1. Reinsurance broker retains brokerage from premiums before remitting balance to foreign reinsurers — dispute over eligibility for deduction under Section 80-O, Income-tax Act, 1961. (Para 1 )
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1996 Supreme(SC) 1792
1996(7) Supreme 760
SUPREME COURT OF INDIA
B.P. Jeevan Reddy and K.S. Paripoornan, JJ.
M/s. J.B. Boda & Co. Pvt. Ltd. -Appellant
versus
Central Board of Direct Taxes, New Delhi -Respondent
Civil Appeal No. 933 of 1989
Decided on 30-10-1996
Counsel for the Parties :
For the Appellant : Dr. V. Gaurishankar, Sr. Advocate and S. Rajappa, Advocate.
For the Respondent : J. Ramamurthy, Sr. Advocate, S.N. Terdol and R. Satish, Advocates.
Important Points
The Court held that under Section 80-O of the Income-tax Act, retaining brokerage fees from gross premiums before remitting the net amount to foreign principals, with RBI approval, constitutes receipt of income in convertible foreign exchange, entitling the assessee to the prescribed deduction.
Subject
Taxation Law - Income Tax
Act Referred
Headnote
TAXATION-Income Tax Act, 1961-Section 80-O-Circular No. 731 dated 20-12-1995-Interpretation of-Appellant Company is engaged in brokerage business as reinsurance-brokers-Appellant arranges for reinsurance of a portion of risk with various reinsurance companies-It receives a percentage of the premium received by foreign companies as its share of brokerage-Remittance to foreign reinsurance company is made through Reserve Bank of India-Entire transaction expressed in foreign exchange-Retention of fee due to the appellant is in dollars for services rendered-Receipt of income in convertible foreign exchange-Proceedings of Central Board of Direct Taxes declining to approve agreements of appellant for purposes of Section 80-O are improper and illegal. (Para 8)
Legal Category Hierarchy
Table of Contents
2. Whether retaining brokerage from gross premiums constitutes receipt of income in convertible foreign exchange or income generated within India under Section 80-O, Income-tax Act, 1961. (Para 5 )
3. Retaining brokerage with regulatory approval is financially equivalent to receiving foreign remittance; insisting on a two-way remittance process is a meaningless ritual. (Para 3 , 8 )
4. Income retained in convertible foreign exchange from gross premiums before remittance to foreign principals satisfies the requirement of receipt in convertible foreign exchange under Section 80-O. (Para 7 , 8 )
5. Appeal allowed — CBDT's refusal to approve the agreement for Section 80-O deduction declared illegal and directions issued to process the agreements. (Para 8 )
6. Does the retention of brokerage from gross premiums before remitting the balance to foreign principals qualify as receipt of income in convertible foreign exchange under Section 80-O?
Yes. The court held that since the transaction is expressed in foreign exchange and approved by the Reserve Bank of India, retaining the fee is equivalent to receiving income in convertible foreign exchange. (Para 7 , 8 )
7. Is a formal process of remitting the full amount abroad and then receiving the commission back necessary to claim deduction under Section 80-O?
No. The court observed that such a two-way traffic is an empty formality and a meaningless ritual when the financial and accounting effect of retaining the brokerage is the same. (Para 8 )
8. What is the impact of CBDT Circular No. 731 on the interpretation of Section 80-O regarding reinsurance brokerage?
The circular clarifies that reinsurance agents in India who deduct brokerage from gross premia before remittance to foreign principals are entitled to the deduction under Section 80-O, and such circulars are binding on the respondent. (Para 7 )
JUDGMENT
Paripoornan, J.-The petitioner in Writ Petition No. 3086 of 1987 in the High Court of Delhi, has filed this appeal against the judgment of the High Court dated 29.10.1987. The short matter that arises for consideration in this appeal is the interpretation to be placed on Section 80-O of the Income-tax Act, 1961. Appellant is a private Company. It is engaged in the brokerage business as reinsurance-brokers. It receives a commission @ 3 to 6 per cent, relating to maritime and other insurance. The Respondent is the Central Board of Direct Taxes, Government of India, New Delhi. In respect of insurance risk covered by Indian or foreign insurance companies, appellant arranges for the reinsurance of a portion of risk with various reinsurance companies either directly or through foreign brokers. In return for the above services, the appellant company receives a percentage of the premium received by the foreign companies as its share of brokerage. For a period of 19 months from 1.3.1980, Oil and Natural Gas Commission insured all their offshore oil and gas exploration and production operation with the United India Insurance Company, Madras. In respect of this insurance risk, the appellant contacted Messrs Sedgwick Offshore Resources Ltd., London who are brokers in London for placement of reinsurance business. The appellant furnished all the details about the risk involved, the premium payable, the period of coverage and the portion of risk which is sought to be reinsured. The said London brokers contacted various underwriters and after getting confirmation about the portion of the risk the foreign reinsurers were prepared to undertake, informed the appellant about such reinsurance coverage. Thereafter, the Indian Ceding Company handed over the total premium to be paid by it to the foreign reinsurance company, to the appellant for onward transmission. When this amount was given to the appellant, the appellant approached the Reserve Bank of India with a statement showing the amount of foreign currency payable as reinsurance premium to the foreign parties after deducting the amount of brokerage due to the appellant. This balance amount after deducting the brokerage, was remitted to the London brokers with the permission of the Reserve Bank of India. According to the appellant, the amount of commission retained by it was a receipt of convertible foreign exchange without a corresponding foreign remittance within the meaning of Section 9 of the Foreign Exchange Regulation Act. It is evident that the appellant company by an agreement with the foreign company, with the approval of the Reserve Bank of India remits premium received to the foreign insurance company on behalf of the Indian insurance company and while doing so, it deducts in terms of foreign exchange fee payable to it while making remittances themselves. The Indian insurers make payment in rupees to the appellant for the amount of reinsurance premium to be remitted to the foreign company, furnishing all particulars with an advice to the appellant to approach the Reserve Bank of India for necessary permission to remit in US Dollars the reinsurance premium abroad. Thereafter, the appellant writes to the Reserve Bank of India enclosing the remittance application in Form "A-2" as prescribed by the Exchange Control Manual together with the statement and Auditor s Certificate. These can be seen from Annexure-A. A statement is also attached thereto, which shows that the gross amount of the reinsurance premium to be remitted in US Dollars, under the heading "Balance of Account" and the amount of brokerage also is mentioned in US Dollars, earned by the appellant on the reinsurance premium to be so remitted under the heading "Brokerage". While in the normal course, the entire premium should be remitted abroad to the foreign parties and then the foreign reinsurers would remit the commission back to the appellant, who supplied the information, under the procedure adopted and approved b
