2023 (1) TMI 62 - AT - Income Tax

Tribunal rules ceding commission not subject to TDS under section 194D.

AXA France Vie, Versus Assistant Commissioner of Income Tax, Circle Int. Taxation-1 (1) (1), New Delhi

The Tribunal ruled in favor of the assessee, holding that the ceding commission was a reimbursement of expenses and not subject to TDS under section 194D. ... TDS u/s 194D - disallowance being 30% of ceding commission u/s 40(a)(ia) alleging failure to deduct tax at source on such commission under section 194D - AO was of the opinion that a reading of provisions of section 194D provides that TDS has to be deducted where any sum is paid for soliciting or procuring insurance business - HELD THAT:- The assessee company is in the business of reinsurance ceded from the insurance companies in India. The term reinsurance ceded means the portion of one or more risk that the cedant transfers to the reinsurer with the object of reducing the cedant’s liability by sharing with reinsurer the insurance liability, premiums, and losses from the reinsured business in that proportion. The reinsurance company also bears a proportionate cost of cedant in this connection which is termed as cednat commission. During the year under consideration, from the gross premium payable by the insurance company to the assessee, a sum was deducted on account of reimbursement of expenses for the share of assessee in the nature of manpower cost, third party administration cost, administration cost, etc. which are termed as cedant commission. As per the facts of the present case, the cedant commission paid by the assessee to the insurance company is actually the share of assessee in the nature of manpower cost, third party administration cost, administration cost, etc. which are actually reimbursement of expenses in relation to the gross premium which the assessee company has received in this regard, so ceading commission cannot be considered to be paid for soliciting or procuring insurance business. As decided in the case of M/s Royal Sundaram Alliance Insurance Company Limited [2019 (2) TMI 923 - MADRAS HIGH COURT] CIT(A) noted that as a matter of industrial practice it was termed as 'commission on reinsurance premium received', however, in substance it is discount on re-insurance premium received by an Insurance Company from an other Insurance Company. We find that the Tribunal rightly decided the issue in favour of the assessee and the revenue has not brought out any ground to interfere with the said finding. Accordingly, the appeals filed by the revenue on this ground are dismissed and consequently, the substantial question of law is answered against the revenue. Thus no TDS is required to be deducted. The other limb of ld. counsel for the assessee’s submission is that no TDS is required in as much as it is reimbursement of expenses and on the touch stone to the decision of the Hon’ble Supreme Court in the case of of DIT(IT)-1 vs Moller Maersk [2017 (2) TMI 993 - SUPREME COURT] no TDS was required to be deducted. Another plea was that on the basis of proviso to section 201(1) of the Act, since the payees have offered the income to pay tax, no TDS was required to be deducted. Appeal of the assessee stands allowed. Issues Involved:1. Legality of the final assessment order dated 25-02-2022.2. Disallowance of Rs. 12,13,74,372/- under section 40(a)(ia) for alleged failure to deduct tax at source under section 194D.3. Nature of ceding commission as reimbursement of expenses versus marketing and acquisition costs.4. Applicability of section 194D to ceding commission.5. Reimbursement nature of ceding commission and its exclusion from section 194D.6. Reliance on ITAT Chennai Bench decision versus other judicial precedents.7. Non-payment of commission by the appellant and its netting against insurance premium.8. Compliance with proviso to section 201(1) through CA certificates.9. Charging of interest under section 234A/B/C.Detailed Analysis:1. Legality of the Final Assessment Order:The assessee challenged the legality of the final assessment order dated 25-02-2022, passed by the Assessing Officer (AO) under the directions of the Dispute Resolution Panel (DRP) u/s 144C(5) of the Income Tax Act, 1961.2. Disallowance Under Section 40(a)(ia):The AO disallowed Rs. 12,13,74,372/- being 30% of the ceding commission of Rs. 40,45,81,243/- under section 40(a)(ia) due to the alleged failure to deduct tax at source under section 194D. The AO held that the assessee should have deducted TDS on the payment made under the head commission, rejecting the assessee's claim that it was a reimbursement of expenses.3. Nature of Ceding Commission:The assessee argued that the ceding commission was a reimbursement of manpower cost, third-party administration cost, and administration cost incurred by insurance companies, and not for marketing or acquisition of policies. The AO, however, characterized the ceding commission as payment for services, thus requiring TDS deduction.4. Applicability of Section 194D:The AO interpreted section 194D to mean that TDS should be deducted on any payment made for soliciting or procuring insurance business. The assessee contended that the ceding commission did not fall within the ambit of section 194D, as it was a reimbursement of expenses rather than a commission for soliciting or procuring insurance business.5. Reimbursement Nature of Ceding Commission:The assessee argued that the ceding commission was not in lieu of any service provided by insurance companies but was a reimbursement of costs incurred. Judicial precedents, including decisions from the Madras High Court and ITAT Mumbai, supported the view that such reimbursements do not attract TDS under section 194D.6. Judicial Precedents:The DRP relied on an ITAT Chennai Bench decision in the case of DCIT vs. United India Insurance Co. Ltd., which was subsequently reversed by the Madras High Court. The assessee cited several judicial precedents supporting their position, including decisions from the Madras High Court, Bombay High Court, and ITAT Mumbai, which held that ceding commission as reimbursement does not require TDS deduction.7. Non-payment of Commission by the Appellant:The assessee contended that the commission was not actually paid but netted against the appellant’s share of insurance premium received from insurance companies, thus falling outside the ambit of section 194D.8. Compliance with Proviso to Section 201(1):The assessee provided Chartered Accountant certificates from insurance companies certifying that the impugned amount was included as part of their taxable income, satisfying the conditions of the proviso to section 201(1). This proviso states that if the payee has paid the tax due on the income declared, the payer is not deemed to be in default for not deducting TDS.9. Charging of Interest Under Section 234A/B/C:The assessee also contested the charging of interest under section 234A/B/C of the Act, arguing that the disallowance and subsequent interest charges were unjustified.Conclusion:The Tribunal ruled in favor of the assessee, holding that the ceding commission was a reimbursement of expenses and not subject to TDS under section 194D. The Tribunal relied on judicial precedents from the Madras High Court and Bombay High Court, which had ruled similarly in favor of the assessee. The Tribunal also noted that the DRP had erred in relying on the ITAT Chennai decision, which was not applicable to the facts of the case. Consequently, the appeal was allowed, and the disallowance under section 40(a)(ia) was overturned. The Stay Application was rendered infructuous due to the favorable ruling on the main appeal.