2023 (6) TMI 1446 - AT - Income Tax

TDS u/s 195 - Disallowance u/s. 40(a)(i) in respect of re-insurance premium ceded to non-resident reinsurer - HELD THAT - We find that an identical issue has been considered by the Tribunal in the assessee s own case 2022 (8) TMI 1549 - ITAT CHENNAI and after considering relevant facts held that reinsurance premium ceded to NRRs is not taxable in India under the Income Tax Act 1961 or under DTAA between India and respective countries where the NRRs are tax residents and thus reinsurance premium cannot be disallowed u/s. 40(a)(i) of the Act for non-deduction of TDS u/s. 195. Direct the AO to delete the disallowance of reinsurance premium paid to NRRs u/s. 40(a)(i) for failure to deduct TDS u/s. 195 - Revenue appeal dismissed.

Summary

Issues Involved:

1. Disallowance under Section 40(a)(i) for reinsurance premium paid to non-resident reinsurers (NRRs) without TDS deduction.
2. Deletion of profit on sale of investments from total income.
3. Deletion of additions on account of provision for wage revision.
4. Disallowance under Section 14A concerning expenditure related to exempt income.

Detailed Analysis:

1. Disallowance under Section 40(a)(i) for Reinsurance Premium:

The primary issue was whether the reinsurance premium paid to non-resident reinsurers (NRRs) was taxable in India, necessitating TDS deduction under Section 195 of the Income Tax Act, 1961. The Tribunal noted that the reinsurance premium paid to NRRs was not taxable in India under the Income Tax Act or under the Double Taxation Avoidance Agreement (DTAA) between India and the respective countries where NRRs are tax residents. The Tribunal emphasized that the income of NRRs does not accrue or arise in India as the reinsurance contracts are independent and executed outside India. Furthermore, the Tribunal found that the NRRs did not have a Permanent Establishment (PE) in India, which is a prerequisite for taxing business profits under DTAA provisions. Consequently, the Tribunal held that the assessee was not liable to deduct TDS under Section 195, and thus, the disallowance under Section 40(a)(i) was unwarranted. The Tribunal relied on several precedents, including the Supreme Court's decision in the case of M/s. G.E. India Technology Centre Pvt. Ltd., which clarified that TDS is only applicable if the income is chargeable to tax in India.

2. Deletion of Profit on Sale of Investments:

The CIT(A) deleted the profit on the sale of investments from the total income, which the Revenue contested. The Tribunal upheld the CIT(A)'s decision, noting that the assessee, being a public financial institution, must recognize income from non-banking financial activities in accordance with RBI guidelines. The Tribunal observed that the profits realized from the sale of investments should be considered as business income of the financial institution, not of the insurance business. The Tribunal noted that the relevant rules under the Insurance Act and the First Schedule did not provide for adjustments concerning the profit on the sale of investments, thus supporting the CIT(A)'s deletion.

3. Deletion of Additions on Account of Provision for Wage Revision:

The CIT(A) deleted the additions made on account of provision for wage revision, holding it as an unascertained liability. The Tribunal agreed with the CIT(A), noting that the provision for wage revision was based on completed negotiations, even though the official notification was issued later. The Tribunal found that the provision was a legitimate business expense, and the CIT(A) rightly relied on the Supreme Court's decision in Rotork Controls India P Ltd., which dealt with provisions for warranty. The Tribunal rejected the Revenue's contention that the provision was premature and unascertained.

4. Disallowance under Section 14A:

The Revenue challenged the CIT(A)'s decision to delete the disallowance under Section 14A, which pertains to expenditure related to exempt income. The Tribunal upheld the CIT(A)'s decision, noting that the provisions of Rule 8D were not applicable for the assessment year in question. The Tribunal emphasized that the CIT(A) correctly held that the expenditure related to exempt income was not allowable under Section 37 of the Act. The Tribunal also noted that the CIT(A) rightly did not follow the decision of the Kerala High Court in Leena Ramachandran, as the facts of the case were not applicable to the assessee's situation.

Conclusion:

The Tribunal dismissed the appeal filed by the Revenue, upholding the CIT(A)'s order on all counts. The Tribunal directed the Assessing Officer to delete the disallowance of reinsurance premium paid to NRRs under Section 40(a)(i) and confirmed the deletion of profit on sale of investments, provision for wage revision, and disallowance under Section 14A. The Tribunal's decision was consistent with the precedents and the legal framework governing the issues in question.