BACKGROUND

All insurance companies operating in India, whether incorporated domestically or internationally, are required to register with the Insurance Regulatory and Development Authority of India (IRDAI) and comply with the rules, regulations, and guidelines set forth by the IRDAI.

One of the guidelines issued by IRDAI on 1 February 2011 pertains to the outsourcing of activities by insurance companies. In this guideline, IRDAI outlines both core and non-core activities, stating that insurance companies are only permitted to outsource non-core activities and are required to report the same to IRDAI. However, IRDAI further clarified that certain activities which support the core activities may be outsourced as per risk management principles outlined in the said guidelines, subject to reporting requirements.

In this regard, recently, the Mumbai Tax Tribunal has held that payment by insurance company to auto dealer falls under the purview of specified activities that can be outsourced by the insurance companies.

We, at BDO in India, have summarised the above ruling and have provided our comments on the impact of this decision hereunder.

FACTS OF THE CASE

• The taxpayer is a public sector undertaking operating under the control of The Ministry of Finance, Government of India. The taxpayer is engaged in the business of General Insurance within and outside India.
• The taxpayer filed the return of income for AY 2014-15, declaring a total income of INR Nil under the provisions of the Act, wherein taxpayer claimed an amount of INR 183,11,32,413 as payment to auto dealers in relation to outsourcing activities.
• The return was selected for scrutiny, during the course of assessment proceedings, the Tax Officer received information from Addl. DG of Central Excise Intelligence that the taxpayer is selling insurance policies through auto dealers and that the commission towards soliciting the insurance is paid in the guise of payment towards infrastructure, placement of banners, advertisement, etc., which are not genuine. Further, states that auto dealers have also accepted that no services as mentioned in the invoices are rendered.
• The taxpayer, in response to the notices, submitted that the auto dealers are independent parties and are not agents of the taxpayer. The taxpayer further submitted that IRDA regulations allow the taxpayer to outsource activities such as those carried on by the auto dealers and same has been reported to IRDA therefore the payments should not be disallowed.
•  The tax officer did not accept the submissions of the taxpayer stating that the IRDA regulations prohibit payment of any reward by way of commission and administrative or servicing charges. The tax officer also placed reliance on the statement recorded from the auto dealers by the Central Excise authorities and held that the invoices raised were not genuine. The tax officer accordingly disallowed the entire amount claimed towards payments made to auto dealers. 
• Aggrieved by the aforesaid decision, the taxpayer preferred an appeal before the First Appellate Authority, who, after due consideration, upheld the findings of the tax officer. Thereafter, the taxpayer lodged an appeal before the Mumbai Tax Tribunal challenging the order passed by the CIT(A).

MUMBAI TAX TRIBUNAL’s RULING

The Mumbai Bench of the Tax Tribunal, while ruling that payment by insurance company to auto dealer is an allowable expense, made the following observations:

• On perusal of the sample invoices submitted by the taxpayer, it was noticed that the reimbursement is claimed by the auto dealer towards services/cost incurred towards computing network, connectivity through Extranet, space, furniture and fixtures, manpower, printers etc.
• Reference is drawn towards “Guidelines on Outsourcing of Activities by Insurance Companies” issued by IRDAI dated 1 February 2011 which state that certain activities which support the core activities may be outsourced as per risk management principles outlined in the said guidelines, subject to reporting requirements.
• On the combined perusal of IRDA guidelines and the nature of services rendered by the auto dealers, it is clear that the services rendered by the auto dealers fall within the purview of specified activities that can be outsourced by the insurance companies. Further, the same has been periodically reported in the prescribed Form-A to the IRDA.
•  The findings of the Central Excise authority alleging that the insurance companies are paying commission in the guise of reimbursement of expenses is reversed by different benches of CESSTAT and Hon'ble Madras High Court in the case of other insurance companies and therefore the disallowance by placing reliance on the findings of the Central Excise is no longer applicable.

BDO INDIA COMMENTS

This ruling emphasises the necessity for insurance companies to ensure that their outsourcing arrangements comply with IRDAI regulations and are substantiated by thorough documentation. Further, this ruling affirms that such compliance not only protects these expenses from potential disallowance during tax assessments but also upholds the integrity of the company's operations.