Referral payments to prospective insurance customers do not amount to insurance commission absent an insurer-agent relationship.

Payments to persons who merely referred prospective insurance customers were not insurance commission under section 194D because the recipients were not appointed as insurance agents and had no principal-agent relationship with the insurer. The commission-like payments therefore did not attract tax deduction at source under that provision, and disallowance under section 40(a)(ia) was not sustainable on these facts. The article also notes that an ad hoc 30% disallowance of referral commission was unsupported where the expenditure was backed by confirmations, bills, vouchers, payment details, and responses to notices and summons, making the arbitrary disallowance unsustainable.

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Issues: (i) Whether the ad hoc disallowance of referral commission was sustainable. (ii) Whether tax was deductible under section 194D on payments made to persons engaged for identifying potential insurance customers, so as to attract disallowance under section 40(a)(ia).

Issue (i): Whether the ad hoc disallowance of referral commission was sustainable.

Analysis: The payment to 14 individuals was supported by confirmations, bills, vouchers and payment details. Notices under section 133(6) of the Income-tax Act, 1961 were responded to, and some persons also appeared in response to summons under section 131. The disallowance was made only on an ad hoc basis without any demonstrated basis or rationality for adopting 30% of the expenditure.

Conclusion: The ad hoc disallowance was unsustainable and is deleted in favour of the assessee.

Issue (ii): Whether tax was deductible under section 194D on payments made to persons engaged for identifying potential insurance customers, so as to attract disallowance under section 40(a)(ia).

Analysis: Section 194D applies to insurance commission paid for soliciting or procuring insurance business. The individuals paid by the assessee were not appointed as insurance agents under section 42 of the Insurance Act, 1938 and had no principal-agent relationship with the insurer. Their role was limited to referring potential customers to the assessee. Such payments were therefore not insurance commission within section 194D and, at best, would fall under section 194H or section 194C, provisions not attracted on the assessee's facts. Consequently, section 40(a)(ia) could not be invoked.

Conclusion: The disallowance under section 40(a)(ia) was not sustainable and is deleted in favour of the assessee.

Final Conclusion: The assessee succeeded on both grounds and the additions made on account of referral commission and alleged TDS default were set aside.

Ratio Decidendi: Payments to persons who merely refer prospective insurance customers, and who are not appointed insurance agents of the insurer, do not constitute insurance commission under section 194D of the Income-tax Act, 1961.

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