agreement is material to decide business connection, but it was categorically held by the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. Vs. DIT, 288 ITR 408 (SC) that contract signed in India is of no material consequence. In the present case, signing of reinsurance treaty is either in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment years do not have any fixed place of PE in India and thus, question of fixed place of PE in India within the meaning of Article 5 of the DTAA does not arise. In fact, the assessee has obtained declaration from foreign reinsurers which are part of paper book filed by the assessee. Thus, in our considered view there is not fixed place of PE of NRRs. 14. The Assessing Officer alleged that there is agency PE of NRRI in India on the basis of availing services of reinsurance brokers. During the subject assessment years, the assessee has remitted reinsurance premium through non-resident brokers outside India. In order to attract agency PE, the Revenue has to establish that person act on behalf of NRRI in India and such person is economically and legally dependent on the NRRI. In the present case, reinsurance brokers act in their independent capacity and they are not dependent agency of the assessee as well as non-resident insurers. They do not conclude any contract for NRRI and thus, we are of the considered view that there cannot be said to constitute business connection for agency PE for foreign reinsurers in India. The Revenue has also not placed any material on record to demon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received income from providing reinsurance to various insurers in India. The Mumbai Bench of the Tribunal reversing the decision of the AO held as follows: (a) The subsidiary of the NRRI in India does not constitute PE of its holding company (b) Conditions specified in cl (a) to (c) of Explanation 2 to Section 9(1)(i) of the Act are not satisfied, therefore, the NRRI does not have any business connection in India. (c) Reinsurance is specifically excluded from the ambit of PE in India-Switzerland DTAA, therefore, there is no PE in India. (d) The services rendered by the subsidiary of NRRI does not constitute a Service PE or Agency PE of the NRRI in India. Thus, the Tribunal held that the reinsurance premium received by the NRRI from Indian reinsurer is not taxable in India both under the Act and the DTAA. (ii) DCIT ICICI Lombard General Insurance Co. Ltd. - ITA No. 2769 Mum, 2011 dt. 30/08/2013 Summary: :In the case of the Indian insurer (ICICI Lombard General Insurance Co. Ltd) the AO disallowed a sum of Rs. 5.84 crores paid to the NRRI in respect of reinsurance premium as no tax was deducted under section 195 and the same could not be considered as business expenditure. The CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he reinsurance proposals are procured from the insurance companies or brokers in India, which is a regular and continuous activity, therefore there is business connection. The Mumbai Bench of the Tribunal reversing the decision of the AO held as follows: (a) The onus is on the AO to establish that the foreign company has a business connection or PE in India. (b) Subsidiary of a foreign company would not be conclusive to say that there exists a PE in India. (c) Activities of Liaison Office which are in nature of preparatory and auxiliary cannot be construed to be the existence of business connection in India within the meaning of section 9(1)(i) or PE under the DTAA. (d) The Tribunal rejected the argument of the AO that there is business connection on account of regular and continuous activity. (e) Activities of subsidiary which are merely in nature of support services do not constitute PE of the NRRI. It also found that the subsidiary had no authority to conclude contract or settle claims on its own or on behalf of the NRRI. (f) The Tribunal also found that in reinsurance arrangements the privity of contract is between the Indian Insurer and the NRRI (g) The Tribunal also held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be decided by the Tribunal. Accordingly, the issue of applicability of provisions of section 40(a)(i) of the Act is adjudicated by us independently. We find that the Co-ordinate Bench of this Mumbai Tribunal in the case of DCIT vs. ICICI Lombard General Insurance Co. Pvt. Ltd., in ITA Nos. 6837 6832/Mum/2014 for A.Y. 2005-06 and 2009-10 vide order dated 04/10/2016 had adjudicated the very same issue in respect of payments made to M/s. Odyssey America Reinsurance Corporation, Singapore for providing reinsurance business, without deduction of tax at source and applicability of provisions of Section 40(a)(i) of the Act. We find that the Tribunal in the aforesaid case placed reliance in assessee ‟s own case for A.Y.2004-05 reported in 152 ITD 855 and also in yet another case rendered in the context of revision proceedings u/s.263 of the Act in ITA No.5777/Mum/2011, had quashed the revision proceedings u/s.263 of the Act by observing as under:- ―2.3. Thus, the Tribunal by the aforesaid order held that invocation of revisional jurisdiction was not valid. In view of this uncontroverted factual matrix, the appeal of the Revenue is dismissed as infructuous. ‖ 3.18. We fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9; or a PE in India so as to invite any tax liability under the Indian tax laws. Ostensibly, the aforesaid is supported by the judgment of the Hon'ble Supreme Court in the case of E funds IT Solution Inc vs ADIT, (2017) 86 taxmann.com 240. Therefore, in this background, we may now examine the facts of the instant case as to whether such an onus has been discharged by the Revenue or not. 17. It has been asserted before us that the instant year is the first year when the assessee has filed a return of income as it had some taxable income, while in the past years there was no taxable income. In the past, there was no income other than premium on reinsurance business, yet the existence of LO since 2007 is in the knowledge of the assessing authority and no steps have been taken in any of the earlier years to construe the activities of the LO as constituting a 'business connection' or a PE of assessee in India. The learned representative asserted that it is only in this year that the function of the LO (for part of the year) has been understood by the Assessing Officer to be giving rise to a 'business connection' or existence of PE in India so as to hold that the inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice Agreement and the Addendum to the Master Service agreement between assessee and the Indian subsidiary and find that the approach of the Assessing Officer is quite misdirected. In fact, the services that have been provided by the Indian subsidiary are support services in the field of actuarial and underwriting functions undertaken by the assessee and not services of actuarial or underwriting of insurance risks per se. We have already quite succinctly noted the nature and scope of the services rendered by the Indian subsidiary in the earlier paras 12 and 13 above. In fact, the Assessing Officer is grossly wrong in holding in para 9.7.8 of his order that all the functions with respect to the claim settlement are carried out by the Indian subsidiary itself; rather, it is a case where the Indian subsidiary provides support functions and assists the assessee in such matters. The privity of contract is between the assessee and the Indian insurance companies and, it is abundantly clear from the terms of engagement between the assessee and the Indian subsidiary that the Indian subsidiary is not authorised to execute any contract or settle claims on its own or on behalf of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be a proper test to determine as to whether there existed a fixed place of business or not. Taking a cue from the reasoning approved by the Hon'ble Supreme Court, in the present case too, 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 (supra), in the present case too, the arguments of the Revenue do not deserve any indulgence. Accordingly, the same are rejected. 20. So far as the case of the Revenue that there is a dependent PE in India is concerned, herein also, the Revenue has merely brushed aside the claim of the assessee that the Indian subsidiary does not have any authority to secure contracts or solicit business on its behalf in India independent of the assessee. According to the Revenue, the Indian subsidiary uses brand name of the assessee while carrying out its activities in India. In our view, the same cannot be a ground to say that there existed a dependent PE in India. In fact, a point which has been emphasi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insurance companies in India. Swiss re-Insurance company had a wholly owned subsidiary in India which was rendering administrative, market intelligence and other risk assessment services, which is quite similar to the services being rendered to assessee before us by its Indian subsidiary. Therein also, the appellant was remunerating its Indian subsidiary on the basis of cost plus mark-up. Therein also, the Assessing Officer had sought to tax the income by invoking 'business connection' in terms of Sec. 9(1)(i) of the Act as well as treating the Indian subsidiary as a PE in India. In nutshell, the facts as well as the dispute before our co-ordinate Bench in the case of Swiss re-Insurance Co. Ltd. (supra) stood on a similar footing as is the case before us. Our co- ordinate Bench considered the provisions of Explanation-2 to Sec. 9(1) of the Act as well as the provisions of India Switzerland DTAA, which was the subject matter before it, and concluded that the foreign company therein did not have any 'business connection' in India or a PE in India. The aforesaid precedent fully supports the inference which has been drawn by us in the earlier paras. Similarly, in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payer to deduct tax at source thereon. Reliance in this regard is placed on the decision of the Hon ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd., vs CIT reported in 327 ITR 456. Accordingly, the provisions of Section 40(a)(i) of the Act would not come into operation at all. Moreover, these decisions were duly quoted by the assessee before the ld. CIT(A) vide its submission dated 25/02/2020 which was completely ignored by the ld. CIT(A) while adjudicating the issue. 3.21. We further find that the Co- ordinate Bench decision of this Tribunal in Swiss Reinsurance Co. Ltd., vs. DDIT International Taxation, Mumbai reported in 55 taxmann.com 520 (Mumbai Trib.) dated 13/02/2015 for A.Y.2010-11 had also addressed the very same issue. The relevant operative portion of the said order is reproduced here under:- 5.3 Assuming that conditions of (i) (ii) mentioned herein above are fulfilled, we do not find that the employees of SRSIPL are providing services to the assessee as if they were the employees of the assessee. Therefore, condition laid down under Article-5 of the Treaty are also not fulfilled to treat SRSIPL as PE of the assessee. Article 5(4) of the Treaty read ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also. 16. Insofar as case laws relied upon by the learned CIT(A), of the Hon ble Bombay High Court in case of Vodafone International Holdings (329 ITR 126), in upholding action of the AO of subjecting reinsurance premium to tax in India, we find that the Hon ble Supreme Court has subsequently overruled this decision and same has been reported in 341 ITR 1 (SC) and thus, entire basis for the decision of the CIT(A) for the assessment year 2007-08 has no legs to stand. Further, the learned CIT(A) for the assessment year 2007-08 did not follow order of his predecessor for the assessment year 2005-06 on the ground that judgment of the Hon ble Bombay High Court in Vodafone International Holdings (supra) and of the Hon'ble Supreme Court in the case of Kanchan ganga were not considered. We find that the Hon'ble Supreme Court has reversed decision of the Hon ble Bombay High Court in the case of Vodafone International Holdings and thus, basis of the CIT(A) to rest his decision on basis of said judgment is no longer justifiable. As regards decision of the Hon'ble Supreme Court in the case of Kanjan ganga, we find that facts of the said case is completely distinguishable and only i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S General Insurance Co. v. DCIT reported in [2022] 142 taxman.com 3 (Chennai Tribunal), where it has been held that income from profit on sale of investment by insurance companies is not taxable after deletion of sub-rule (b) of Rule 5 of first schedule to Income Tax Rules, 1962. 5.1 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. We find that an identical issue has been considered by the Tribunal in the case of Cholamandalam MS General Insurance Co. v. DCIT (supra) where the Tribunal by considering relevant facts and also by following the decision of the Hon ble Madras High Court in the case of CIT v. United India Insurance Co. (supra), held that profit on sale of investment is not taxable in the hands of insurance company. The relevant findings of the Tribunal are as under: 54. We have heard both the parties, perused material available on record and gone through orders of the authorities below. We find that the Hon'ble High Court of Madras had considered an identical issue in the case of United India Insurance Co. Vs.CIT (2019) 111 taxmann.com 217(Mad) and held that profit on sale of investments is no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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