TaxTMI 
TaxTMI 
2025 (8) TMI 301
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....ad running through all the appeals is qua disallowance of certain expenses invoking the provisions of Section 37(1) of the Income Tax Act 1961 (herein after called the 'Act'). 3. The relevant facts relating to the aforesaid issue are more or less identical in all the appeals filed by the assessee, except, variance quantum. However, since learned First Appellate Authority has taken up the appeal for AY 2014-15 as the lead appeal and applied the decision taken therein to other appeals, the parties before us had also requested to take up the appeal relating to AY 2014-15, ITA No. 2839/Mum/2024 as the lead appeal and proceeded accordingly. In view of the aforesaid, we proposed to take up ITA No. 2839/Mum/2024 as the lead appeal. 4. Briefly stated, the assessee is a resident corporate entity engaged in the business of providing general insurance. The assessee offers general insurance products ranging from motor, health, travel, home & personal accident in the retail space and customized products like property, marine and liability insurance in the corporate space. For the AY 2014-15, the assessee had filed its return of income on 28.11.2014 declaring total income of Rs. 59,53,73,4....
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....40(2A), 42E of Insurance Act, 1938 and circular issued by Insurance Regularity and Development Authority of India (IRDAI), the AO observed that the quantum of commission/brokerage that can be paid on general insurance cannot exceed 10% of the premium amount. He further observed that no brokerage can be paid in where agency commission is payable and likewise, agency commission can be paid where brokerage is payable. However, he observed, the amount paid by the assessee to AMA and Team Space exceeds the amount of commission payable in terms with the insurance Act and IRDAI Circular. Further, he observed that since procurement of insurance is a core activity, it cannot be outsourced too other. Accordingly, he issued a show cause notice to the assessee to explain why the payment made to AMA and Team Space should not be disallowed as it falls within the mischief of Explanation-1 to Section 37 of the Act. 6. In response to the query raised by the AO, the assessee furnished a detailed reply submitting that the payment made to the intermediaries/aggregators is not commission per se for motor insurance policy. It was submitted, for facilitating certain non-core activities such as filling....
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....t. Though, the assessee contested the aforesaid disallowance by filing appeal before learned First Appellate Authority, however, it was unsuccessful as learned First Appellate Authority more or less concurred with the view expressed by the AO. 8. Before us, learned counsel appearing for the assessee reiterated the stand taken before the Departmental Authorities. He submitted, when a customer purchases a car from a motor vehicle dealer, to avoid any exigencies along with the car, he also takes a general insurance. He submitted, the insurance is always taken through the registered agent of the insurance company to whom 10% of the premium amount is paid as commission. He submitted, however, to facilitate taking out insurance policy certain administrative function like filling up of form, verification of identity and similar other functions are done, the motor vehicle dealers have engaged personnels in their premises who help out the customers in the preliminary activities. He submitted, since such personnels are in large number and present with every motor vehicle dealer spread across India, it is difficult on the part of the assessee deal with them independently. Therefore, assess....
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....s, learned counsel submitted that policy servicing and related activity though fall within the core activity, however, it can be outsourced. In this context, he drew our attention to Paragraph Nos. 2, 4 an Annexure-1 of the aforesaid guideline. Further, referring to Circular dated 12.08.2015, issued by IRDAI, learned counsel submitted that other activities such as policy servicing and related activities in support of core activity and non-core activities can be outsourced. Thus, he submitted, outsourcing of policy servicing and related activities to aggregators does not fall foul of any provision contained under the Insurance Act much less Section 40(1) of the Act. He submitted, for breach/violation of any of the rules and regulations of the Act penalty provision has been incorporated in the statute. He submitted, the competent authority under the Insurance Act has not reported any violation by the assessee nor has taken any penal action. Therefore, he submitted, when the competent authority has not alleged any violation, the AO cannot infer violations of the Insurance Act and IRDAI regulations. In this context, he relied upon the following observations of the coordinate Bench in c....
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....ction 25 of the said Regulation empowers the Board to inspect or investigate the books of account, records and documents of a Venture Capital Fund through an Inspecting or Investigating Officer and on the basis of such report, the Board can take such measures against the Venture Capital Fund as per section 29 or 30 of the said Regulation. Undisputedly, in case of the present assessee there is no such allegation or action by the SEBI which could demonstrate violation of any conditions imposed by SEBI. At least, no material has been brought before us by the learned Departmental Representative to demonstrate such fact. Thus, in the absence of any allegation or action by the SEBI against the assessee towards violation of SEBI Regulations, the learned Principal Commissioner cannot make such allegation only for the purpose of denying assessee's claim of Milestone Real Estate Fund exemption under section 10(23FB) of the Act. In this context, we may rely upon the following decisions:- i) G.V.K. Biosciences Pvt. Ltd. v/s ACIT, [2014]49 taxmann.com 385; ii) ACIT v/s Small Is Beautiful, [2013] 26 ITR (Trib.) 41; and iii) ITO v/s Gujarat Information Technology Fu....
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....ed 10% of the premium amount. Whereas, the payment made by the assessee to aggregators/motor vehicle dealers exceeds that amount, hence, violates the condition of Section 40(1) r.w.s. 40(2)(b) of the Insurance Act, as also, IRDAI guidelines. In fact, the allegation of the Departmental Authorities is twofold. Firstly, services were never rendered to the assessee by the aggregators and secondly, the payment to the aggregators is not authorized by law. 13. Before we proceed to examine the validity of the aforesaid reasoning of the Departmental Authorities, it is necessary to look into exact charge levelled against the assessee by the Central Excise Department. On a reading of the report of DGCEI, it becomes very much clear that the grievance of the Central Excise Department is with regard to claim of CENVAT credit by Insurance Companies on the service tax paid towards services availed from aggregators/motor vehicle dealers in connection with policy servicing and related activities. Pertinently, in pursuance to investigation report of DGCEI proceedings were initiated by the Central Excise Department against the assessee to examine the claim of CENVAT credit and while deciding the is....
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.... customer generally also buys insurance cover for the vehicle to avoid any exigency due to accident or otherwise. Of course, it is a purely voluntary act of the assessee as the assessee has the option to either get the car insured through the help of motor vehicle dealer or on his own. However, in both the cases the insurance policy is done through the authorized agent of the insurance company. For which, the agent is entitled to commission in terms with Section 40(1) of the Insurance Act and IRDAI guidelines. As per the guidelines, for motor insurance the maximum amount of commission that can be paid to an agent is 10% of the premium amount. Undisputedly, agency commission of 10% has been paid by the assessee. However, before the vehicle is actually insured through an agent certain preliminary work known as policy servicing and related activities is carried out by personnel present in the premises of the motor vehicle dealers. These works include filling up of form, verification of identity, verification of documents, collection of cheque etc. Since, motor vehicle dealers are in large numbers spread across India, the assessee has entered into service agreements with two entities v....
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...., Security, Catering, etc. ii. PF Trust iii. Internal audit, Internal / branch /concurrent audit etc. (Note: However, the Board of Directors shall appoint the internal /branch / concurrent auditor based on the recommendation of the Audit Committee / Investment Committee respectively as mandated by the Authority in Corporate Governance Guidelines. The report of internal auditor / concurrent auditor shall be placed before the Audit Committee / Investment Committee / Board Meeting for their information and necessary action) iv. Website Development and Management / Software and other IT Support v. Pay Roll Management vi. HR Services vii. Service Tax Consultancy and Support viii. TDS filing ix. Compliance with labour laws x. Data entry Including Scanning, Indexing Services xi. Printing and posting of reminders and other documents xii. Pre employment medical checkups xiii. Reminders for Premium Payment xiv. Call Centre and outbound calling for registering complaints or answering enquiries xv. Claim Processing for Overseas Medical Insurance Contracts xvi. Tele-mark....
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....ermitted to outsource core activities.: 2. Other activities which support the Core activities (such as Policy servicing and related activities) and Non-core activities may be outsourced, 3. Insurance companies have also been instructed to classify any activity not listed by the Authority, as core or non-core activities, after due diligence: 4. Insurance companies have also been advised to ensure that the outsourcing arrangements/service provider employ same standards in performing the services as if such activities were conducted in house so that insurer's ability to fulfil the obligations to Policy holders is not diminished nor effective supervision by the Regulators is impeded; 5. An insurer is required to report the activities outsourced to the Authority as under: a. In case of support activities of core Activities: within 45 days from the date of entering into outsourcing agreement b. In case of non-core activities: within 45 days from the end of every half year I am sure that the Service Tax authorities would keep the Outsourcings guidelines issued by the Authority in view while dealing with the cases recently ....
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....s. Chola could not term such payout as commission (which would be in violation of IRDA guidelines) and hence the Dealers were given prescribed format to raise invoices as if they provided "computing network connectivity through extranet, internet space, furniture and fixtures, consumables, salary of staff, computers, printers, electronics and electricity"; (iii) the Dealers accordingly raised invoices on the insurance companies in the format provided to them and (iv) the Dealers have not provided the services as mentioned in the description of the invoices. In other words, the description of the services contained in the invoices used for availing Cenvat Credit do not reflect the true description of the services." 6.2 From the above, it can be seen that the case of the Department is that the payout paid by the appellant to the dealers on the OD premium collected by the dealers from the customers is camouflaged as service provided by the dealers to the appellant; that therefore, the services contained in the invoices have actually not been provided by the dealers to the appellant and thus, CENVAT Credit is not eligible. 7.1 Though in the Show Caus....
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.... whether the Tribunal can go into the question as to whether the said service provider had provided service to the appellant or not, more so when the said service provider has been assessed to service tax under Business Support Service for the service rendered by them to the appellant. b) Is the Tribunal not in error in refusing credit to the appellant for service tax paid by them to service provider when payment of service tax by the appellant for the service rendered by service provider is not in dispute and that it is settled, the assessment to tax at the hands of the service provider end cannot be questioned in the hand of service receiver (appellant in this case)" 8.2 The brief facts of the said case are that the appellant therein had availed input service credit on "Multi Protocol Label Switching" (MPLS) service based on the Invoices issued by M/s. Brakes India Ltd., Chennai ("M/s. BIL" for short), The appellants were job workers for M/s. BIL. The services were utilized by M/s. BIL for communicating and retrieving the data from the appellant's therein. The Department alleged that the by BSNL and Communications Ltd. to M/s. BIL and that M/s. BIL had servi....
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....n turn, has raised an invoice on the assessee's claiming proportionately the costs which they have incurred to BSNL/Reliance. By way of illustration, if Rs. 20/- has been passed on to one of the assesses, a sum of Rs. 2/- is collected as Service Tax and each of the assesses pays Rs. 22/- to BIL, on which Rs. 2/- is the Service Tax paid. The assessee's have taken CENVAT credit on the said Rs. 2/- paid by it as Service Tax to BIL. Therefore, the question would be as to whether the department can dispute the nature of transaction at this juncture, more particularly, when the assessment made on the BIL and the collection of Service Tax on them has not been reopened. 15. From the reasons assigned by the Commissioner (Appeals), we find that the Commissioner (Appeals) has travelled beyond the scope of allegation made in the show cause notices. By giving a different interpretation to the nature of transaction, which, in our considered view, could not have been done by the Appellate Authority in the light of the settled position with regard to the Service Tax liability admitted and paid by BIL. Therefore, unless and until, the assessment on BIL had been reopened, the nature of tran....
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....Hon'ble High Court, unless and until the assessment made by the dealer is revised, the credit at the recipient's end cannot be denied. 9. Before we part, we must state that we have gone through the several decisions placed by the Learned Authorized Representative for the Department before us; none of these decisions are applicable to the issue or facts under consideration in this appeal. 10. From the foregoing, after appreciation of the facts and following the decision of the Hon'ble High Court in M/s. Modular Auto Ltd. (supra), we hold that the impugned order cannot sustain and requires to be set aside, which we hereby do." 18. Identical view was expressed by the CESTAT, Mumbai Bench in case of ICICI Lombard General Insurance Company Ltd. (Supra). The relevant observations of the CESTAT are as under: "4. Heard both sides and perused the records. 5. In this case, it is an undisputed facts that the automotive dealers had paid service tax on the nature of services described in the invoices issued to the appellant; that payment of service tax by such dealers have been accepted by the service tax authorities having jurisdiction over th....
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.... impugned order, the appeal is allowed in favour of the appellant." 19. Thus, it could be seen from the above observations, while deciding identical nature of dispute, the CESTAT has discarded all the allegations of the Central Excise Authorities and reversed their decision declining CENVAT credit to the Insurance Companies. Notably, though, the decision of the CESTAT were furnished before learned First Appellate Authority by the assessee, however, instead of taking note of the decisions of higher appellate authorities, learned CIT(A) has thought it appropriate to rely upon the report of DGCEI and the order of Central Excise Department, which virtually have become inconsequential as a result of the decisions rendered by the CESTAT in identical nature of dispute. Therefore, in our view, the disallowance of deduction claimed by the assessee purely based on the report of the Central Excise Authorities is unsustainable. 20 Having held so, it is now necessary to advert to the issue as to whether, the payment can at all be disallowed by invoking Explanation-1 to Section 37(1) of the Act. On a reading of Explanation-1 to Section 37(1) of the Act it becomes clear that any expenditure....
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....when the assessee has not been declared to be guilty of any offence nor there is any penal action initiated against the assessee for violation of the provisions of the Insurance Act or IRDAI guidelines, in our humble opinion, the exceptions provided under Explanation-1 to Section 37(1) of the Act would not apply. In this context, we respectfully agree with the observations made by the coordinate Bench in case of Milestone Real Estate Fund (Supra). Pertinently, in case of M/s Cholamandalam MS General Insurance Co. Ltd. [2025] 174 taxmann.com 603 (Mad.), identical issue of disallowance of payment made to motor vehicle dealers u/s. 37(1) of the Act came up for consideration. While deciding the issue, the Hon'ble Court upheld the decision of the Tribunal restoring the issue to the AO to decide afresh. Keeping in view the order of CESTAT in case of the same party. The decision taken by the Tribunal to restore the issue was for the fact that the CESTAT decision was not available before the Departmental Authorities. However, in the facts of the present appeal, the material on record do establish that the orders of CESTAT, though, were furnished before learned First Appellate Authority, ho....