Aggregator Payments by Insurance Companies Are Allowable Business Expenditure Under Section 37(1) — ITAT Mumbai

Overview of the Dispute

The Income Tax Appellate Tribunal (ITAT), Mumbai, recently delivered a significant ruling in the case of HDFC ERGO General Insurance Company Ltd. Vs ACIT, involving a consolidated batch of eleven appeals filed by both the assessee and the Revenue. These appeals covered Assessment Years 2010-11 through 2016-17 and arose from a common order passed by the Commissioner of Income Tax (Appeals), Mumbai, dated 27.02.2025.

The primary controversy in the assessee's appeals centred on whether payments disbursed to certain intermediaries — commonly referred to as aggregators — were liable to be disallowed under the provisions of Section 37(1) of the Income Tax Act, 1961, specifically by invoking Explanation 1 to that section. The appeal pertaining to AY 2014-15 was designated as the lead case, and findings recorded therein were applied uniformly to the remaining appeals.

Background and Material Facts

HDFC ERGO General Insurance Company Ltd. is a resident corporate entity engaged in the business of providing general insurance products, spanning motor, health, travel, home, and personal accident insurance in the retail segment, alongside customised property, marine, and liability products for corporate clients.

For AY 2014-15, the assessee 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 was selected for scrutiny assessment.

During the course of assessment proceedings, the Assessing Officer (AO) came across a report prepared by the Directorate General of Central Excise Intelligence (DGCEI), Chennai Zone, which had conducted an investigation into certain motor vehicle dealers, their intermediaries, and the head offices of various insurance companies. The investigation alleged that insurance companies were routing commission payments to motor vehicle dealers — who were not licensed agents, brokers, or intermediaries under the Insurance Act — through intermediary entities styled as aggregators.

The DGCEI's findings indicated that the format of invoices to be raised, and the amount to be reflected therein, were dictated by the insurance companies to the motor vehicle dealers via these aggregators, with the aggregator retaining approximately 3.5% of the amount as its own charge. This report was subsequently forwarded by the Director of Income Tax (Investigation), Chennai, to the assessing jurisdictions.

On examination of the assessee's financial statements, the AO observed that an amount of Rs. 92,86,24,019/- had been debited to the profit and loss account under the head of legal and professional charges. Upon scrutiny of the details furnished by the assessee, it emerged that:

  • Rs. 11,41,93,260/- had been paid to M/s Ashar Mehta Associates (AMA) towards outsourced motor insurance-related services.
  • Rs. 42,30,091/- had been paid to M/s Team Space Financial Pvt. Services Ltd. (Team Space) for similar services.
  • The aggregate outflow on this account thus amounted to **Rs. 11,84,23,351/-.

Assessing Officer's Findings and Disallowance

The AO, drawing upon Section 40(1), Section 40(2A), and Section 42E of the Insurance Act, 1938, as well as circulars issued by the Insurance Regulatory and Development Authority of India (IRDAI), observed that the maximum permissible commission payable on general insurance policies could not exceed 10% of the premium amount. He further noted that agency commission and brokerage could not simultaneously be payable under the same policy.

The AO concluded that the amounts paid by the assessee to AMA and Team Space exceeded the permissible commission threshold under the Insurance Act and IRDAI guidelines. He also held that since procurement of insurance constitutes a core activity, it could not be outsourced to third parties. On these grounds, he issued a show-cause notice to the assessee, ultimately invoking Explanation 1 to Section 37(1) of the Income Tax Act, 1961, to disallow the payments made to the aggregators.

Assessee's Submissions Before the AO and Appellate Authorities

The assessee, in its detailed response, maintained that the payments made to AMA and Team Space were not in the nature of insurance commission but were consideration for administrative and policy servicing support activities. These included: