No Tax Implications On Business Profits Earned On Reinsurance Business In Absence Of Fixed Place PE in India: ITAT

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that there are no tax implications on business profits earned on account of the reinsurance business in the absence of a fixed place permanent establishment (PE) in India.

The two-member bench headed by Pramod Kumar (Vice President) and Anikesh Banerjee (Judicial Member) has observed that the existence of the dependent agent permanent establishment (DAPE) is wholly tax-neutral in India. The business profits earned by the assessee on account of the reinsurance business have no tax implications in India.

The appellant/assessee is a company incorporated in and fiscally domiciled in Ireland and is admittedly entitled to the benefits of the India-Ireland Double Taxation Avoidance Agreement (DTAA). The assessee is in the business of providing reinsurance services, amongst others, to its clients in India. The assessee has earned a reinsurance commission of Rs 504,37,83,613 from India.

Reinsurance is an insurance cover for insurance companies, and it constitutes insurance of the risk liability that an insurer has undertaken under a contract 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.

Since the assessee does not have any permanent establishment in India and, therefore, in terms of the provisions of the Indo-Irish tax treaty, its business profits, embedded in the reinsurance premium received from Indian entities, are not taxable in India. The claim, however, has not found favour with the authorities below.

The view of the Assessing Officer has been approved by the Dispute Resolution Panel, that the subsidiary constitutes a DAPE as well as a fixed place permanent establishment (FP-PE) of the assessee in India. Consequently, in the view of the authorities below, the assessee was 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 at the rate of 10% of the gross reinsurance revenue. The action taken by the Assessing Officer has also been confirmed by the DRP. Accordingly, the Assessing Officer has proceeded to bring the reinsurance revenues to tax in India as business income.

The ITAT held that the core reinsurance activity is the assumption of risk, and the assumption of risk has been done outside India. There is 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.

The ITAT disapproved the stand of the authorities below and held that there was no fixed place or permanent establishment.

Case Title: RGA International Reinsurance Company Ltd Versus Assistant Commissioner of Income Tax International Taxation

Citation: ITA No. 6935/Mum/2018

Date: 31.10.2022

Counsel For Appellant: P J Pardiwalla

Counsel For Respondent: Sunil Umap

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