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April 20, 2022

ITAT: Demand due to non-deduction of TDS on Reinsurance Commission Stayed

by CA Shivam Jaiswal in Income Tax

ITAT: Demand due to non-deduction of TDS on Reinsurance Commission Stayed

Facts and Issue of the case

The  application has been filed by the assessee seeking stay on realization of outstanding demand quantified at Rs.6,29,73,067/- pertaining to assessment year 2018-19. Learned counsel for the assessee submitted, the entire demand has been created because of disallowance made under section 40(a)(ia) of the Income-tax Act, 1961 (for short ‘the Act’) for alleged failure of the assessee to deduct tax at source under section 194D of the Act.

Learned counsel for the assessee submitted, the assessee is  a non-resident company  incorporated in France and is engaged in the business of providing reinsurance services. He submitted, assessee has been duly approved by Insurance Regulatory Development Authority of India (IRDAI) to undertake reinsurance business in India. Explaining the modus operandi of assessee’s activities, learned counsel for the assessee submitted, the assessee is in the business of reinsurance ceded from insurance company, meaning thereby, the portion of one or more  risks that the  insurance  company undertakes is transfered to the reinsurer with the object of reducing cedants liability by sharing with reinsurer the  insurance  liability,  premium  and losses from the reinsured business in that proportion Thus, he submitted, the assessee does not have any direct access or contact with the policy holders of the insurance company.

Drawing our attention to section 194D of the Act, learned counsel for the assessee submitted, the provision  is  applicable only in respect of commission paid to solicit or procure insurance business. He  submitted,  what  the assessee receives from the insurance company towards reinsurance commission is not a commission in strict sense of the term, but, in the nature of compensation towards cost of procurement incurred by insurance company for accepting insurance business through agents. He submitted, rather than making any payment to the insurance company towards commission, in fact, the assessee has received payment from insurance company net off administrative cost termed as commission.

Drawing our attention to Circular No. 120(a)/2/2010-ST, dated 16th April, 2010, issued by Central Board of  Excise  & Customs (CBEC), learned counsel for the assessee submitted, though, the payments made to reinsurer by  insurance  company are termed as commission, however, they are shared expenses not strictly coming within the nature of commission. Further, he submitted, the Circular makes it clear that it  is  the  reinsurer which provides insurance services to the insurance company. Proceeding further, he drew our attention to the decision of the Tribunal in case of General Insurance Corporation India Vs. ACIT, [2009] 28 SOT 453 (Mum.) to emphasize that since the commission paid by the assessee to the insurance company is in the nature of compensation towards cost of procurement business incurred by the insurance company, it will not come within the purview of section 194D of the Act. Thus, learned counsel for the assessee urged for absolute stay on recovery of the demand, since according to him, the issue in dispute is squarely covered in favour of the assessee by various judicial precedents. Further, he submitted, the assessee is prepared and ready to argue the issue on merits, hence, requested for fixation of the corresponding appeal on out of turn basis. Opposing grant of absolute stay, learned Departmental Representative submitted, let the assessee be directed to pay 20% of the outstanding demand.

Observation of the court

Court has considered rival submissions and perused the materials on record. It is evident, the demand in dispute is as a result of disallowance made under section 40(a)(ia) of the Act due to alleged non-compliance with the provisions of section 194D of the Act. It is the claim of  the  assessee  that  the  provision contained under section 194D is not applicable to the reinsurance commission. The acceptability or otherwise of the aforesaid contention of the assessee has to be tested when  the  issue  is heard on merits at the time  of hearing of the  appeal. However, after careful examination of the ratio laid down in various judicial precedents cited before court by learned counsel for the assessee, court is of the prima facie view that the issue in dispute appears to be covered in favour of the assessee by a number of judicial precedents. Therefore, court is inclined to grant  expeditious hearing of the corresponding appeal of the assessee. Accordingly, with the consent of both the parties, Registry is directed to fix the appeal for hearing on 28.04.2022. Paper-books, if any,  shall  be filed by the parties sufficiently ahead of the date of hearing of the appeal, in accordance with the extant rules. Since, the date of hearing of the appeal is announced in the open court in presence of both the parties, issuance of separate notice for hearing to the parties is dispensed with.

As regards the impugned demand, the Assessing Officer may pursue the assessee for paying a part of the demand. However, no coercive action shall be taken by the Assessing Officer for recovery of the demand till the date of hearing of the  appeal,  i.e., 28.04.2022. It is made clear, in case of any unnecessary adjournment being sought by the assessee, the interim protection granted to the assessee will be vacated and the assessee will also lose the benefit of early hearing of appeal.

Conclusion

The Court allowed the stay application .

AXA-France-Vie-Vs-ACIT-ITAT-Delhi

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