TMI Blog2019 (6) TMI 1668X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 invok ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le DRP, erred in not considering the Appellant's claim that no further income can be attributed to the Appellant's alleged PE, since the remuneration paid to GSSMPL is at arm's length price. 6. 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 estimating 10% of the gross receipts as taxable profits by applying Rule 10 of the Income-tax Rules, 1962 while attributing profits to the alleged PE of the Appellant in India. 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, not used any scientific method in determining 50 percent of taxable profits (as arrived by applying Rule 10) to be attributable to the Indian operations. 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. The learned AO has, on the facts and circumstances of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For this purpose, the Assessing Officer observed that the assessee did not furnish any India specific Profit Loss Account; and, therefore, he resorted to estimation of taxable profits in terms of Rule 10(i) of the Income Tax Rules, 1962. The Assessing Officer apportioned the receipts between the country of recipient and the source country, i.e. India on a 50:50 basis by considering the level of operations which could be attributable to the activities in India thereby estimating that 50% of the income is attributable to India. In this manner, 50% of the gross receipts, i.e. ₹ 51,91,15,641/- was held attributable to operations in India and by applying a profit rate of 10%, the income from re-insurance business liable to be taxed in India was determined at ₹ 5,19,11,564/-. The said decision of the Assessing Officer has been arrived at after taking into account the directions of the DRP dated 04.09.2018, which was as a consequence of the objections raised by the assessee against the draft assessment order passed by the Assessing Officer dated 30.12.2017. In this background, the assessee-company is in appeal before us on the aforestated Grounds of appeal. 5. As a perus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and are the entities engaged in re-insurance business and on the other hand are the entities who are providing support services, like the Indian subsidiary from India. 7. The income-tax authorities have set-up a case that the premiums earned by the assessee from various re-insurance contracts with Indian insurance companies is taxable in India because assessee has (i) a business connection in India within the meaning of Sec. 9(1)(i) of the Act; (ii) a PE in India in terms of Article 5(1) of the India-Germany Tax Treaty; and, (iii) a Dependent Agent PE in terms of Article 5(6) of the India-Germany Tax Treaty on account of the activities of the Indian subsidiary in India. 8. As per the Assessing Officer the existence of business connection in India is established because the technical and key functions of re-insurance business relatable to actuarial and underwriting support and risk assessment services are enabled by the Indian subsidiary. Secondly, it is sought to be pointed out that the Indian subsidiary has used the Electronic Underwriting Software, which is globally used by entities of the assessee group. As per the Assessing Officer, after uploading the data in the sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entative for the 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. It is contended that the Assessing Officer has grossly misunderstood the use of Electronic Underwriting Software by the Indian subsidiary. According to the appellant, the Indian subsidiary had access to a common software platform, which is owned by the assessee-company and which is also used by other group companies worldwide. It is explained that the Indian subsidiary merely feeds the data and information received from third parties with regard to the re-insurance proposal in the software; thus, this activity of the Indian subsidiary is merely a support service and does not reflect the carrying out of core re-insurance functions of actuarial or underwriting or risk assessment, which falls in the exclusive domain of the assessee based in Germany. It has been emphasised that once the data is uploaded by the Indian subsidiary in the software, no further recommendation is uploaded by the Indian subsidiary, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pute in this appeal relates to the taxability or otherwise in India of the reinsurance premium earned by the non-resident foreign assessee by underwriting the risks of various Indian insurance companies. It is not in dispute that the appellant before us is an entity incorporated in Germany and is a tax resident of Germany. The manner in which the reinsurance premium is earned by the assessee is also not in dispute. But to recapitulate, we may note that the appellant is a global re-insurance company which has entered into re-insurance contracts with various Indian insurance companies. For underwriting the risks of the Indian insurance companies, assessee earns reinsurance premiums, which is the subject-matter of dispute before us. So far as the nature of receipts in question is concerned, there is a convergence between the assessee and the Revenue that the same are in the nature of business receipts. It is quite well understood that in such like cases where the foreign company earns business income, the same can be taxed in India only if it has a PE in India or business connection so as to fall within the scope of Indian tax laws. At the outset, it has been asserted by the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting models. Support GRAG in investigating claims and provide information for assessing claims. Support GRAG in its conduct of underwriting and claims audits of clients Representation Development Promote GRAG in India and other designated markets. Act as a communication channel between GRAG and GRAG's clients in India and other designated markets. Represent Gen Re at market and industry functions in India and other designated markets. Identify business development opportunities for GRAG in India and other designated markets and pursue them under the instructions and guidance of GRAG. Analyse and assess new products launched in the Indian and other designated markets. Support GRAG in developing products that could be reinsured by GRAG's clients with GRAG. Training Presentations Provide training to staff and clients of GRAG. This training can take place in India and other designated markets. Provide presentations on business-related topics on which the SC has expertise. This can be to GRAG clients in India or other designated markets. 13. A perusal of the aforesaid reveals that the scope of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he matter which has been dealt with by the Hon'ble Supreme Court in the case of E funds IT Solution Inc (supra) in the context of existence of a subsidiary in India of a foreign company. As per the Hon'ble Supreme Court, the presence or otherwise of subsidiary of a foreign company in India would not be conclusive to say that there exists a PE in India. Thus, the existence of the Indian subsidiary cannot ipso-facto be understood as a PE of the assessee in India. 16. At this stage, we may briefly refer to the existence of the LO of the assessee in India. The LO stopped functioning in November, 2014, near about when the Indian subsidiary started functioning. In the course of hearing, it has been explained that the LO, as approved by IRDA, has been functioning in India since 2007, a copy of the approval dated 23.11.2007 has been placed at pages 1 2 of the Paper Book. A perusal of the terms of approval by the IRDA clearly brings out that the LO was permitted for the purpose of acting as a communication channel between the assessee s Head Office and parties in India. The LO was specifically prohibited from engaging in carrying out insurance, reinsurance, cession or retrocess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T (IT), 383 ITR 648 (Del) in the context of the nature of activities of the LO being preparatory or auxiliary in character. The Hon'ble High Court therein noted that the LO of the assessee was found adhering to the conditions imposed by the RBI for running a LO and, therefore, it would increase the burden of Revenue to show that notwithstanding the RBI permission continuing over the years, the LO can still be considered as a PE of the foreign company in India. 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 conne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material on record, namely, the Master Service 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 claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction was also not found to 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 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. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for providing reinsurance to various 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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