The reinsurer is not required to withhold tax on the “ceding commission” deducted by the Indian insurer

Indian Insurance Regulatory Development Authority (‘IRDAI’) governs the activities of the insurance industry in India. The insurance industry is not only highly regulated, but due to the unique and complex nature of the business, transactions are sometimes different from those found in other industries. This is perhaps the reason why the taxation of the income of insurance companies is also governed by specific provisions of the Income Tax Act 1961 (the “Law‘).

Context – Insurance sector

Generally, the following 4 constituents are involved in the insurance industry in India:





The person who takes out insurance to cover the risks.

The person who acts as an intermediary between the insured and the insurer.

The person who assumes the risk of the insured for a premium.

The person who provides insurance to the insurer for a premium.

The insured is the client/customer who pays the premium to the insurer.

The broker is an agent of the insurer who earns a commission for rendering the service of selling/providing insurance policies.

The insurer collects premium income from the insured, pays a commission to the broker for his services and, subject to the actual payment of insurance claims, retains the premium as income.

The reinsurer collects premium income from the insurer and insulates the risks of the insurer from any adverse event that could affect the solvency of the insurer itself. The insurer is therefore the client/customer of the reinsurer.

Background – Disposal Fee

One of the unique transactions in the Indian insurance industry is the deduction of “ceding commission” (also sometimes referred to as reinsurance commission) by insurers when paying gross reinsurance premium to reinsurers. Said “cession commission” is recognized as an expense in the books of the reinsurer while the gross premium is recognized as income. Although the terminology used is that of “commission”, the ceding commission essentially relates to the reinsurer’s actual share of the labor costs, third party costs, administration costs, etc., to the reinsurance purposes which are reimbursed to the insurer. This is an industry wide practice and the opinion of the industry is that no service is rendered by the insurer to the reinsurer and therefore the same is not not in the nature of the insurer’s income.

Section 194D of the Act requires the deduction of tax from the payment to any resident of “income” as remuneration or reward (commission or otherwise) for soliciting or procuring insurance business ( including matters relating to the continuation, renewal or repossession of insurance policies). Reinsurers have

has taken a position that the relinquishing commission is not subject to the tax deduction under section 194D for the reasons explained above. There have, however, been instances where tax authorities have diverged and considered that the “ceding commission” borne by reinsurers should be subject to a tax deduction under Section 194D. When these taxes were not deducted, the tax authorities rejected the expenses claimed by the reinsurer pursuant to section 40(a)(ia) of the Act, which gave rise to litigation.

Judicial precedents

Although there are judgments from the High Court of Madras and Bombay in favor of the reinsurers on this issue, the issue has yet to be decided by the Supreme Court of India. As a result, the tax authorities have not adopted a consistent approach to the matter despite the absence of contrary rulings on this subject.

In this context, a recent decision by the Delhi Bench of the Income Tax Appeal Tribunal (‘STATUS) in case of AXA France Life [ITA NO.439/DEL/2022] provided reinsurers with more clarity that a consensus seems to be developing on this issue among legal authorities across the country.

The Delhi ITAT held that since a “ceding commission” is essentially a reimbursement by a reinsurer of the actual costs to insurers, the same cannot be considered paid for soliciting or procuring insurance business. Among others, ITAT Delhi relied on the decision of ITAT Mumbai in case of India General Insurance Company [2009] 28 SOT 453where it was found in substance that:

  1. Section 194D applies only to the payment of any remuneration or reward paid for soliciting or providing insurance. In other words, if the commission or other payments are not intended as remuneration or reward for soliciting or obtaining insurance business, Section 194D would not apply.
  2. For the “ceding commission”, the insurers did not procure business from the reinsurers and the reinsurers did not pay any commission or other payment to the insurers for soliciting business from the insurers.
  3. Normally, in the context of Section 194D, there should be 3 parties involved (i.e. the insured, the broker and the insurer/reinsurer). If the insurer obtains business directly from the insured, no payment should be made by the insurer to the insured by way of commission or otherwise to solicit or procure the business for the insurer.
  4. If a discount is granted by the insurer to the insured, this will not fall within the definition of brokerage or commission paid for soliciting or procuring insurance business.
  5. Even otherwise, the payment or deduction would not constitute a reward or remuneration for a service such as soliciting or obtaining insurance business for the insurer.
  6. Ceding commission is a deduction allowed by the reinsurer to the insurer from the original gross rate to compensate the insurer for brokerage and other costs incurred in procuring the business by the insurer for itself .
  7. While the insurer would be required to deduct tax under Section 194D on brokerage and similar costs it incurs, reimbursement of costs by the reinsurer to the insurer would not fall into the same category.

The above decision of ITAT Mumbai was followed by ITAT Mumbai in the case of Tata AIG General Insurance Co. Ltd. [2011] 43 SOT 215 (Mom.)which was confirmed by the Bombay High Court in the case of PCIT v Tata AIG General Insurance Co. Ltd. [2019] 111 92 (Bombay). Accordingly, the justification for the decision of the ITA Mumbai was upheld by the High Court of Bombay.

In light of the above judgments, the Delhi ITAT found that the Indian insurers’ ceding commission, incurred by the reinsurer, was not subject to tax deduction under Section 194D. Accordingly, the refusal made under Article 40(a)(ia) should be deleted.

KLA comments

This is a welcome decision which further underlines the industry’s position that the ceding commission borne by the reinsurer (who is the insurer in the contract) and the insurer (who is the client of the reinsurer in contract), is essentially not a service transaction but one of cost sharing and reimbursement. Although the amount is accounted for separately in accordance with practice and regulation, it is actually a deduction from the gross premium charged by the reinsurer. This was also recognized by the Central Board of Excise and Customs under the old service tax regime. Circular No. 120(a)/2/2010-ST dated 16e April 2010 where it was stated as follows:

  • “…each insurer carrying on insurance business is required to reinsure a specified percentage of the sum insured with another insurance company.”
  • “The insurance company pays a premium to the reinsurance company for this service. However, part of this premium is deducted and retained by the insurance company to cover administrative expenses. In other words, the insurance company and the reinsurance company jointly bear the operating expenses of the insurance/reinsurance business. This shared expense is commonly referred to as a “commission”, even if it is strictly not in the nature of a commission. It may be relevant to mention that the client/beneficiary only deals with the insurance company and may not even be aware of the role of reinsurer and the behind-the-scenes dealings between the insurance company and the reinsurer.
  • “….the arrangement between the insurance company and the reinsurer is only an expense sharing and there is no service provided by the insurance company to the reinsurer for consideration. … In fact, it is the reinsurer who provides the insurance service to the insurance company. Since the insurance company and the reinsurer pay service tax on the total amount of premium they charge, the question of charging service tax for any other taxable service does not arise. »


The Delhi ITAT decision confirms that reinsurers are not required to deduct tax from the ceding commission. In light of the above factual and legal positions, to improve the ease of doing business, it would be advisable for the Central Board of Direct Taxation (India’s supreme body for direct taxation) to issue a binding circular accepting the substantiation of the above judgments and putting the said controversy to rest. In addition, the insurance industry is also requesting that the clarifications previously provided under the old service tax regime also be provided under the goods and services tax (‘GST‘) law effective as of July 1, 2017 itself (i.e. the effective date of GST in India) to avoid unnecessary controversy and litigation.

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