Tata AIG General Insurance Company Limited Vs DCIT (ITAT Mumbai)
Facts- The assessee, being a general insurance company, is challenging the disallowance of re-insurance premium paid to non-resident reinsurers, who do not have a place of business / branch in India, u/s.37(1) of the Act. The alternative disallowance that was made by the ld. AO in this regard was u/s.40(a)(i) of the Act for payments made without deduction of tax at source.
Conclusion- We would like to reiterate the fact that there is absolutely no dispute that the foreign reinsurers does not have any place of business in India / permanent establishment in India / branch established in India / Liaison office in India. Hence, any payment made by the assessee company to such foreign insurers would not be chargeable to tax in the hands of the foreign reinsurers in India in terms of Section 195(1) of the Act. Accordingly, as stated earlier, there would be no obligation on the part of the assessee, being a payer, to deduct tax at source and consequently there cannot be any disallowance u/s.40(a)(i) of the Act.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal in ITA No.1718/Mum/2020 for A.Y.2015-16 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-15, Mumbai in appeal No. CIT(A)-15, Mumbai/10628/2019-20 dated 28/02/2020 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 31/12/2018 by the ld. Dy. Commissioner of Income Tax-8(3)(1), Mumbai (hereinafter referred to as ld. AO).
2. The ground Nos. 1 & 2 raised by the assessee are general in nature and does not require any specific adjudication. It would be relevant to mention here that the assessee being a general insurance company is bound to prepare the accounts in accordance with the provisions of the first schedule to the Income Tax Act, 1961 (hereinafter referred to as „Act’). The computation of income of insurance company would be prepared on these accounts subject to the adjustments that are provided in Rule 2 and Rule 5 of the first schedule of the Act. In effect as per Rule 5 of the first schedule to the Act, the assessee’s income would be profits as disclosed in the profit and loss account prepared as per the Insurance Act, 1938 excluding the amounts disallowable u/s. 30 to 43B of the Income Tax Act. This has been duly followed by the assessee in the instant case.
3. The ground Nos. 3 & 4 raised by the assessee are challenging the disallowance of re-insurance premium paid to non-resident reinsurers, who do not have a place of business / branch in India, u/s.37(1) of the Act. The alternative disallowance that was made by the ld. AO in this regard was u/s.40(a)(i) of the Act for payments made without deduction of tax at source.
3.1. We have heard rival submissions and perused the materials available on record. We find that assessee is in the business of general insurance. During the year, the assessee paid an amount of Rs.681,13,22,176/- to non-resident companies (foreign reinsurers) as reinsurance premium. The assessee had not withheld tax on these outward remittances except one payment of Rs.45,55,87,765/- made to Swiss Reinsurance Co. Ltd., The ld. AO observed that the remaining reinsurance premium paid in the sum of Rs.635,57,94,411/- was liable for disallowance u/s.37 of the Act in view of the provisions contained in Section 101A r.w.s. 2(9) of the Insurance Act, 1938. Additionally, the ld. AO, on without prejudice basis, also observed that since the said payment of Rs.635,57,94,411/- was made without deduction of tax at source, the same would be liable for disallowance u/s.40(a)(i) of the Act also. When assessee was show-caused in this regard, the assessee gave a detailed explanation before the ld. AO which was not considered. Accordingly, the ld. AO proceeded to make disallowance of reinsurance premium of Rs.635,57,94,411/- u/s.37(1) and alternatively also stated that the same would be liable for disallowance u/s.40(a)(i) of the Act.
3.2. The ld. CIT(A) considering the fact that there was an amendment in Section 2(9) of the Insurance Act, 1938 w.e.f. 26/12/2014 held that the assessee shall be allowed deduction on payments made prior to 26/12/2014 and payments made on or after 26/12/2014 shall be covered within the ambit of Explanation 1 to Section 37 of the Income Tax Act liable for disallowance thereon. The ld. CIT(A) however, said that since the entire payment was made without deduction of tax at source, the ld. AO was justified in alternatively making disallowance u/s.40(a)(i) of the Act.
3.3. We find that assessee is an independent insurance company registered with Insurance Regulatory and Development Authority of India (IRDA) as provided in Section 3(2A) of the Insurance Act, 1938. It is not in dispute that the assessee has paid reinsurance premium to nonresident insurance companies. It is not in dispute that the said nonresident reinsurance companies do not have any branch or any place of business in India. The case of the Revenue is that the payments made to non-resident reinsurance companies were in violation of provisions of Insurance Act 1938 and accordingly, not allowable as deduction in terms of Explanation-1 to Section 37 of the Act. Hence, the two points that are to be decided in this appeal are as under:-
a) Whether the re-insurance premium paid to non-resident reinsurance companies was in violation of provisions of the Insurance Act and consequently whether the provisions of Explanation to Section 37(1) of the Act after 26/12/2014 could be brought into force ?
b) Whether reinsurance payment made would be in violation of provisions of Section 40(a)(i) of the Act ?
3.4. We find that the ld. AO had heavily placed reliance on the decision of the Co-ordinate Bench of Chennai Tribunal in the case of DCIT vs. Cholamandalam MS General Insurance Co. Ltd where the provisions of Section 2(9) r.w.s. 101A(7) of the Insurance Act, 1938 were dealt with and the issue in dispute was decided against the assessee. In this regard, it would be relevant to reproduce the provisions of Section 2(9) and Section 101A of the Insurance Act, 1938 as under:-
(9) “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;
PART IV-A
RE-INSURANCE
Re-insurance with Indian reinsurers
101A. (1) Every insurer shall re insure with Indian rc-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.
(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 reinsurers 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 (I) 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).“
3.5. Further w.e.f. 26/12/2014, Insurance Laws (Amendment) Act, 2015 was brought into force wherein the erstwhile Section 2(9) of the Insurance Act, 1938 was amended. The amended definition of “insurer” as per Section 2(9) of the Insurance Act is as under:-
(9) “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 its Members;“
3.6. From the amended definition of term “insurer” u/s.2(9) of the Insurance Act w.e.f. 26/12/2014, it could be seen that a foreign company engaged in reinsurance business through a branch established in India would also fall within the definition of “insurer”. Prior to 26/12/2014 this amended definition was not in force and hence, not applicable. That‟s why the ld. CIT(A) had granted relief to the assessee by holding that any payment of reinsurance premium made to non-resident reinsurers would not be in violation of provisions of Insurance Act and consequently the provisions of Explanation-1 to Section 37 of the Income Tax Act could not be applied thereon. Against this finding, the Revenue is not in appeal before us and hence, this particular finding had attained finality. Hence, what is required for us to be adjudicated is only whether the payments made on or after 26/12/2014 would be in violation of provisions of Insurance Act and consequently liable for disallowance in terms of Explanation 1 to Section 37 of the Income Tax Act. As stated earlier, undisputedly, reinsurers to whom assessee had made payment, does not have any place of business or branch in India. So, even after 26/12/2014, the amended definition of Section 2(9) of the Insurance Act could not be made applicable to the facts of the instant case.
3.7. The provisions of Section 101A of Insurance Act has already been reproduced hereinabove. The relevant provision which is applicable thereon to the facts of the instant case is Section 101A(7). For the sake of convenience, the Section 101A(7) of the Insurance Act alone is reproduced hereunder:-
101A(7):
―For the removal of doubts, it is hereby declared that nothing in sub-section (1) shall be construed as preventing an insurer from re-insuring 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).‖
3.8. From the aforesaid provision, the expression “other insurer” assumes significance. Whether the aforesaid expression “other insurer” would include foreign re-insurers? If the answer is in the affirmative, then the assessee has not violated any provisions of the Insurance Act, 1938 and consequently there cannot be any disallowance in terms of Explanation 1 to Section 37(1) of the Income Tax Act. If the answer is in the negative, then the assessee had violated the provisions of Insurance Act and consequently would be liable for disallowance in terms of Explanation 1 to Section 37 of the Income Tax Act.
3.9. As stated earlier, the provisions of Insurance Act i.e. Section 2(9) and Section 101A(7) were subject matter of adjudication by the Chennai Tribunal in the case of Cholamandalam MS General Insurance Co. Ltd referred to supra which was heavily relied upon by the ld. AO. The relevant operative portion of the said judgement as reproduced in the order of the ld. CIT(A) is reproduced herein for the sake of convenience:-
”The question now arises for consideration is when the 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 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 nonresident 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.
3.10. This was the strong contention of the Revenue to deny the disallowance of reinsurance premium payment made to non-resident reinsurers in the instant case. We find that the aforesaid finding of Chennai Tribunal has been reversed by the Hon’ble Madras High Court in the case of Cholamandalam MS General Insurance Co. Ltd vs. DCIT reported in 102 taxmann.com 292 dated 12/12/2018. It would be relevant to reproduce the questions raised before the Hon’ble Madras High Court as under:-
“2.The common legal issue arising in these appeals relates to disallowance of reinsurance premium ceded to non-resident reinsurers. The assessees have raised the following substantial questions of law for consideration:-
“(i) Whether the ITAT erred in deciding the validity of reinsurance ceded to the non-resident reinsurers when such issue was not even raised before it by either the Department or the Appellant?
(ii) Whether the ITAT erred in holding that the IRDA (General Insurance – Reinsurance) Regulation, 2000 is contrary to section 101A of the Insurance Act, 1938 when it does not have the power to decide the validity of regulations made by the IRDA?
(iii) Whether the ITAT erred in holding that reinsurance payments to nonresidents are prohibited by law and therefore hit by Explanation 1 to section 37 of the Act?
(iv) Whether the ITAT erred in failing to follow co-ordinate bench decisions on the very question of reinsurance payments to non-residents when it ought to have referred the matter to a larger bench if it disagreed with such judgments?‖
3.11. The Hon’ble Madras High Court considered Cholamandalam MS General Insurance Co. Ltd case in TCA No.754 of 2018 as the lead case. Out of the aforesaid four questions, the question Nos. 2 & 3 would be relevant for our adjudication in the instant case. The aforesaid questions were addressed by the Hon’ble Madras High Court by observing as under:-
“12. The sum and substance of the conclusion of the Tribunal is that the entire reinsurance arrangement of the assessee-company is in violation and contrary to the provisions of Section 2(9) of the Insurance Act and therefore, the entire reinsurance premium has to be disallowed under Section 37 of the Act. The Tribunal holds that there is a clear prohibition for payment of reinsurance premium to the non- resident reinsurance companies.
13. As noticed above, it is neither the case of the Revenue, nor the case of the assessee that the claim for deduction was made under Section 37 of the Act. The Tribunal suo motu has non-suited the assessee by referring Explanation 1 to Section 37 of the Act. Under the said Explanation, it was declared that any expenditure incurred by an assessee for any purpose, which is an offence or which is prohibited by law, shall not have been deemed to be incurred for the purpose of business or supervision and no allocation or allowance shall be made in respect of such expenditure. Admittedly, the Tribunal did not render any finding that the assessee has incurred expenditure for a purpose, which is an offence. However, the Tribunal holds that expenditure incurred by the assessee is prohibited by law.
14. The larger question would be whether at all this is an expenditure? However, we do not propose to deal with this, as that was never decided by the Tribunal in the impugned order and leave the issue open. Thus, we are required to examine as to whether in the facts and circumstances, the Tribunal was right in holding that payment of reinsurance premium to nonresident insurance companies is prohibited and to be disallowed under Section 37 of the Act.
15. As pointed out earlier, neither the Revenue, nor the assessee referred to Section 37 of the Act. Thus, the error committed by the Tribunal firstly is in exceeding the scope of the order of remand passed by the Division Bench of this Court in the earlier decision noted above. Secondly, the Tribunal has no jurisdiction to declare a transaction to be either prohibited or illegal occurring under a different statute over which, it has no control. In other words, the Income-tax Officer cannot declare a transaction as illegal under the provisions of the Insurance Act or the Regulations framed thereunder. The Income- tax Officer can examine as to whether any income accrued in the hands of the assessee is required to be taxed. In the instant case, neither the Assessing Officer, nor the Commissioner of Income-tax (Appeals)-II (for brevity ―the CIT(A)‖) has made any such endeavour, but the Tribunal has done such an exercise which, in our considered opinion, was without jurisdiction. Nevertheless, as we have heard elaborate arguments on the side of the assessees as well as the Revenue, we are constrained to test the correctness of the order passed by the Tribunal in this regard. Thus, we have to decide as to whether there is a prohibition under law for insurance payments to non-residents so as to attract the rigour of Explanation 1 to Section 37 of the Act.
16. In this regard, we may straightaway refer to the statement of objects and reasons for the Insurance (Amendment) Bill, 1961, which was introduced in the Lok Sabha on 14th February, 1961. This Bill was passed and the Insurance Act stood amended. The Hon’ble Finance Minister for the Union of India would state that re-insurance is an essential part of general insurance business and at present (1961), insurance companies, operating in India, are dependent on companies outside India for a very large part of their requirements in this connection and more often than not enter into disadvantageous arrangements. Moreover, re-insurance with companies outside India results in loss of foreign exchange and the Bill is intended to foster the growth of Indian re-insurance companies and also to save foreign exchange. The Bill sought to provide that every insurance company operating in India must re-insure a certain percentage of its business with Indian re-insurance companies approved in this behalf by the Central Government. The Central Government was given power to fix the percentage and this power to be exercised in consultation with the Advisory Committee so constituted. The power was also conferred on the Central Government to allocate the percentage so fixed amongst the approved Indian re-insurance companies. With the aforesaid object, the Bill proposed to insert Part IVA under the head ―Re- insurance containing two provisions, viz., Sections 101A and 101B.
17. The Bill had been passed by the Parliament and the Insurance Act stood amended with effect from 01.04.1961. For better appreciation, the same is quoted hereinbelow:-
”Re-insurance with Indian re-insurers. Section 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 [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 re-insured 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.
(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 reinsurance 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 sub- section, the year 1961 shall be deemed to mean the period from 1st April to the 31st December of that year.
(4) A notification under sub-section (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 re-insuring 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 subsection (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 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.]“
18.The interpretation given by the Tribunal is with regard to the meaning of the term “other insurer” occurring in sub-Section (7) of Section 101A of the Insurance Act. Sub-Section (7) of Section 101A starts with the words “For the removal of doubts“, which would denote that it is clarificatory with regard to what has been stated in sub- Section (1) of Section 101A. It was clarified and declared that nothing in sub-Section (1) of Section 101A shall be construed as preventing an insurer from re-insuring with any Indian re-insurer or other insurer, the entire sum on any policy or any portion thereof in excess of the percentage specified under sub-Section 2 of Section 101A. The Tribunal while explaining the meaning of the words “other insurer“, held that the definition of “insurer” under sub-Section (9) of Section 2 of the Act alone should be relied upon and that is the only definition of “insurer” and if such a definition is applied, re-insurance with foreign companies is prohibited by law. The Tribunal held that the word “other insurer” provided in Section 101A(7) of the Insurance Act enables the Indian insurer for reinsuring over and above the percentage fixed by the Regulatory Authority and the reinsurance may be either with Indian re-insurer or other insurer. It further held that by taking advantage of the term “other insurer“, the assessee claims that they can re-insure with nonresident reinsurance company ignoring the provisions of the Insurance Act. It further proceeded to hold that the term “other insurer” as provided in Section 101A(7) of the Insurance Act is only the insurer, which is defined in Section 2(9) of the Insurance Act and there cannot be any extended meaning, which can be given to the term “other insurer“. Thus, it held an Indian insurer cannot have any reinsurance arrangement with reinsurance company other than the insurer, as defined in Section 2(9) of the Insurance Act. In our considered view, the conclusion of the Tribunal is not \ sustainable. We support such conclusion with the following reasons.
19. In exercise of the powers under Section 114A of the Insurance Act, and Sections 14 and 26 of the Insurance Regulatory and Development Authority Act, 1999, the Central Government framed the Insurance Regulatory and Development Authority Regulations pertaining to General Insurance – Reinsurance called Insurance Regulatory and Development Authority (General Insurance – Reinsurance) Regulations, 2000. Chapter II of the said Regulations deals with procedure to be followed for reinsurance arrangements and it would be beneficial to refer to the said provision, which reads as follows:-
“Chapter II:-
3. Procedure to be followed for Reinsurance Arrangements:-
(1) The Reinsurance Programme shall continue to be guided by the following objectives to:
(a) maximise retention within the country;
(b) develop adequate capacity;
(c) secure the best possible protection for the reinsurance costs incurred;
(d) simplify the administration of business.
(2) Every insurer shall maintain the maximum possible retention commensurate with its financial strength and volume of business. The Authority may require an insurer to justify its retention policy and may give such directions as considered necessary in order to ensure that the Indian insurer is not merely fronting for a foreign insurer.
(3) Every insurer shall cede such percentage of the sum assured on each policy for different classes of insurance written in India to the Indian reinsurer as may be specified by the Authority in accordance with the provisions of Part IVA of the Insurance Act, 1938.
(4) The reinsurance programme of every insurer shall commence from the beginning of every financial year and every insurer shall submit to the Authority, his reinsurance programmes for the forthcoming year, 45 days before the commencement of the financial year;
(5) Within 30 days of the commencement of the financial year, every insurer shall file with the Authority a photocopy of every reinsurance treaty slip and excess of loss cover covernote in respect of that year together with the list of reinsurers and their shares in the reinsurance arrangement
(6) The Authority may call for further information or explanations in respect of the reinsurance programme of an insurer and may issue such direction, as it considers necessary;
(7) Insurers shall place their reinsurance business outside India with only those reinsurers who have over a period of the past five years counting from the year preceding for which the business has to be placed, enjoyed a rating of at least BBB (with Standard & Poor) or equivalent rating of any other international rating agency. Placements with other reinsurers shall require the approval of the Authority. Insurers may also place reinsurances with Lloyd’s syndicates taking care to limit placements with individual syndicates to such shares as are commensurate with the capacity of the syndicate.
(8) The Indian Reinsurer shall organise domestic pools for reinsurance surpluses in fire, marine hull and other classes in consultation with all insurers on basis, limits and terms which are fair to all insurers and assist in maintaining the retention of business within India as close to the level achieved for the year 1999-2000 as possible. The arrangements so made shall be submitted to the Authority within three months of these regulations coming into force, for approval.
(9) Surplus over and above the domestic reinsurance arrangements class wise can be placed by the insurer independently with any of the reinsurers complying with sub-regulation (7) subject to a limit of 10% of the total reinsurance premium ceded outside India being placed with any one reinsurer. Where it is necessary in respect of specialised insurance to cede ashare exceeding such limit to any particular reinsurer, the insurer may seek the specific approval of the Authority giving reasons for such cession.
(10) Every insurer shall offer an opportunity to other Indian insurers including the Indian Reinsurer to participate in its facultative and treaty surpluses before placement of such cessions outside India.
(11) The Indian Reinsurer shall retrocede at least 50% of the obligatory cessions received by it to the ceding insurers after protecting the portfolio by suitable excess of loss covers. Such retrocession shall be at original terms plus an over-riding commission to the Indian Reinsurer not exceeding 2.5%. The retrocession to each ceding insurer shall be in proportion to its cessions to the Indian Reinsurer.
(12) Every insurer shall be required to submit to the Authority statistics relating to its reinsurance transactions in such forms as the Authority may specify, together with its annual accounts.‖ The above Regulations are Statutory Regulations, which bind the stakeholders.
20. A conjoint reading of Regulation 3 and sub-Regulations (1) to (10) will clearly show that the objectives were to maximize the retention of revenue within the country. What we are required to see is whether there is any indication in the Insurance Regulatory and Development Authority (General Insurance – Reinsurance) Regulations, 2000 prohibiting reinsurers with a foreign insurer. A reading of Regulations 3(2), 3(4), 3(7), 3(9) and 3(10) clearly show that there is no bar.
21. The sum and substance of the Regulations is that every insurer shall cede such percentage of sum assured on each policy, for different classes of insurance written in India to the Indian re-insurer as may be specified by the Authority under Section 101A of the Insurance Act. Therefore, every Indian insurer is to cede, such specified/notified percentage of the sum assured and not the whole. The commencement date for the re-insurance programme is also spelt out in the Regulations. The insurer has to disclose payments made outside India and there is also a restriction on with whom, they can enter into a contract of re-insurance, as the Regulations place an embargo stating that such entity should have enjoyed the rating of at least BBB or equivalent rating of any other international rating agency. Thus, the reading of the Regulations will clearly show there is absolutely no prohibition for re-insurance with a foreign re-insurance company.
22. The observations made in the finding rendered by the Tribunal stating that the Regulations are inconsistent with the provisions of the Act are utterly perverse and to be outrightly rejected. In 2008, the Standing Committee on Finance proposed the amendment to the Insurance Laws and the Insurance Laws (Amendment) Bill, 2008 was introduced. The report of the Committee states that the General Insurance Corporation Re is the only national re-insurer operating in India and also has re-insurance business in international market and its share of international business is 44 per cent. The Chairman of the General Insurance Corporation (GIC), who is one of the respondents in these appeals, has deposed before the Standing Committee on Finance and would state that the legal position as of 2008, there was no bar on doing re-insurance business by any foreign reinsurance company in India. The Chairman, GIC expressed deep concern that when GIC has to transact international business in various countries, they are subjected to lot of crosschecks and regulation and there is no corresponding regulation in India, as a result of which, foreign reinsurance companies can accept re-insurance business without taking any licence and without opening any branch in India. Thus, the suggestion was there is a need for regulation for any foreign country coming into India and doing re-insurance business. Ultimately, the Standing Committee on Finance noted that there is no bar on foreign re-insurance business companies carrying on re- insurance business in the country without any licence or opening a branch, nor there was a regulation to control the transaction of foreign re-insurers. This ultimately, led to the amendment to the Insurance Act by amending the definition of “insurer” in Section 2(9) of the Insurance Act to mean a foreign company engaged in re-insurance business through a branch established in India. The Tribunal was of the view that unless and until a branch is opened by the foreign re- insurance company, the question of conducting re-insurance business in India cannot be done. In our considered view, this conclusion of the Tribunal is not sustainable. The answer lies not in any recent proceedings but, a circular issued by the CBDT as early as on 03.10.1956 bearing Circular No. 38(XXXIII-7) [F.No.51(5)-IT/54]. The operative portion of the circular reads as follows:-
“Liability to tax or freedom therefrom of the foreign reinsurer will depend on various factors, such as the existence of reciprocity between the Indian insurer and the foreign reinsurer, the magnitude of local retention as compared with the reinsurance premium paid by the Indian insurer to the foreign reinsurer and so on. The Income-tax Officers will, therefore, have to examine each case in the light of its facts and decide where tax liability is attracted, what portion of the income from the reinsurance should be assessed under section 42(2) of the 1922 Act [corresponding to section 92 of the 1961 Act].“
23. A reading of the above circular would clearly reveal that at no point of time, the Income-tax Department took a stand that the re-insurance business with a foreign re-insurance company was a prohibited business. Further, the Tribunal fell in error in rendering such a finding without noticing the Re-insurance Regulations, which has been provided by the Insurance Regulatory and Development Authority of India. In the said Regulations, the highlights of the statement and objects for introduction of Chapter IVA to the Insurance Act in the amendment, in the year 1961, had been brought into after which, there is an order of Preference for Reinsurance Cessions. In the order of preference, the last among them is what can be offered to Indian insurers and overseas insurers. Thus, the regulations does not wholly prohibit any re-insurance with overseas reinsurance companies subject to the condition that the other priorities contained in Clauses 1, 2 and 3 of the regulations are exhausted. Furthermore, the Reserve Bank of India, Exchange Control Department, Central Office, Mumbai notified the Foreign Exchange Management (Insurance) Regulations, 2000. The major changes in the procedure as per the memorandum of Exchange Control Regulations relating to General Insurance in India (GIM) were summarised and the relevant Regulation, pertaining to re- insurance arrangement, is as follows:-
