Introduction

The case of M/s International Reinsurance and Insurance Consultancy & Broking Services Pvt. Ltd., Mumbai versus the Income Tax Department adjudicated by the Income Tax Appellate Tribunal (ITAT) Mumbai bench on June 13, 2022, addresses significant issues regarding the liability of brokers to deduct Tax Deducted at Source (TDS) under Section 195 of the Income Tax Act, 1961. The appellant, an Indian resident entity licensed as a composite reinsurance broker under the Insurance Regulatory and Development Authority of India (IRDAI), contested the Assessing Officer's (AO) findings that it failed to deduct TDS on remittances made to a non-resident reinsurer via an overseas co-broker.

Summary of the Judgment

The Income Tax Appellate Tribunal (ITAT) upheld the decision of the Chief Commissioner of Income Tax (Appeals), Mumbai, which held that the appellant was not liable to deduct TDS under Section 195. The AO had initially contended that the appellant, acting as a dependent agent Permanent Establishment (PE) of the overseas co-broker, M/s Aon Benfield Asia Pte. Ltd., Singapore, should be responsible for withholding tax on premium remittances. However, ITAT Mumbai found that the appellant was merely a broker facilitating transactions between Indian insurers and non-resident reinsurers without possessing ownership over the premium amounts. Consequently, the appellant was not deemed the actual payer under Section 195, leading to the dismissal of the revenue's appeal.

Analysis

Precedents Cited

The appellant referenced two decisions from the ITAT Chennai Bench: United India Insurance Co. Ltd. v. JCIT (2018) 97 taxmann.com 466 (Chn-Trib) and DCIT v. Cholamandalam Ms General Insurance Co. Ltd. (2018) 99 taxmann.com 302 (Chn-Trib). In both instances, the courts dealt with insurance companies' obligations to deduct TDS on payments to non-resident reinsurers. However, ITAT Mumbai distinguished these cases, noting that the appellant was not an insurance company but a brokerage firm. Unlike the cited cases, there was no deduction claimed in the appellant's profit and loss account for reinsurance premiums, making the precedents inapplicable to the present facts.

Legal Reasoning

ITAT Mumbai meticulously dissected the roles of all parties involved:

• Agricultural Insurance Company of India (AICI): The Indian insurer and actual payer of premiums.
• M/s International Reinsurance and Insurance Consultancy & Broking Services Pvt. Ltd. (Appellant): The Indian broker facilitating the transaction.
• M/s Aon Benfield Asia Pte Ltd., Singapore: The overseas co-broker involved in remitting premiums to non-resident reinsurers (NRRs).
• Non-Resident Reinsurance Companies (NRRs): The foreign entities receiving premiums.

The Tribunal emphasized that the appellant acted merely as an intermediary without ownership over the premium funds, which were held in a "Client Money Account" as per IRDAI regulations. These funds were strictly meant for transfer to NRRs and were not available for the appellant's use. Furthermore, the appellant had provided necessary documentation, including Tax Residency Certificates (TRC), Form 10F, and PE declarations from NRRs, demonstrating that these entities did not have a Permanent Establishment in India.

The Tribunal also analyzed the Double Taxation Avoidance Agreement (DTAA) between India and Singapore, particularly Article 5, which defines conditions under which a dependent agent PE is established. ITAT concluded that the appellant did not satisfy the criteria to be considered a dependent agent, as it did not habitually conclude contracts on behalf of AB Singapore nor was its business exclusively or predominantly tied to AB Singapore.

Impact

This judgment serves as a critical reference for brokerage firms involved in international transactions, clarifying that brokers acting solely as intermediaries without ownership over the funds are not liable to deduct TDS under Section 195. It delineates the boundaries of responsibility concerning tax deductions in the context of reinsurance transactions, potentially reducing the compliance burden on brokers who operate independently of the actual payers.

Moreover, the decision underscores the importance of clearly defining roles and maintaining proper documentation to substantiate claims of non-liability. Future cases with similar structures may rely on this judgment to argue against unwarranted TDS obligations imposed on brokers.

Complex Concepts Simplified

Section 195 of the Income Tax Act, 1961: This section mandates the deduction of tax at source by any person responsible for paying to a non-resident. The payer is required to deduct tax before making the payment.

Assessee in Default (Section 201): If a responsible person fails to deduct or remit TDS as required under Section 195, they become liable for additional penalties under Section 201.

Permanent Establishment (PE): A PE refers to a fixed place of business through which the business of an enterprise is wholly or partly carried out in another country. Establishing a PE can subject the foreign enterprise to tax in the host country.

Dependent Agent PE: Under Double Taxation Avoidance Agreements (DTAA), a dependent agent PE exists if an agent habitually exercises authority to conclude contracts on behalf of an enterprise, among other criteria.

Double Taxation Avoidance Agreement (DTAA): An agreement between two countries to avoid taxing the same income twice, providing mechanisms for resolving disputes and defining taxing rights.

Client Money Account: A bank account where a broker holds funds on behalf of clients, segregated from the broker’s own funds, ensuring that the broker does not have access to or ownership over these funds.

Conclusion

The ITAT Mumbai judgment in the case of ITO, (IT)-2(2)(2), Mumbai v. M/s International Reinsurance and Insurance Consultancy & Broking Services Pvt. Ltd. reaffirms the principle that brokerage firms acting solely as intermediaries without ownership over premium funds are not liable to deduct TDS under Section 195 of the Income Tax Act. By meticulously analyzing the nature of the transactions, roles of the parties involved, and applicable DTAA provisions, the Tribunal provided clear guidance on the non-liability of brokers in similar setups. This decision not only alleviates undue compliance burdens on independent brokers but also sets a precedent for future interpretations of tax obligations in complex reinsurance and brokerage arrangements.