• Feb
  • 23
  • 2009

Applicability of section 194D of IT Act in case of a reinsurance company paying commission to insurance companies

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CASE LAW DETAILS

APPEAL No.: ITAT, MUMBAI BENCHES `G’, MUMBAI

IN THE CASE OF: General Insurance Corporation of India v. ACIT (TDS)

APPEAL NO.: ITA NOS. 4479 TO 4481/MUM/2007
DATED: FEBRUARY 13, 2009

RELEVANT PARAGRAPHS: 

32. In order to attract section 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 do not procure business for the assessee company nor does the assessee company pay commission or other payment for soliciting the business from the insurance companies. The language of section 194D clearly indicates that ordinarily there would be three parties involved in the payment of commission or other payments as remuneration or reward for soliciting or procuring the insurance business. Firstly, there would be an insurance company and the second would be insured. If the insurance company gets business directly from the insured, no payment would be required to be made  by the insurance company to the insured by way of commission or  otherwise for soliciting or procuring the business for the assessee. If any discount is allowed by the insurance company to the insured that will not fall within the definition of brokerage or  commission paid for soliciting or procuring insurance business. That payment, in our view, would fall within the category of a discount offered to the insured for giving the business to the insurance company. Even otherwise the payment or deduction would neither be a reward nor remuneration for any services like soliciting or procuring insurance business for the assessee. The assessee company may be said to have solicited business from the insurance companies in certain cases but the commission credited / paid is not by way of remuneration or reward for soliciting or procuring of insurance business. As noted earlier, remuneration or reward would be related to services rendered in connection with soliciting or procuring business. In this case the payment or discount is made to insurance companies but the payee companies have not solicited or procured insurance business for the assessee. For the sake of arguments, it may be accepted that the assessee company has solicited or procured insurance business from the insurance companies but the payment is not made to the solicitor or procurer of insurance business but to those from whom business has been solicited or procured. In the present case, payer would be a solicitor or procurer of insurance business but not the payee companies. For attracting section 194D, the payment has to be by way of remuneration or reward not for giving business to the assessee but for soliciting or procuring the insurance business.

33. Considering the nature of the payment or deduction made by the assessee company to the insurance 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 section 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 commission”. The authors of “Reinsurance” describe the “profit commission” as under:-

“Payment of profit commission in addition to a flat rate commission is a common method of rewarding a ceding company for better than average experience under surplus and quota share treaties. The idea is to give the ceding company a share of any profit earned by the reinsurer on the reinsurances ceded.”

It has been clarified before us that the profit commission is not payable in every case. It is payable only in the event of transaction resulting into a profit. It is calculated at the end of the each quarter and we are informed by the learned counsel for the assessee that the adjustments are made by way of deductions from the Original Gross Rate. This sort of payment, according to our understanding, also does not fall within the ambit of any remuneration or reward for soliciting or procuring of insurance business. In our view, the profit commission is on a better footing than the ceding commission. The payment is sort of sharing of profit and it, in our view, does not fall within the ambit of remuneration or reward for soliciting or procuring insurance business. As pointed out earlier, remuneration or reward should be paid to the solicitor or procurer of insurance business. In the present case, solicitor or procurer is the payer and not the payee. Therefore, section 194D has no application.

Sandeep Kanoi

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