TaxTMI 
TaxTMI 
2018 (11) TMI 1539
X X X X Extracts X X X X
X X X X Extracts X X X X
....e for consideration in all these appeals, we heard these appeals together and disposing of the same by this common order. 2. The first common issue arises for consideration in both the assessee and Revenue's appeals is disallowance of re-insurance premium paid by the assessee to the non-resident re-insurance companies. 3. Shri Percy J. Pardiwala, the Ld. Sr. counsel for the assessee, submitted that there are five categories of re-insurance premiums paid by the assessee to the non-resident. (1) Directly to non-resident re-insurance companies who are residents of countries with whom India has Double Taxation Avoidance Agreement. (2) Directly to non-resident re-insurance companies through non-resident brokers who are residents of countries with whom India has Double Taxation Avoidance Agreement. (3) Directly to non-resident re-insurance companies through resident brokers where there is Double Taxation Avoidance Agreement between India and the residence of re-insurance companies. (4) Directly to non-resident re-insurance companies where there is no Double Taxation Avoidance Agreement. (5) Directly to non-resident companies through brok....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ration of India. Therefore, naturally, the assessee has to reinsure the risk assumed on each policy with General Insurance Corporation of India as specified by the Insurance Regulatory And Development Authority of India. The Ld. Sr. counsel further submitted that in fact, the assessee complied with the mandatory requirement of reinsurance as specified by Insurance Regulatory And Development Authority of India and there is no dispute about this. In other words, there is no dispute with regard to statutory ceding or obligatory ceding of reinsurance as required under Section 101A(1) of the Insurance Act, 1938. 5. Shri Percy J. Pardiwala, the Ld. Sr. counsel for the assessee, further submitted that Section 101A(7) of the Insurance Act, 1938 further clarifies that the assessee over and above the percentage of re-insurance sum fixed by the Insurance Regulatory And Development Authority of India may also at its option, reinsure the risk with any Indian re-insurer or other re-insurer the entire sum assured on the policy or portion thereof in excess of percentage specified by Insurance Regulatory And Development Authority of India. Therefore, according to the Ld. Sr. counsel, in order to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....axes. The Ld. Sr. counsel further submitted that foreign re-insurance company deals only with Indian insurer either directly or through independent brokers situated either in India or outside India. The brokers who operate in India need to get registered themselves with the Insurance Regulatory And Development Authority of India. According to the Ld. Sr. counsel, the brokers represented multiple insurance companies and reinsurance companies. Therefore, they are independent agents / brokers and they are not attached to any particular insurance company or re-insurance company. According to the Ld. Sr. counsel, the independent brokers act only as a facilitator between the assessee-insurance company and non-resident re-insurance company. The brokers have no role in negotiating the re-insurance contract on behalf of either the Indian insurer or non-resident reinsurer. According to the Ld. Sr. counsel, the brokers function in their ordinary course of business representing no re-insurance or insurance companies. They can also represent multiple nonresident re-insurance companies as non-resident brokers. The brokers are not dependent and agent of any other insurance companies, therefore, t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ry / obligatory ceding would also be accepted by non-resident reinsurance company. According to the Ld. Sr. counsel, normally, there was no negotiation in the terms and conditions. The reinsurance premium would be paid in proportionate to the risk taken over by the non-resident company. The Ld. Sr. counsel further clarified that if the non-resident re-insurance company takes over the risk of 10% of risk assumed by the assessee-company, the 10% of premium collected by the assessee-company would be paid to the non-resident re-insurance company. According to the Ld. Sr. counsel, the negotiation with non-resident re-insurance company would only be with respect to percentage of risk that would be taken over by them. The percentage of risk would normally offered by the assessee-company, and then there would be counter offers from the re-insurance company. According to the Ld. Sr. counsel, if there is a broker, he acts only as a communication channel in the transaction and the broker would not play any role for negotiation or finalization of percentage of the re-insurance. Once the percentage of re-insurance is accepted by the assessee and non-resident reinsurance company, the proportiona....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsel, the assessee being an insurer transfers their part of risk to another re-insurer or insurer in order to reduce its own liability in the event of any claim of damages. On a query from the Bench, the Ld. Sr. counsel submitted that normally the re-insurer accepts the claim made by the assessee-company wherever there was a loss to the property which is subject matter of insurance. However, to meet the extraordinary event, in case of disputes, according to the Ld. Sr. counsel, the treaty slip provides for appointing of arbitrator. The place of sitting of arbitrator is in India. The Ld. Sr. counsel further submitted that since the nonresident re-insurance company operates outside the country, the profit is not chargeable to tax in India. Referring to the order of the CIT(Appeals), the Ld. Sr. counsel submitted that the CIT(Appeals) placed reliance on the judgment of Bombay High Court in the case of Vodafone International Holdings B.V. v. Union of India (2010) 329 ITR 126. Since the judgment of Bombay High Court was reversed by the Supreme Court (reported in (2012) 341 ITR 1), the entire basis of finding of the CIT(Appeals) would no longer exist. Therefore, according to the Ld. Sr. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion 101A. As per this definition, "Indian reinsurer" means an insurance company which has been granted registration certificate under sub-section (2a) of Section 3 by Insurance Regulatory And Development Authority of India to carry on exclusively the re-insurance business in India. As on date, the authority granted registration exclusively for carrying on reinsurance business is the General Insurance Corporation of India. Therefore, according to the Ld. Sr. Standing Counsel, the General Insurance Corporation of India is the only Indian re-insurance company. Sub-section (7) of Section 101A of Insurance Act, 1938 also enables the assessee to have re-insurance with other insurer. Therefore, according to the Ld. Sr. Standing Counsel, the real question is who are the other insurers other than Indian re-insurer, namely, General Insurance Corporation of India? 15. Referring to Section 2(9) of the Insurance Act, 1938, the Ld. Sr. Standing Counsel for the Revenue submitted that the term "insurer" is defined in Section 2(9) of the Insurance Act, 1938. Section 2(9) as it stood at the relevant point of time clearly says that "insurer" means in respect of body corporate incorporated under t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he CIT(Appeals) where he restricted disallowance to 15%. According to the Ld. Sr. Standing Counsel, the entire re-insurance premium paid by the assessee-company has to be disallowed under Section 37 of the Act since it was paid in violation of Section 2(9) of the Insurance Act, 1938 as it stood at the relevant point of time. 17. By way of rejoinder, Shri Percy J. Pardiwala, the Ld. Sr. counsel for the assessee, submitted that re-insurance programme of the assessee-company was made after extensive discussion with General Insurance Corporation of India, the lead-reinsurer. The Ld. Sr. counsel further submitted that Section 2(9) of the Insurance Act, 1938 is not at all applicable to the assessee. By virtue of the rule framed by the Insurance Regulatory And Development Authority of India, in exercise of its statutory power under Section 114A of the Insurance Act, 1938, the assessee was allowed to have re insurance programme with non-resident reinsurer. The Ld. Sr. counsel has also referred to the memorandum of object for introduction of Section 101A in the Parliament. The memorandum clearly says that there was no prohibition for the Indian insurance companies for re-insuring their r....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in lieu of re-insuring the percentage specified under sub-section (2) of the sum assured on each policy in respect of such business, re-insure with Indian re-insurers such amount out of the first surplus in respect of that business as he thinks fit, so however that the aggregate amount of the premiums payable by him on such re-insurance in any year is not less than the said percentage of the premium income (without taking into account premiums on re-insurance ceded or accepted) in respect of such business during that year Explanation- For the purposes of this-section, the year 1961 shall be deemed to mean the period from the 1st April to the 31st December of that year. (4) A notification under subsection (2) may also specify the terms and conditions in respect of any business of re-insurance required to be transacted under this section and such terms and conditions shall be binding on Indian re-insurers and other insurers. (5) No notification under sub-section (2) shall be issued except after consultation with the Advisory Committee constituted under Section 101B. (6) Every notification issued under this section shall be laid before each House o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Insurance Act, 1938 which reads as follows:- "re-insurance" means the insurance part of one insurer's risk by another insurer who accepts the risk for a mutually acceptable premium. 20. Therefore, the entire business of insurance / re-insurance is codified and regulated by Insurance Act, 1938. All the insurance companies which are carrying on insurance business in India have to necessarily comply with the provisions of Insurance Act, 1938 as amended and the rules made thereunder. For the purpose of regularizing the insurance business in a better manner, the Insurance Regulatory And Development Authority of India was established and the said authority was also empowered to frame regulations in consistent with the provisions of Insurance Act, 1938 and rules made thereunder. Therefore, it is obvious that Insurance Regulatory And Development Authority of India has to frame regulations in consistent with the provisions of Insurance Act and rules made thereunder. In other words, Insurance Regulatory And Development Authority of India cannot frame any regulation contrary to the provisions of Insurance Act and the rules made thereunder. Hence, the insurers who are engaged in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd includes Lloyd's established under the Lloyd's Act, 1871 (United Kingdom) or any of the Members;] 22. The term "Indian insurance company" is also defined in Section 2(7A) of Insurance Act, 1938, which reads as follows:- (7A) "Indian insurance company" means any insurer being a company- (a) which is formed and registered under the Companies Act, 1956 (1 of 1956); (b) in which the aggregate holdings of equity shares by a foreign company, either by itself or through its subsidiary companies or its nominees, do not exceed twenty-six per cent. paid-up equity capital of such Indian insurance company; (c) whose sole purpose is to carry on life insurance business or general insurance business or re-insurance business. Explanation.- For the purposes of this clause, the expression "foreign company" shall have the meaning assigned to it under clause (23A) of section 2 of the Income-tax Act, 1961 (43 of 1961);] Section 2(7A) was amended by Insurance Laws (Amendment) Act, 2015 with retrospective effect from 26.12.2014, which reads as follows:- (7A) "Indian insurance company" means any insurer, being a company which is limited by sha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion of the assessee in paying re-insurance premium to non-resident company. It is obvious that the assessee has violated the provisions of Indian Insurance Act. Provisions of Section 101A makes it mandatory to every insurer to re-insure with Indian re-insurers such percentage of sum assured on each policy as may be specified by the authority, namely, Insurance Regulatory And Development Authority of India. An option was given to the insurer under sub-clause (7) of Section 101A of Insurance Act, 1938 that an insurer may re-insure over and above the percentage prescribed by Insurance Regulatory And Development Authority of India with other insurer. By taking advantage of this provisions of sub-caluse (7) of Section 101A, the assessee now claims before this Tribunal that there was no prohibition in Insurance Act, 1938 or rules made thereunder or any regulation framed by Insurance Regulatory And Development Authority of India from re-insuring over and above the percentage prescribed by Insurance Regulatory And Development Authority of India with non-resident re-insurer. There is no dispute that Insurance Act, 1938 is the parent Act which governs and regulates the business of insurance ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nce business in India and no insurer carrying on any class of insurance business in India shall after the expiry of one year from such commencement, continue to carry on any such business unless he is- (a) a public company, or (b) a society registered under the Co-operative Societies Act, 1912 (2 of 1912), or under any other law for the time being in force in any State relating to co-operative societies, or (c) a body corporate incorporated under the law of any country outside India not being of the nature of a private company: Provided that the Central Government may, by notification in the official Gazette, exempt from the operation of this section to such extent for such period and subject to such conditions as it may specify, any person or insurer for the purpose of carrying on the business of granting superannuation allowances and annuities of the nature specified in subclause (c) of clause (11) of Section 2 or for the purpose of carrying on any general insurance business: Provided further that in the case of an insurer carrying on any general insurance business no such notification shall be issued having effect for more than three ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....surer" provided in Section 101A(7) of the Insurance Act, 1938 enables the Indian insurers for re-insuring over and above the percentage fixed by the Insurance Regulatory And Development Authority of India. The re-insurance may be either with Indian re-insurer or other insurer. By taking advantage of the term "other insurer", now the assessee claims that they can re-insure with non-resident re-insurance company ignoring the provisions of Indian Insurance Act, 1938. This Tribunal is of the considered opinion that there is no merit in the contention of the Ld. Sr. counsel for the assessee. The term "other insurer" as provided in Section 101A(7) of the Insurance Act, 1938 is only the insurer which was defined in Section 2(9) of the Insurance Act, 1938. There cannot be any extended meaning which can be given to the term "other insurer". The definition given in Section 2(9) of Insurance Act, 1938 is not inclusive one. It is an exhaustive one. Therefore, an Indian insurer cannot have any re-insurance arrangement with re-insurance company other than the insurer as defined / referred in Section 2(9) of Insurance Act, 1938. 30. After 2014, Section 2(9) of the Insurance Act, 1938 was amend....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee-company has no merit at all. This Tribunal is of the considered opinion that the provisions of Section 2(9)(c) of Insurance Act, 1938 is very much applicable to the re-insurance business, therefore, the profit of non-resident reinsurance company or the person in India who has standing contract with underwriters, who are members of the Lloyds, is taxable in India. Hence, the assessee has to necessarily deduct tax on the premium paid to non-resident re-insurance company for reinsurance. Even otherwise, if the assessee claims that there was no person in India, who has standing contract with underwriters who are members of the Lloyds and premium was paid directly to nonresident re-insurance company, then the transaction of the assessee is clearly in violation of provisions of Section 2(9)(c) of Insurance Act, 1938. In other words, the entire re-insurance arrangement of the assessee- company is in violation and contrary to the provisions of Section 2(9) of Insurance Act, 1938. Therefore, the entire re-insurance premium has to be disallowed under Section 37 of the Act. In this case, the Assessing Officer disallowed for nondeduction of tax. Section 2C read with Section 2(9)(c) of I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that the Assessing Officer did not have any tangible material for reopening the assessment. According to the Ld. Sr. counsel, the original assessment was completed under Section 143(3) of the Act on 27.02.2006 for the assessment year 2003-04. The notice under Section 148 of the Act was issued on 25.03.2008. In the absence of any tangible material, according to the Ld. Sr. counsel, the Assessing Officer cannot reopen the assessment. The details of re-insurance premium to non-resident re-insurer were available before the Assessing Officer and he allowed the claim of the assessee. Therefore, according to the Ld. Sr. counsel, reopening of assessment is only due to change of opinion. 38. On the contrary, Shri M. Swaminathan, the Ld. Sr. Standing Counsel for the Revenue, submitted that the re-insurance premium was paid to non-resident companies contrary to the provisions of Insurance Act. Moreover, the TDS was not made while making reinsurance premium to the non-resident companies. Therefore, according to the Ld. D.R., the Assessing Officer has rightly reopened the assessments. 39. We have considered the rival submissions on either side and perused the relevant material available o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....but not enough reported. Hence, a provision has been made for all the unsettled claims on the basis of the claim lodged by the insured persons. According to Ld. Sr. counsel, the date of damage / loss was considered for recognising the claim in a particular year. In certain circumstances, the damages / losses were not reported in the balance sheet of the insurance company. Such claims are known as claims incurred but not reported. Sometimes, according to the Ld. Sr. counsel, the damages / losses incurred may be reported. However, it was not enough reported. According to the Ld. Sr. counsel, the liability of the assessee has to be met by making necessary provision as per the Insurance Regulatory And Development Authority of India guidelines. The liability of the assessee-company is determined based on the actual loss / damage. According to the Ld. Sr. counsel, the methodology to determine the liability is also certified by the actuary in accordance with guidelines and norms issued by the Institute of Actuaries of India and Insurance Regulatory And Development Authority of India. The Ld. Sr. counsel further submitted that the assessee claimed before the Assessing Officer under Section....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t not enough reported, the year in which the actual damages or losses were determined and crystalized is the year in which the assessee is eligible to claim the damages. 43. We have considered the rival submissions on either side and perused the relevant material available on record. Admittedly, the assessee made provision in respect of claims incurred but not reported and in respect of claims incurred but not enough reported. The compensation for making insurance claim arises on the date of loss or damage occurred to the insured property. But, the actual liability to make the payment arises on the date on which the loss or damage was assessed and the amount was determined. In this case, the accident or loss was reported to the assessee but the actual loss or compensation was not determined during the assessment year 2009-10. Therefore, as rightly submitted by the according to the Ld. Sr. Standing Counsel for the Revenue, the liability to make the payment accrues to the assessee only in the year in which the loss or damage was ascertained and compensation payable to insured person is determined. Admittedly, the compensation payable to insured person was not determined during the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the provisions of this Act relating to the computation of income chargeable under the head "Interest on securities", "Income from house property", "Capital gains" or "Income from other sources", or in section 199 or in sections 28 to 43B, the profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or by a co-operative society, shall be computed in accordance with the rules contained in the First Schedule." Rule 5 of First Schedule to Income-tax Act, 1961 read as follows:- Computation of profits and gains of other insurance business. 5. The profits and gains of any business insurance other than life insurance shall be taken to be the profit before tax and appropriations as disclosed in the profit and loss account prepared in accordance with the provisions of the Insurance Act, 1938 (4 of 1938) of the rules made thereunder or the provisions of Insurance Regulatory And Development Authority Act, 1999 (4 of 1999) or the regulations made thereunder,] subject to the following adjustments - (a) subject to the other provisions of this rule, any expenditure or allowance [including any amount debited ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... perused the relevant material available on record. It is not in dispute that Rule 5(b) of the First Schedule to the Income-tax Act, 1961 was deleted by Finance Act, 1988 with effect from 01.04.1989 and it was re-inserted by Finance (No.2) Act, 2009 with effect from 01.04.2011. Therefore, during the years under consideration, i.e. 2008-09 and 2009-10, the provisions of Rule 5(b) were not in statute book. Hence, as rightly contended by the Ld. Sr. Standing Counsel for the Revenue, the Assessing Officer has rightly taken the sale of investments as taxable income of the assessee. In the earlier order of this Tribunal the fact of deletion of provisions of Rule 5(b) of the First Schedule to the Act by Finance Act, 1988 was not brought to the notice of the Bench. Therefore, the earlier order of this Tribunal may not be applicable to the facts of the case. Accordingly, the order of the CIT(Appeals) is set aside and that of the Assessing Officer is restored. 53. The next issue arises for consideration in the assessee's appeals for assessment years 2003-04, 2004-05 and 2006-07 to 2009-10 is with regard to depreciation on UPS. 54. Shri Percy J. Pardiwalla, the Ld. Sr. counsel for the a....