TMI Blog2009 (2) TMI 234X X X X Extracts X X X X X X X X Extracts X X X X ..... id 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - Member(s) : M. A. BAKSHI., RAJENDRA SINGH. ORDER-M.A. BAKSHI, VICE PRESIDENT: We find it convenient to dispose of these three appeals of the assessee, for the asst. yrs. 2004-05, 2005-06 and 2006-07, by this consolidated order. 2. The Asstt. CIT (TDS)-1(2), Mumbai, had passed orders under s. 201(1) r/w s. 201(1A) of the IT Act, 1961, dt. 4th Oct., 2006, holding the assessee to be in default for having failed to deduct tax under s. 194D, from the payments made to the insurance companies on account of commission, business commission, etc. It may be pertinent to mention that subsequently the AO has rectified the orders and omitted the demand for the tax under s. 201(1) on finding that the payees had filed their r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the appellant and the insurers was on 'principal-to-principal basis' and there is no agency element as contemplated in the provisions of s. 194D. 4. On the facts and in the circumstances of the case and in law, the authorities below erred in treating the transaction between the appellant (reinsurer) and the insurers as procurement of insurance business on 'commission' basis, even though the same is on 'principal-to-principal' basis and no third person or intermediary is involved and the reasons assigned for doing so are wrong and contrary to the facts of the case, provisions of the IT Act, 1961 and the Rules made thereunder. 5. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that the provisions of s. 194D are applicable to payments of reinsurance commission without appreciating that reinsurance commission is nothing but a reimbursement towards cost of procurement incurred by insurance companies for originally accepting the insurance business who on the first hand pays commission to their agents on which TDS is deducted and paid under s. 194D by them, and as such doing so is wrong and contrary to the facts of the case, provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee was required to deduct tax at source on the payment of commission paid to various insurance companies during the financial years 2003-04, 2004405 and 2005-06. The assessee was asked to show cause as to why action under s. 201(1) and s. 201(1A) of the Act may not be taken. The assessee had objected to the proposed action. So however, the Asstt. CXT (TDS)-1 (2) was not satisfied with the claim of the assessee that it was not required to deduct tax from the commission/profit commission credited or paid to various insurance companies. The contention that the reinsurance premium was received from various companies after the deduction of commission, profit commission and, therefore, in any case no deduction of tax was required to be made was also rejected. 5. The assessee appealed to the CIT(A) and explained the nature of the payments credited to the insurance companies from whom the assessee had received the reinsurance business. The assessee had also placed reliance on the following decisions before the CIT(A) to support the claim that the provisions of s. 194D are not attracted in this case: (a) Asstt. CIT vs. The Samaj (2001) 71 TTJ (Ctk) 783 : (2001) 77 ITD 358 (Ctk); (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the mandatory obligation of taking reinsurance, which at the relevant point of time was 20 per cent. That the assessee has got business from the insurance companies on payment of premium, reduced by a certain percentage called as "Commission". It was contended that the deduction described as commission is in fact compensation to the insurance companies for meeting the administrative cost in respect of the original policyholders. It was contended that the policies of reinsurance are known as "treaty", under which the terms and conditions are settled between the assessee and the insurance companies. It was pointed out that the assessee had also paid brokerage in some cases for procuring the business from the insurance company, from which tax has been deducted at source and there is no dispute in respect of the same. It was contended that the Department of revenue has misinterpreted the provisions of s. 194D insofar as it is attracted in the case of payment of any remuneration or reward by way of commission for soliciting or procuring insurance business. It was contended that the assessee has not paid any remuneration or reward to the insurance companies nor is it paying any commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t there is no contractual relationship between the direct insured and the reinsurer. It was pointed out that the author has mentioned that there are separate contracts involved-one between the insured and the insurer and another between the insurer and the reinsurer. It has been pointed out by the author that insurer has to pay all valid claims to the insured, irrespective of whether the insurer can recover the same from his reinsurer. It was, accordingly, contended that s. 194D, which is attracted in the case of insurance business would not be applicable to the reinsurance business. 8. Quoting from the same book, it has been contended that the "ceding commission" is designed to reimburse the ceding company for the reinsurer's share of his acquisition costs (brokerage or agency commission paid by the ceding company to attract the business), as well as making a contribution towards the ceding company's other costs, such as administration, advertising, etc. Our attention has also been invited to a book known as "Reinsurance", Fourth Edition by R.L. Carter, L.D. Lucas and N. Ralph. In this book, the distinction between the insurance contracts and reinsurance contracts has been indic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the 1st day of June, 1973: Provided further that no deduction shall be made under this section in a case where the amount of such income or, as the case may be. the aggregate of the amounts of such income credited, or paid or likely to be credited or paid during the financial year to the account of, or to the payee, does not exceed five thousand rupees." 12. At the outset, it may be pertinent to mention that s. 194H also makes it obligatory for any person, other than individual or an HUF, to deduct tax at source from the payment or credit of any income by way of commission or brokerage to the account of the payee at the specified rate. The said s. 194H, however, is not applicable in respect of any insurance commission referred to in s. 194D. We leave it at that. 13. Reverting back to s. 194D, it provides for an obligation upon any person responsible for paying to a resident any income by way of remuneration or reward, whether by way of commission or otherwise, f-or soliciting or procuring insurance business (including business relating to the continuance, renewal or revival of policies of insurance) to deduct income-tax at the rates in force. The said section is appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Gujarat Stamps Supply and Sales Rules, 1987. It is not that the stamp vendor collects the stamp papers from the Government, sells them to the retail customers and then deposits the sale proceeds with the Government less the discount. The liability of the stamp vendor to pay the price less the discount is not dependent upon or contingent to sale of the stamp papers by the licensed vendor. It has been held that there is no element of agency involved in the sale of stamp papers to the stamp vendors. The discount allowed to the stamp vendors on the sale of stamp papers would not attract provisions of s. 194H. This view has been reiterated by the Hon'ble Kerala High Court in the case of Kerala State Stamp Vendors Association Ors. vs. Office of The Accountant General Ors. (2006) 200 CTR (Ker) 658 : (2006) 282 ITR 7 (Ker). 19. Similarly, in the case of M.S. Hameed Ors., the Kerala High Court in respect of the lotteries held that the lottery agent has received bulk quantities of lottery tickets from the State Government and received discount on the slab system. The tickets purchased thereafter were distributed through other agents as sub-agents on commission basis. The IT Depar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... words under the IT Act. Therefore, we will have to take assistance from the dictionary meaning of the words: "Remuneration" as per Oxford Dictionary means payment for services rendered. "Reward" as per the said dictionary means recompense for service or merit. "Solicit" means to appeal for something, to ask for the purpose of receiving, to endeavour to obtain by asking or pleading. "Procure" as per Oxford English Dictionary means the action of causing, compassing, accomplishing, or bringing about, especially through the instrumentality of an agent, management, arrangement, authorization, instigation, prompting, contrivance, to ask earnestly or persistently. 24. Having understood the dictionary meaning of the above words, we now proceed to appreciate the nature of the business of the assessee and the nature of the payments or credit in respect of which the assessee pas been held to be obliged to deduct tax at source under s. 194D. 25. As pointed out earlier, the agreement between the assessee company and the other insurance companies in regard to the reinsurance contracts is known as "treaty". The assessee has placed three treaties on record. At p. 32 onwards is the trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insurance, an agreed or ascertainable amount known as a premium. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : Ceding companies incur certain costs which their reinsurers do not have to bear; that is, commissions paid to agents plus other expenses incurred in acquiring the original business and administering the business ceded. Therefore, reinsurers allow from their share of the original premiums payable by cedants a discount in the form of a reinsurance commission, which should not be confused with the brokerage paid by a reinsurer to an intermediary who introduces the business........." It has further been explained that the most commonly used method of reinsurance commission, and the easiest to administer, is for the commission payable to be calculated by applying an agreed fixed percentage rate to the original gross premiums ceded. It further explains that the reinsurance commission allowed is known as "ceding commission" because it is the amount of commission agreed by the reinsurer as a deduction from the reinsurance premium accounted to the reinsurer for the treaty cessions. 32. In order to attract s. 194D, the commission or any other payment covered under the section should be a remuneration or reward for soliciting or procuring the insurance business. The insurance companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surance companies by way of commission, we are of the view that the same does not fall within the category of the payments by way of remuneration or reward for soliciting or procuring insurance business from the insurance companies. In our considered view, it is a deduction allowed by the assessee company to the insurance companies from the original gross rate in order to compensate the insurance companies for the brokerage and other costs incurred in procuring the business by the ceding company for themselves. Whereas the cost incurred by the insurance companies by way of brokerage to them would fall within the ambit of s. 194D in their hands, the reimbursement of expenses by the assessee company to the insurance companies would not fall within the same category. 34. Taking the totality of facts and circumstances of this case into consideration, we hold that the commission paid or allowed as a deduction from gross rate to the insurance companies does not fall within the category of remuneration or reward for soliciting or procuring insurance business. 35. There is another part of the payment made by the assessee company to the insurance companies, which is known as "profit com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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