By TIOL News Service

MUMBAI, APR 07, 2015: THE CCE & ST (LTU), Mumbai confirmed two humongous Service Tax demands of Rs.2075.64 Crores and Rs.283.15 Crores respectively and imposed penalties and interest.

The demand is confirmed on the ground that the applicants are providing General Insurance Business service as covered under Section 65(49) of the Finance Act, 1994. The demand for the period 1.5.2006 to 31.03.2011 is made vide show-cause notice dated 24.10.2011 and for the period 01.04.2011 to 30.09.2011 by SCN dated 7.3.2012.

In the stay proceedings before CESTAT, the applicant submitted that they are a wholly owned subsidiary of the RBI and the interest of revenue is secured; that the applicants had not provided any General Insurance Business services; that in the business conducted under the Deposit Insurance and Credit Guarantee Corporation Act, 1961, there is no profit motive.

It is further submitted that the applicants had approached the CBEC for exemption from service tax and that the Board denied the exemption. However, on subsequent representation, vide letter dated 24.02.2009, the Board conveyed that the applicants are not performing the taxable service of General Insurance but is performing the function of a watchdog and guarantor of banking activities by any bank operating in India. It is also conveyed that the charges collected by the applicants are not taxable under the taxable service of General Insurance Business. That,subsequently vide letter dated 20.09.2011, the Board reviewed its earlier decision and decided that the activity undertaken by the applicants fall within the ambit of Sec.65(105) of the Finance Act, 1994 and the applicants are liable to pay service tax as provider of General Insurance Business Service.

The applicant also submitted that the demand is up to 30.09.2011 and the show cause notices were issued in view of letter dated 20.09.2011. It is also informed that the applicants started paying tax with effect from October 2011. Inasmuch as since the Board letter is dated 20.09.2011, the same is prospective in nature and, therefore, the demand for the earlier period is not sustainable.

The CESTAT noted the facts involved and observed that in view of the Board letter dated 24.02.2009 prima facie the applicants have a strong case for waiver of pre-deposit of dues.

We reported the Stay order as (2013-TIOL-1695-CESTAT-MUM) and remarked that - One thing is guaranteed - we have many more miles to go before the demands are put to sleep!

The appeal was decided recently.

Two more appeals joined the bandwagon. The demand of Service Tax involved in these appeals was Rs.19.17 crores and Rs.12 lakhs and the period covered is from 06.11.2011 to 30.03.2012 and 06.05.2012 to 23.08.2012 respectively.

Exhaustive submissions were made by both sides.

The Member (T), writing for the Bench, in an expansive order consisting of almost 13000 words formulated seven issues for consideration and gave his findings accordingly. The crux of the same are as under -

Adverting to the history of deposit insurance in India and and the provisions of the Deposit Insurance and Credit Guarantee Corporation Act, 1961 and the Deposit Insurance Scheme in place on account of the enactment of the said Act read with the Annual Report of the Corporation for the year 2013-2014 (downloaded from the web-site of the appellant) &statement of Objects and Reasons to the DICGC Act, 1961, the Bench observed -

++ When the appellant (through its annual report), the legislature (through the Statement of Objects and Reasons and the Pre-amble) and the law (through the various provisions of the enactment), have, clearly, unambiguously and loudly, stated that the activity undertaken by the appellant is "insurance", there cannot be any scintilla of doubt in this regard. Any contention to the contrary has to be rejected outright and in toto and we do so.

++ Whether the appellant is carrying on "general insurance business" as defined in the Finance Act, 1994? Finance Act, 1994 has defined "general insurance business" by reference to section 3(g) of the General Insurance Business (Nationalisation) Act, 1972, (GIB Act in short). The meaning and scope of referential legislation has been laid down by the hon'ble apex court in State of Kerala vs. Attesee (Agro Industrial Trading Corporation) [1988 (38) ELT 720 (SC)], Onkarlal Nandlal vs. State of Rajasthan [1986 AIR 2146]

++ In the light of above decisions of the apex Court, it has to be held that the definition "general insurance business" given in GIB Act has become an integral part of the Finance Act, 1994 and has to be understood accordingly.

In the light of the above, it is clear that 'deposit insurance' undertaken by the appellant, falls within the ambit of 'general insurance business' as defined in section 65(49) read with 65(105)(d) of the Finance Act, 1994 and we hold accordingly.

++ The contention of the appellant is that it is a statutory body carrying out functions as laid down by the statute and collects the premium as per rate approved by Reserve Bank of India. The expenditure is incurred by the appellant as per the statute and the investment in various securities is made as provided in the statute. Therefore, the appellants does not have profit motive and they cannot be said to have been engaged in any business.

++ The above contention is both factually and legally incorrect in view of section 3 of the DICGC Act. The DICGC has been established as a "body corporate" with power to acquire, hold or dispose of 'property' and 'to contract'. As per section 65(13) of the Finance Act, 1994, "body corporate" shall have the meaning assigned to it in clauses (7) of Section 2 of the Companies Act, 1956 (1 of 1956). In law, body corporate means a legal entity (such as an association, company, person, government, government agency, or institution) identified by a particular name. The authorised capital of the Corporation is Rs.50 crore which is entirely subscribed to by the Reserve Bank. There cannot be any doubt or dispute on the fact that the power to acquire, hold or dispose of property and to enter into contract in this regard comes within the ambit/scope of commercial/business transaction which is undertaken with a profit motive.

++ It is also an admitted position, as evident from para 12 of the Annual Report of the appellant Corporation that the appellant Corporation is assessed to Income Tax as a 'company' as defined under the Income Tax Act, 1961 and has been paying income tax since the financial year 1987-88. As can be seen from the audited balance sheet figures, the appellant has paid income tax on the surplus of income over expenditure, derived, inter alia, from the insurance premium collected from the insured banks, which is otherwise called "profit" of the corporation.

In the light of the foregoing analysis, the question is answered in favour of Revenue and against the appellant and it is held that the appellant Corporation is engaged in the business of insuring deposits for a consideration with a profit motive.

++ From the decisions of the apex court (Bangalore Water-Supply & ... vs R. Rajappa & Others [1978 AIR 548] N. Nagendra Rao & Co vs State of A.P. [1994 AIR 2663, 1994 SCC (6) 205]), it is clear that only those functions of the State where the State cannot be sued in a court of law can be called sovereign functions. All other activities of the State which are undertaken by the State or the corporations established by the State to achieve various socio-economic objectives cannot be regarded as sovereign functions and are therefore amenable to civil and criminal laws, including taxation. Further section 3(1) of the DICGC Act, 1961 provides that "Deposit Insurance Corporation shall be a body corporate having perpetual succession and a common seal with power, subject to the provisions of this Act, to acquire, hold or dispose of property and to contract, and may, by the said name, sue or be sued".

++ In view of this explicit provision in law, we find no merit in the contention that the activity of deposit insurance is a sovereign/statutory function not amenable to service taxation. Accordingly we reject this contention as completely devoid of merits and hold that service tax is leviable on the deposit insurance activity under the taxable service category of "general insurance business service".

++ Even if we take the criteria laid down by the appellant to qualify as a contract of insurance, the activity of deposit insurance meets all the criteria. The first criterion is 'contractual relationship between the parties'. The same exists between the DICGC and the insured bank. The contract need not always be written or explicit. It can be oral and implicit. The second criterion is there should be some event the happening of which is uncertain. In other words there should be some risk for which insurance is being sought. The uncertain event in the deposit insurance is liquidation or winding up of the insured bank. It is this risk which might impair the capacity of the insured bank to repay its debt/liability to the depositor, that is being insured upto a certain limit (Rs. 1 lakh per depositor). The third criterion is that the 'insure' must have an insurable interest in the subject matter of the property. The insurable interest is the liability of the insured in respect of the deposits it has received from various depositors. The fourth criterion is the Insurer is bound to pay money or provide its equivalent if any uncertain event occurs. In the event of liquidation of the bank, the Insurer, that is, DICGC, makes good the liability upto a maximum limit of Rs.1 lakh per depositor. The last criterion is insurance should be a contract of indemnity. The insurer indemnifies discharge of liability to the extent of deposit made subject to a cap of Rs.1 lakh per depositor. Thus, all the criterion of an insurance contract is satisfied in the case of deposit insurance and therefore, it is a contract of insurance and a contract of indemnity.

++ Deposit Insurance Contract is also a general insurance contract as defined in law and merely because they are statutorily prescribed, they do not cease to be contract of insurance. The insurer is the Corporation, the insured are the banks and the beneficiary is the depositor(s).

++ Since the exemption is available to the taxable services rendered by RBI, the exemption clause has to be strictly interpreted to see as to whether DICGC will fall within the said exemption. Since DICGC is both legally and functionally distinct and different from RBI, it will not be eligible for the exemption under notification 22/2006-ST.

++ When the Board, the apex indirect tax enforcement authority, itself was not clear or entertained doubts about the taxability of the deposit insurance activity, how can it be alleged that the appellant suppressed or mis-represented the facts? In our considered view, this charge, made in the show cause notice and confirmed in the impugned order, cannot be legally sustained. Our view is supported by the decision of the hon'ble Apex Court in Suchitra Components Ltd. v. Commissioner of Central Excise Guntur, (2007-TIOL-09-SC-CX) wherein it was categorically held that any revision which is against the assessee is effective prospectively and not retrospectively. Therefore, demand of service tax can be made from the assessee only with effect from 20.09.2011 and not from an earlier date and we hold accordingly.

++ Since the adjudicating /assessing authority is a part of the LTU where the appellant is filing their income tax returns, we do not understand how the service tax department could not have obtained/accessed information regarding the premium collected on deposit insurance activity. The audited financial report of the appellant is put on the public domain and can be 'freely downloaded from the appellant's web-site. In these circumstances, we are unable to accept the contention of the Revenue that the appellant suppressed/withheld information from the department with an intent to evade service tax. Consequently, the invocation of extended period of time for demand of service tax cannot be sustained in law and we hold accordingly.

++ It is a settled position in law that imposition of penalty is not justifiable in matters involving interpretation and classification. In any case, section 80 of the Finance Act, 1994 provides for waiver of penalty on sufficient cause being shown. In our considered view, the facts of the present case warrant invoking the discretion provided under section 80 and we do so.

Conclusion:

(1) The deposit insurance activity undertaken by Deposit Insurance and Credit Guarantee Corporation, falls within the taxable service category of 'general insurance business service' and is liable to service tax accordingly.

(2) The appellant is liable to pay service tax on the said activity for the period from 20/09/2011 onwards along with interest thereon. The service tax demand for the period prior to 20/09/2011 is set aside in view of the clarification given by the CBEC vide letter dated 24/02/2009 that the said service is not taxable &which was withdrawn vide letter dated 20/09/2011.

(3) The appellant is not eligible for the benefit of exemption under notification 22/2006-ST.

(4) Penalty imposed on the appellant is set aside invoking the powers conferred under Section 80 of the Finance Act, 1994.

(See 2015-TIOL-629-CESTAT-MUM)