Page 231 - India Insurance Report 2023- BIMTECH

India Insurance Report - Series II 219

7. No Uniformity in Applying the Tax Deduction at Source (TDS) Provisions on
Interest on Compensation payable by general insurance companies under the Motor
Accident Claims Tribunal (MACT)

Section 194A of the Act requires the payer of interest (other than interest on securities) to Indian tax
residents to deduct tax at source. However, it provides that TDS should not apply inter alia on

(ix) to such income credited by way of interest on the compensation amount awarded by the Motor
Accidents Claims Tribunal;

(ixa) to such income paid by way of interest on the compensation amount awarded by the Motor
Accidents Claims Tribunal where the amount of such income or, as the case may be, the aggregate of the
amounts of such income paid during the financial year does not exceed fifty thousand rupees;

Different high courts in India have taken different views on the requirement to deduct tax at source
on the interest awarded under the MACT. The High Courts of Bombay, Himachal Pradesh, Punjab &
Haryana, Madras, Uttar Pradesh, Gujarat and Kerala have held that interest awarded by MACT partakes
the character of compensation and thus, tax should not be deducted at source on such interest paid.

The Gujarat High Court has also held that one cheque for the consolidated amount of the
compensation awarded (including interest) should be deposited with MACT from the date of the Claim
Petition till the passing of the award or the judgment, and no tax should be deducted at source under
section 194A of the Act. However, any interest paid subsequent to the date of the order should attract
TDS under section 194A of the Act.

Due to conflicting views of different high courts, including the Madras High Court, and uncertainty
faced by the insurance company, the Madras High Court directed the Registry to place the issue of TDS
applicability on interest awarded by MACT before the Hon’ble Chief Justice for resolution by a larger
bench and further directed that all execution petitions pending before MACT in Tamil Nadu relating to
such issue shall stand stayed till the time any direction is issued by the larger bench. Further, the insurance
company was directed not to apply TDS on interest awarded by MACT and further stated that such a
ruling should not be applied as a precedent.

The High Courts of Patna, Rajasthan, Karnataka, Chhattisgarh, Madhya Pradesh, & Uttarakhand
have held that interest on compensation stands on a different footing as compared to the compensation
awarded, and thus, tax should be deducted at source on such interest paid.

8. Conclusion

General insurance companies are in the business of underwriting risk for their customers but are
faced with uncertainty and risk of tax litigations even though the Act provides for a specific code of
taxation with just a few adjustments to the profits arrived as per the Insurance Regulations. These
entities expect a clear guidance or certainty.