Reinsurance Companies (‘Reinsurers’) provide a cover to Insurance Companies (also known as Cedants) who cede (pass on) their insurance liabilities to a reinsurer, who ensures the solvency of Cedants in case of major claims and gives a certain degree of insurance cover to the reinsurer.
Foreign Reinsurance Companies in India are required to adhere to rules and regulations stipulated as per the Insurance Regulatory and Development Authority Act, 1999 (‘IRDAI’) and, ceding of the quantum of insurance is also stipulated as per the IRDAI regulations in terms of order of preference.
Ceding Commission is an expense that is customary in the Reinsurance business wherein the Reinsurer re-imburses the Cedents for administrative, underwriting and business acquisition costs incurred by them, either in whole or part.
Section 194D of the Income-tax Act, 1961 (‘IT Act’) requires tax to be withheld on any insurance commission paid to a resident who solicits or procures insurance business. Further, provisions of the IT Act also state that any failure to deduct and deposit the withholding taxes attract a disallowance of the expenditure on which taxes ought to be withheld.
Recently, the Delhi Tax Tribunal in its ruling1 has distinguished between Ceding Commission and Insurance Commission in-depth and upheld that tax must not be withheld while making payment of ceding commission by the reinsurer to the insurance company as the same is a mere reimbursement of costs.
At BDO in India, we have summarized the above ruling and have provided our comments on the impact of this decision hereunder.
Facts of the case
- The taxpayer, a global re-insurance company is a French tax resident and is engaged in the business of providing insurance and reinsurance globally. It also operates in India through its Branch Office.
- The taxpayer received a premium for re-insurance from insurance companies for the risks undertaken by it. A portion of the premium was retained by them. The amount retained bore a character of ceding commission, which was reduced from the premium paid and which would otherwise be reimbursed/paid by the taxpayer to the insurance companies.
- Provisions of the IT Act, in cases where no taxes have been withheld, grant immunity to the taxpayers from a defaulter status if the person to whom payment has to be made without withholding taxes, files the return of income, taking into consideration the income received and taxes due thereon.
The insurance companies fulfilled the said condition. Thus, the taxpayer was a bona fide taxpayer. Certificates from Chartered Accounts were also obtained in this regard.
- The Tax Officer categorising ceding commission as insurance commission, was of the view that the taxpayer should have withheld taxes on the aforesaid payment and thus, made a disallowance of the ceding commission expenses. The First Appellate Authority i.e. the Dispute Resolution Panel (‘DRP’) concurred with the tax officer, not taking into consideration the various judicial precedents placed on record.
The Taxpayer, aggrieved by the order of DRP, preferred an appeal before the Delhi Tax Tribunal
- Hon’ble Delhi Tax Tribunal relying on the decisions of the Hon’ble Madras High Court2 has extensively dealt with the nature of ceding commission. It was held that ceding commission is reinsurance companies’ share in the expenses incurred by insurance companies on account of administration, third party administration, etc. These are merely reimbursed and do not tantamount to commission for soliciting insurance business.
- Further, a distinction was drawn between the Insurance Commission and Ceding Commission and the applicability of withholding taxes basis the Mumbai Tax Tribunal Ruling3 as under:
- Section 194D of the IT Act requiring the withholding of taxes on insurance commission applies only if a payment is made for soliciting or procuring insurance business;
- Payment of insurance commission is a tri-party affair – an insurance company, insurer and the person receiving the commission/one who solicits insurance business. Thus, if a payment is made by the insurance company directly to the insured, the element of solicitation being absent, no commission shall be paid;
- Any discount allowed by the insurance company to the insured shall not amount to insurance commission.
- Withholding provisions for insurance commission cease to be applicable if payment made to insurance companies is in the nature of reimbursement of expenses.
The above decision was affirmed by the Hon’ble Bombay High Court4
- It was also held that no taxes must be withheld if expenses are being re-imbursed, which was squarely covered by the decision of the Hon’ble Supreme Court5.
- Moreover, since taxes were duly discharged by Insurance Companies, no withholding of taxes was required
The Delhi Tax Tribunal, the basis of several jurisprudence has ruled in favour of the taxpayer. The applicability of withholding taxes on ceding commission has always been contentious. This is a welcome ruling, providing much-needed clarity on the applicability of withholding taxes on ceding commission. Also, this ruling has in a way reduced the burden of re-insurance companies to substantiate the fact that ceding commission is not in the form of commission paid for soliciting/ procuring insurance business and thereby reducing the withholding tax compliance burden on the insurance companies.
1 AXA France Vie [TS-391-ITAT-2022(DEL)]
2 M/s Royal Sundaram Alliance Insurance Company Limited [T.C. (A) No. 41 of 2019]
CIT v. United India Insurance Co.  11 taxmann.com 217 (Madras)
3 General Insurance Corp. of India  28 SOT 453
4 PCIT vs Tata AIG General Insurance Co. Ltd.  111 taxmann.com 92 (Bombay).
5 DIT (IT) v. Moller Maersk [TS-70-SC-2017]