2011 (11) TMI 307 - HC - Service Tax

Liability to pay Service tax by government authority undertaking Insurance business assessee contending it to be soverign function and thus exemption from payment of service tax under para 2 of circular No. 89/7/2006-Service Tax, dated 18th December 2006 Held that - Insurance business is not a sovereign act. It is squarly covered by paragraph 3 of the said circular which provides that if a government authority performs a service which is not in the nature of statutory activity and the same is undertaken for a consideration not in the nature of statutory fee/levy, then in such cases, service tax would be leviable and it falls within the ambit of taxable service. - Decided against the assessee.

Summary

Issues:
1. Liability of the Karnataka Government Insurance Department to pay service tax on general insurance business.
2. Validity of the circular exempting sovereign/public authorities from service tax on statutory activities.
3. Interpretation of the circular in relation to the insurance business of the petitioner.

Analysis:

Issue 1: Liability of Karnataka Government Insurance Department to pay service tax
The Karnataka Government Insurance Department filed a petition challenging the imposition of service tax on their general insurance business by the Government of India. The department argued that their activities were in the public interest and mandatory statutory functions, exempting them from service tax liability. However, the authorities held that the department, engaged in general insurance business since 1946, was liable to pay service tax as per the relevant provisions of the Finance Act, 1994. The failure to register, pay tax, and furnish returns led to a show cause notice, which was contested by the department on the grounds of being a government organization insuring only government vehicles. The authorities upheld the tax liability, citing the department as a service provider under the Finance Act.

Issue 2: Validity of the circular exempting sovereign/public authorities
The department relied on Circular No. 89/7/2006 issued by the Government of India, which exempted sovereign/public authorities from service tax on statutory activities performed under the law. The circular clarified that fees collected for such activities were compulsory levies and not subject to service tax. The department argued that their insurance activities fell under this exemption. However, the court differentiated between sovereign acts and services provided for consideration, stating that insurance business did not involve statutory fees and thus was not exempt from service tax as per the circular.

Issue 3: Interpretation of the circular in relation to the petitioner's insurance business
The court analyzed the circular's provisions and concluded that the insurance activities of the petitioner did not qualify for the exemption outlined in the circular. As insurance business was not considered a sovereign act and involved consideration beyond statutory fees, it fell within the ambit of taxable services liable for service tax. The court upheld the authorities' decision on the tax liability of the petitioner, dismissing the petition based on the interpretation of the circular and the nature of the petitioner's insurance business.

In conclusion, the Karnataka Government Insurance Department was held liable to pay service tax on their general insurance business as it did not fall under the exemption provided for sovereign/public authorities in the circular. The court upheld the tax liability decision of the authorities, emphasizing the distinction between statutory activities and services provided for consideration in determining service tax applicability.