The re-insurance premium paid to foreign re-insurers before amendments to the Insurance Act in 2014 by an Indian insurer cannot be considered as business expenditure, the Chennai Bench of the Income Tax Appellate Tribunal has ruled.
The recent ruling could have a significant impact on insurers’ tax liability.
“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,” the ITAT noted.
“Therefore, there is a clear prohibition for payment of re-insurance premium to non-resident re-insurance companies,” it said. Accordingly, such payments cannot be considered as business expenditure under Section 37 of the Income Tax Act, 1961, it said.
The section, which provides for all kinds of business expenditure not included in Sections 30 to 36, states that a deduction or allowance will not be given for any expenditure prohibited by law.
The tribunal further held that assessees have to deduct tax on the premium paid to non-resident re-insurance company for re-insurance.
The ruling came in the case of Cholamandalam MS General Insurance Company against the Income Tax department for Assessment Years 2003-04 to 2009-10.
The Revenue Department had disallowed re-insurance premium paid by the assessee to non-resident re-insurance companies.
The Tribunal said the Assessing Officer had rightly disallowed the re-insurance premium under Section 40(a)(i) of the Act, and had said the Commissioner of Income Tax (Appeals) is not justified in restricting the claim of the assessee to 15 per cent without any reason.
Tax experts said the ruling could have a significant impact on the tax liability of insurers before the amendments to the Insurance Act in 2014.
“This judgment is far-reaching inasmuch as it de-recognises the reinsurance premium paid to foreign insurers before the amendment to the Insurance Act in 2014 which is in violation of the Insurance Act and not admissible as business expenditure under Section of 37 of IT Act,” said an expert, who did not wish to be identified.
“It has held that if the provisions under the Insurance Act do not cover a non-resident insurance company as an insurer, the entire deduction of premium will not be available as a business expenditure being in violation of law,” they added.
Withholding tax provision
“It has also held that where the non-resident insurer is considered having business operations with India, appropriate withholding tax should consequently apply, in the absence of which the deduction is to be disallowed,” they noted.