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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.
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