2025 (10) TMI 330 - AT - Service Tax

Reimbursements to insurance agents for mandatory training travel not treated as remuneration; exclude from taxable value of auxiliary services

M/s Aviva Life Insurance Co. India Ltd. Versus Commissioner of Service Tax, Delhi-IV

CESTAT allowed the appeal, holding that reimbursements to insurance agents (such as conveyance for mandatory training) are not remuneration for soliciting ... Calculation of service tax under Insurance Auxiliary Services - reimbursement of expenses to form part of assessable value or not - reverse charge mechanism - HELD THAT:- The appellants claim that these expenses have no nexus with the insurance business generated by the agents and thus, it cannot be held to be commission paid to agents which is exigible to Service Tax. The appellants claim that either as per Clause (ix) of sub-Rule (1) of Rule 6 of the Valuation Rules or in terms of sub-clause (A) of clause (i) of sub-rule 2(1)(d) of the Service Tax Rules or the erstwhile Rule 2(1)(d)(iii) of the Service Tax Rule, any commission, fee or any other sum paid to the insurance agent in relation to Insurance Auxiliary Services by the insurer shall be included in the value of taxable service; reimbursement of conveyance is not remuneration for soliciting insurance business; therefore, conveyance charges for attending mandatory training cannot be considered as a consideration for the services provided by the agents. As per the ratio of Bhayana Builders [2018 (2) TMI 1325 - SUPREME COURT], Intercontinental Consultants & Technocrats Pvt. Ltd. [2012 (12) TMI 150 - DELHI HIGH COURT], only the consideration for such service is includible in the assessable Value. It is found that these reimbursements are not the remuneration to the agents for the business procured or generated by them for the appellants. They are at best expenses incurred in the course of conduct of business and therefore, need to be excluded for the purposes of arriving at the assessable value of the service exigible to Service Tax. The issues raised herein are no longer res integra. Therefore, the impugned order cannot be sustained - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether reimbursements of conveyance expenses paid by an insurer to insurance agents for attending mandatory training constitute consideration for 'insurance auxiliary services' rendered by the agents and are includible in the assessable value for Service Tax under the reverse charge mechanism. 2. Whether expenses incurred by an insurer for selecting and sending certain agents abroad for training form part of the taxable value of insurance auxiliary services provided by those agents and are exigible to Service Tax under the reverse charge mechanism. 3. Whether extended period of limitation and levy of interest under the Service Tax provisions are invokable where the taxability turns on interpretation of the statutory scheme and industry practice, absent fraud, suppression or collusion. 4. Whether penalties under Sections 76, 77 and 78 (as applied in the impugned order) are sustainable where the assessee acted under bona fide belief of non-liability and where demands are held not to arise as a matter of law. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Conveyance reimbursements for mandatory training: legal framework Legal framework: Value determination rules (Rule 5 and Rule 6 of the Service Tax Valuation Rules) and the concept that only 'consideration' for a taxable service is includible in assessable value; Service Tax leviable under reverse charge on insurance auxiliary services where commission/fee paid in relation to such services is included in value. Precedent treatment: The Court relied on and followed the principles in Intercontinental Consultants & Technocrats (as affirmed by higher courts) and the reasoning in Bhayana Builders that only consideration for the taxable service is includible. The Tribunal's prior decisions in Max Life and certain Bench orders (e.g., Bajaj Allianz) with identical facts were treated as persuasive and followed. Interpretation and reasoning: The Court examined the statutory wording of Rule 5(1) - inclusion of expenditures 'incurred by the service provider in the course of providing taxable service' - and Rule 6(1)(ix) - inclusion of sums paid 'in relation to insurance auxiliary services.' The Court held that reimbursements of conveyance for attending training are incurred to discharge a statutory/regulatory obligation (IRDA-mandated training) and do not constitute remuneration for solicitation or procurement of insurance business. The nexus between payment and any specific taxable act (solicitation/procurement) is absent; selection criteria for overseas training based on prior performance does not convert reimbursement into remuneration for services rendered. Ratio vs. Obiter: Ratio - reimbursements of conveyance for mandatory training are not consideration for insurance auxiliary services and therefore are not includible in assessable value under Rule 5/6; follows binding principles that assessable value must have nexus to consideration for the taxable service. Obiter - observations on practical reasons for selection of agents for overseas training and policy considerations about IRDA mandates. Conclusions: The Court concluded that conveyance reimbursements for mandatory training are excluded from the taxable value of insurance auxiliary services and cannot be taxed under the reverse charge mechanism. Issue 2 - Expenses for overseas training of selected agents: legal framework Legal framework: Same valuation rules and the reverse charge liability for insurance auxiliary services; statutory mandate under insurance regulations requiring training of agents (regulatory context informing nexus analysis). Precedent treatment: The Court expressly followed the Tribunal's Principal Bench decision (Max Life) and other Bench orders (Bajaj Allianz) which addressed identical issues and rejected inclusion of training-related reimbursements in assessable value. The Court treated these decisions as applicable and persuasive; no contrary higher court authority was invoked to displace them. Interpretation and reasoning: The Court emphasized that training mandated by regulatory authority is not the provision of the taxable service by agents to the insurer; training enhances agents' competence but is not consideration for solicitation of business. Expenditure on overseas training borne by the insurer is therefore an expenditure in the conduct of the insurer's business and not remuneration for the agents' taxable services. The rule language 'in relation to insurance auxiliary services' requires a direct relation to procurement/solicitation; mere selection based on performance does not create that direct relation. Ratio vs. Obiter: Ratio - expenses for overseas training of agents, when undertaken pursuant to regulatory mandate and not as remuneration linked to solicitation, are not includible in the taxable value of insurance auxiliary services. Obiter - commentary on impracticability of training all agents abroad and how selection criteria do not supply the requisite nexus. Conclusions: Expenses for overseas training of selected agents are not part of the assessable value for Service Tax under the reverse charge mechanism and the demands on this count cannot be sustained. Issue 3 - Extended period of limitation and interest under Section 75 Legal framework: Provisions allowing extended period in cases of wilful suppression, fraud or collusion; interest liability where tax is payable; principles governing invocation of extended limitation. Precedent treatment: The Court applied established limitation principles and considered industry-wide awareness and regulatory reporting. It followed the view that extended limitation is not automatically available where the matter is interpretational and the department had knowledge of the industry practice. Interpretation and reasoning: The Court found that the matters in dispute were primarily questions of statutory interpretation and valuation, not instances of concealment or fraud. The department was aware of the insurer's practices through audits and industry practice; there was no finding of willful suppression or collusion. Consequently, the extended period of limitation and related interest were not applicable. Ratio vs. Obiter: Ratio - extended period of limitation and interest cannot be invoked where taxability depends on bona fide interpretational issues and no fraud/suppression exists. Obiter - none significant beyond application to facts. Conclusions: Extended limitation and interest under Section 75 are not invokable on these facts; interest liability does not survive where the underlying demand is unsustainable as a matter of law. Issue 4 - Penalties under Sections 76, 77 and 78 Legal framework: Penalty provisions applicable for non-payment/short payment/erroneous refund and for other defaults, and defenses where assessee acted bona fide under an arguable legal position. Precedent treatment: The Court considered that penalty cannot be imposed where tax demand itself is not sustainable and where bona fide belief negates culpability; it applied established principles disallowing penalties in the absence of mala fide intent or willful default. Interpretation and reasoning: The Court observed that where the appellant had a bona fide belief in non-liability (supported by legal authority and reviewable interpretation), and where part of the demand had been paid prior to the show cause notice, imposition of penalties under the cited sections lacked justification. The absence of intentional evasion or mis-statement meant statutory thresholds for extended or aggravated penalties were not crossed. Ratio vs. Obiter: Ratio - penalties under Sections 76, 77 and 78 are unsustainable where the underlying tax demand is untenable as a matter of law and where the taxpayer acted under bona fide belief without fraud or collusion. Obiter - remarks on adequacy of penalty where some amounts were paid pre-notice. Conclusions: Penalties imposed by the adjudicating authority cannot be sustained on the facts; penalty orders must be set aside along with the tax demands held unsustainable. Final Disposition (Court's conclusion) The Court held that the impugned demands in respect of conveyance reimbursements and overseas training expenses cannot be sustained, followed relevant precedents, rejected invocation of extended limitation and interest, and found penalties unsustainable; accordingly, the impugned order was set aside and the appeal allowed.