TaxTMI 
TaxTMI 
TaxTMI 
2015 (9) TMI 1219
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....g re-insurance business for them is outside the Finance Act, 1994 for the period prior to the amendment by the Finance Act, 2006? (ii) Whether in the facts and circumstances the re-insurance business procured for and remunerated by foreign re-insurers abroad is export of service and hence outside the Act being destined and consume abroad? (iii) Whether in the facts and circumstances of the case, the Tribunal is correct in upholding extended period of limitation relying upon the provisions of Section 73 of the Act as it stood prior to Act 2 of 2004, whereas the proceedings for re-assessment had been initiated and completed after the amendment of 2004?" C.M.A.No.1459 of 2009: 1. Whether the decision of the second respondent Tribunal is correct in restricting the demand of service for the normal period after 10.09.2004 on the ground that details were requested from the assessee by the Superintendent? 2. Whether the second respondent is justified in law in vacating the penalties imposed under Sections 76 and 78 of Finance Act, 1994 on the ground that the issue involved is highly interpretative in nature?" 2. We have heard Mr.C.Natarajan, learned Senior Counsel, appearing for....
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....ght only), being the Service Tax payment (Service Tax of Rs. 1,40,98,127/- Plus Education Cess of Rs. 1,46,753/-) as detailed in the enclosed Annexure on the Commission received for reinsurance of Policies ceded should not be demanded under proviso to sub-section (1) of Section 73 of the said Act read with erstwhile Section 71(3) of the said Act. b) interest at the applicable rates should not be demanded on the above Service Tax and Education Cess from the due date till the actual date of payment from Suprasesh under Section 75 of the said Act; c) Penalty should not imposed on M/s.Suprasesh under Section 76 of the said Act for every day of delay of payment of Service Tax and Education Cess from the due date till the actual payment of the Service Tax and Education Cess; and d) Penalty under Section 78 of the said Act should not be imposed on Suprasesh for the contraventions and non-payment of Service Tax and Education Cess, mentioned supra." 5. In response to the said show cause notice, the assessee filed a reply inter alia contending that the commercial brokerage was received from the re-insurer abroad for the services rendered in the course of the business, which would fa....
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....rvice". In this case, as already explained, Suprasesh rendered service to insurers in India and the same is consumed in India only. Notification No.6/99 ST dt. 09.04.99 which was in vogue upto 28.02.2006 also exempts the taxable services provided to any person in respect of which payment is received in India in convertible foreign exchange from the whole of Service Tax. As per this notification, exemption from Service Tax is available only when the payment for the service rendered is received in convertible foreign exchange. Therefore, there should be physical receipt of payment in convertible foreign exchange. The retention of brokerage amount before remitting the premium to foreign Reinsurance companies cannot be termed as payment received in convertible foreign exchange. 21. The Hon'ble Supreme Court in the case of JB Boda Case relating to Income tax relied on the relevant provisions of the Foreign Exchange Act, 1961. The decision rendered in JB Boda case is applicable only to direct tax cases and no influence can be drawn that it is applicable to Service Tax cases. Here the notification is very specific and nowhere in the notification, it is mentioned that such income is ....
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....as follows: "a) I confirm the demand of Rs. 1,42,44,880/- (Rupees One Crore forty-two lakhs forty four thousand eight hundred and eighty only), being the Service Tax payment (Service tax of Rs. 1,40,98,127/- Plus Education Cess of Rs. 1,46,753/-) under proviso to sub section (1) of Section 73 of the said Act. b) I also demand interest at the applicable rates on the above Service Tax and Education Cess from Suprasesh under Section 75 of the said Act; c) I impose a penalty of Rs. 200/- per day on Suprasesh from the due date of payment of Service Tax and Education Cess till the actual date of payment of the above demand under Section 76 of the said Act. However, the penalty imposed under this Section shall not exceed the Service Tax and Education Cess demanded in this order. d) I also impose a penalty of Rs. 1,42,44,880/- (Rupees One Crore forty-two lakhs forty four thousand eight hundred and eighty only), on Suprasesh under Section 78 of the said Act." 10. Aggrieved by the above-said order of the Adjudicating Authority, the assessee pursued the matter before the Tribunal. The Tribunal, after analysing the provisions and after hearing the submissions of both sides came to t....
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....ression is concerned, the Tribunal took a different view holding as follows: "14. The show-cause notice invoked the proviso to Section 73(1) of the Finance Act, 1994 on the ground of suppression of facts etc. for recovery of service tax from the appellants for the period 16-7-2001 to 30-6-2005. It is not in dispute that the reinsurance brokerage received by the appellants was not included in the taxable value of "insurance auxiliary service" rendered by them to insurers (including reinsurers) for the purpose of payment of tax for the above period. According to the appellants, they did not suppress material facts before the Department. We think, in this context, it is relevant to consider the Superintendent's letter dated 3-6-2008 addressed to the appellants, which reads thus :- "We request you to furnish the following particulars immediately :- 1.Copies of reinsurance contract/Agreement entered into by you with Indian/Foreign Insurance Companies. 2. The list of insurance companies for which your company act/acted as reinsurer as stated in para 20 of Order-in-Original No. 2/2007, dated 31-1-2007 and the details of reinsurance done by your company from July 2001. 3. Whe....
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.... 'intermediary or Insurance intermediary' 16.07.2001 Insurance Auxiliary service introduced by Finance Act 2001 came into effect vide Notification No.4/2001 - S.T. dated 09.07.2001 Section 65 (72) (zl)"to a policy holder or insurer by an actuary or intermediary or insurance intermediary or insurance agent in relation to insurance auxiliary services". Section 65 (31) "Insurance Auxiliary service" means any service provided by an actuary, an intermediary or insurance intermediary or an insurance agent in relation to general insurance business and includes risk assessment, claim settlement, survey and loss assessment." Section 65(32)"Intermediary or insurance intermediary" has the meaning assigned to it in sub-clause (f) of clause (1) of section 2 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999) ." 16.08.2002 Insurance Auxiliary service amended by Finance Act 2002 came into effect Notification No.8/2002- ST.dated 1.8.2002 Section 65(90) (zl)"to a policy holder or insurer by an actuary or intermediary or insurance intermediary or insurance agent in relation to insurance auxiliary services concerning g....
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....ervice and other definitions, namely, intermediary or insurance intermediary. It is not in dispute that the assessee, who is an insurance intermediary, is performing insurance ancilliary service, which is a taxable service under the provisions mentioned above. 18. In this case, the period in dispute is as follows: 16.07.2001 to 31.3.2002; 2002-2003; 2003-2004 upto 13.5.2003; 2003-2004 (from 14.5.2003 to 31.3.2004); 2004-2005 (from 01.04.2004 to 09.09.2004); 2004-05 (from 10.09.2004 to 31.3.2005) and 2005-06. 19. The core issue involved in this case is what is the nature of service performed by the assessee. Initially the assessee placing reliance on the decision of the Supreme Court in JB Boda's case tried to make a plea that the services rendered by them should be termed as "export of service" and the commission or brokerage received will come within the definition of "export of service" in India in convertible foreign exchange in terms of Notification Nos.2/99 dated 28.2.1999 as amended by Notification No.6/99 dated 9th April, 1999, 9/01 dated 16th July, 2001 , 13/2002 dated 1st August, 2002 and 2/2003 dated 1st March, 2003. 20. The relevant notifications are set out here....
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....the following amendment in the notification of the Government of India, in the Ministry of Finance (Department of Revenue), No. 6/99-Service Tax, dated the 9th April, 1999, except as respects things done or omitted to be done before such amendment, namely :- In the said notification, for the words, brackets and figures 'taxable service specified in sub-section (72) of section 65', the words, brackets and figures 'taxable service specified in clause (90) of section 65' shall be substituted. 2. This notification shall come into force on the 16th day of August, 2002. [Notification No. 13/2002-S.T., dated 1-8-2002] Service tax - Receipt of payment in foreign exchange - Notification No. 6/99-S.T. rescinded In exercise of the powers conferred by section 93 of the Finance Act, 1994 (32 of 1994), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby rescinds the notification of the Government of India in the erstwhile Ministry of Finance (Department of Revenue) No. 6/99-Service Tax, dated the 9th April, 1999, published in the Gazette of India, vide number G. S. R. 251(E), dated the 9th April 1999, except as respec....
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....on such secondary services. However in case where the secondary service gets consumed in part or toto for providing service in India, the service tax would be leviable on the secondary service provider. For this purpose both primary and secondary service providers would maintain the records deemed fit by them to identify the secondary services with services that are being exported. 5. A further question raised is relating to payments receivable in foreign exchange for the services performed prior to March, 1, 2003 when the rate of service tax applicable was 5% but payments are received after March 1, 2003. The enhancement of the rate of service tax from 5% to 8% would be applicable only when the Finance Bill is passed. If payments are received in the aforesaid case after the Finance Bill is passed, the rate of tax applicable would be 5% so long as the billing has been made prior to the date of passing of the Finance Bill. If the billing is made subsequent to the date of the passing of the Finance Bill, the service tax would be applicable at the enhanced rate of 8%. 6. The field formations may suitably be informed. 7. Trade Notice may be issued for the information of the trade....
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....rance contracts with insurance companies and/or reinsurance companies on behalf of his clients. Explanation: The term "insurance broker" wherever it appears in these regulations shall be deemed to mean a direct broker, a reinsurance broker or a composite broker, as the case may be, unless expressly stated to the contrary. (m) "reinsurance broker" means an insurance broker who, for a remuneration, arranges reinsurance for direct insurers with insurance and reinsurance companies." 25. Mr.M.Santhanaraman, learned counsel appearing for the Department has laid much emphasis on the above-said provisions. To buttress his plea, he submitted that primarily, the service is rendered to the re-insured within India. Regulation 19 of the IRDA (Insurance Brokers) Regulations, 2002 provides for remuneration of insurance broker and Regulation 23 provides for segregation of insurance money. The said Regulations read as follows: "19. Remuneration - (1) No insurance broker shall be paid or contract to be paid by way of remuneration (including royalty or licence fees or administration charges or such other compensation), an amount exceeding: (A) on direct general insurance business - (i) o....
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....mit to the reinsurer and/or collect the claims due from the reinsurer to be passed on to the insured. In these circumstances the money collected by the licensed insurance broker shall be dealt with in the following manner: (a) he shall act as the trustee of the insurance money that he is required to handle in order to discharge his function as a reinsurance broker and for the purposes of this regulation it shall be deemed that a payment made to the reinsurance broker shall be considered as payment made to the reinsurer; (c) give written notice to, and receive written confirmation from, a bank, or other institution that he is not entitled to combine the account with any other account, or to exercise any right of set off, charge or lien against money in that account; (d) ensure that all monies received from or on behalf of an insured is paid into the 'Insurance Bank Account' which remains in the 'Insurance Bank Account' to remain in deposit until it is transferred on to the reinsurer or to the direct insurer. (e) ensure that any refund of premium which may become due to a direct insurer on account of the cancellation of a policy or alteration in its terms an....
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....e goods at Rs. 362.70 cores, of which New India Assurance Co. Ltd. wanted to retain Rs. 60 crores under own cover. Thereafter, for and on behalf of the foreign company - re-insurer, another mail was received on 10.11.2005 from Richmond John, Heath Lambert Group stating that the underwriters have offered 60% on certain terms, which includes commission including brokerage at 15%. The said document reads as follows: "Further to your todays Email have discussed with underwriters and have so far obtained 60% support to the following: 1) INR 3027 Million Excess of Loss to INR 600 Million (i.e. USD 66,535,784 Excess of Loss to USD 13,188,262) 2) Rate 0.0275% payable on INR 3027 Million 3) Full wording to be agreed also underlying wording to be agreed by London Reinsurers, which please forward. 4) Total commission your side including your brokerage 15.00% Further to the above please advise how many vehicles will be carrying the Radar equipment. Will discuss with others tomorrow to obtain 100% support to the above terms unless we hear otherwise from you. We await your further advices with much interest. Kind Regards, John." 28. Thereafter, after series of negotiation, it ....
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.... office." 31. Thereafter, Heath Lambert Group, the re-insurer, issued a cover note dated 28th December, 2005 for a sum of Rs. 340 crores. Based on the said cover note, debit note was raised. The debit note states that the sum insured was Rs. 340 crores; rate of premium 0.075% inclusive of SRCC; order premium is Rs. 2,101,200/- RI Commission 10% and the premium due to the reinsurer is Rs. 1,891,080/- (Taxes/levies extra at actuals). The bank details for payment has been stated as follows: "Bank of India, Nariman Point Branch, Mumbai - 500 021. Bankers MICR No.400013043 Further Credit to Suprasesh General Insurance Services & Brokers Pvt. Ltd. Current a/c CD No.4768." 32. The assessee forwarded the cover note and debit note to the New India Assurance Co. Ltd. on 16th January, 2006 for processing the debit note for immediate payment. Thereafter, on 19th January, 2006, the Heath Lambert Group raised a debit on the assessee in the following manner: "Accounting Reference : MB3686005/0030201 Risk No : MB3686005 Description : Cargo Reinsurance Reassured : New India Assurance Company Limited Original Assured : L.R.D.E. Government of India (Defence Department) Period : 12t....
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....riod 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. 36. In this situation, there arose a problem between the assessee and the Department. According to the Department, the amount was paid by New India Assurance Co. Ltd. for the services rendered to them and since the nature of transaction undertaken by the assessee is primarily in relation to the client in India, namely, The New India Assurance Co. Ltd., it is not a case of export of service. To support this argument, it was contended that there is no receipt of convertible foreign exchange by the assessee in this transaction and therefore, they would not fall within the parameters of Notification No.6/99 dated 09.04.1999, 9/01 dated 16.07.2001, 13/02 dated 01.08.2002 and 2/03 dated 01.03....
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....nt showing the amount of foreign currency payable as reinsurance premium to the foreign parties after deducting the amount of brokerage due to the appellant. This balance amount after deducting the brokerage, was remitted to the London brokers with the permission of the Reserve Bank of India. 39. The appellant - M/s.JB Boda contended that amount of commission retained by it was a receipt of convertible foreign exchange without a corresponding foreign remittance within the meaning of section 9 of the Foreign Exchange Regulation Act. In that case, the Indian insurers make payment in Rupees to the appellant - JB Boda for the amount of reinsurance premium to be remitted to the foreign company, furnishing all particulars with an advice to the appellant to approach the Reserve Bank of India for necessary permission to remit in U.S. dollars the reinsurance premium abroad. Based on that request, by following the procedure prescribed and based on the agreement with M/s.Sedgwick Offshore Resources Limited, London, the appellant remitted the premium of US dollars 989,887.20 on 11.1.1984 to the Union Bank of India after retaining the fee of 71,004.48 dollars for the technical services rendere....
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....r in relation to which the approval is first sought: . . . . Explanation. For the purposes of this section, (i) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the law for the time being in force for regulating payments and dealings in foreign exchange; (ii) "foreign enterprise" means a person who is a non-resident." 41. The question that arose in that case was whether instead of remitting the amount to the foreign reinsurers first and receiving the commission due to the appellant later, the arrangement by which the appellant remitted the reinsurance premia, after retaining the fee due to it for technical services rendered, would satisfy the requirement of section 80-O of the Income-tax Act. 42. The contention of the Department before the Apex Court in that case was that the Central Board of Direct Taxes was justified in declining to approve the agreement submitted by the appellant since the income under the agreement is generated in India and is not received in convertible foreign exchange as required under section 80-O of the Act. This contention of th....
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....ting Authority as well as the Tribunal. Hence, we hold that the 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. 45. 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. 46. This position does not really affect the case of taxable service. It is clarified by the Government of India, Ministry of Finance vide circu....
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.... 65 of the Finance Act may be, export without payment of service tax and the exclusion, 'the export of taxable services' are enumerated under Rule 3 of the Export of Service Rules, 2005. 49. The taxable service has been listed in Rule 3(1) and 3(2) of the Export of Services Rules, 2005, which reads as follows: "3. Export of taxable service. - The export of taxable service shall mean, - (1) in relation to taxable services specified in sub-clauses (d), (p), (q), (v) and (zzq) of clause (105) of section 65 of the Act, such taxable services as are provided in relation to an immoveable property which is situated outside India; (2) in relation to taxable services specified in sub-clauses (a), (f), (h), (i), (j), (l), (m), (n), (o), (s), (t), (u), (w), (x), (y), (z), (zb), (zc), (zi), (zj), (zn), (zo), (zq), (zr), (zt), (zu), (zv), (zw), (zza), (zzc), (zzd), (zzf), (zzg), (zzh), (zzi), (zzj), (zzl), (zzm), (zzn), (zzo), (zzp), (zzs), (zzt), (zzv), (zzw), (zzx) and (zzy) of clause (105) of section 65 of the Act, such services as are performed outside India : Provided that if such a taxable service is partly performed outside India, it shall be considered to have been perfo....
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....ssee is that in contrast to Rule 3(3) (i) (ii) and (iii) and proviso makes it clear that only in respect of the services relatable to proviso, if the payment received for such service by the service provider is in convertible foreign exchange, then it will be export of taxable service. Since the insurer in the present case does not fall within the ambit of proviso and as we have held that in the nature of transaction in question it is an export of service, as has been held by the Supreme Court in JB Boda's case (supra), the Department was clearly in error in calling upon the assessee to pay service tax on commission/brokerage received by the assessee from the foreign re-insurer for the period in issue in the show cause notice. 53. Learned Standing Counsel appearing for the Department placed much emphasis on IRDA (Insurance Brokers) Regulations stating that the definition on 're-insurance broker' clearly means that an insurance broker, who, for a remuneration, arranges reinsurance for direct insurers with insurance and reinsurance companies. In the present case, the assessee has acted as a re-insurance broker with the New India Assurance Co. Ltd. and with the foreign co....
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....ided by the reinsured and transmits monies in settlement of balances due by either party. The correspondence between reinsured and reinsurer is channelled through the broker. It is vital for the reinsured and the reinsurer that the standard of organisation and administration of the reinsurance broker ensures reliability and efficiency, particularly with regard to contract and administration and handling of accounts, including cash loss settlements. The services of reinsurance brokers are usually required for placing and properly spreading high exposure cat covers (eg natural perils such as windstorm and earthquake), taking advantage of their contact networks with reinsurance markets worldwide. The reinsurer pays the reinsurance broker a commission, called brokerage, which remunerates the broker for his services in placing and handling reinsurance contracts. The reinsurance brokerage is further justified since the broker saves reinsurer acquisition costs, which he would otherwise incur through direct marketing efforts. The brokerage is usually stipulated as a percentage of the reinsurance premium; it has recently started to take the form of a fee, especially in case of special....
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....ional insurance brokers having regard to their respective security rating and establishing respective responsibilities at the time of engaging their services." 56. From the facts narrated, we have culled out that the 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 comp....