CHOLAMANDALAM MS GENERAL INSURANCE COMPANY LTD.,CHENNAI vs. ACIT, CHENNAI

आदेश /O R D E R

PER N.R.S. GANESAN, JUDICIAL MEMBER:

The appeals filed by both the assessee and Revenue are

directed against the respective orders of the Commissioner of

Income Tax (Appeals), Large Taxpayer Unit, Chennai and pertain to

assessment years 2003-04 to 2009-10. Since common issues arise

for consideration in all these appeals, we heard these appeals

together and disposing of the same by this common order.

assessee and Revenue’s appeals is disallowance of re-insurance

premium paid by the assessee to the non-resident re-insurance

companies.

3 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 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 brokers where there is no Double Taxation Avoidance Agreement.

According to the Ld. Sr. counsel, the assessee is engaged in the

business of general insurance in India and recognized as such by

Insurance Regulatory And Development Authority of India. The Ld.

Sr. counsel explained that when an aircraft or satellite was insured,

the assessee has to assume large amount of risk which the

assessee may not be able to handle by itself. Therefore, in order to

distribute the risk, the assessee enters into re-insurance contract

with non-resident re-insurance company. According to the Ld. Sr.

4 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 counsel, re-insurance contract or re-insurance treaty is independent

of insurance between the assessee-company and re-insurer. Re-

insurance, according to the Ld. Sr. counsel, is an insurance for

insurer. The Ld. Sr. counsel further submitted that the re-insurer

and the assessee-company being an insurance company, deal with

the each other on principal-to-principal basis. Re-insurance, in fact,

does not affect the relationship between the insured person and the

assessee-company. The insured person is not a party to the re-

insurance treaty or contract. In the event of loss, according to the

Ld. Sr. counsel, the assessee being an insurance company, has to

compensate the insured person independently. Subsequently, a

claim would be made by the assessee in respect of the re-insurance

contract / treaty before the re-insurer. The re-insurer, as per the re-

insurance treaty, would compensate the assessee being the

insurance company.

assessee, further submitted that in order to distribute the risk,

normally, re-insurance would be made with number of re-insurance

companies. Referring to Section 101A of the Insurance Act, 1938,

5 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 the Ld. Sr. counsel submitted that the assessee being an insurance

company, mandatorily reinsure with Indian re-insurer such

percentage of sum assured with each policy as specified by the

Insurance Regulatory And Development Authority of India. The

Insurance Regulatory And Development Authority of India specifies

various percentages ranging from 10% to 20% for various

accounting years. This is a mandatory requirement, therefore, re-

insurance with Indian re-insurer is known as statutory ceding or

obligatory ceding. The Ld. Sr. counsel further submitted that the

only Indian re-insurance company is General Insurance Corporation

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 re-

insurance 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.

6 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08

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

reinsure the risk over and above specified by the Insurance

Regulatory And Development Authority of India, the assessee opted

to reinsure with non-resident re-insurance companies. The Ld. Sr.

counsel further clarified that while the assessee retains the

maximum risk in India as per the Insurance Regulatory And

Development Authority of India regulation, they also ceded re-

insurance risk to non-resident re-insurance company in order to

protect its risk. On a query from the Bench, when sub-section (7)

of 101A of the Insurance Act, 1938 clarifies that the insurance

companies may have re-insurance with Indian re-insurer or other re-

7 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 insurer the entire sum assured on some policy or any portion

thereof in excess of the percentage specified by the Insurance

Regulatory And Development Authority of India, how can they have

re-insurance contrary to the provisions of Section 2(9) of the

Insurance Act, 1938? The Ld. Sr. counsel clarified that Section 2(9)

of the Insurance Act, 1938 is not applicable to the assessee-

insurance company. Referring to Section 114A(zd) of the Insurance

Act, 1938, the Ld. Sr. counsel submitted that the Insurance

Regulatory And Development Authority of India framed regulations

for having re-insurance treaty with non-resident re-insurance

company. Since the Insurance Regulatory And Development

Authority of India framed a regulation in exercise of its statutory

power conferred under Section 114A(zd) of the Insurance Act,

1938, according to the Ld. Sr. counsel, the provisions of Section

2(9) of the Insurance Act, 1938 is not applicable to the assessee.

assessee, further submitted that Section 2C of Insurance Act, 1938

in categorical terms says that only an Indian re-insurance company

holding a valid license for dealing in insurance business can operate

8 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 in India. In other words, the foreign re-insurance company cannot

do any business in India. The Ld. Sr. counsel further submitted that

the foreign insurance company have no place of business in India or

business connection in India. Moreover, no license was granted by

the Insurance Regulatory And Development Authority of India to any

of the non-resident re-insurance company to operate in India. This

was clarified by the Insurance Regulatory And Development

Authority of India in its letter dated 07/05/2008 addressed to Central

Board of Direct Taxes. 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 re-

insurance 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

9 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 company. The brokers have no role in negotiating the re-insurance

contract on behalf of either the Indian insurer or non-resident re-

insurer. 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 non-

resident re-insurance companies as non-resident brokers. The

brokers are not dependent and agent of any other insurance

companies, therefore, the brokers cannot be construed as

dependent agent having a permanent establishment in India.

According to the Ld. Sr. counsel, even though in some of the re-

insurance contract or re-insurance slip, the brokers sign in addition

to re-insurance company, the brokers have no role either in

negotiating the terms of contract of re-insurance or for settlement of

claim. The brokers do not take any decision to accept re-insurance

business.

further submitted that the re-insurance programme of the assessee-

insurance company is approved by the Board of Directors of the

assessee and it was submitted before the Insurance Regulatory

10 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 And Development Authority of India every year. The assessee-

company is expected to identify the re-insurance company to whom

re-insurance contract could be entered into over and above the

obligatory cession to the General Insurance Corporation of India.

On a query from the Bench how the assessee-company identifies

the re-insurance company, either by calling for tender or by inviting

non-resident company for negotiation? The Ld. Sr. counsel

submitted that the assessee contacts the non-resident re-insurance

company by sending e-mail. In some cases, the non-resident re-

insurance company was also contacted by mails through brokers.

The contract was settled by way of communication exchange via e-

mail.

further submitted that normally the assessee-company deals with

re-insurance company outside the country directly. However, in

order to distribute the risk to various companies and the assessee

may not have the entire list of re-insurance companies across the

globe, the assessee has to naturally contact the brokers who have

entire information of the international brokers and re-insurance

11 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 companies. The knowledge of brokers help the assessee-company

in selecting the non-resident re-insurance companies and

placement of re-insurance policies.

further submitted that negotiation was normally as per the agreed

terms with General Insurance Corporation of India. According to

the Ld. Sr. counsel, General Insurance Corporation of India is the

lead-reinsurer, therefore, whatever terms and conditions accepted

by General Insurance Corporation of India for the statutory /

obligatory ceding would also be accepted by non-resident re-

insurance company. According to the Ld. Sr. counsel, normally,

there was no negotiation in the terms and conditions. The re-

insurance 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

12 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 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 re-

insurance company, the proportionate share as per the agreed

percentage would be paid to non-resident re-insurance company as

per the terms and conditions agreed by the lead-reinsurer, namely,

General Insurance Corporation of India.

further submitted that the slip or re-insurance slip is signed by the

re-insurer wherever the re-insurance was direct or through a broker.

Sometimes, even though the broker may sign the re-insurance slip

specifying the share of each re-insurer in respect of particular line of

business, each re-insurer signs the re-insurance slip agreeing their

respective share of risk. According to the Ld. Sr. counsel, the

13 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 broker cannot bind the re-insurer by signing the re-insurance slip in

case the treaty terms have not been accepted by the re-insurer by

signing the treaty or re-insurance slip.

the quarterly statement of accounts is normally sent to the non-

resident re-insurer or the broker as the case may be, specifying the

re-insurance premium, re-insurance claim, commission and net

payable or receivable from the re-insurer. According to the Ld. Sr.

counsel, in case the assessee has to pay money to the re-insurer or

broker, the same would be paid. In case the re-insurer has to pay

money, the same would be paid by the re-insurer either directly or

through the broker. In case of claim, according to the Ld. Sr.

counsel, it is obligation of the assessee-company to settle the claim

irrespective of the fact whether the re-insurer accepts the claim or

not. The assessee would normally appoint independent surveyor to

assess damages caused to the machinery which was subject matter

of insurance and accepts the obligation on the basis of survey

report. The assessee subsequently communicates to the re-insurer

the amount of loss and claim the re-insurer to pay their

14 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 proportionate obligation as per the re-insurance policy. According

to the Ld. Sr. counsel, it is open to the re-insurer to appoint

independent surveyor to assess the extent of damage. However, no

such incident of appointing independent surveyor by the re-insurer

has happened.

nothing but an insurance taken by the insurance companies to

protect itself against the loss and to safeguard its interest.

According to the Ld. Sr. counsel, 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 non-

resident re-insurance company operates outside the country, the

15 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 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. counsel, the CIT(Appeals)’s

order cannot stand in the eye of law after the reversal of Bombay

High Court judgment in the case of Vodafone by the Supreme

Court. Since the non-resident re-insurance company operates

outside the country, their income is not taxable in India, therefore,

the assessee is not liable to deduct tax. Hence, according to the

Ld. Sr. counsel, the disallowance made by the Assessing Officer

under Section 40(a)(i) of the Income-tax Act, 1961 (in short 'the Act')

is not justified.

Counsel for the Revenue, submitted that Section 101A of the

Insurance Act, 1938 clearly says that every insurer shall re-insure

16 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 with Indian re-insurer such percentage of sum assured on each

policy as may be specified by the authority. In this case, according

to the Ld. Sr. Standing Counsel, the authority referred in Section

101A is Insurance Regulatory And Development Authority of India.

In fact, Insurance Regulatory And Development Authority of India by

way of notification specified the percentage of sum assured on each

policy to be re-insured with Indian re-insurer. In fact, according to

the Ld. Sr. Standing Counsel, there is no dispute with regard to re-

insurance premium paid by the assessee to the Indian re-insurer.

The Ld. Sr. Standing Counsel further submitted that the Indian re-

insurer is General Insurance Corporation of India. Therefore, the

assessee being an insurer has obligation to re-insure the

percentage of sum assured as specified by the Insurance

Regulatory And Development Authority of India with General

Insurance Corporation of India.

Act, 1938, the Ld. Sr. Standing Counsel for the Revenue submitted

that the Parliament in its wisdom clarified that the assessee or other

insurer, over and above obligatory re-insurance as specified by the

17 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 Insurance Regulatory Development Authority of India with General

Insurance Corporation of India also re-insures with any Indian re-

insurer or other insurer the entire sum assured on any policy or any

portion thereof in excess of percentage specified by the Insurance

Regulatory And Development Authority of India under sub-section

(2) of Section 101A of the Insurance Act, 1938. According to the

Ld. Sr. Standing Counsel, the “Indian re-insurer” is defined in sub-

section (8)(ii) of Section 101A. As per this definition, “Indian re-

insurer” 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 re-

insurance 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

18 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 question is who are the other insurers other than Indian re-insurer,

namely, General Insurance Corporation of India?

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 the

law of any country other than India which carries on that business in

India or its principal place of business is in India or maintains a

place of business in India. The insurer as defined in Section 2(9) of

Insurance Act, 1938 alone can carry on the re-insurance business.

Therefore, according to the Ld. Sr. Standing Counsel, the other

insurer as referred in sub-section (7) of Section 101A of the

Insurance Act, 1938 is an insurer as defined in Section 2(9). It does

not include non-resident re-insurance company or other insurance

company which is not referred in Section 2(9).

Standing Counsel for the Revenue submitted that “Indian insurance

company” was also defined in Section 2(7A). Therefore, the non-

19 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 resident re-insurance company which has no place of business in

India or business connection in India would not fall within the term

“other insurer” as provided in sub-section (7) of Section 101A.

According to the Ld. Sr. Standing Counsel, the assessee has

business connection by making re-insurance with non-resident re-

insurance company in violation of Insurance Act, 1938, therefore,

the entire premium paid by the assessee has to be disallowed under

proviso to Section 37 of the Act. According to the Ld. Sr. Standing

Counsel, if the assessee claims that there is a business connection

for non-resident re-insurance company in India or non-resident

company has permanent establishment in India, then naturally the

profit of non-resident company is liable for taxation in India, hence,

the assessee is liable to deduct tax. In this case, according to the

Ld. Sr. Standing Counsel, admittedly, the assessee-company has

not deducted any tax, therefore, the Assessing Officer has rightly

disallowed the entire premium paid by the assessee under Section

40(a)(i) of the Act. The CIT(Appeals), however, restricted the

disallowance to 15% without any rhyme or reason. When the

assessee failed to deduct tax, according to the Ld. Sr. Standing

Counsel, the entire amount has to be disallowed under Section

20 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 40(a)(i) of the Act. Even otherwise, the re-insurance premium was

paid contrary to the statutory provision, namely, the Insurance Act,

1938, therefore, the CIT(Appeals) is not justified in restricting the

disallowance to 15%. According to the Ld. Sr. Standing Counsel,

the Revenue filed appeal against the order of the 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.

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-

21 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 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 risk with non-resident re-insurance

companies. After 2014, according to the Ld. Sr. counsel, the

assessee is deducting taxes while making payment to non-resident

re-insurance companies in view of amended provision of Section

2(9) of the Insurance Act, 1938. On a query from the Bench

whether the assessee can have re-insurance as such with other

Indian insurance companies apart from General Insurance

Corporation of India? The Ld. Sr. counsel clarified that the

assessee can also have re-insurance programme with other Indian

insurers like United India Insurance, New India Assurance, etc.

apart from General Insurance Corporation of India. In fact,

according to the Ld. Sr. counsel, the assessee has taken up re-

insurance programme with Indian companies for its own risk and

also received re-insurance premiums from other Indian insurer by

taking part of their risk.

22 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 18. We have considered the rival submissions on either side and

perused the relevant material available on record. The assessee is

an Indian insurance company registered with Insurance Regulatory

And Development Authority of India as provided in Section 3(2A) of

the Insurance Act, 1938. Till 2014, the re-insurance programmes

are not regularized in India. The Parliament for the first time

amended the Insurance Act, 1938 by introducing Part IVA by

Insurance (Amendment) Act, 1961. For the purpose of

convenience, Part IVA is reproduced as under:-

PART IV-A RE-INSURANCE

Re-insurance with Indian reinsurers 101A. (1) Every insurer shall re insure with Indian re-insurers such percentage of the sum assured on each policy as may be specified by the Authority with the previous approval of the Central Government under sub- section (2).

(2) For the purposes of sub-section (1), the Authority may, by notification in the official Gazette,— (a) specify the percentage of the sum assured on each policy to be reinsured and different percentages may be specified for different classes of insurance:

Provided that no percentage so specified shall exceed thirty per cent of the sum assured on such policy; and (b) also specify the proportions in which the said percentage shall be allocated among the Indian re-insurers.

23 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08

(3) Notwithstanding anything contained in sub-section (1), an insurer carrying on fire-insurance business in India may, 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 of Parliament, as soon as may be, after it is made.

(7) For the removal of doubts, it is hereby declared that nothing in subsection (1) shall be construed as preventing an insurer from reinsuring with any Indian re-insurer or other insurer the entire sum assured on any policy or any portion thereof in excess of the percentage specified under sub-section (2).

(8) In this section, (i.) "policy" means a policy issued or renewed on or after the 1st day of April, 1961, in Respect of general insurance business transacted in India and does not include a re-insurance policy; and (ii.) 'Indian re-insurer" means an insurer specified in sub-clause (b) of

24 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08

Clause (9) of Section 2 who carries on exclusively re-insurance business and is approved in this behalf by the Central Government.

Advisory Committee

101B. (1) The Authority with the previous approval of the Central Government shall, for the purposes of Section 101A, constitute an Advisory Committee consisting of not more than five persons having special Knowledge and experience of the business of insurance.

(2) The term of office of, and the allowance payable to, members of the Advisory Committee, the procedure to be followed by, and the quorum necessary for the transaction of business of, the Committee and the manner of filling casual vacancies therein shall be such as may be determined by the regulations made by the Authority.

Examination of re-insurance treaties

101C. The Authority may, at any time (a) call upon an insurer to submit for his examination at the principal place of business of the insurer in India all re-insurance treaties and other re-insurance contracts entered into by the insurer;

(b) examine any officer of the insurer on oath in relation to any such document as is referred to in C1ause (a) above; or

(c) by notice in writing, require any insurer to supply him with copies of any of the documents referred to in Clause (a), certified by a principal officer of the insurer.

Insurance Regulatory And Development Authority of India to make

regulations in consistent with the provisions of Insurance Act and

the rules made thereunder, to carry out the purposes of the

25 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 Insurance Act. The term “re-insurance” is also defined in Section

2(16B) of the 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.

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

26 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 thereunder. Hence, the insurers who are engaged in the business

of insurance and re-insurance are governed by the provisions of

Insurance Act, 1938. The Insurance Act, 1938 is the parent act

which regulates the business of insurance and re-insurance in India.

Insurance Act, 1938. Section 2(9) of the Insurance Act, 1938 reads

as follows:-

“Insurer” means - (a) any individual or unincorporated body of individuals or body corporate incorporated under the law of any country other than India, carrying on insurance business [not being a person specified in sub-clause (c) of this clause] which— (i) carries on that business in India, or (ii) has his or its principal place of business or is domiciled in India or (iii) with the object of obtaining insurance business, employs a representative, or maintains a place of business, in India; (b) any body corporate [not being a person specified in sub-clause (c) of this clause] carrying on the business of insurance, which is a body corporate incorporated under any law for the time being in force in India; or stands to any such body corporate in the relation of a subsidiary company within the meaning of the Indian Companies Act, 1913 (7 of 1913), as defined by sub-section (2) of section 2 of that Act, and (c) any person who in India has a standing contract with underwriters who are members of the Society of Lloyd's whereby such person is authorised within the terms of such contract to issue protection notes, cover notes, or other documents granting insurance cover to others on behalf of the underwriters, but does not include a principal agent, chief agent, special agent, or an insurance agent or a provident society as defined in Part III;

27 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08

Section 2(9) of Insurance Act, 1938 was amended with effect from

1.11.1956 which reads as follows:-

“insurer” means – (a) an Indian Insurance Company, or (b) a statutory body established by an Act of Parliament to carry on insurance business, or (c) an insurance co-operative society, or (d) a foreign company engaged in re-insurance business through a branch established in India.

Explanation – For the purposes of this sub-clause, the expression “foreign company” shall mean a company or body established or incorporated under a law of any country outside India and includes Lloyd’s established under the Lloyd’s Act, 1871 (United Kingdom) or any of the Members;]

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);]

28 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 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 shares, and –

(a) which is formed and registered under the Companies Act, 2013 (18 of 2013) as a public company is converted into such a company within one year of the commencement of the Insurance Laws (Amendment) Act, 2015;

(b) in which the aggregate holdings of equity shares by foreign investors, including portfolio investors, do not exceed forty-nine per cent of the paid-up equity capital of such Indian insurance company, which is Indian owned and controlled, in such manner as may be prescribed.

Explanation – For the purposes of this sub-clause, the expression “control” shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements;

(c) whose sole purpose is to carry on life insurance business or general insurance business or re-insurance business or health insurance business;]

of Insurance Act, 1938 which was omitted with retrospect effect

from 26.12.2014, reads as follows:-

(8) “insurance company” means any insurer being a company, association or partnership which may be wound up under 18 [the

29 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 Companies Act, 1956 (1 of 1956)], or to which the Indian Partnership Act, 1932 (9 of 1932), applies;

101A(8)(ii) of Insurance Act, 1938 which reads as follows:-

“Indian re-insurer” means an insurer specified in sub-clause (b) of clause (9) of section 2 who carries on exclusively re-insurance business and is approved in this behalf by the Central Government.

The definition of “Indian re-insurer” was subsequently amended by

Insurance (Amendment) Act, 2002 with effect from 23.9.2002 which

reads as follows:-

“Indian re-insurer” means an Indian insurance company which has been granted a certificate of registration under sub-section (2A) of section 3 by the Authority to carry on exclusively the re- insurance business in India.

company which was granted a certificate of registration by

Insurance Regulatory And Development Authority of India under

Section 3(2A) of the Insurance Act, 1938. By keeping the above

provisions in mind, let us now examine the transaction 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

30 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 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 and re-insurance. As observed earlier,

Insurance Regulatory And Development Authority of India Act, 1999

was enacted to implement the provisions of Insurance Act, 1938

more effectively and Insurance Regulatory And Development

Authority of India was empowered to frame regulations in consistent

31 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 with the provisions of Insurance Act, 1938 and rules made

thereunder. Therefore, insurance or re-insurance business in India

cannot be carried on contrary to the provisions of Insurance Act,

1938 and rules made thereunder.

premium to non-resident re-insurance company and claimed the

same as deduction while computing the taxable income. The

Assessing Officer disallowed the claim of the assessee on the

ground that tax was not deducted as required. The contention of

the Ld. Sr. counsel for the assessee before this Tribunal is that the

provisions of Section 2(9) of the Insurance Act, 1938 is not

applicable to the assessee-insurance company. The Ld. Sr.

counsel has also referred to provisions of Section 114A(zd) of the

Insurance Act, 1938 and submitted that Insurance Regulatory And

Development Authority of India framed regulations for having re-

insurance treaty with non-resident re-insurance companies. The

non-resident re-insurance company, according to the Ld. Sr.

counsel, was not granted any license to do insurance business in

India. Therefore, according to the Ld. Sr. counsel, the entire

32 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 transaction of the non-resident re-insurance company was outside

the territorial jurisdiction of India and the individual brokers acted

only as facilitator between the assessee-insurance company and

non-resident re-insurance companies, therefore, the profit of the

non-resident re-insurance company is not taxable in India. Hence,

according to the Ld. Sr. counsel, there cannot be any disallowance

for non-deduction of tax under Section 40(a)(i) of the Act. The Ld.

Sr. counsel for the assessee very fairly admitted before this Tribunal

that from the year 2014, the assessee started deducting tax on re-

insurance premium paid to non-resident companies.

Insurance Act, 1938 which reads as follows:-

“2C. (1) Save as hereinafter provided, no person shall, after the commencement of the Insurance (Amendment) Act, 1950 (47 of 1950), begin to carry on any class of insurance 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

33 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08

(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 sub- clause (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 years at any one time:

Provided also that no insurer other than an Indian insurance company shall begin to carry on any class of insurance business in India under this Act on or after the commencement of the Insurance Regulatory and Development Authority Act, 1999.

Provided also an insurer, being an Indian Insurance Company, insurance co- operative society or a body corporate referred to in clause (c) of this sub- section carrying on the business of insurance, may carry on any business of insurance in any Special Economic Zone as defined in clause (za) of section 2 of the Special Economic Zones Act, 2005.

(2) Every notification issued under subsection (1) shall be laid before Parliament as soon as may be after it is issued.

(3) Notwithstanding anything contained in sub-section (1), an insurance co- operative society may carry on any class of insurance business in India under this Act on or after the commencement of the Insurance (Amendment) Act, 2002.”

on insurance business otherwise they are permitted under the

34 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 Insurance Act, 1938. Third proviso to Section 2C clearly says that

insurer other than Indian insurance company shall begin to carry on

any class of insurance business in India. We have also carefully

gone through the provisions of Section 2(9) of the Insurance Act,

1938. The Ld. Sr. counsel for the assessee very fairly submitted

before this Tribunal that after 2014, the assessee started deducting

tax on the re-insurance premium paid to the non-resident re-

insurance company. This is because of the amendment carried out

by the Parliament in Section 2(9) of the Act by Insurance Laws

(Amendment) Act, 2015 was with retrospective effect from

26.12.2014. Therefore, the Ld. Sr. counsel for the assessee admits

that from 26.12.2014, Section 2(9) of Insurance Act, 1938 is

applicable in respect of re-insurance premium paid to non-resident

companies.

provisions of Section 2(9) of the Insurance Act, 1938 is applicable

with effect from 26.12.2014, why it is not applicable for earlier

assessment years? This Tribunal is of the considered opinion that

the provisions of Section 2(9) of the Insurance Act, 1938 is

35 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 applicable as it stood at relevant point of time even for earlier

assessment years. The word “other insurer” 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.

36 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 30. After 2014, Section 2(9) of the Insurance Act, 1938 was

amended which enables foreign company engaged in re-insurance

business to establish a branch in India. Therefore, unless a branch

was established in India, the non-resident insurance company

cannot do any business after 2014. Therefore, naturally the profit of

non-resident re-insurance company is taxable in India. Hence, the

assessee-insurance company has to deduct tax under Section

40(a)(i) of the Act.

person who in India has a standing contract with underwriters who

are members of the Society of Lloyd’s, whereby such person is

authorized within the terms of such contract, to issue protection

notes, cover notes or other documents granting insurance cover to

other on behalf of the underwriters. Therefore, it is obvious that the

first condition is that the person, namely, the insurer or re-insurer

shall be in India. The second condition is that such person shall

have standing contract with underwriters who are members of the

Society of Lloyd’s, whereby such person in India was authorized to

issue protection note or cover note or other documents granting

37 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 insurance cover. The question now may arise what is meant by

“Lloyds”? Lloyds is nothing but an insurance market located in the

city of London. “Lloyds” is a body corporate established by Lloyds

Act, 1871 to operate as a partially- mutualised market place within

which multiple financial brokers, grouped in syndicates, come

together to pool and spread risk. These underwriters or members

are a collection of both Corporations and private individuals, the

latter being traditionally known as “Names”. Therefore, a person in

India has a standing contract with underwriters who are members of

the Lloyds, can be an insurer or re-insurer in India before 2014.

This Tribunal is of the considered opinion that Section 2(9) of

Insurance Act, 1938 before amendment is also equally applicable

for insurance and re-insurance business in India. It cannot be the

intention of the Parliament to authorise Indian insurer to have re-

insurance outside the country ignoring the provisions of Insurance

Act, 1938. Section 2(9) of the Insurance Act, 1938 was amended

by Insurance Laws (Amendment) Act, 2015. Therefore, the

contention of the Ld. Sr. counsel for the assessee that the

provisions of Section 2(9) of Insurance Act, 1938, as it stood before

2014, is not applicable to the assessee-company has no merit at all.

38 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 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 re-

insurance 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 re-

insurance. 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 non-

resident 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 non-

deduction of tax. Section 2C read with Section 2(9)(c) of Insurance

Act, 1938 prohibits any person from doing insurance or re-insurance

business in India otherwise permitted under Insurance Act, 1938.

39 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 Therefore, there is a clear prohibition for payment of re-insurance

premium to the non-resident re-insurance companies. Hence, the

disallowance has to be made under Explanation 1 to Section 37 of

the Act also.

opinion that the Assessing Officer has rightly disallowed the re-

insurance premium under Section 40(a)(i) of the Act. Therefore, the

CIT(Appeals) is not justified in restricting the claim of the assessee

to 15% without any reason.

in the case of Vodafone International Holdings (supra). The

provisions of Insurance Act, 1938, more particularly Section 2(9)

was not considered by the Apex Court and that is not the subject

matter of adjudication before the Apex Court. Therefore, this

Tribunal is of the considered opinion that the judgment of Apex

Court in Vodafone International Holdings (supra) is not applicable at

all.

40 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 34. We have carefully gone through the decision of Mumbai

Bench of this Tribunal in Swiss Re-Insurance Company Limited v.

DDIT (38 ITR 568) and other decisions cited by the Ld. Sr. counsel

for the assessee on identical issue. In all these cases, the

provisions of Section 2(9) of Insurance Act, 1938 was not brought to

the notice of the Benches of the Tribunal which decided the above

cases. Therefore, the Mumbai Bench and Pune Bench had no

occasion to decide the applicability of Section 2(9) of Insurance Act,

1938. Since this Bench of the Tribunal finds that Section 2(9) of

Insurance Act, 1938 as it stood before amendment in 2014, is

applicable to the payment of re-insurance premium to non-resident

re-insurance company, the assessee is liable to deduct tax.

Therefore, the above decisions of Mumbai Bench and Pune Bench

of this Tribunal also may not be of any assistance to the assessee.

aside and that of the Assessing Officer is restored except for the

assessment years 2003-04 and 2004-05.

41 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 36. The assessee has taken one more issue with regard to

validity of reopening of assessment for the assessment years 2003-

04 and 2004-05.

assessee, submitted 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.

Counsel for the Revenue, submitted that the re-insurance premium

was paid to non-resident companies contrary to the provisions of

42 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 Insurance Act. Moreover, the TDS was not made while making re-

insurance premium to the non-resident companies. Therefore,

according to the Ld. D.R., the Assessing Officer has rightly

reopened the assessments.

perused the relevant material available on record. It is not in

dispute that for the assessment years 2003-04 and 2004-05, the

Assessing Officer completed the assessment under Section 143(3)

of the Act on 27.02.2006. The notice under Section 148 of the Act

for reopening the assessments was admittedly issued on

25.03.2008. It is not the case of the Revenue that any new material

was found for the purpose of reopening the assessments. On the

basis of the material already available while processing the

assessment under Section 143(3) of the Act on 27.02.2006, the

Assessing Officer came to a conclusion that the assessee has not

deducted tax while making payment towards re-insurance premium.

This Tribunal is of the considered opinion that when the Assessing

Officer examined the material available on record while passing

order under Section 143(3) of the Act and the assessee also

43 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 disclosed the payment of re-insurance premium, it cannot be said

that there was any negligence on the part of the assessee in

disclosing the relevant material for completing assessment. The

Madras High Court in the case of TANMAC India v. DCIT in Tax

Case (Appeal) No.1426 of 2007 dated 19.12.2016 found that

provisions of Sections 147 & 148 of the Act are not giving extended

time for completing assessment. Unless there is a tangible material

found after completion of assessment, the High Court found that the

completed assessment cannot be reopened on the basis of the

material already available on record. In view of the above, this

Tribunal is of the considered opinion that reopening of assessment

for the assessment years 2003-04 and 2004-05 in the absence of

any tangible material after assessment under Section 143(3) of the

Act is not justified. Therefore, the consequential orders passed by

the Assessing Officer for both the assessment years 2003-04 and

2004-05 are set aside and the appeals of the assessee for those

years are allowed.

provision created towards claim incurred but not reported.

44 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08

assessee, submitted that during the relevant year, claims were

incurred but were not reported. Moreover, the claims incurred

which were not enough reported. The Ld. Sr. counsel explained that the assessee-company has made provision of ₹12,63,76,000/-

on account of claim incurred but not reported and claim incurred 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 /

45 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 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 37(1) of the Act since all

the conditions were fulfilled. The Ld. Sr. counsel further submitted

that the provisions were made on the basis of the damages / losses

occurred during the year under consideration, therefore, the liability

of the assessee-company is ascertained. The provisions made were

in respect of the liability incurred by the assessee and not based on

any future liability. Therefore, according to the Ld. Sr. counsel, the

CIT(Appeals) has rightly allowed the claim of the assessee.

for the Revenue, submitted that the assessee created provision in

anticipation of settlement of claims that were not ascertained. What

was reported to the assessee is damage / losse caused to the

insured persons. According to the Ld. Sr. Standing Counsel, the

assessee is yet to assess the loss and determine the amount to be

46 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 compensated, therefore, it is unascertainable liability. What is to be

allowed under the Income-tax Act is ascertainable liability and not

the unascertainable liability. In this case, according to the Ld. Sr.

Standing Counsel, at the best, the assessee may claim that there is

a liability for compensation. But, the amount of compensation is not

quantified on the last day of the financial year. Therefore, according

to the Ld. Sr. Standing Counsel, it has to be allowed in the year in

which the liability was quantified. Referring to the order of the

CIT(Appeals), the Ld. Sr. Standing Counsel submitted that the assessee made the provision of ₹12,63,76,000/- for the assessment

year 2009-10. It is not known how much amount was actually paid

by the assessee towards compensation. No details were available

even after long time. Therefore, according to the Ld. Sr. Standing

Counsel, it has to be ascertained when the actual compensation or

loss was quantified by the insurance company. The year in which

the actual loss or compensation was quantified is the year in which

the assessee is liable to make the payment. Therefore, according

to the Ld. Sr. Standing Counsel, even though technically loss or

damage suffered is the point for determining the compensation, as

far as the assessee is concerned, the actual compensation or

47 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 damage is quantified only after assessment of actual damages.

Therefore, according to the Ld. Sr. Standing Counsel, whether the

claim incurred but not reported or incurred but 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.

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

48 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 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 assessment year 2009-10. Therefore, this Tribunal is of

the considered opinion that merely because the incident happened

during the year which is the basis for making claim, that cannot be a

reason for allowing the compensation payable by the assessee for

the assessment year 2009-10. In other words, the compensation

payable by the assessee has to be allowed in the year in which the

amount of compensation was determined. Since the amount was

not determined during the year under consideration, this Tribunal is

of the considered opinion that the same cannot be allowed for

assessment year 2009-10. Hence, the CIT(Appeals) is not correct

in allowing the claim of the assessee. Accordingly, the order of the

CIT(Appeals) is set aside and that of the Assessing Officer is

restored.

years 2008-09 and 2009-10 with regard to disallowance made by

the Assessing Officer under Section 14A of the Act.

49 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08

Revenue, submitted that the CIT(Appeals) has deleted the

disallowance on the ground that provisions of Section 14A of the Act

are not applicable to the insurance company. According to the Sr.

Standing Counsel, expenditure relating to exempted income is not

allowable under Section 37 of the Act. Therefore, according to the

Sr. Standing Counsel, it ought to have been quantified under

Section 14A of the Act.

for the assessee, submitted that Section 44 of the Act specifically

says that the provisions of Sections 28 to 43B are not applicable to

the insurance companies. According to the Ld. Sr. counsel, the

income has to be computed as per the provisions contained in the

First Schedule of the Income-tax Act, 1961. Therefore, according to

the Ld. Sr. counsel, it is not correct to contend that under Section 37

of the Act the expenditure relating to income has to be disallowed in

respect of insurance company.

50 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 47. We have considered the rival submissions on either side and

perused the relevant material available on record. In respect of

insurance companies, the profit has to be computed as per the

provisions contained in the First Schedule of the Income-tax Act,

1961. Section 44 of the Act reads as follows:-

Insurance business

“44. Notwithstanding anything to the contrary contained in 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.

51 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08

(a) subject to the other provisions of this rule, any expenditure or allowance [including any amount debited to the profit and loss account either by way of a provision for any tax, dividend, reserve or any other provision as may be described] which is not admissible under the provisions of sections 30 to [43B] in computing the profits and gains of a business shall be added back;

(b) (i) any gain or loss on realization of investments shall be added or deducted, as the case may be, if such gain or loss is not credited or debited to the profit and loss account;

(ii) any provision for diminution in the value of investment debited to the profit and loss account, shall be added back;

(c) such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf shall be allowed as a deduction.”

In view of Rule 5(a), the expenditures which are not for insurance

business cannot be allowed and it has to be added back.

order of the CIT(Appeals). Accordingly, the order of the

CIT(Appeals) is set aside and that of the Assessing Officer is

restored.

52 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 49. The next issue arises for consideration is taxability of profit

on sale of investments. This issue arises for consideration for the

assessment years 2008-09 and 2009-10.

Revenue, submitted that as per Rule 5 of the First Schedule of the

Income-tax Act, 1961, the assessee has to offer to tax the profit as

disclosed in the annual accounts prepared in accordance with the

provisions of Insurance Act and subjected to adjustments made in

accordance with Rule 5(a) and Rule 5(c) of the First Schedule to the

Income-tax Act, 1961. According to the Ld. Sr. Standing Counsel,

Rule 5(b) was omitted by Finance Act, 1988, therefore, as per the

law applicable during the relevant year, there was no provision for

any adjustment with regard to profit on sale of adjustment. Hence,

according to the Ld. Sr. Standing Counsel, the CIT(Appeals) is not

justified in allowing the claim of the assessee.

for the assessee, submitted that the CIT(Appeals) followed the

order of this Tribunal in the case of DCIT v. Royal Sundaram

53 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 Alliance Insurance Company Ltd. in I.T.A. Nos.847-849/Mds/2008 dated 5th March, 2010, therefore, no interference is called for.

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.

54 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 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.

assessee, submitted that this Tribunal in DCIT v. International

Flowers and Fragrances (66 SOT 261) found that UPS is a part of

computer and allowed depreciation at the rate of 60%. This

Tribunal in Sundaram Asset Management Co. Ltd. v. DCIT (145 ITD

17) also found that UPS is a part of computer.

Counsel for the Revenue also. Since the co-ordinate Bench of this

Tribunal found that UPS is a part of computer and allowed

depreciation at the rate of 60%, we are unable to uphold the orders

of the lower authorities. Accordingly, we set aside the orders of

both the authorities below and direct the Assessing Officer to allow

60% in respect of UPS also.

exemption under Section 10(23G) of the Act.

55 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08

assessee, submitted that for the assessment year 2006-07, the

assessee claimed exemption under Section 10(23G) of the Act.

The Ld. Sr. counsel submitted that the Assessing Officer found that

the assessee is not entitled for exemption under Section 10(23G) of

the Act. According to the Ld. Sr. counsel, investments were made

by the assessee in Rural Electrification Corporation Ltd., Power Grid

Corporation of India Ltd. and Bombay Suburban Electricity Supply

and Transport Ltd. Since all the companies in which the

investments were made were engaged in the distribution of

electricity, the CIT(Appeals) confirmed the order of the Assessing

Officer. According to Ld. Sr. counsel, Section 10(23G) of the Act

enables the assessee to claim dividend received from infrastructure

companies. The CIT(Appeals) by referring to Section 80(IA(4) of

the Act found that the companies in which the assessee made

investments were not eligible for business.

for the Revenue, submitted that Section 80(IA)(4) of the Act applies

only to enterprises carrying on business of developing, operating

56 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 and maintaining or developing or maintaining infrastructure facility.

Since the assessee made investments in the companies which are

not generating or producing electricity and were only distributing

electricity, therefore, not eligible for exemption as provided under

Section 10(23G) of the Act.

perused the relevant material available on record. It is not in

dispute that investments were made by the assessee in the

companies which are not producing or generating electricity. All

these companies are admittedly distributing the electricity.

Therefore, as rightly found by the CIT(Appeals), they are not eligible

business under Section 80(IA)(4) of the Act. Therefore, this

Tribunal do not find any reason to interfere with the order of the

lower authority and accordingly the same is confirmed.

2003-04, 2004-05 and 2006-07 to 2009-10 is addition made while

computing book profit.

57 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 61. Shri Percy J. Pardiwalla, the Ld. Sr. counsel for the

assessee, submitted that the provisions of Section 115JB of the Act,

which enables the Department to compute the income, is not

applicable to insurance companies, therefore, there cannot be any

addition to the book profit. According to the Ld. Sr. counsel, the

insurance companies prepare Profit & Loss account as per the

guidelines issued by Insurance Regulatory And Development

Authority of India and not as per Part II and III of Schedule VI of

Companies Act. According to the Ld. Sr. counsel, the applicability

of Schedule VI of the Companies Act was specifically excluded in

respect of insurance companies.

Counsel for the Revenue also. It is not in dispute that the

applicability of provisions of Schedule VI of the Companies Act was

excluded in respect of insurance companies. Therefore, the

provisions of 115JB of the Act, which enables the companies to

compute the book profit, may not be applicable to the insurance

companies. Therefore, this Tribunal is unable to uphold the orders

of both the authorities below. Accordingly, orders of both the

58 I.T.A. Nos.1674 to 1676 & 1759/Chny/11 I.T.A. No.40/Chny/09 I.T.A. Nos.1366 & 1350/Chny/13 I.T.A. Nos.2372 & 2276/Chny/14 I.T.A. Nos.1618 to 1621/Chny/11 I.T.A. No.2146/Chny/08 authorities below are set aside and the Assessing Officer is directed to delete the additions.

Order pronounced on 31st July, 2018 at Chennai.

sd/- sd/- (अ�ाहम पी.जॉज�) (एन.आर.एस. गणेशन) (Abraham P. George) (N.R.S. Ganesan) लेखा सद�य/Accountant Member �या�यक सद�य/Judicial Member

चे�नई/Chennai, �दनांक/Dated, the 31st July, 2018.

Kri.

आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�त (अपील)/CIT(A), LTU, Chennai 4. आयकर आयु�त/CIT, LTU, Chennai 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF.