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TMI Blog2018 (11) TMI 1539X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 brokers where there is no Double Taxation Avoidance Agreement. According to the Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 reinsure the risk over and above specified by the Insurance Regulatory And Developme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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, the brokers cannot be construed as dependent agent having a permanent establishment in I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 proportionate share as per the agreed percentage would be paid to non-resident re-insurance company as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. counsel, the CIT(Appeals)'s order cannot stand in the eye of law after the reversal of Bombay High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the law of any country other than India which carries on that business in India or its principal place of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire 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 risk with non-resident re-insurance companies. After 2014, according to the Ld. Sr. counsel, the assessee is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. 21. The term "insurer" is also defined in Section 2( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies 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 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 eq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 with the provisions of Insurance Act, 1938 and rules made thereunder. Therefore, insurance or re-insurance business in India cannot be carrie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... porated 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 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 cooperative society or a body corporate referred to in clause (c) of this subsection carrying on the business of insurance, may carry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. 31. Before amendment, the term "insurer" clearly says that any person who in India has a standing cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, 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 Insurance Act, 1938 prohibits any person from doing insurance or re-insurance business in India otherwise permitted under Insurance Act, 1938. 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. 32. In view of the above, this Tribunal is of the considered opinion that the Assessing Officer has rightly disallowed the reinsurance premium under Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, 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 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. 42. On the contrary, Shri M. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red 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 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 op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 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 add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. 55. We heard Shri M. Swaminathan, the Ld. Sr. Standing 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computing book profit. 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. 62. We heard Shri M. Swaminathan, the Ld. Sr. Standing 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 author ..... X X X X Extracts X X X X X X X X Extracts X X X X
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