Tca/754/2018 Of M/S Cholamandalam Ms General Insurance Co.ltd v. The Deputy Commissioner Of Income Tax, Large Tax

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMANDTHE HONOURABLE MR.JUSTICE N.SATHISH KUMAR TAX CASE APPEAL NOS.754, 834, 836, 837, 838, 840,841, 845, 847, 851, 856, 862, 866, 868, 871,903, 907, 910 AND 913 OF 2018AND CONNECTED CIVIL MISCELLANEOUS PETITIONS M/S.CHOLAMANDALAM MS GENERAL INSURANCE CO.LTD., DARE HOUSE,NO.2, NSC BOSE ROAD, CHENNAI-600 001.PAN AABCC 6633 K ... Appellant in T.C.A.Nos.754, 834,836, 837, 838, 840, 841 of 2018 M/S.ROYAL SUNDARAM GENERAL INSURANCE CO.LTD., “SUNDARAM TOWERS” 45 AND 46, WHITES ROAD, CHENNAI 600 002PAN.AABCR7106G ... Appellant in T.C.A.Nos.845,847, 851, 856 of 2018 M/S.UNITED INDIA INSURANCE CO.LTD., 24-WHITES ROAD, CHENNAI-600014 ... Appellant in T.C.A.Nos.862, 866, 868,871, 903, 907, 910 and 913 of 2018 1. The Deputy Commissioner of Income Tax, Large Tax Payer Unit, Chennai-600 101. Large Tax Payer Unit, Chennai-600 101. 1. The Assistant Commissioner of Income Tax, Large Tax Payer Unit, Chennai-600 101. Large Tax Payer Unit, Chennai-600 101. 1. The Deputy Commissioner of Income Tax Assistant Commissioner of Income Tax/ Income Tax Officer (TDS), Large Tax Payer Unit, Chennai-600 101... Respondents in T.C.A.Nos.862, 866, 868,871, 903, 907, 910 and 913 of 2018 2. Ministry of Finance, Department of Financial Services, Rep., by its Secretary, Jeevan deep Building, Parliament Street, New Delhi-110 001.3. Insurance Regulatory and Development Authority of India, Rep., by its Chairman, Sy No.115/1, Financial District, Nanakramguda, Gachibowli, Hyderabad-500 032.4. The Central Board of Direct Taxes, Rep., by its Chairman, 9[th] floor, Lok Nayak Bhavan, Khan Market, New Delhi-3.5. General Insurance Council, Rep., by its Secretary General, 5[th] floor, National Insurance Building, 14, Jamshedji tata Road, Churchgate, Mumbai-20. (RR2 to 5 - Impleaded vide Court order dated 20.11.2018 made in T.C.A.No.754 of 2018) ... Respondents Prayer:- Tax Case Appeal filed under Section 260A of the Income-taxAct, 1961 against the order of the Income-tax Appellate Tribunal'A' Bench, Chennai, dated 31.07.2018, in I.T.A.No.2276/Chny/2014,I.T.A.No.1350/Chny/2013, dated 31.07.2018, I.T.A.No.1676/Chny/2011,dated 31.07.2018, I.T.A.No.1621/Chny/2011,dated 31.07.2018,I.T.A.No.2146/Chny/2008, dated 31.07.2018, I.T.A.No.1759/Chny/2011, dated 31.07.2018, I.T.A.No.40/Chny/2009, dated 31.07.2018,I.T.A.No.1666/Chny/2011, dated 06.08.2018, I.T.A.No.1626/Chny/2011,dated06.08.2018,I.T.A.No.1356/Chny/2013,dated06.08.2018, I.T.A.No.2310/Chny/2014, dated 06.08.2018, I.T.A.No.1689/Chny/2011, dated 28.08.2018, I.T.A.No.1608/Chny/2011, dated https://hcservices.ecourts.gov.in/hcservices/ 28.08.2018, I.T.A.No.1688/Chny/2011, dated 28.08.2018, I.T.A.No.1673/Chny/2011, dated 28.08.2018, I.T.A.No.1692/Chny/2011, dated28.08.2018, I.T.A.No.36/Chny/2014, dated 28.08.2018, I.T.A.No.696/Chny/2014, dated 28.08.2018, I.T.A.No.1693/Chny/2011, dated28.08.2018 for the assessment year 2009-10. Assessment Year2008-09, 2007-08, 2007-08, 2005-06, 2006-07, 2005-06, 2005-06,2005-06, 2009-10, 2010-11, 2005-06, 2006-07, 2004-05, 2003-04,2007-08, 2009-10, 2010-11 and 2008-09. TCA.Nos.754, 836, 837, 910 and 913 of 2018:- Against the Order of the Commissioner of Income Tax(Appeals) Large Tax Payer Unit, Chennai made in ITA.No.13/13-14/LTU(A) dated 26.06.2014, ITA.No.37/10-11/LTU(A) dated28.07.2011, ITA.No.12/13-14/LTU(A) dated 23.01.2014 andITA.No.51/10-11/LTU(A) dated 20.07.2011 against the order of theDeputy Commissioner of Income Tax, Large Tax Payer Unit, ChennaimadeinG.I/P.A.No.AABCC6633K,dated28.03.2013,G.I/P.A.No.AABCC 6633K, dated 16.12.2010, G.I/P.A.No.AAACU5552C, dated 27.03.2013 and G.I/P.A.No.AAACU 5552C, dated28.12.2010. TCA.Nos.754, 836, 837, 910 and 913 of 2018:- Against the Order of the Commissioner of Income Tax(Appeals) Large Tax Payer Unit, Chennai made in ITA.No.13/13-14/LTU(A) dated 26.06.2014, ITA.No.37/10-11/LTU(A) dated28.07.2011, ITA.No.12/13-14/LTU(A) dated 23.01.2014 andITA.No.51/10-11/LTU(A) dated 20.07.2011 against the order of theDeputy Commissioner of Income Tax, Large Tax Payer Unit, ChennaimadeinG.I/P.A.No.AABCC6633K,dated28.03.2013,G.I/P.A.No.AABCC 6633K, dated 16.12.2010, G.I/P.A.No.AAACU5552C, dated 27.03.2013 and G.I/P.A.No.AAACU 5552C, dated28.12.2010. For Appellant:Mr.R.V.Eshwar, (United India Insurance)Senior Counselassisted by:Mr.M.V.Swaroop:Mr.V.Prashanth Kiran:Mr.M.S.Hredai:& Ms.Sheetal SrikanthFor Appellant:Mr.Percy Pardiwallia,(Royal Sundaram Senior Counsel& Cholamandalam)assisted by:Mr.Sandeep Bagmar:Mr.Bharat R. Srinivas:& Ms.Neelaya Dakshi For R1:Mr.M.Swaminathan,(In all Appeals)Senior Standing Counselassisted by :Mrs.V.Pushpa,Junior Standing CounselFor RR2 and 4:Mr.Venkataswamy Babu, (In all Appeals)Central Govt. Standing CounselFor R3:Mr.M.B.Gopalan (IRDAI)(In all Appeals)For R5:Mr.M.Vijayaraghavan (GIC)(In all Appeals) COMMON JUDGMENT (Delivered by T.S.Sivagnanam, J.) In all these appeals, filed by the assessees under Section260A of the Income-tax Act, 1961 (“the Act” for brevity), whoare Insurance Companies, viz., United India Insurance CompanyLimited, Cholamandalam MS General Insurance Company Limited, andRoyal Sundaram General Insurance Company Limited, the challengeis to the common order passed by the Income-tax AppellateTribunal 'A' Bench, Chennai (“the Tribunal” for brevity), in assessment year 2009-10; I.T.A.No.1350/Chny/2013, dated 31.07.2018, for theassessment year 2008-09;I.T.A.No.1676/Chny/2011, dated 31.07.2018, for theassessment year 2007-08; I.T.A.No.1759/Chny/2011, dated 31.07.2018, for theassessment year 2006-07; I.T.A.No.1666/Chny/2011, dated 06.08.2018, for theassessment year 2005-06; I.T.A.No.1626/Chny/2011, dated 06.08.2018, for theassessment year 2005-06; I.T.A.No.1356/Chny/2013, dated 06.08.2018, for theassessment year 2009-10; https://hcservices.ecourts.gov.in/hcservices/ I.T.A.No.1688/Chny/2011, dated 28.08.2018, for theassessment year 2004-05; I.T.A.No.1673/Chny/2011, dated 28.08.2018, for theassessment year 2003-04; I.T.A.No.1692/Chny/2011, dated 28.08.2018, for theassessment year 2007-08; I.T.A.No.36/Chny/2014, dated 28.08.2018, for theassessment year 2009-10; I.T.A.No.696/Chny/2014, dated 28.08.2018, for theassessment year 2010-11; I.T.A.No.1693/Chny/2011, dated 28.08.2018, for theassessment year 2008-09; respectively. 2.The common legal issue arising in these appeals relatesto disallowance of reinsurance premium ceded to non-residentreinsurers. The assessees have raised the following substantialquestions of law for consideration:- “(i) Whether the ITAT erred in decidingthe validity of reinsurance ceded to the non-resident reinsurers when such issue was not evenraised before it by either the Department or theAppellant? (ii) Whether the ITAT erred in holdingthat the IRDA (General Insurance – Reinsurance)Regulation, 2000 is contrary to section 101A ofthe Insurance Act, 1938 when it does not havethe power to decide the validity of regulationsmade by the IRDA?(iii) Whether the ITAT erred in holdingthat reinsurance payments to non-residents areprohibited by law and therefore hit byExplanation 1 to section 37 of the Act? (iv) Whether the ITAT Erred in failing tofollow co-ordinate bench decisions on the veryquestion of reinsurance payments to non-residents when it ought to have referred thematter to a larger bench if it disagreed withsuch judgments?” (ii) Whether the ITAT erred in holdingthat the IRDA (General Insurance – Reinsurance)Regulation, 2000 is contrary to section 101A ofthe Insurance Act, 1938 when it does not havethe power to decide the validity of regulationsmade by the IRDA?(iii) Whether the ITAT erred in holdingthat reinsurance payments to non-residents areprohibited by law and therefore hit byExplanation 1 to section 37 of the Act? (iv) Whether the ITAT Erred in failing tofollow co-ordinate bench decisions on the veryquestion of reinsurance payments to non-residents when it ought to have referred thematter to a larger bench if it disagreed withsuch judgments?” 3.We have elaborately heard Mr.R.V.Eshwar, learned SeniorCounsel for M/s.United India Insurance Company Limited; Mr.PercyPardiwallia, learned Senior Counsel for M/s.Cholamandalam MSGeneral Insurance Company Limited, and M/s.Royal SundaramGeneral Insurance Company Limited; and Mr.M.Swaminathan, learned Senior Standing Counsel and Mrs.V.Pushpa, learned JuniorStanding Counsel for the respondent/Revenue. 4.T.C.A.No.754 of 2018 is taken as the lead case. 5.The cases on hand have had a chequered history and thisis the second round of litigation before this Court. Earlier,the assessees had approached this Court by filing tax caseappeals in T.C.(A) Nos.361 to 370 of 2012 and etc., batchchallenging the order passed by the Tribunal by which, theassessments were set aside and the matter was remanded to theAssessing Officer for fresh consideration. The Tribunal opinedthat both the assessee and the Revenue had filed fresh documentsand therefore, the matter has to be remanded to the AssessingOfficer for fresh consideration. The assessee as well as theRevenue filed miscellaneous petitions before the Tribunalcontending that no fresh documents were produced and remand tothe Assessing Officer was unnecessary. The Tribunal rejectedthose applications, which were challenged by way of writpetitions, which were not numbered, however, were tagged alongwith the tax case appeals. 6.The Division Bench, by judgment dated 17.06.2013, inCholamandalam MS General Insurance Co. vs. Assistant/Deputycommissioner of Income-tax, [2013] 357 ITR 597 (Madras), allowedthe appeals filed by the assessee and set aside the order ofremand passed by the Tribunal. The Division Bench pointed outthat there is absolutely no material, which necessitated theremand of the case to the Assessing Officer, as the admittedfactual position was that the materials, which were relied on bythe assessee and the Revenue, were admitted before the AssessingOfficer. In the background of such a conclusion, the appealswere allowed with the following directions:- “18. We may point out that the order of theTribunal makes no mention at all as to what werethe documents filed before the Tribunal as by wayof fresh document, necessitating remand. In thebackground of the facts pleaded and admitted bythe Revenue, we set aside the order of theTribunal and remand the appeal to the Tribunal tobestow its attention in all sincerity to theissues raised by the Revenue as well as by theassessees in their appeals and pass orders inaccordance with law. This would includeconsiderationoftherelevanceoftheretrospective amendment to Section 9 of the IncomeTax Act after the Vodafone Case to the facts ofthe case. Thus taking note of the submissions ofthe learned senior counsel appearing for theassessee and the learned standing counsel appearing for the Revenue, particularly on theamendment to the Act consequent on the Vodafonecase, we direct the Income Tax Appellate Tribunalto consider the case of the assessees afresh onthe materials placed and the effect of the amendedprovision on the assessees' cases. It is open tothe assessees to file such additional grounds onthe points of law before the Tribunal for a full-fledged hearing on the issues raised.” appearing for the Revenue, particularly on theamendment to the Act consequent on the Vodafonecase, we direct the Income Tax Appellate Tribunalto consider the case of the assessees afresh onthe materials placed and the effect of the amendedprovision on the assessees' cases. It is open tothe assessees to file such additional grounds onthe points of law before the Tribunal for a full-fledged hearing on the issues raised.” 7.In terms of the above direction, the Tribunal had tobestow its attention in all sincerity to the issues raised bythe Revenue as well as by the assessee in their appeals and passorders in accordance with law. Thus, the Tribunal was bound tostrictly adhere to the directions issued by the jurisdictionalHigh Court which in no unclear terms, set out what the Tribunalhas to do. (Union of India and Others vs. Kamalakshi FinanceCorporation Limited, AIR 1992 SC 711) 8. It needs to be reiterated that the Division Benchdirected the Tribunal to bestow its attention to the issuesraised by the Revenue and the issues raised by the assessee intheir appeals. Thus, the Tribunal was bound to consider theissues raised by the Revenue and the assessee in their appeals. 9.The other limb of the direction was permitting theassessee to file additional grounds on the points of law beforethe Tribunal. It is not disputed before us that no suchadditional grounds, raising points of law, were filed before theTribunal and the parties were left to contest the issues, whichthey have raised in their respective memorandum of grounds ofappeal. We have perused the memorandum of grounds of appealfiled by the assessee as well as the Revenue, in September,2018. There is no dispute or controversy on this issue, and theparties are clear that the grounds raised by them are thosewhich are contained in the grounds of appeal filed before us inthe typed set of papers. Thus, the Tribunal should haveendeavoured to consider the grounds raised by both parties andtake fresh decision on merits. 10.Section 254 of the Act states that the AppellateTribunal, may, after giving both the parties to the appeal anopportunity of being heard, pass such orders thereon as itthinks fit. What is to be borne in mind is the words “suchorders thereon”. Therefore, the Tribunal is required to take adecision on the appeal petition and in the instant case, on thegrounds raised by the assessee and the Revenue questioning theorder passed by the Assessing Officer. Unfortunately, in theimpugned decision taken by the Tribunal, it proceeded on anindependent issue, which was never raised by the assessee or the Revenue, this, in our considered view, was without jurisdictionand wholly unwarranted. 11.From a reading of the impugned order passed by theTribunal, more particularly, in para 6, it shows that thedecision of the Tribunal on the effect of certain provisions ofthe Insurance Act, 1938 (for brevity “the Insurance Act”)whether reinsurance was permissible with foreign entities andwhether the same was prohibited or valid in law, were allqueries, which were raised by the Tribunal suo motu, when theappeals were heard. It is true that the learned counselsappearing for the assessees and the Revenue responded to thequeries and made their submissions and ultimately, the Tribunalheld against the assessees. However, the moot question iswhether the Tribunal could have done so in the light of thepointed directions issued by the Division Bench in its judgmentdated 17.06.2013 (supra). 12.The sum and substance of the conclusion of the Tribunalis that the entire reinsurance arrangement of the assessee-company is in violation and contrary to the provisions ofSection 2(9) of the Insurance Act and therefore, the entirereinsurance premium has to be disallowed under Section 37 of theAct. The Tribunal holds that there is a clear prohibition forpayment of reinsurance premium to the non-resident reinsurancecompanies. 13.As noticed above, it is neither the case of theRevenue, nor the case of the assessee that the claim fordeduction was made under Section 37 of the Act. The Tribunalsuo motu has non-suited the assessee by referring Explanation 1to Section 37 of the Act. Under the said Explanation, it wasdeclared that any expenditure incurred by an assessee for anypurpose, which is an offence or which is prohibited by law,shall not have been deemed to be incurred for the purpose ofbusiness or supervision and no allocation or allowance shall bemade in respect of such expenditure. Admittedly, the Tribunaldid not render any finding that the assessee has incurredexpenditure for a purpose, which is an offence. However, theTribunal holds that expenditure incurred by the assessee isprohibited by law. 14.The larger question would be whether at all this is anexpenditure? However, we do not propose to deal with this, asthat was never decided by the Tribunal in the impugned order andleave the issue open. Thus, we are required to examine as towhether in the facts and circumstances, the Tribunal was rightin holding that payment of reinsurance premium to non-residentinsurance companies is prohibited and to be disallowed underSection 37 of the Act. 15.As pointed out earlier, neither the Revenue, nor theassessee referred to Section 37 of the Act. Thus, the errorcommitted by the Tribunal firstly is in exceeding the scope ofthe order of remand passed by the Division Bench of this Courtin the earlier decision noted above. Secondly, the Tribunal hasno jurisdiction to declare a transaction to be either prohibitedor illegal occurring under a different statute over which, ithas no control. In other words, the Income-tax Officer cannotdeclare a transaction as illegal under the provisions of theInsurance Act or the Regulations framed thereunder. The Income-tax Officer can examine as to whether any income accrued in thehands of the assessee is required to be taxed. In the instantcase, neither the Assessing Officer, nor the Commissioner ofIncome-tax (Appeals)-II (for brevity “the CIT(A)”) has made anysuch endeavour, but the Tribunal has done such an exercisewhich, in our considered opinion, was without jurisdiction.Nevertheless, as we have heard elaborate arguments on the sideof the assessees as well as the Revenue, we are constrained totest the correctness of the order passed by the Tribunal in thisregard. Thus, we have to decide as to whether there is aprohibition under law for insurance payments to non-residents soas to attract the rigour of Explanation 1 to Section 37 of theAct. 16.In this regard, we may straightaway refer to thestatement of objects and reasons for the Insurance (Amendment)Bill, 1961, which was introduced in the Lok Sabha on 14[th]February, 1961. This Bill was passed and the Insurance Actstood amended. The Hon'ble Finance Minister for the Union ofIndia would state that re-insurance is an essential part ofgeneral insurance business and at present (1961), insurancecompanies, operating in India, are dependent on companiesoutside India for a very large part of their requirements inthis connection and more often than not enter into dis-advantageous arrangements. Moreover, re-insurance withcompanies outside India results in loss of foreign exchange andthe Bill is intended to foster the growth of Indian re-insurancecompanies and also to save foreign exchange. The Bill sought toprovide 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 CentralGovernment. The Central Government was given power to fix thepercentage and this power to be exercised in consultation withthe Advisory Committee so constituted. The power was alsoconferred on the Central Government to allocate the percentageso fixed amongst the approved Indian re-insurance companies.With the aforesaid object, the Bill proposed to insert Part IVAunder the head “Re-insurance” containing two provisions, viz.,Sections 101A and 101B. 17.The Bill had been passed by the Parliament and theInsurance Act stood amended with effect from 01.04.1961. Forbetter appreciation, the same is quoted hereinbelow:-“Re-insurance with Indian re-insurers. Section 101A:- (1) Every insurer shall re-insure withIndian re-insurers such percentage of the sumassured on each policy as may be specified by the[the Authority with the previous approval of theCentral Government] under sub-section (2). (2) For the purposes of sub-section (1),[the Authority] may, by notification in theOfficial Gazette,- (a) specify the percentage of the sumassured on each policy to be re-insured anddifferent percentages may be specified fordifferent classes of insurance: Provided that no percentage so specifiedshall exceed thirty per cent. of the sum assuredon such policy; and(b) also specify the proportions in whichthe said percentage shall be allocated among theIndian re-insurers.(3) Notwithstanding anything contained insub-section (1), an insurer carrying on fireinsurance business in India may, in lieu of re-insuring the percentage specified under sub-section (2) of the sum assured on each policy inrespect of such business, re-insure with Indianre-insurers such amount out of the first surplusin respect of that business as he thinks fit, sohowever that, the aggregate amount of the premiumspayable by him on such re-insurance in any year isnot less than the said percentage of the premiumincome (without taking into account premiums onre-insurance ceded or accepted) in respect of suchbusiness during that year. Explanation .—For the purposes of this sub-section, the year 1961 shall be deemed to mean theperiod from 1st April to the 31st December of thatyear.(4) A notification under sub-section (2) mayalso specify the terms and conditions in respectof any business of re-insurance required to betransacted under this section and such terms andconditions shall be binding on Indian re-insurersand other insurers. (5) No notification under sub-section (2)shall be issued except after consultation with theAdvisory Committee constituted under section 101B. Explanation .—For the purposes of this sub-section, the year 1961 shall be deemed to mean theperiod from 1st April to the 31st December of thatyear.(4) A notification under sub-section (2) mayalso specify the terms and conditions in respectof any business of re-insurance required to betransacted under this section and such terms andconditions shall be binding on Indian re-insurersand other insurers. (5) No notification under sub-section (2)shall be issued except after consultation with theAdvisory Committee constituted under section 101B. (6) Every notification issued under thissection shall be laid before each House ofParliament, as soon as may be, after it is made.(7) For the removal of doubts, it is herebydeclared that nothing in sub-section (1) shall beconstrued as preventing an insurer from re-insuring with any Indian re-insurer or otherinsurer the entire sum assured on any policy orany portion thereof in excess of the percentagespecified under sub-section (2). (8) In this section,—(i) “policy” means a policy issued orrenewed on or after the 1st day of April, 1961, inrespect of general insurance business transactedin India and does not include a re-insurancepolicy; and[(ii) “Indian re-insurer” means an Indianinsurance company which has been granted acertificate of registration under sub-section (2A)of section 3 by the Authority to carry onexclusively the re-insurance business in India.]” 18.The interpretation given by the Tribunal is with regardto 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 ofdoubts”, which would denote that it is clarificatory with regardto what has been stated in sub-Section (1) of Section 101A. Itwas clarified and declared that nothing in sub-Section (1) ofSection 101A shall be construed as preventing an insurer fromre-insuring with any Indian re-insurer or other insurer, theentire sum on any policy or any portion thereof in excess ofthe percentage specified under sub-Section 2 of Section 101A.The Tribunal while explaining the meaning of the words “otherinsurer”, held that the definition of “insurer” under sub-Section (9) of Section 2 of the Act alone should be relied uponand that is the only definition of “insurer” and if such adefinition is applied, re-insurance with foreign companies isprohibited by law. The Tribunal held that the word “otherinsurer” provided in Section 101A(7) of the Insurance Actenables the Indian insurer for reinsuring over and above thepercentage fixed by the Regulatory Authority and the reinsurancemay be either with Indian re-insurer or other insurer. Itfurther held that by taking advantage of the term “otherinsurer”, the assessee claims that they can re-insure with non-resident reinsurance company ignoring the provisions of theInsurance Act. It further proceeded to hold that the term“other insurer” as provided in Section 101A(7) of the InsuranceAct is only the insurer, which is defined in Section 2(9) of theInsurance Act and there cannot be any extended meaning, which https://hcservices.ecourts.gov.in/hcservices/ can be given to the term “other insurer”. Thus, it held anIndian insurer cannot have any reinsurance arrangement withreinsurance company other than the insurer, as defined inSection 2(9) of the Insurance Act. In our considered view, theconclusion of the Tribunal is not sustainable. We support suchconclusion with the following reasons. https://hcservices.ecourts.gov.in/hcservices/ can be given to the term “other insurer”. Thus, it held anIndian insurer cannot have any reinsurance arrangement withreinsurance company other than the insurer, as defined inSection 2(9) of the Insurance Act. In our considered view, theconclusion of the Tribunal is not sustainable. We support suchconclusion with the following reasons. 19.In exercise of the powers under Section 114A of theInsurance Act, and Sections 14 and 26 of the InsuranceRegulatory and Development Authority Act, 1999, the CentralGovernment framed the Insurance Regulatory and DevelopmentAuthority Regulations pertaining to General Insurance –Reinsurance called Insurance Regulatory and DevelopmentAuthority (General Insurance – Reinsurance) Regulations, 2000.Chapter II of the said Regulations deals with procedure to befollowed for re-insurance arrangements and it would bebeneficial to refer to the said provision, which reads asfollows:- “Chapter II:-3. Procedure to be followed for ReinsuranceArrangements:- (1) The Reinsurance Programme shall continueto be guided by the following objectives to: a) maximise retention within the country; b) develop adequate capacity; c) secure the best possible protection for thereinsurance costs incurred; d) simplify the administration of business. (2) Every insurer shall maintain the maximumpossible retention commensurate with its financialstrength and volume of business. The Authoritymay require an insurer to justify its retentionpolicy and may give such directions as considerednecessary in order to ensure that the Indianinsurer is not merely fronting for a foreigninsurer. (3) Every insurer shall cede such percentageof the sum assured on each policy for differentclasses of insurance written in India to theIndian reinsurer as may be specified by theAuthority in accordance with the provisions ofPart IVA of the Insurance Act, 1938.(4) The reinsurance programme of every insurershall commence from the beginning of everyfinancial year and every insurer shall submit tothe Authority, his reinsurance programmes for theforthcoming year, 45 days before the commencementof the financial year;(5) Within 30 days of the commencement of thefinancial year, every insurer shall file with the Authority a photocopy of every reinsurance treatyslip and excess of loss cover covernote in respectof that year together with the list of reinsurersand their shares in the reinsurance arrangement; (6) The Authority may call for furtherinformation or explanations in respect of thereinsurance programme of an insurer and may issuesuch direction, as it considers necessary; (7) Insurers shall place their reinsurancebusiness outside India with only those reinsurerswho have over a period of the past five yearscounting from the year preceding for which thebusiness has to be placed, enjoyed a rating of atleast BBB (with Standard & Poor) or equivalentrating of any other international rating agency.Placements with other reinsurers shall require theapproval of the Authority. Insurers may also placereinsurances with Lloyd’s syndicates taking careto limit placements with individual syndicates tosuch shares as are commensurate with the capacityof the syndicate. (8) The Indian Reinsurer shall organisedomestic pools for reinsurance surpluses in fire,marine hull and other classes in consultation withall insurers on basis, limits and terms which arefair to all insurers and assist in maintaining theretention of business within India as close to thelevel achieved for the year 1999-2000 as possible.The arrangements so made shall be submitted to theAuthority within three months of these regulationscoming into force, for approval. (8) The Indian Reinsurer shall organisedomestic pools for reinsurance surpluses in fire,marine hull and other classes in consultation withall insurers on basis, limits and terms which arefair to all insurers and assist in maintaining theretention of business within India as close to thelevel achieved for the year 1999-2000 as possible.The arrangements so made shall be submitted to theAuthority within three months of these regulationscoming into force, for approval. (9) Surplus over and above the domesticreinsurance arrangements class wise can be placedby the insurer independently with any of thereinsurers complying with sub-regulation (7)subject to a limit of 10% of the total reinsurancepremium ceded outside India being placed with anyone reinsurer. Where it is necessary in respect ofspecialised insurance to cede a share exceedingsuch limit to any particular reinsurer, theinsurer may seek the specific approval of theAuthority giving reasons for such cession. (10) Every insurer shall offer an opportunityto other Indian insurers including the IndianReinsurer to participate in its facultative andtreaty surpluses before placement of such cessionsoutside India. (11) The Indian Reinsurer shall retrocede atleast 50% of the obligatory cessions received byit to the ceding insurers after protecting the portfolio by suitable excess of loss covers. Suchretrocession shall be at original terms plus anover-riding commission to the Indian Reinsurer notexceeding 2.5%. The retrocession to each cedinginsurer shall be in proportion to its cessions tothe Indian Reinsurer. (12) Every insurer shall be required tosubmit to the Authority statistics relating to itsreinsurance transactions in such forms as theAuthority may specify, together with its annualaccounts.” The above Regulations are Statutory Regulations, whichbind the stakeholders. 20.A conjoint reading of Regulation 3 and sub-Regulations(1) to (10) will clearly show that the objectives were tomaximize the retention of revenue within the country. What weare required to see is whether there is any indication in theInsurance Regulatory and Development Authority (GeneralInsurance – Reinsurance) Regulations, 2000 prohibiting re-insurers 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 everyinsurer shall cede such percentage of sum assured on eachpolicy, for different classes of insurance written in India tothe Indian re-insurer as may be specified by the Authority underSection 101A of the Insurance Act. Therefore, every Indianinsurer is to cede, such specified/notified percentage of thesum assured and not the whole. The commencement date for there-insurance programme is also spelt out in the Regulations.The insurer has to disclose payments made outside India andthere is also a restriction on with whom, they can enter into acontract of re-insurance, as the Regulations place an embargostating that such entity should have enjoyed the rating of atleast BBB or equivalent rating of any other international ratingagency. Thus, the reading of the Regulations will clearly showthere is absolutely no prohibition for re-insurance with aforeign re-insurance company. 22.The observations made in the finding rendered by theTribunal stating that the Regulations are inconsistent with theprovisions of the Act are utterly perverse and to be outrightlyrejected. In 2008, the Standing Committee on Finance proposedthe amendment to the Insurance Laws and the Insurance Laws(Amendment) Bill, 2008 was introduced. The report of theCommittee states that the General Insurance Corporation Re isthe only national re-insurer operating in India and also has re-insurance business in international market and its share ofinternational business is 44 per cent. The Chairman of the 22.The observations made in the finding rendered by theTribunal stating that the Regulations are inconsistent with theprovisions of the Act are utterly perverse and to be outrightlyrejected. In 2008, the Standing Committee on Finance proposedthe amendment to the Insurance Laws and the Insurance Laws(Amendment) Bill, 2008 was introduced. The report of theCommittee states that the General Insurance Corporation Re isthe only national re-insurer operating in India and also has re-insurance business in international market and its share ofinternational business is 44 per cent. The Chairman of the General Insurance Corporation (GIC), who is one of therespondents in these appeals, has deposed before the StandingCommittee on Finance and would state that the legal position asof 2008, there was no bar on doing re-insurance business by anyforeign re-insurance company in India. The Chairman, GICexpressed deep concern that when GIC has to transactinternational business in various countries, they are subjectedto lot of crosschecks and regulation and there is nocorresponding regulation in India, as a result of which, foreignre-insurance companies can accept re-insurance business withouttaking any licence and without opening any branch in India.Thus, the suggestion was there is a need for regulation for anyforeign country coming into India and doing re-insurancebusiness. Ultimately, the Standing Committee on Finance notedthat there is no bar on foreign re-insurance business companiescarrying on re-insurance business in the country without anylicence or opening a branch, nor there was a regulation tocontrol the transaction of foreign re-insurers. Thisultimately, led to the amendment to the Insurance Act byamending the definition of “insurer” in Section 2(9) of theInsurance Act to mean a foreign company engaged in re-insurancebusiness through a branch established in India. The Tribunalwas of the view that unless and until a branch is opened by theforeign re-insurance company, the question of conducting re-insurance business in India cannot be done. In our consideredview, this conclusion of the Tribunal is not sustainable. Theanswer lies not in any recent proceedings but, a circular issuedby 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 thecircular reads as follows:- “Liability to tax or freedom therefrom ofthe foreign reinsurer will depend on variousfactors, such as the existence of reciprocitybetween the Indian insurer and the foreignreinsurer, the magnitude of local retention ascompared with the reinsurance premium paid by theIndian insurer to the foreign reinsurer and so on.The Income-tax Officers will, therefore, have toexamine each case in the light of its facts anddecide where tax liability is attracted, whatportion of the income from the reinsurance shouldbe 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 revealthat at no point of time, the Income-tax Department took a standthat the re-insurance business with a foreign re-insurancecompany was a prohibited business. Further, the Tribunal fellin error in rendering such a finding without noticing the Re-insurance Regulations, which has been provided by the Insurance https://hcservices.ecourts.gov.in/hcservices/ 23.A reading of the above circular would clearly revealthat at no point of time, the Income-tax Department took a standthat the re-insurance business with a foreign re-insurancecompany was a prohibited business. Further, the Tribunal fellin error in rendering such a finding without noticing the Re-insurance Regulations, which has been provided by the Insurance https://hcservices.ecourts.gov.in/hcservices/ Regulatory and Development Authority of India. In the saidRegulations, the highlights of the statement and objects forintroduction of Chapter IVA to the Insurance Act in theamendment, in the year 1961, had been brought into after which,there is an order of Preference for Re-insurance Cessions. Inthe order of preference, the last among them is what can beoffered to Indian insurers and overseas insurers. Thus, theregulations does not wholly prohibit any re-insurance withoverseas re-insurance companies subject to the condition thatthe other priorities contained in Clauses 1, 2 and 3 of theregulations are exhausted. Furthermore, the Reserve Bank ofIndia, Exchange Control Department, Central Office, Mumbainotified the Foreign Exchange Management (Insurance)Regulations, 2000. The major changes in the procedure as perthe memorandum of Exchange Control Regulations relating toGeneral Insurance in India (GIM) were summarised and therelevant Regulation, pertaining to re-insurance arrangement, isas follows:-S.No.SubjectChangesMatterThe reinsurance arrangement of public sectorgeneral insurance companies registered withReinsuranceITDA are to be decided by the respective1ArrangementBoards of the insurance companies and IRDA isto be kept informed. ADs designated by theseinsurance companies are now permitted to makeremittances falling under such approvedreinsurance arrangements without reference tothe bank. 24.The above will clearly show that re-insurancearrangement with a foreign insurance company is permissible.Thus, it is evidently clear that on and after the introductionof Section 101A to the Insurance Act, there is a mandatoryrequirement for other insurer to re-insure with the Indian re-insurers and such percentage is put to a maximum of 30% and thelanguage of Section 101A nowhere prohibits the re-insurance withforeign re-insurance companies above the percentage specified bythe authority with previous approval by the Central Government.That apart, the Tribunal erred in drawing a presumptionregarding prohibition of re-insurance with foreign re-insurancecompanies. This presumption is erroneous for the simple reasonthat the statement of objects of the Insurance Act itselfclearly stipulates wherever there is a prohibition. By way ofillustration, we can refer to Sections 2(c), 2(c)(b), 2(9), 32(a), 40, 41, 42(a) and 52(a). Therefore, no inference couldhave been drawn, as drawn by the Tribunal and consequently, tobe held that there can be no bar or prohibition under theInsurance Act, which prohibits ceding of re-insurance with a foreign re-insurer outside India. foreign re-insurer outside India. 25.Section 2(16B) defines “re-insurance” to mean theinsurance of all or part of one insurer's risk by anotherinsurer who accepts the risk for a mutually acceptable premium.There is no distinction drawn between an Indian re-insurer and aforeign re-insurer. As rightly submitted by Mr.M.Vijayaraghavan,learned counsel for CIG, the words “other insurer” occurring insub-Section 7 of Section 101A of the Insurance Act cannot betreated as a “pronoun” or a “noun” and should be read as a“verb”. This is more so because, there is no separate definitionprovided for “other insurer” and considering the scheme ofSection 101A of the Insurance Act, “other insurer” should meanthe insurer, who is outside India and not a person in terms ofthe definition under Section 2(9) of the Act. In the light ofthe above discussion, we are of the clear view that the Tribunalerred in coming to a conclusion that it is not the intention ofthe Parliament to authorize an Indian insurer to have re-insurance outside the country ignoring the provisions ofInsurance Act referred above. The Tribunal had no jurisdictionto declare any provisions of the regulations to be inconsistentwith the provisions of the Insurance Act. This was whollyoutside the purview of the Tribunal. Thus, the Tribunal clearlyexceeded its jurisdiction in stating that the assessees haveengaged in a transaction, which is prohibited by law andtherefore, not entitled for deduction under Section 37 of theAct. This has never been the case of the Revenue either beforethe Assessing Officer or before the CIT(A) or before theTribunal, when they filed appeals challenging that portion ofthe order passed by the CIT(A), which was against the Revenue. 26.The Tribunal while upholding the order of the AssessingOfficer did not assign any independent reasons. The discussionin the impugned order relates to the validity of re-insurancebusiness outside India done by an Indian insurer. The Tribunaldid not consider the correctness of the order passed by theAssessing Officer or that of the CIT(A). Therefore, theTribunal could not have held that the Assessing Officer rightlydisallowed the re-insurance premium under Section 40(a)(i).This finding is not supported with any reasons. Therefore, theTribunal misdirected itself, exceeded the scope of remand asordered by the Division Bench and ventured into a jurisdiction,which is wholly prohibited in the light of the plain language ofSection 254(1) of the Act. 27.Thus, for the above reasons, we are of the clear viewthat the order passed by the Tribunal calls for interference.Accordingly, the appeals, filed by the assessee are allowed andthe substantial questions of law framed are answered in favourof the assessee. https://hcservices.ecourts.gov.in/hcservices/ 28.In the light of the above, the matter stands remandedto the Tribunal to take a decision on the following points:- (i) Whether the Assessing Officer was right in disallowingthe re-insurance premium under Section 40(a)(i) of the Act; (ii) Whether the CIT(A) was right in rejecting partiallythe appeal filed by the assessee; and (iii) Whether the CIT(A) was justified in restricting theclaim of the assessee to 15% instead of confirming the orderpassed by the Assessing Officer. 29.We make it clear that the Tribunal shall decide theabove questions alone and nothing more and the decision shall betaken based on the available material and the assessee and theRevenue are not entitled to place any fresh material before theTribunal so as to enable the Tribunal to take a decision asexpeditiously as possible. No costs. Consequently, the connectedmiscellaneous petitions are closed. Sd/- Assistant Registrar abrTo //True Copy// Sub Assistant Registrar 1.The Income-tax Appellate Tribunal, 'A' Bench, Chennai. 2.The Commissioner of Income Tax(Appeals),Large Tax Payer Unit, Chennai. (iii) Whether the CIT(A) was justified in restricting theclaim of the assessee to 15% instead of confirming the orderpassed by the Assessing Officer. 29.We make it clear that the Tribunal shall decide theabove questions alone and nothing more and the decision shall betaken based on the available material and the assessee and theRevenue are not entitled to place any fresh material before theTribunal so as to enable the Tribunal to take a decision asexpeditiously as possible. No costs. Consequently, the connectedmiscellaneous petitions are closed. Sd/- Assistant Registrar abrTo //True Copy// Sub Assistant Registrar 1.The Income-tax Appellate Tribunal, 'A' Bench, Chennai. 2.The Commissioner of Income Tax(Appeals),Large Tax Payer Unit, Chennai. 3.The Deputy Commissioner of Income Tax,Large Tax Payer Unit, Chennai. 4.The Assistant Commissioner of Income Tax,Large Tax Payer Unit, Chennai. 5.The Deputy Commissioner of Income Tax,Assistant Commissioner of Income Tax,Income Tax Officer(TDS)Large Tax Payer Unit, Chennai. 6.The Chairman,Central Board of Direct Taxes, 9[