2015 (5) TMI 143 - AT - Service Tax

General Insurance Business - deposit insurance services rendered by DICGC - DICGC is a subsidiary of RBI - exemption from service tax - Finance Ministry, who issued a clarification vide letter dated 24/2/2009 to the effect that the charges collected by DICGC are not taxable under the taxable service of General Insurance Service - CBEC, vide letter dated 20/9/2011 clarified that the insurance activity of DICGC falls within the ambit of section 65(105) (d) of Finance Act,1994 and is chargeable to service tax under general insurance business - Invocation of extended period of limitation - Suppression of facts - Imposition of penalty - Whether the activity undertaken by the appellant, DICGC, is insurance business or not and if so, does it fall within the ambit of general insurance business as defined in Section 65 (49) read with 65 (105) (d) of the Finance Act, 1994. Held that - From the Annual Report of the Corporation (a document placed before the Parliament), there cannot be any doubt that Deposit Insurance is a social welfare measure to provide financial stability to the banking system in the country. The Corporation is engaged in the business of deposit insurance and credit guarantee functions assigned to it and is run on a commercial basis. The Corporation is assessed to Income Tax as a company. Thus the Corporation functions as an Insurer, the insured are the various banks who pay the insurance premium and the beneficiaries are the depositors of the insured banks. Thus 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. - deposit insurance comes within the scope of miscellaneous insurance business. As per section 65 (49) of the Finance Act, general insurance business has the meaning assigned to it in clause (g) of section 3 of the General Insurance Business (Nationalisation) Act, 1972. As per section 65 (105)(d), taxable service means any service provided or to be provided to a policy holder or any person by an insurer or re-insurer, carrying on general insurance business in relation to general insurance business . In the preceding paragraphs, we have held that DICGC is in the business of providing deposit insurance service to banks on payment of insurance premium. Nowhere in section 65(49) or 65(105)(d) is there any restriction placed that such service should be provided by an entity as defined in the Insurance Act, 1938 or Companies Act, 1956. In the absence of any such stipulation, the said provisions cannot be construed or interpreted in a restrictive manner. - 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 Whether the activity of deposit insurance undertaken by the appellant is a sovereign/statutory function not amenable to service taxation or is it a commercial activity which can be subjected to tax - Held 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. Whether deposit insurance is a contract of insurance/contract of indemnity or a contract of guarantee - held that - deposit insurance activity undertaken by the appellant falls within the scope and ambit of general insurance business as defined in section 65(49) read with 65(105)(d) of the Finance Act, 1994. 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. One of the essential ingredients of an Insurance contract is that the insured must have an insurable interest in the subject matter of the contract. Insurance without insurable interest would be a mere wager and as such unenforceable in the eyes of law. The subject matter of the Insurance contract may be a property, or an event that may create a liability but it is not the property or the potential liability which is insured but it is the pecuniary interest of the insured in that property or liability which is insured. There is no scintilla of doubt that deposit insurance like other insurance is a contract of indemnity and is amenable to the provisions of the Indian Contract Act. Merely because it has been made compulsory under the DICGC Act, 1961, it does not cease to be a contract of insurance. Whether the appellant is eligible for the benefit of tax exemption under notification No. 22/2006-ST dated 31-5-2006 - Held that - 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. The said difference exists even in the case of direct taxes. While RBI is exempt from payment of income tax under section 48 of the RBI Act, no such exemption from income tax is available in the case of DICGC, which is admittedly paying income tax under the Income Tax Act, 1961 since 1987-88 as stated in para 12 of the Annual Report for 2013-2014. Whether the appellant could be alleged to have suppressed facts with an intent to evade tax and whether extended period of time could be invoked to confirm the service tax demand - Held that - 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. 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. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Whether the activity undertaken by the appellant, DICGC, is insurance business and falls within the ambit of general insurance business as defined in Section 65 (49) read with 65 (105) (d) of the Finance Act, 1994.
2. Whether the activity of DICGC is a business.
3. Whether the activity of deposit insurance undertaken by the appellant is a sovereign/statutory function not amenable to service taxation or is it a commercial activity which can be subjected to tax.
4. Whether deposit insurance is a contract of insurance/contract of indemnity or a contract of guarantee.
5. Whether the appellant is eligible for the benefit of tax exemption under notification No. 22/2006-ST dated 31/05/2006.
6. Whether the appellant could be alleged to have suppressed facts with an intent to evade tax and whether extended period of time could be invoked to confirm the service tax demand.
7. Whether the appellants are liable to penalty.

Detailed Analysis:

1. Whether the activity undertaken by the appellant, DICGC, is insurance business and falls within the ambit of general insurance business as defined in Section 65 (49) read with 65 (105) (d) of the Finance Act, 1994:
The DICGC was established under the DICGC Act, 1961 for insuring deposits in commercial banks. The legal provisions and the annual report of the Corporation confirm that it is engaged in the business of deposit insurance. The preamble and the provisions of the DICGC Act, as well as the statements in the annual report, clearly indicate that DICGC provides insurance services. The definition of general insurance business under the Finance Act, 1994, which refers to Section 3(g) of the General Insurance Business (Nationalisation) Act, 1972, includes miscellaneous insurance business. Since deposit insurance falls under miscellaneous insurance, it is considered general insurance business. Thus, the activity of DICGC is insurance business and falls within the ambit of general insurance business as defined in Section 65 (49) read with 65 (105) (d) of the Finance Act, 1994.

2. Whether the activity of DICGC is a business:
The DICGC is a body corporate with the power to acquire, hold, or dispose of property and to contract. It is assessed to income tax as a company and pays income tax on its surplus income. The term "business" extends to all cases where work is done for payment and does not necessarily require a profit motive. The DICGC collects premiums from insured banks and pays income tax on the surplus, indicating that it operates with a profit motive. Therefore, the activity of DICGC is considered a business.

3. Whether the activity of deposit insurance undertaken by the appellant is a sovereign/statutory function not amenable to service taxation or is it a commercial activity which can be subjected to tax:
Sovereign functions are those where the state cannot be sued in a court of law, such as defense, foreign affairs, and making peace or war. The DICGC is a body corporate with the power to sue and be sued, indicating that its activities are not sovereign functions. The deposit insurance activity is a commercial activity and is amenable to service taxation. Therefore, the activity of deposit insurance undertaken by DICGC is a commercial activity that can be subjected to tax.

4. Whether deposit insurance is a contract of insurance/contract of indemnity or a contract of guarantee:
Deposit insurance meets all the criteria of an insurance contract, including a contractual relationship between the parties, an uncertain event (liquidation of the insured bank), insurable interest, and indemnity. The insurer indemnifies the insured bank's liability to depositors up to a certain limit. Therefore, deposit insurance is a contract of insurance and a contract of indemnity.

5. Whether the appellant is eligible for the benefit of tax exemption under notification No. 22/2006-ST dated 31/05/2006:
The exemption under notification No. 22/2006-ST is available to taxable services provided by the Reserve Bank of India (RBI). The DICGC, although a subsidiary of RBI, is a separate legal entity and performs different functions. Therefore, the appellant is not eligible for the benefit of tax exemption under notification No. 22/2006-ST dated 31/05/2006.

6. Whether the appellant could be alleged to have suppressed facts with an intent to evade tax and whether extended period of time could be invoked to confirm the service tax demand:
The CBEC initially clarified that DICGC's activities were not taxable but later revised this view. The appellant sought exemption and pursued the matter with the CBEC, indicating no intent to evade tax. The invocation of the extended period of time for demand of service tax cannot be sustained as there was no willful suppression of facts. Therefore, the demand for service tax can only be made from 20/09/2011 onwards.

7. Whether the appellants are liable to penalty:
Imposition of penalty is not justified in matters involving interpretation and classification. Section 80 of the Finance Act, 1994 provides for waiver of penalty on sufficient cause being shown. In this case, the facts warrant invoking the discretion provided under section 80, and the penalty imposed on the appellant is set aside.

Conclusion:
1. The deposit insurance activity undertaken by DICGC falls within the taxable service category of general insurance business service and is liable to service tax.
2. The appellant is liable to pay service tax from 20/09/2011 onwards along with interest for any delay in payment.
3. The appellant is not eligible for tax exemption under notification No. 22/2006-ST dated 31/05/2006.
4. The penalty imposed on the appellant is set aside under Section 80 of the Finance Act, 1994.