2015 (9) TMI 1219 - HC - Service Tax

Court allows appeal, deems services as exports, overturns service tax, penalties under Finance Act vacated.

The court allowed the appeal filed by the appellant and dismissed the appeal filed by the Revenue. It held that the services provided by the appellant ... Insurance as well as reinsurance broker – international insurance - service providers situated abroad - import of services and / or export of services - reinsurance brokerage was not included in the taxable value of ‘insurance auxiliary service’ rendered to insurers/reinsurers for the disputed period. - reverse charge - effective date of levy. Held that:- Net premium payable by the New India Assurance Co. Ltd. to the reinsurer in London is ₹ 2,101,200/-. After extending the benefit of 10% commission, the net premium due to Heath Lambert Limited comes to ₹ 18,91,080/-. Under the terms of contract, for providing the service as re-insurance broker, which fact is not disputed, a sum of ₹ 16,18,960/- alone is remitted to M/s.Heath Lambert Group as client money as set out by the assessee in the letter to the Chief Manager, Bank of India, Overseas Branch, Chennai dated 25.1.2006 as net premium, retaining the balance amount as commission/brokerage. This transaction is illustrative of series of transactions which had taken place over the period in dispute in the show cause notice. In effect, in respect of remitting the entire amount to the re-insurer and getting the brokerage separately, the assessee, in this case, in relation to the trade practice prevalent in the trade internationally and following the practice and procedure that is followed by the re-insurance brokers with the reinsurance companies, the assessee had retained that portion of the commission or brokerage and remitted the balance to the re-insurance company at London. Services rendered by the assessee in this case to the re-insurer abroad and the transaction with the foreign re-insurer would have to be necessarily accepted as 'export of service'. Once we hold that it is export of service, we will now look into the provisions of the Service Tax Act. - Decision in the case of JB Boda & Company Private Ltd. [1996 (10) TMI 70 - SUPREME Court] followed. - Decided in favor of assessee. Insofar as Notification Nos.6/99 dated 09.04.1999 and the rescinding Notification No.2/03 dated 01.03.2003 and the subsequent Notification No.21/03 dated 20.11.2003 are concerned, though relied upon by the assessee at the first instance in the light of J.B.Boda's case, we feel that may not be really necessary to resolve the issue raised in the present case, as all these Notifications granted exemption from payment of service tax to any person, in respect of which payment is received, specified under sub-section (48) of Section 65 of the Finance Act provided, to any person, in respect of which payment is received in India in convertible foreign exchange from whole of service tax. Role of the assessee is collecting and remitting the premium. There is also a commitment on the part of the assessee in relation to any claims that may arise from New India Assurance Co. Ltd. in respect of re-insurance contract. IRDA (Insurance Brokers) Regulations further casts a duty on the assesee as to how the money collected in relation to the re-insurance contract should be dealt with by the broker. The terms contained in Regulation 23 speaks for itself that the role of the assessee as an insurance broker is not merely receiving and transmitting the amount as has been propounded by the Adjudicating Authority and the Tribunal. There is much more to be done by the Insurance broker even as per the IRDA (Insurance Brokers) Regulations, of which much emphasis has been made by the Tribunal in paragraph No.15. If this is the role of the assessee, we fail to understand how the Tribunal could have said that it is just forwarding the premium amount to the re-insurer company. That finding, of the tribunal in confirming the demand, is a fallacy in the light of the findings given by the Supreme Court in JB Boda's case (supra), as also the provisions of the Service Tax Act, more particularly, the binding circular of the Reserve Bank of India dated 25.4.2003. On the issue of non-receipt of the commission or brokerage in convertible foreign exchange, the Adjudicating Authority as well as the Tribunal have time and again misdirected themselves to hold that since the New India Assurance Co. Ltd. have paid the premium amount, it cannot be treated as receipt of amount in convertible foreign exchange and for this, Mr.M.Santhanaraman, learned Standing Counsel appearing for the Department submitted that there is no specific agreement as in the case of J.B.Boda (supra) and therefore, it stands distinguished. Under RBI Regulations, there was a requirement of such an agreement under law and the permission of the RBI has to be obtained before remitting the foreign exchange. That issue does not arise in the present case and the provisions of the Service Tax Act does not impose such a condition. In any event, as we have held that the basis of the circular, which is clarified that Notification Nos.6/99 dated 09.04.1999, 9/01 dated 16.07.2001, 13/02 dated 01.08.2002 and 2/03 dated 01.03.2003 would not apply to export of service, the question of receiving the payment in convertible foreign exchange does not arise. Even the Export of Service Rules, 2005 does not put an embargo in relation to taxable service as specified in Rule 3(3)(i), (ii) and (iii) of the Export of Service Rules. - Decided in favour of assessee. Issues Involved:1. Taxability of services rendered by the appellant as a re-insurance broker prior to the Finance Act, 2006.2. Classification of the re-insurance business as an export of service.3. Applicability of the extended period of limitation under Section 73 of the Finance Act, 1994.4. Justification for restricting the demand of service tax for the normal period post-10.09.2004.5. Justification for vacating penalties imposed under Sections 76 and 78 of the Finance Act, 1994.Detailed Analysis:1. Taxability of Services Rendered by the Appellant as a Re-insurance Broker Prior to the Finance Act, 2006:The primary issue was whether the services provided by the appellant, a re-insurance broker, were taxable under the Finance Act, 1994 before the amendment by the Finance Act, 2006. The court analyzed the nature of services rendered by the appellant, who was licensed under the Insurance Regulatory and Development Authority (Insurance Brokers) Regulations, 2002. The appellant provided services to foreign re-insurers and received brokerage from them. The court held that these services, being intermediary services for re-insurance, were indeed taxable under the 'Insurance Auxiliary Services' category as per Section 65(105)(zl) of the Finance Act, 1994.2. Classification of the Re-insurance Business as an Export of Service:The appellant contended that the brokerage received from foreign re-insurers should be classified as an export of service and thus exempt from service tax. The court referred to the Supreme Court's decision in JB Boda & Co. Pvt. Ltd. v. CBDT, which dealt with similar issues under Section 80-O of the Income Tax Act. The court concluded that the services rendered by the appellant were indeed export services, as they were provided to foreign re-insurers and the payment was received in convertible foreign exchange. The court emphasized that service tax is a destination-based consumption tax and is not applicable to export of services, as clarified by the Central Board of Excise and Customs Circular No.56/5/2003 dated 25.04.2003.3. Applicability of the Extended Period of Limitation under Section 73 of the Finance Act, 1994:The Department invoked the extended period of limitation under Section 73(1) of the Finance Act, 1994, alleging suppression of facts by the appellant. The court noted that the show-cause notice was issued and adjudicated without gathering all relevant facts. The court held that the allegation of suppression was not sustainable, as the Department had not established willful suppression of facts by the appellant. Consequently, the court restricted the tax liability to the normal period and up to 10.09.2004, the date on which Section 73(1) was amended.4. Justification for Restricting the Demand of Service Tax for the Normal Period Post-10.09.2004:The Tribunal had restricted the demand of service tax to the normal period post-10.09.2004, based on the Superintendent's letter requesting information from the appellant. The court upheld this decision, noting that the Department had not gathered all relevant facts before issuing the show-cause notice. Therefore, the demand for the period beyond the normal period was not justified.5. Justification for Vacating Penalties Imposed under Sections 76 and 78 of the Finance Act, 1994:The Tribunal had vacated the penalties imposed under Sections 76 and 78 of the Finance Act, 1994, on the ground that the issue involved was highly interpretative in nature. The court agreed, noting that the dispute was complex and involved interpretation of various provisions of the Finance Act and the IRDA Regulations. Therefore, it was not just or fair to inflict any penalty on the appellant.Conclusion:The court allowed the appeal filed by the appellant (C.M.A.No.1058 of 2009) and dismissed the appeal filed by the Revenue (C.M.A.No.1459 of 2009). The court held that the services rendered by the appellant were export services and not liable to service tax. The extended period of limitation was not applicable, and the penalties imposed under Sections 76 and 78 of the Finance Act, 1994, were vacated.