Section 194D does not apply to each and every payment made by any person by way of commission or otherwise; it applies to remuneration or reward paid for soliciting or procuring insurance business.

        b. Since commission paid by assessee to insurance companies was in nature of compensation towards cost of procurement incurred by insurance companies for originally accepting insurance business from agents, provisions of Section 194D would not be attracted.

        The assessee public sector undertaking, engaged in the business of re-insurance, accepted re-insurance contracts from other insurance companies and paid commission on the re-insurance premium earned without deducting tax at source on such commission. The Assessing Officer treated the assessee to be in default for non-deduction of tax u/s.194D. The CIT (A) upheld the order of the Assessing officer.

        The Tribunal held that Section 194D was not attracted on the facts of the instant case. The Tribunal noted as under :

        1. In terms of Section 194D, tax deduction is to be made from income which is in the nature of remuneration or reward (whether it is called commission or otherwise) for soliciting or procuring insurance business. Section 194D does not apply to each and every payment made by any person by way of commission or otherwise; it applies only to remuneration or reward paid for soliciting or procuring insurance business. The language of Section 194D makes it abundantly clear that if the commission or other payments are made by any assessee not by way of remuneration or reward for soliciting or procuring insurance business, then Section 194D would not apply.

        2. In the instant case, the insurance companies did not procure business for the assessee-company nor did the assessee-company pay any commission or other payment for soliciting the business from the insurance companies.

        3. Such commission was allowed by the assessee-company in order to compensate the insurance companies for the brokerage and other costs incurred in procuring the business by the ceding company. Considering the nature of the payment made by the assessee-company to the insurance companies by way of commission, it could be said that the same did not fall within the category of payments by way of remuneration or reward for soliciting or procuring insurance business from the insurance companies.

    2. As held in the case of Gujarat Gas Financial Services Ltd. vs. Asst.CIT (2008) 115 ITD 218 (Ahd.)(SB), deposits cannot be equated with loans or advances. The Special Bench had held that the two expressions ‘loans’ and ‘deposits’ are different and the distinction can be summed up by stating that in the case of loan, the needy person approaches the lender for obtaining the loan therefrom. The loan is clearly lent at the terms stated by the lender. In case of deposits, however, the depositor goes to the depositee for investing his money primarily with the intention of earning interest.

    3. Section 2(22)(e) enacts a deeming fiction whereby the scope and ambit of the word ‘dividend’ has been enlarged to bring within its sweep certain payments made by a company as per the situations enumerated in the said Section.

    4. Such a deeming fiction could not be given a wider meaning than what it purports to be. The provision would necessarily be accorded strict interpretation and the ambit of the fiction would not be pressed beyond its true limits.

    5. The requisite condition for invoking Section 2(22)(e) is that payment must be made by way of loan or advance. Since there is a clear distinction between inter-corporate deposits vis-à-vis loans / advances, the lower authorities were not right in treating the same as deemed dividend u/s.2(22)(e).