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2009 (2) TMI 234 - AT - Income TaxTDS u/s 194D - payment of reinsurance commission - charging interest u/s. 201(1A) - difference between insurance and reinsurance - Whether s. 194D applies to the nature of deductions or payments allowed by the assessee company to the other insurance companies from the gross premium payable by such insurance companies for reinsurance - According to the Asstt. CIT (TDS) the business of insurance also includes reinsurance and accordingly u/s. 194D the assessee was required to deduct tax at source on the payment of commission paid to various insurance companies during the financial years 2003-04 2004-05 and 2005-06. The assessee was asked to show cause as to why action u/s. 201(1) and s. 201(1A) may not be taken. HELD THAT - It is not disputed before us that s. 194D applies to any payment made to an agent who is procuring business for insurance companies to whom certain percentage of the premium is paid by way of commission as a reward or remuneration for procuring or soliciting insurance business. The case of the assessee is that the commission paid to the insurance companies having been deducted from the gross premium there is neither any payment made by the assessee nor any amount credited attracting the provisions of s. 194D. We are of the considered view that the mere deduction by the insurance companies may not be sufficient to conclude that the payment is in the nature of discount. We will have to consider the nature of the deduction. The difference between insurance and reinsurance has been identified by the authors as under (a) An insurer contracts with individuals and organization whose business generally is not that of insurance whereas reinsurance contracts are between two insurers the one known as the reinsurer the other as the reinsured the direct or primary insurer or the ceding office. Reinsurers in turn may reinsure reinsurances they have accepted the contract then being known as a retrocession with the ceding company being the retrocedent and the reinsurer being the retrocessionaire. (b) The subject-matter of an insurance is some property person or benefit exposed to loss or damage or some potential legal liability the insured may incur arising out of activities undertaken either by himself or herself or by a servant or agent. Thus an insurer directly insures against events which may give rise to economic loss such as the destruction of property by fire or other perils and accidents giving rise to legal liability for injury to or for damage to the property of third parties. Reinsurers on the other hand only become interested in such primary losses insofar as they have undertaken to compensate a reinsured for claims settlements the latter has made in respect thereof. Therefore it would appear logical to regard the subject-matter of a reinsurance contract as all or part of the contractual liabilities that the ceding company has accepted under the insurance policies it has written. British Courts; however have taken a contrary view holding that the subject-matter of insurance under a reinsurance contract is the same as the subject-matter of the underlying direct insurance and the insurance regulator has largely accepted that principle for supervisory purposes. (c) Not all insurance contracts are subject to the principle of indemnity; it is well accepted law that insurances covering human life (i.e. life personal accident and sickness policies) are excluded from the principle and therefore are sometimes termed benefit policies. All reinsurance contracts including those covering insurances on human life are contracts of indemnity being limited to the amount of the claims paid by the reinsured under policies it has written. In practice most reinsurance contracts provide only partial compensation with a part of any loss being borne by the reinsured. Therefore we hold that judging from the nature of business the insurance companies have not provided any service of soliciting or procuring of insurance business for the assessee company. On the other hand the assessee company has provided reinsurance to the insurance companies. The insurance companies do not get business from the insured for the assessee. The said insurance companies have got business for themselves and not for the assessee company. The insurance companies get business either directly or through agents. If any commission is paid to the agents by them that attracts provisions of s. 194D as the same is paid for services rendered for soliciting or procuring insurance business. If the insurance companies reduce the premium directly from the premium payable by the insured on account of no claim bonus etc. such a deduction will not attract the provisions of s. 194D. On the facts of the present case. s. 194D is not attracted. We hold accordingly. The order under ss. 201(1) and 201(1A) is accordingly set aside. Hence appeals of the assessee are allowed.
Issues Involved:
1. Applicability of Section 194D of the IT Act, 1961 to reinsurance commission payments. 2. Liability of the assessee under Sections 201(1) and 201(1A) for failure to deduct tax at source. 3. Nature of payments made by the assessee to insurance companies. 4. Interpretation of terms "remuneration," "reward," "soliciting," and "procuring" in the context of Section 194D. 5. Determination of whether reinsurance payments are discounts or commissions. 6. Treatment of profit commission in reinsurance contracts. Detailed Analysis: 1. Applicability of Section 194D of the IT Act, 1961 to Reinsurance Commission Payments: The core issue was whether Section 194D, which mandates tax deduction at source on insurance commission, applies to reinsurance commission payments. The Tribunal analyzed the nature of reinsurance business and concluded that reinsurance differs significantly from direct insurance. The Tribunal held that Section 194D applies to payments made as remuneration or reward for soliciting or procuring insurance business. In reinsurance, the payments made by the assessee to insurance companies were not for soliciting or procuring business but were deductions from the gross premium to compensate for administrative costs. 2. Liability of the Assessee under Sections 201(1) and 201(1A) for Failure to Deduct Tax at Source: The assessee was initially held liable under Sections 201(1) and 201(1A) for not deducting tax on reinsurance commission payments. However, the Tribunal found that the nature of these payments did not fall within the ambit of Section 194D. Consequently, the assessee was not considered an "assessee in default," and the interest levied under Section 201(1A) was deemed unjustified. 3. Nature of Payments Made by the Assessee to Insurance Companies: The Tribunal examined the payments made by the assessee to insurance companies, which included commission, profit commission, and brokerage. It was determined that these payments were deductions from the gross premium and not payments for soliciting or procuring insurance business. The Tribunal emphasized that the payments were compensations for administrative costs incurred by the insurance companies. 4. Interpretation of Terms "Remuneration," "Reward," "Soliciting," and "Procuring" in the Context of Section 194D: The Tribunal referred to dictionary definitions to interpret the terms "remuneration," "reward," "soliciting," and "procuring." It concluded that for Section 194D to apply, the payments must be for services rendered in soliciting or procuring insurance business. Since the reinsurance payments were not for such services, they did not attract Section 194D. 5. Determination of Whether Reinsurance Payments are Discounts or Commissions: The Tribunal distinguished between discounts and commissions by examining the nature of deductions from the gross premium. It referred to judicial precedents and concluded that the deductions allowed to insurance companies were in the nature of discounts and not commissions. This distinction was crucial in determining the applicability of Section 194D. 6. Treatment of Profit Commission in Reinsurance Contracts: The Tribunal analyzed the nature of profit commission, which is paid only if the reinsurance transaction results in a profit. It was concluded that profit commission is a form of profit-sharing and not a remuneration or reward for soliciting or procuring insurance business. Therefore, profit commission did not fall within the scope of Section 194D. Conclusion: The Tribunal ruled that Section 194D does not apply to the reinsurance commission payments made by the assessee. Consequently, the assessee was not liable under Sections 201(1) and 201(1A) for failure to deduct tax at source. The Tribunal allowed the appeals of the assessee, setting aside the orders under Sections 201(1) and 201(1A).
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