Anti-fragmentation Rule and Business Activities of a Foreign Enterprise in India : RGA Services International Reinsurance Company v. DCIT

Brief Facts: 

RGA International Reinsurance Company DAC, an Ireland-based life reinsurer entered into reinsurance arrangements with Indian insurers and received reinsurance premiums for assuming risk overseas. The taxpayer had no office, employees, or physical presence in India, and all core functions such as underwriting approval, risk assumption, capital deployment, and contract execution took place outside India. An Indian group entity, RGA India, provided underwriting support, actuarial assistance, risk analysis inputs, market research, customer relationship coordination, and administrative back-office support. These services were rendered on a cost-plus arm’s-length basis, and RGA India also serviced other group entities. The taxpayer contended that RGA India’s activities were preparatory and auxiliary in nature and therefore did not trigger a Permanent Establishment (“PE”) under the India–Ireland treaty. 

Issue under consideration: 

The Revenue alleged that RGA India constituted both a fixed place PE and a Dependent Agent PE (“DAPE”), arguing that the support functions were integral to the taxpayer’s business model. Further, relying on the MLI anti-fragmentation rule, the Revenue asserted that the activities of the taxpayer and RGA India formed complementary parts of a cohesive business operation in India, thereby nullifying the preparatory-and-auxiliary exemption. The core question before the Tribunal was whether the Indian support entity’s functions crossed the threshold from auxiliary assistance to core business activity, and whether the anti-fragmentation rule could expand PE exposure in such a structure. 

ITAT Ruling: 

The Tribunal undertook a detailed functional and factual analysis and reaffirmed that the taxpayer’s reinsurance business was not carried on in or from India. It emphasized that the core income-generating activity in reinsurance is the assumption of risk, which was undertaken exclusively by the taxpayer outside India using overseas infrastructure, personnel, and capital. Reinsurance contracts were executed offshore, premiums were received abroad, and no part of the key decision-making chain was situated in India. Consequently, RGA India’s premises could not be regarded as a fixed place at the disposal of the taxpayer, which is a threshold condition for a fixed place PE under Article 5.  

On the nature of services, the Tribunal observed that RGA India only performed administrative, analytical, and coordination-level support functions such as information collation and proposal evaluation support. These functions did not involve risk assumption, pricing authority, capital deployment, or binding decision-making, and were therefore correctly categorized as ‘preparatory and auxiliary’.  

Further, RGA India was remunerated on an arm’s-length cost-plus basis and serviced multiple group entities, reinforcing its independent operational character rather than functioning as an extension of the taxpayer’s business in India. 

With respect to DAPE, the Tribunal held that RGA India neither negotiated nor concluded contracts, nor did it habitually secure orders for the taxpayer, and in the absence of IRDAI authorization, it was not legally competent to enter into reinsurance contracts — a decisive factor negating agency authority. The Tribunal reiterated that the DAPE test requires substantive contractual authority or principal-like conduct, neither of which was present.  

Turning to the MLI anti-fragmentation rule, the Tribunal clarified that the rule applies only where both entities carry on complementary business activities forming a cohesive business operation in the same country. Since the taxpayer’s core functions were performed offshore and the Indian entity’s role was limited to support activities, the rule could not be invoked to expand PE exposure. Finally, the Tribunal held that the Revenue’s profit attribution exercise was unsustainable in the absence of a PE and consistent with earlier years, concluded that the reinsurance premium was not taxable in India, with the preparatory-and-auxiliary characterization remaining intact. 

Our thoughts: 

This judgment brings much-needed clarity by drawing a clear line between core business activities and support functions. The Tribunal rightly recognized that in a reinsurance business, income is generated where risk is assumed and capital and underwriting decisions are made, all of which happened outside India in this case. Indian support services, even if detailed and technical, were correctly treated as back-end assistance and not as carrying on the business itself. The ruling also limits the use of the anti-fragmentation rule, making it clear that it cannot be used to create a PE where the foreign company does not actually operate in India. Overall, the decision offers relief to foreign reinsurers that routinely support arrangements in India, when properly structured and paid at arm’s length, will not by themselves lead to tax exposure, while also reminding businesses to keep decision-making and risk assumption clearly offshore. 

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