Loading judgment…
Facts
The assessee, a general insurance company, made payments to aggregators for policy servicing and related activities for motor insurance, which the Assessing Officer (AO) disallowed under Section 37(1) Explanation 1 of the Income Tax Act. The AO, relying on a DGCEI report, contended that these payments were disguised commissions exceeding IRDAI limits and violating Section 40(1) of the Insurance Act, thus being an expenditure prohibited by law or an offence. The assessee argued the payments were for non-core administrative services, not commissions, and did not violate any law.
Held
The Tribunal held that the payments made to aggregators were allowable as business expenditure under Section 37(1) of the Income Tax Act. It concluded that these payments did not fall under Explanation-1 to Section 37(1) as there was no evidence of an offence or prohibition by law, citing IRDAI clarifications permitting outsourcing of such activities and the absence of any penal action by competent insurance authorities. The Tribunal also dismissed the Revenue's appeals related to Section 14A disallowance, finding it inapplicable to income computed under Section 44.
Key Issues
Whether payments made by an insurance company to aggregators for policy servicing and related activities are allowable as business expenditure under Section 37(1) of the Income Tax Act, considering Explanation-1; and the applicability of Section 14A read with Rule 8D when income is computed under Section 44.
Sections Cited
37(1), 14A, 44, 10(23FB)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY, VP & SHRI PRABHASH SHANKAR, AM
O R D E R PER BENCH: Captioned are bunch of eleven appeals both by the assessee and filed by the Revenue. These appeals arise out of a common order dated 27.02.2025 passed by learned Commissioner of Income Tax (Appeal) [in short ‘CIT(A)], Mumbai pertaining to Assessment Years (AYs) 2010-11, 2011-12, 2012-13, 2013-14, 2014-15, 2015-16 and 2016-17.
In so far as appeals of the assessee are concerned, though, multiple grounds have been raised including some grounds on legal issues, however, the common thread 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’).
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, as the lead appeal and proceeded accordingly. In view of the aforesaid, we proposed to take up as the lead appeal.
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.59,53,73,450/- under the normal provisions of the Act. The return so filed by the assessee was selected for scrutiny. In course of assessment proceeding, the Assessing Officer (AO) observed, as per material available on record, the Director General of Central Excise Intelligence, Chennai Zone (DGCEI) had carried out investigation in respect of certain dealers of motor vehicles, their intermediaries and their head office. In course of such investigation, it was found that the insurance companies are making payouts on account of commission to various dealers of motor vehicles through intermediaries/aggregators. The report of DGCEI further mentioned that as motor dealers are not licensed as agents/brokers/intermediaries of the insurance company, they were not entitled to receive any commission directly from the insurance company. Therefore, the format of the invoices to be raised and the amount to be raised by the motor dealers are given by the assessee to the motor vehicle dealers through intermediaries for which the intermediary charged 3.5% of the amount towards commission payable to motor vehicle dealers.
The investigation carried out by DGCEI revealed that the assessee had engaged two intermediaries, namely, M/s. Ashar Mehta Associates (AMA) and M/s Team Space Financial Pvt. Services Ltd. (in short ‘Team Space’) through whom the motor vehicle dealers were paid commission and on the amount of service tax paid to the entities assessee claimed CENVAT credit. The aforesaid report of the DGCEI, in turn, was forwarded to the AO by the Director of Income Tax (Investigation) Chennai. Based on the report of DGCEI the AO called upon the assessee to furnish the necessary details. On perusal of the financial statement of the assessee, the AO noticed that an amount of Rs.92,86,24,019/- has been debited to the P&L account towards legal and professional charges. From verification of details furnished by the assessee, he found that amount of Rs.11,41,93,260/- was paid to AMA towards out sourcing of motor car insurance. Similarly, an amount of Rs. 42,30,091/- was paid to Team Space. Thus, aggregate amount of Rs.11,84,23,351/- was paid towards motor care insurance. He further found that the intermediaries/aggregators AMA and Team Space retained 3.5% of the amount received from the assessee and passed on the balance amount to motor vehicle dealers. Referring to Section 40(1),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.
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 up of form, collection of documents and other related activities payment was made. Explaining further, assessee submitted that the of motor vehicle dealers engage persons and provides space in their premises, who facilitate the process of insurance of vehicle purchased by a customer in case the customer is interested in availing their services in getting the vehicle insured through any general insurance company. It was submitted by the assessee that since the motor vehicle dealers are in large numbers spread across India, the assessee has entered into service agreements with AMA and Team Space, who act as aggregators for various services providers to provide various administrative services such as verification of customer, verification of assets, documents collection, discrepancies securing, tally verification, welcome calling services, payment pickup from customers etc., which are purely non-core activities. In sum and substance, it was submitted by the assessee that the payment made by the assessee to the aggregators is totally different from commission paid to agents towards insurance policy. The assessee further submitted that the payment made is neither prohibited by law nor an offence under Insurance Act. Hence, no disallowance u/s 37 can be made.
7. The AO however, was not convinced with the submissions of the assessee. Referring to certain judicial precedents the AO concluded that since the assessee has paid commission in excess of the permissible amount under the Insurance Act, it has violated the provisions of insurance Act. Therefore, the payment falls within the mischief of Explanation-1 to Section 37. He held that the activities relating to verification of customer, verification of assets, KYC document collection, discrepancy curing, tally verification etc. are classified as core activities under the guidelines of out sourcing of activity by insurance company issued by IRDAI. Therefore, such core activities are prohibited from big outsourced. The assessee having outsourced activities to AMA and Team Space it has violated the guidelines. Hence, Explanation-1 to Section 37 is attracted. He further observed that payments made to motor car dealers through aggregators is prohibited u/s. 40(1) of the Insurance Act. Thus, on the aforesaid premises, the AO finally concluded that the payment made to the aggregators cannot be allowed u/s. 37 of the Act. 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.
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, assessee had hire services of aggregators who coordinate with the service providers located in the preemies of motor vehicle dealers and raise invoices on the assessee for the services rendered. He submitted, based on the invoice raised, the assessee makes the payment to the aggregator at the rate of 3.5% on the premium. He submitted, the amount paid to aggregators is totally different from commission paid to insurance agent as activities are totally different. He further submitted, while commission paid to insurance agents is for the core activity of assessee’s business, the payment to aggregators falls within the non-core activity. Therefore, there is no violation of Section 40(1) of the Insurance Act. He submitted, the entire basis of the addition is the report submitted by the DGCEI. He submitted, the report does not deny the fact that services were rendered by the motor vehicle dealers. What the report disputes is the claim of CENVAT credit by the insurance companies. He submitted, the appellate authority, CESTAT in a number of cases have rejected the stand of the Central Excise Department in denying CENVAT credit to the insurance companies in similar payment to aggregators/motor vehicle dealers. In this context, he drew our attention to the following decisions of CESTAT: i. M/s Cholamandalam MS General Insurance Co. Ltd. vs. Commissioner of GST & Central Excise, Service Tax Appeal No. 40938 of 2017 dated 24.02.2021. ii. ICICI Lombard General Insurance Company Ltd. vs. Commissioner of CGST and Central Excise, Mumbai (Service Tax Appeal No.89570 of 2018) dated 06.02.2023.
9. He submitted, once the service tax department accepted the service tax paid on the service rendered by aggregators/motor vehicle dealers they cannot deny CENVAT credit. Thus, he submitted, in view of the decisions of CESTAT on identical dispute, the disallowance made by the AO based on the report of the DGCEI is unsustainable. Without prejudice, he submitted, as per Explanation-1 to Section 37 of the Act, no payment which is an offence or prohibited by law can be claimed as deduction. Drawing our attention to Section 40(1) of the Insurance Act, leaned counsel submitted, none of the condition of the said provision have been violated. Drawing our attention to Circular dated 01.02.2011 issued by IRDAI containing guideline on outsourcing of activities by insurance companies, 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 case of Milestone Real Estate Fund vs. ACIT, Mumbai, [2018] 97 taxmann.com 141 (Mumbai-Trib): “5. Further, the learned Principal Commissioner has observed that the assessee has violated the conditions imposed under Securities and Milestone Real Estate Fund Exchange Board of India Act and Regulations by investing in mutual fund. However, the learned Principal Commissioner has not specified which provisions of SEBI Act or Regulations have been violated by the assessee by investing in mutual fund. On carefully going through the Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996, we were unable to locate any restriction / condition imposed therein prohibiting the assessee from investing in mutual fund. On the contrary, the learned Sr. Counsel has brought to our notice a clarification issued by SEBI, wherein, it has been specifically stated that there is no prohibition in investing surplus fund available with Venture Capital Fund in short term liquid mutual fund. In any case of the matter, the allegation of breach / violation of SEBI Regulation has originated from the Principal Commissioner, whereas, there is no such allegation of violation of SEBI Regulations by the competent authority i.e., SEBI. Undisputedly, SEBI has issued registration certificate to the assessee registering it as a Venture Capital Fund in the year 2005. Therefore, the competent authority which can look into any violation is the SEBI. Neither the registration certificate granted has been withdrawn by SEBI nor any action has been taken against the assessee for any violation as alleged by the learned Principal Commissioner. In fact, on going through the Securities and Exchange Board of India (Venture Capital Funds) Milestone Real Estate Fund Regulations, 1996, we find that as per section 8 of the said Regulations, the grant of registration certificate is subject to the condition that Venture Capital Fund shall abide by the conditions mentioned therein. There is no material on record to indicate that the assessee has violated any of the conditions of section 8 of Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996. Further, section 22 of the said Regulation empowers SEBI to call upon the Venture Capital Fund to file such report, as the Board may desire with regard to activities carried on by the Venture Capital Fund. Further, section 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 Fund, [2011] 45 SOT 529.”
10. Finally, learned counsel submitted, based on the orders of CESTAT in case of ‘M/s Cholamandalam MS General Insurance Co. Ltd.’ (Supra) ITAT has set aside the orders passed by the AO and First Appellate Authority disallowing similar payment made to motor vehicle dealers. In this context, he referred to the judgment of the Hon’ble Madras High Court in the case of ‘M/s Cholamandalam MS General Insurance Co. Ltd. vs. DCIT’, [2019] 102 taxmann.com 292 (Madras). Thus, he submitted, the disallowance made, being unsustainable, should be deleted.
Learned Departmental Representative (DR) strongly relied upon the observations of the AO and First Appellate Authority.
12. We have given thoughtful consideration to rival contentions and perused the materials on record. We have also applied our mind to judicial precedents cited before us. The core issue arising for consideration is-whether the payment made by the assessee to the aggregators would qualify for deduction u/s. 37(1) or would fall within the mischief of Explanation-1 to Section 37(1) of the Act. As discussed earlier, the genesis of the dispute is the investigation carried out by the DGCEI initially in case of M/s Cholamandalam MS General Insurance Co. Ltd. (Supra). Thereafter, the DGCEI spread their dragnet over other Insurance Companies including assessee as well. Based on the investigation the DGCEI furnished a report. The report of the DGCEI, in turn, was circulated by the Director General of Investigation, Income Tax, Chennai to all the ranges. The report of the DGCEI basically is on the issue of claim of CENVAT credit by various insurance companies on account of service tax paid by them to aggregators/motor vehicle dealers towards services rendered by them in relation to policy servicing and related activities. Relying upon the observations made in the said report, the Departmental Authorities have concluded that the payment made by the Insurance Companies including the assessee to aggregators/motor vehicle dealers is an offence and/or prohibited by law in terms of Explanation-1to Section 37(1) of the Act, hence, cannot be allowed as business expenditure. The reasoning of the Departmental Authorities is that as per the provisions contained under the Insurance Act, 1938, more specifically, Section 40(1) of the Act, payment of commission to insurance agents cannot exceed 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 issue, the Commissioner of GST and Central Excise, though, has doubted assessee’s claim that services relating to policy servicing and related activities were provided by the aggregators, however, he has given a categorical finding that such services were provided by motor vehicle dealers to the assessee and not by the aggregators. He has given a further finding that though services were provided by the motor vehicle dealers to the assessee but the assessee did not make payment to the motor vehicle dealers but to the aggregators, who in turn made payment to the motor vehicle dealers, though, the aggregators did not receive any service from the motor vehicle dealers. The Commissioner, GST and Central Excise has alleged that the aforesaid exercise was undertaken only for the purpose of availing CENVAT credit, whereas, the correct approach would have been to pay service tax through reverse charge mechanism. However, there is no denial of the fact that services were rendered to the assessee in relation to policy servicing and related activities and such services were received by the assessee on payment of service tax. The doubt, if any, is only with regard to who actually provided such services to the assessee, whether the aggregators or motor vehicle dealers. This is the sum and substance of the proceeding before the Central Excise and GST authorities. Taking a cue from the aforesaid observations, the Departmental Authorities have inferred that the assessee has violated the provisions of Insurance Act, thereby, making the payment to aggregators inadmissible for deduction in terms with Explanation-1 to Section 37(1) of the Act.
In this context, the contention of the assessee is that there is no violation of provisions of Insurance Act, 1938 as also the guidelines issued by the IRDAI from time to time authorizing the assessee to outsource its non-core activities. Before we proceed to deal with the contentions of the parties, it is necessary to examine the nature of services provided to the assessee by the aggregators/motor vehicle dealers for which payment was made and whether such payment is towards agency commission for insurance policy. As discussed earlier, the dispute in the present appeal is only with regard to motor insurance policy. It is a common knowledge, when a customer goes to a motor vehicle dealer to buy a motor car, along with the vehicle the 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 viz. AMA and M/s Team Space who act as aggregators of the actual service providers. The aggregators raise invoice on behalf of service providers on the assessee and the assessee makes the payment to the aggregators along with service tax. The aggregators, in turn, make payment to the services providers after retaining certain percentage. Copies of the agreements have been placed in the paper book. As per the terms of the agreement, the aggregators are required to render the following services: i. Staff training related services. ii. HR support services. iii. Discrepancy curing services. iv. Verification services for customers & Assets. v. Tele verification/welcoming calling services. vi. Technical Assistance/advisory on claims. vii. RTO delivery services. viii. Training related Services. ix. Market Research and Customer Feed back support services. x. Road Show, Kiosks & Signage Management services. xi. Software and other IT support services.
As discussed earlier, the AO referring to IRDAI guidelines dated 01.02.2011 has alleged that only non-core activities can be outsourced by an Insurance Company. Whereas, the assessee has outsourced core activity, thereby, violated the guidelines. In this context, it is necessary to look into the relevant IRDAI guidelines. Paragraphs 2 and 3 of IRDAI guidelines, dated 01.02.2011, enlists the core and non-core activities as under:
2. CORE ACTIVITIES 2.1 All activities relating to:- i. Underwriting, ii. Product design and all Actuarial functions and Enterprise wide Risk Management iii. Investment and related functions iv. Fund Accounting including NAV calculations v. Admitting or Repudiation of all Claims vi. Bank Reconciliation vii. Policyholder Grievances Redressal viii. Approving Advertisements ix. Market Conduct issues x. Appointment of Surveyors and Loss Assessors xi. Compliance with AML, KYC etc. xii. All integral components of the above activities shall be treated as Core Activities 2.2 Policy Servicing and related activities 2.3 Insurers shall not outsource any of the core activities listed in para 3. NON CORE ACTIVITIES: i. Facility management i.e. Housekeeping, 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-marketing xvii. Consultancy Services pertaining to Service Tax, Income Tax and any other taxes payable by insurer xviii. Other Employee Benefits xix. Deployment of personnel within the premises / offices of the Insurer on a contract basis.
16. As could be seen from the above, though policy servicing and related activities fall within core activities, however, there is no prohibition in outsourcing such activities. Even, Para-4 of the guideline permits outsourcing of activities supporting core activities, such as data collection of prospect/insurer details, submission of proposal data entry, data analysis medical examination, risk management service policy holder/insurers premises reinsurance etc. Notably, the Chairman of IRDAI in a letter dated 12.08.2015 specifically addressed to the Chairperson, Central Board of Excise & Customs (CBEC) has clarified on the issue of core and non-core activities as per IRDAI guidelines issued on 01.02.2011. The contents of the said letter are as under: “Shri Kaushal Srivastava, Chairperson, Central Board of Excise & Customs (CBEC) NORTH BLOCK. NEW DELHI-110001 Sir, Sub: Investigations of General Insurance Companies by Services TAX DGCEI teams under Chennai jurisdiction General insurance companies through their representative body, General Insurance Council, have brought to the notice of the IRDAI the recent investigations conducted by the Service Tax investigation teams of DGCEI under Chennai jurisdiction on general insurance companies. IRDAI is given to understand that the Service Tax authorities are examining whether outsourcing of some of the functions by insurance companies to Automobile dealers is as per regulatory regime.
Insurance of Motor vehicles, especially for Third party liability risks, is mandated by Motor Vehicles Act, 1988. No vehicle can be driven on the public roads without valid insurance policy. Since, automobile dealers are the first Point of Contact with potential customers: Insurance companies find it convenient to outsource some of the support services in respect of Policy servicing and related activities to the Dealers. IRDAI has notified Guidelines on Outsourcing Activities in February 2011 (copy enclosed for ready reference) whereby:
Insurance companies are not permitted 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 investigated by its teams. Thanking you, Yours faithfully (TS Vijayan)”
17. As could be seen from the aforesaid clarification issued by the Chairman, IRDA, the activities which support the core activities, such as, policy servicing and related activities can be outsourced. The Departmental Authorities though have rejected the aforesaid claim of the assessee, however, they have failed to establish on record that the payment made by the assessee to aggregators are in relation to services which cannot be outsourced. Much stress has been put by the Assessing Officer on the statement recorded by the DGCEI from officials of AMA and Team Space, wherein, they allegedly stated that no services were rendered by them to the assessee. In this context, it can be said that as per the terms of the agreements with the assessee they are merely aggregators of service providers who actually provide services to the assessee. Even, the Commissioner Central Excise and GST has accepted the aforesaid factual position while recording the finding that services were actually provided by the motor vehicle dealers. In fact, the material available on record demonstrate the aforesaid fact. Pertinently, the investigation report of the DGCEI and the subsequent proceeding initiated based on such report by the Central Excise Authorities resulting in denial of CENVAT credit came up for consideration before the CESTAT, Chennai Bench in case of M/s Cholamandalam MS General Insurance Co. Ltd. (Supra), while deciding the issue, the CESTAT has held as under: “5. Heard both sides and carefully perused the records. 6.1 The allegation of the Department is that no services have been provided by the dealers to the appellant as per the invoices and therefore, the appellant is not eligible to avail credit of the Service Tax reflected in this invoices. In paragraph 31 of the Order-in- Original dated 30.01.2017, the crux of the allegations of the Department has been recorded by the Original Authority, as under: "31. On careful consideration of the statements of personnel of M/s. Chola and Dealers, I find that (1) The payment made by M/s. Chola to M/s. Hyundai / Dealers of Motor Vehicles is only a percentage of OD premium collected and the said payout details are calculated by the Head Office of M/s. Chola and communicated to the Dealers; (ii) M/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 Cause Notice the main allegation is that the description of services in the documents on which credit has been availed is not correct, at the time of adjudication, the main finding is that no services have been provided by the dealers to the appellant and that therefore credit is not eligible. At this juncture, it needs to be pointed out that the Department has no dispute with the Service Tax collected from the appellant by the dealer and remitted to the Government. The assessment of Service Tax paid at the dealer's end has not been disturbed/questioned by the Department; only the credit availed at the service recipient's end has been questioned by issuing the present Show Cause Notice. 7.2 If the Department contends that no service has been provided, the crucial question arises as to why Service Tax was collected from the dealer. The discussion by the Original Authority at paragraph 37 countering this argument is as under:
"37. As regards their contention in Para N.1 to N.7 that if no service is provided by the Dealer there is no requirement to pay service tax; that at the time of accepting service tax from the dealer, the department chooses to look at the form of transaction and accept service tax. In this regard, I find that the issue involved is not about the service tax payable by the Dealer. It is about the mentioning of true description of services in the Invoice and the services mentioned in the invoices in the instant case admittedly were not provided by the Dealers. Only after the in-depth investigation conducted with the Dealers, the fact of Dealers issuing invoice with the description suggested by the Taxpayer have come to light. Hence their contention that department cannot approbate and reprobate in the same case is not valid." 7.3 It is not disputed that the dealer has paid Service Tax on the services described in the invoices. If that be so, the denial of credit at the recipient's end cannot be justified by the Department without reopening the assessment at the dealer's end. 8.1 A similar issue came up for consideration in the case of M/s. Modular Auto Ltd. (supra). The substantial questions of law considered in the above case are as under: "2. The above appeals are admitted on the following substantial questions of law; a) When the service provider was not before the Tribunal, 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 services were rendered Reliance raised invoices on the appellants claiming reimbursement under these invoices as MPLS charges along with Service Tax. The Department was of the view that the invoices were raised for reimbursement of expenses and that no service was rendered by M/s. BIL to the appellants and that the appellants were not eligible for credit. The appellants therein had contended that M/s. BIL are retrieving data relating to the assessees from the server and are further processing the same for their end use and therefore, M/s. BIL is rendering the service. It was also explained by the appellant therein that but for M/s. BIL retrieving the data, the appellant would have retrieved the data and passed on the same to M/s. BIL. The Hon'ble High Court, after analysis of the issue, observed as under: "11. The short question, which falls for consideration, is whether the department as well as Tribunal could have held what was availed by the assesseess as credit is only a reimbursement and it is an attempt of BIL to pass costs incurred by them towards MPLS.
Mrs. Aparna Nandakumar, learned Senior panel counsel for the Revenue, produced a lecture on Multi Protocol Label Switching with Quality of Service in High Speed Computer Network to explain as to what is Multi Protocol Label Switching (MPLS) and it has been stated therein that it is a method that directs data from one system node to the next based on short path lables rather than long network addresses in high- performance telecommunication association. Referring to a chart showing the working methodology, it is submitted that it is a facility created and the beneficiary is BIL and no input service is rendered by the BIL to the assessees for them to claim Input Tax Credit.
To test the correctness of the said submission, we give the following illustration, which is broadly the nature of transactions done by the assessees with BIL 14. The BSNL/Reliance Communications Private Limited have provided the MPLS facility to BIL and assuming the amount to be paid is Rs.100/- towards the cost and Rs.10/- towards the Service Tax, when the invoice is raised by the BSNL/Reliance Communication Private Limited for the said amount and the BIL has paid Rs.110/- to BSNL/Reliance Communication Private Limited, which includes the cost as well as Service Tax element, the BIL, in turn, has raised an invoice on the assessees 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 assessees 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 transaction as referred by BIL has to be held to be wrong and the Commissioner (Appeals) could not have given a different interpretation to the nature of claim made by the BIL from the assessees by interpreting the terminology used in the invoice. The correct test, which ought to have been applied by the Adjudicating Authority, Appellate Authority and the Tribunal, is as to what is the character of payment made by the assessees on which they have availed the CENVAT credit.
In the instant cases, it is not in dispute that whatever the portion of Service Tax component which was collected from the assessees by BIL was only the amount on which the CENVAT credit has been claimed by the assessees. Therefore, unless and until the assessment made on BIL was revised, which obviously could have been done, at this juncture, on account of the expiry of the period of limitation, the interpretation given by the Commissioner (Appeals) as well as the Tribunal with regard to the nature of invoice raised on the assesses is unsustainable. Furthermore, we find that the reason assigned by the Tribunal in paragraph 6.2 stating that the activity performed by the BIL for monitoring of production activities of the assesses cannot by any stretch of imagination be considered as an input service or in relation to the manufacture of final products of the assesses, is a statement, which is unsubstantiated by any record. At best, it can be taken as a personal opinion of the Tribunal, which could not have been a reason to reverse the credit availed by the assesses.
What is important to note that the assessees specific case is that there has been a service by BIL to the assessees in the matter of retrieval of data and service tax has been collected and paid by BIL and the correctness, legality or otherwise of the tax paid by the subject providers cannot be called in question by the Central Excise Officer having the jurisdiction over the assesses availing the credit. This question has not been considered. If the impugned orders are allowed to stand, then it would in effect mean that the jurisdictional assessment officers of the assesses are sitting in the judgment over the assessment made on BIL, over which, they have no jurisdiction." (Emphasis added) 8.3 The above decision squarely applies to the facts of the case before us. As discussed by the 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.
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.
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."
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 their business premises. Since, the service tax paid by such dealers was availed as Cenvat credit try the appellant, availment of such credit is in conformity with the Cenvat statute. We find that in an identical case, Cenvat credit was denied by the Department, holding that the invoices issued by the automotive dealers are false/fraudulent/invalid, since no service of the description contained therein was rendered by the auto dealer. The dispute was resolved by the co-ordinate Bench of the Tribunal in the case of M/s. Cholamandalam Ms General Insurance Co. Ltd. (supra), holding that since the service tax was paid by the auto dealer, under the taxable head of "Business Auxiliary Service" and the assessment of auto dealer has not been re-opened or questioned, credit availed cannot be denied to the insurance company. This is also the ratio of the judgment of the Hon'ble Supreme Court in the case of MDS Switchgear Ltd. (supra), wherein it was held that once the tax liability has been discharged and accepted by the Department, the consequential Cenvat credit cannot be denied at the recipient's end. 6. The learned Original Authority has held that no commission could have been paid by the appellant to the automotive dealer under Section 40 of the Insurance Act, 1938 and that such payment, which is recorded by the automotive dealers in their books of account as a commission, is illegal. Such findings, as per our considered view, are untenable on the question of the eligibility to avail Cenvat credit, when tax had undisputedly been received by the Government from the automotive dealers. In addition, the regulatory authority namely, Insurance Regulatory Development Authority (IRDA) has also clarified the correct position in the letter dated 12.08.2015 addressed to the Chairman, CBEC. Such clarification furnished by the Regulatory Authority regarding the procedures followed for outsourcing non-core services of the automotive/automobile dealers, is binding on the Revenue. In this context, the law is well settled that when a competent authority ha issued an opinion on a particular matter, the same shall be bindin and cannot be questioned by the other agencies.
In view of the foregoing discussions, we do not find any merits in the impugned order, insofar as; it has confirmed the adjudged demands on the appellant. Therefore, by setting aside the impugned order, the appeal is allowed in favour of the appellant.”
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 incurred by assessee for any purpose, which is an offence or is prohibited by law shall not be regarded as expenditure incurred for the purpose of business, hence, no deduction can be allowed. So the exceptions are, the expenditure incurred must not be for any purpose which is an offence, secondly which is prohibited by law. As far as the first limb of Explanation- 1 is concerned, it cannot be said that the expenditure incurred by the assessee is in the nature of an offence. At least there is nothing on record to suggest that any prosecution has been launched against the assessee to try any offence committed under the Insurance Act or the assessee has been held guilty for committing any offence. Second limb of the explanation is for expenditure prohibited by law. The relevant law in the present case is the Insurance Act. The AO has alleged that the assessee has violated the provision of Sections 40(1) and 40(2A) of the Insurance Act and IRDAI guidelines. In this context, the allegation of the Departmental Authorities is the assessee has paid commission in excess of what is authorized under the Insurance Act. Per contra, assessee has claimed that it has paid agency commission for motor insurance purely in accordance with the provisions of Insurance Act, which is 10% of the premium value. It is the case of the assessee that the alleged excess payment made is not insurance commission but payment made towards services rendered in relation to non-core activities such as policy servicing and related activities.
Though, the Departmental Authorities have not accepted the aforesaid claim of the assessee, however, there is no material on record to demonstrate that any action has been taken by the competent authorities under the Insurance Act. As per our understanding, Sections 102, 103, 104, 105, 105A and 105B contain provisions to impose penalty for default in complying with or acting in contravention of any provisions of the Act. Whereas, Section 105A deals with offences by company and awarding of punishment in case a company is found to be guilty of any offence. No material has been brought on record by the Department to demonstrate that the competent authority under the Insurance Act or the IRDAI has taken any punitive or penal action against the assessee for violation or contravention of any of the provisions of Insurance Act, as alleged by the AO. Thus, 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, however, they were completely ignored. Therefore, we do not intend to remit the issue to the Departmental Authorities. Thus, on overall consideration of facts and materials on record, we are inclined to accept assessee’s claim and hold that the payment made is allowable as deduction u/s. 37(1) of the Act. In view of our decision on merits as above, other grounds raised
by the assessee have become infructuous hence, dismissed.
22. In so far as the appeals by the Department are concerned, the common issue arising in all the appeals relate to deletion of disallowance of expenditure u/s. 14A of the Act read with Rule 8D. As could be seen from the facts on record, learned First Appellate Authority deleted the disallowance made u/s. 14A r.w.r. 8D of the reasoning that since the income of an assessee engaged in insurance business has to be computed u/s. 44 of the Act read with first schedule the provisions of Section 14A would not be applicable.
Having considered rival submissions, we find that issue is squarely covered in favour of the assessee by various judicial precedents of Hon’ble High Courts and Coordinate Benches of the Tribunal as could be seen from the case law compilation furnished before us. In that view of the matter, we do not find any valid reason to interfere with the decision of learned First Appellate Authority. Grounds raised
by the Revenue are dismissed.
24. To sum up assessee’s appeals are partly allowed and Revenue’s appeals are dismissed.
Order pronounced in the open court on 30/07/2025..