Karnataka State Government department exempt from service tax on employee life insurance premiums under welfare scheme

CESTAT Bangalore held that a Karnataka State Government department collecting life insurance premiums from employees under a welfare scheme performs a sovereign function exempt from service tax, following Board circular and tribunal precedent. However, service tax on renting immovable property was confirmed with interest, though penalties were dropped citing SC precedent in Krishi Upaj Mandi Samiti case regarding conflicting legal interpretations. The department did not contest the renting service tax liability. Appeals were disposed with modified orders dropping life insurance service tax demands and penalties on property rental while confirming the rental service tax with interest.

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Issues Involved:
1. Whether the premium collected for providing life insurance service is taxable.
2. Whether the amount received for renting of immovable property is taxable.

Summary:
The appeals were filed against Orders-in-Original passed by the Commissioner of Central Excise and Service Tax, Bangalore. The appellant, a department of the Karnataka Government, provided life insurance service to employees during specific periods. Two show-cause notices were issued for non-payment of service tax on insurance service and renting of immovable property service. The Commissioner confirmed the demand of service tax, interest, and penalties under various sections of the Finance Act, 1994, leading to the present appeals.

Regarding the life insurance service, the appellant argued that the service falls under sovereign functions, citing a Circular from the Board. The Tribunal agreed, stating that the premium collected is in the nature of a sovereign function and not subject to service tax. The Tribunal referenced the Circular and previous case law to support its decision, emphasizing that the activity is mandatory and statutory, fulfilling sovereign obligations.

On the issue of renting of immovable property, the appellant did not contest the levy of service tax, aligning with a recent Supreme Court judgment. Due to conflicting opinions on the applicability of service tax during the relevant period, the Tribunal ruled that penalties for non-payment of service tax on renting of immovable property cannot be sustained. The demands related to service tax on life insurance service were dropped, while service tax on renting of immovable property was confirmed with interest. Penalties for failure to discharge service tax on renting of immovable property were also dropped. The impugned orders were modified accordingly, and the appeals were disposed of in favor of the appellant.

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