Eligibility for deduction under section 80-O in case of receipt of brokerage by reinsurance agent, operating in India on behalf of principals abroad, from gross premia before remittance to his foreign principals
1. Under the provisions of section 80-O of the Income-tax Act, 1961 an Indian company or a non-corporate assessee, who is resident in India, is entitled to a deduction of fifty per cent of the income received by way of royalty, commission, fees, etc., from a foreign Government or foreign enterprise for the use outside India of any patent, invention, model, design, secret formula or process, etc., or in consideration of technical or professional services rendered by the resident. The deduction is available if such income is received in India in convertible foreign exchange, or having been converted into convertible foreign exchange outside India, is brought in by or on behalf of the Indian company or aforementioned assessee in accordance with the relevant provisions of the Foreign Exchange Regulation Act, 1973 for the time being in force.
2. Reinsurance brokers, operating in India on behalf of principals abroad, are required to collect the reinsurance premia from ceding insurance companies in India and remit the same to their principals. In such cases, brokerage can be paid either by allowing the brokers to deduct their brokerage out of the gross premia collected from Indian insurance companies and remit the net premia overseas, or they could simply remit the gross premia and get back their brokerage in the form of remittance through banking channels.
3. The Reserve Bank of India have expressed the view that since the principle underlying both the transactions is the same, there is no difference between the two modes of brokerage payment. In fact, the former method is administratively more convenient and the reinsurance brokers had been following this method till 1987 when they switched over to the second method to avail of deduction under section 80-O of the Act.
4. The matter has been examined. The condition for deduction under section 80-O is that the receipt should be in convertible foreign exchange. When the commission is remitted abroad, it should be in a currency that is regarded as convertible foreign exchange according to FERA. The Board are of the view that in such cases the receipt of brokerage by a reinsurance agent in India from the gross premia before remittance to his foreign principals will also be entitled to the deduction under section 80-O of the Act.
Circular : No 731, dated 20-12-1995.
JUDICIAL ANALYSIS
In J.B. Boda & Co. (P.) Ltd. v. CBDT [1997] 223 ITR 271, the Supreme Court cited the above circular and observed that “the said circular which seeks to declare and clarify the real scope and impact of section 80-O of the Act, is certainly binding on the respondent which issued it.” (p. 280)
