Page 227 - India Insurance Report 2023- BIMTECH

India Insurance Report - Series II 215

a. Fire or engineering insurance business which provides insurance for terrorism risks, 100% of the
net premium income of such business,

b. fire or miscellaneous insurance other than that covered under clause (a), 50% of the net premium
income of such business, and

c. marine insurance, 100% of the net premium income of such business

If the URR per Rule 6E is less than the URR per financials, the amount which remains to be
allowed as a deduction due to the restriction per Rule 6E shall be excluded in computing the total
income for immediately next succeeding assessment year in the revenue account relating to which the
amount aforesaid is credited.

2. Some Important Precedents

Some key judicial precedents related to direct tax matters in the general insurance business are
discussed here:

1. Allowability of Re-insurance premium paid to non-resident reinsurers not having branch office in
India under Rule 5(a) of the First Schedule

2. The general insurance companies claim deduction for re-insurance premium paid to non-resident reinsurers
as deductible under section 37 of the Act and do not add back as per Rule 5(a) of the First Schedule.

Expenditure allowable under section 37 of the Act are expenditure that is not in the nature of
capital expenditure or personal expenses of the assessee and are laid out or expended wholly and exclusively
for the purposes of the business or profession.

Generally, reinsurance premium paid by an Indian general insurance company should be allowable
under section 37 of the Act. Explanation to Section 37 of the Act further provides that any expenditure
incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be
deemed to have been incurred for the purpose of business or profession, and no deduction or allowance
shall be made in respect of such expenditure.

Expenditure payable to non-residents on which tax is not withheld is disallowable under section
40(a)(i) of the Act. Generally, the reinsurance premium paid to non-resident reinsurers is claimed as
business income and in absence of permanent establishment in India, tax is not deducted at source in
view of the provisions of the applicable Double Taxation Avoidance Agreements.
The tax authorities have added back the reinsurance premium paid to non-resident reinsurers under
Rule 5(a) on two counts:

(i) Since no tax is deducted at source, the expenditure is disallowable under section 40(a)(i) of the Act;

(ii) Since the payment is to a non-resident reinsurer, it is not permissible under the IRDA regulations
and so it is violative of the IRDA regulations and so not allowable under section 37 of the Act in
view of the Explanation to the Section.