Reinsurance Companies (‘Reinsurers’) provide a cover to Insurance Companies (also known as Cedants) who cede (pass on) their insurance liabilities to a reinsurer, who ensures the solvency of Cedants in case of major claims and gives a certain degree of insurance cover to the reinsurer.
Many Foreign Reinsurers do not have an office/ place of business in India and therefore they rely on brokers in India for premium remittance and claim settlement for ease of their operations. The Insurance Regulatory and Development Authority of India (‘IRDAI’) has made separate regulations that govern the functioning of Reinsurers and Insurance/Reinsurance brokers1. The IRDAI Regulations of 2013 for Insurance Brokers had laid down rules for co-broking i.e., instances where insurance broking is jointly handled by more than one broker.
There have been instances where a resident Indian entity/ broker undertakes transactions or executes contracts on behalf of a foreign entity/broker. Such a foreign entity/ broker is typically not taxed in India because the foreign entity has no fixed place of business or No Permanent Establishment (‘PE’) in India. In order to tax such arrangements, India’s Double Tax Avoidance Agreements (DTAA) with several countries have a Dependant Agency PE (‘DAPE’)2 clause to cover such transactions under the ambit of tax.
The Mumbai Tax Tribunal, in its recent ruling,3 has held that no DAPE is constituted in such transactions by analysing the peculiar Co-broking transaction and held that Co-brokers remitting reinsurance premiums are not liable to pay taxes for such remittance.
We, at BDO in India, have summarized the above ruling and have provided our comments on the impact of this decision hereunder.
Facts of the case
- The Taxpayer is an IRDAI registered composite broker authorised to carry out both insurance and reinsurance broking and consultancy services.
- As stipulated by IRDAI guidelines, the Taxpayer, while remitting reinsurance premium paid by Indian cedants to Non-resident reinsurers, remitted the amount through a Singapore-based co-broker (‘Co-broker’).
- By virtue of no PE and no business connection in India, the non-resident reinsurers were not liable to tax in India. Accordingly, the Taxpayer did not withhold taxes before making remittances to the Co-broker.
- The Tax Officer held that out of the brokerage received by the Taxpayer, 97.3% is received from the Co-broker and thus, majority of its reinsurance broking and consultancy business relates to the Singaporean Co-broker. Thus, the Co-broker constitutes a DAPE in India as per India-Singapore DTAA and its income will be chargeable to tax in India.
The Taxpayer was accordingly considered as an ‘assessee in default’ for failure to withhold taxes and interest liability followed.
- The First Appellate Authority however over-turned the contention of the Tax Officer and held that the Taxpayer is not liable to withhold taxes by stating the following:
- The Taxpayer is a mere broker and has no ownership of the premium paid by the Indian cedant to the Non-resident reinsurer. He is not the ‘Payer’.
- It is the Indian Cedant and not the Taxpayer who is the ‘Payer’ i.e., the party paying premium. The onus to withhold taxes, if applicable based on Tax Treaty provisions, is on the Indian Cedant.
The tax authorities, aggrieved by the order of the First Appellate Authority, preferred an appeal before the Mumbai Tax Tribunal.
Tax Tribunal Ruling
1. The Hon’ble Mumbai Tax Tribunal has analysed the transaction of the Taxpayer in-depth and held that the Taxpayer and Co-broker merely facilitate premium remittance.
The Taxpayer is instructed by the Indian cedants to remit the amount overseas, which is done by remitting the premium first to the Co-broker. The Co-broker then remits the premium to Non-resident reinsurers in the proportion of the risk they have undertaken.
2. The observation of the First Appellate Authority has been upheld by the Mumbai Tax Tribunal which states that the entire transaction is a quadripartite transaction involving the Indian Cedant, Taxpayer (Indian Broker), Co-broker (Singapore-based broker) and the Non-resident reinsurers.
While the Indian Cedant is the payer and the Non-resident reinsurer the receiver, the Taxpayer remits the payment to the Co-broker and the Co-broker remits the payment to the Non-resident reinsurer for a commission. The Taxpayer is paid its share of the commission by the Co-broker.
3. The premiums, being receipts for the Non-resident reinsurers shall be taxable in India only if they have a PE in India. In absence of PE, the receipts will be taxable in the country of domicile.
4. Further, the Mumbai Tax Tribunal analysed the operation of the Taxpayer in tandem with the IRDAI Regulations and inferred that the Taxpayer receives only brokerage income and the premium received is deposited in a ‘Client Money Account’ as mandated by IRDAI regulations. The Taxpayer holds them in the capacity of trustee and not for its use. It is reflected as a liability in its financials and the said premium has to be remitted within 2 weeks to the Non-resident reinsurer.
5. A clarification was issued by IRDAI on the Taxpayer’s request which highlighted that the reinsurance premium remitted is not an income of the Co-broker but, is an income for the Non-resident reinsurer. Accordingly, taxpayers need not withhold taxes for such remittances.
6. It was further highlighted that the Taxpayer operates independently and on a one-to-one basis with the Co-broker in addition to other entities/ individuals and receives income from several parties. Its activities are neither wholly nor exclusively for the Co-broker nor on behalf of the Co-broker. Thus, the India-Singapore DTAA provisions resulting in the formation of DAPE are not triggered.
7. The Mumbai Tribunal, thus rejected the Revenue’s appeal by observing the following:
- The Taxpayer and Co-broker are independent and merely facilitate payments;
- Premium paid by Taxpayer is not the Co-broker’s income but just a transfer of funds for onward remittance;
- The premium is not subjected to tax in India since the Co-broker and Non-resident reinsurers do not have a PE in India; and
- The Taxpayer does not exclusively function for the Co-broker since it receives brokerage from several other Non-resident reinsurers and thus, does not constitute DAPE.
While delivering the said decision, the Mumbai Tax Tribunal has comprehensively analysed the transaction along with the IRDAI Regulations, providing much-needed clarity on who will be termed as a ‘Payer’ and his liability to withhold taxes in case of Co-broking transactions. Given the fact that due to its complex nature, insurance/reinsurance transactions with foreign domiciled entities are coming under the lens of the tax authorities and entailing complex litigation, the said ruling establishes that co-brokers are distinct institutions, and no principal-agent relationship exists to constitute DAPE. Consequently, it might prove a huge relief for Insurance brokers who are merely facilitating the remittance of reinsurance premiums to the overseas co-broking entity.
1Brokers licensed to carry out both insurance and reinsurance broking are termed as ‘Composite Brokers’.
2Broadly speaking, a foreign person/ entity is deemed to constitute a DAPE in India if an Indian person/entity habitually exercises authority to and concludes contracts on behalf of such a foreign entity unless the Indian person/entity does so in its ordinary course of business. Further, the Indian person/entity shall not constitute a DAPE if it is an agent of independent status i.e., legally and economically independent of its principal. However, an in-depth analysis of India’s Tax Treaty with respective country is required to conclude about formation of DAPE.
3International Reinsurance and Insurance Consultancy & Broking Services Pvt. Ltd. v. ITO(IT) – 2(2)(2)
(ITA No. 2823/Mum/2019)