2023 (6) TMI 1430 - AT - Income Tax

Reinsurance premium to non-residents exempt from TDS under section 195; investment profits non-taxable for insurers

The Dy. Commissioner-of Income Tax, Chennai. Versus M/s. Royal Sundaram–Alliance Insurance Co. Ltd., chennai

ITAT Chennai upheld CIT(A)'s decision favoring the assessee on two issues. First, reinsurance premium paid to non-resident reinsurers cannot be disallowed ... TDS u/s 195 - disallowance of reinsurance premium paid to non-resident reinsurers u/s.40(i)(a) for non-deduction of TDS - HELD THAT:- As decided in assessee own case [2022 (8) TMI 1533 - ITAT CHENNAI] reinsurance premium paid to NRRs cannot be disallowed u/s.40(a)(i) of the Act, for failure to deduct TDS u/s.195, because, reinsurance ceded to non-resident reinsurers is not taxable in India under Income Tax Act, 1961 or under DTAA between India, and respective countries. CIT(A) after considering relevant facts has rightly deleted the additions made by the AO, and thus, we are inclined to up held the findings of the CIT(A), and reject the ground taken by the Revenue for all assessment years. Addition of profit on sale of investment - HELD THAT:- This issue also covered in favour of the assessee by the decision of the Hon’ble Madras High Court in the case of CIT v. United India Insurance Co. [2019 (7) TMI 387 - MADRAS HIGH COURT] and further, from the decision of Cholamandalam MS General Insurance Co. [2021 (11) TMI 1200 - MADRAS HIGH COURT] where it has been held that income from profit on sale of investment by insurance companies is not taxable after deletion of sub-rule (b) of Rule 5 of first schedule to Income Tax Rules, 1962. Decided in favour of assessee. Issues Involved:1. Disallowance of reinsurance premium paid to non-resident reinsurers.2. Addition of profit on sale of investment.3. Disallowance under Section 14A.4. Deletion of disallowance of provisions towards Solatium Fund.5. Deletion of disallowance under Section 40(a)(i) for reimbursement of expenditure and survey fees.6. Deletion of disallowance under Section 40(a)(ia) for commission payments.7. Deletion of disallowance of provisions towards Solatium Fund in computation of book profits under Section 115JB.8. Addition of unexpired risk reserve to book profit.Detailed Analysis:1. Disallowance of Reinsurance Premium Paid to Non-Resident Reinsurers:The primary issue revolves around whether reinsurance premium paid to non-resident reinsurers is taxable in India and subject to TDS under Section 195. The Tribunal noted that this issue has been consistently decided in favor of the assessee in earlier years, holding that reinsurance premiums paid to non-resident reinsurers are not taxable in India under the Income Tax Act, 1961, or under the relevant DTAA. Consequently, the assessee is not liable to deduct TDS under Section 195, and such payments cannot be disallowed under Section 40(a)(i). The Tribunal reiterated that the reinsurance contract is independent of the insurance contract and that the non-resident reinsurers do not have a business connection or PE in India.2. Addition of Profit on Sale of Investment:The Tribunal addressed whether the profit on the sale of investments by insurance companies is taxable. Citing the decision of the Hon'ble Madras High Court in CIT v. United India Insurance Co., the Tribunal held that income from the profit on the sale of investments is not taxable after the deletion of sub-rule (b) of Rule 5 of the First Schedule to the Income Tax Rules, 1962. The Tribunal upheld the CIT(A)'s decision to delete the additions made by the AO towards profit on sale of investments.3. Disallowance Under Section 14A:The Tribunal did not provide a detailed analysis on this issue in the provided text. However, it is implied that the CIT(A)'s decision to delete the disallowance under Section 14A was upheld, considering the overall context of the judgment.4. Deletion of Disallowance of Provisions Towards Solatium Fund:The Tribunal upheld the CIT(A)'s decision to delete the disallowance of provisions towards the Solatium Fund, which was made on an estimated basis at 0.1% of the gross premium from Motor Vehicle Insurance. The CIT(A) had found that such provisions were not unascertained liabilities and thus not disallowable.5. Deletion of Disallowance Under Section 40(a)(i) for Reimbursement of Expenditure and Survey Fees:The Tribunal upheld the CIT(A)'s decision to delete the disallowance made under Section 40(a)(i) for reimbursement of expenditure and survey fees. The CIT(A) had found that the reimbursements and payments did not fall under the purview of TDS as per the relevant Board's circular and judicial precedents.6. Deletion of Disallowance Under Section 40(a)(ia) for Commission Payments:The Tribunal upheld the CIT(A)'s decision to delete the disallowance under Section 40(a)(ia) for commission payments related to the receipt of reinsurance premium. The CIT(A) had found that the payments were not in the nature of commission under Section 194H and thus not subject to TDS.7. Deletion of Disallowance of Provisions Towards Solatium Fund in Computation of Book Profits Under Section 115JB:The Tribunal upheld the CIT(A)'s decision to delete the disallowance of provisions towards the Solatium Fund in the computation of book profits under Section 115JB. The CIT(A) had found that such provisions were not unascertained liabilities and thus not disallowable.8. Addition of Unexpired Risk Reserve to Book Profit:The Tribunal upheld the CIT(A)'s decision to direct the AO to add back to book profit only the pro-rata portion of the unexpired risk reserve based on the number of days of the risk period remaining in the subsequent year. The CIT(A) had found that the entire amount of reserve for unexpired risk should not be added back while computing book profits under Section 115JB.Conclusion:The Tribunal dismissed the appeals filed by the Revenue for all assessment years, thereby upholding the CIT(A)'s decisions on all issues contested by the Revenue. The Tribunal's judgment was consistent with prior decisions and judicial precedents, affirming that the reinsurance premiums paid to non-resident reinsurers are not taxable in India and that profits on the sale of investments by insurance companies are not taxable post the deletion of specific rules.