2019 (12) TMI 121 - AT - Service Tax

Demand of service tax - amount recovered by the appellants from their Insurance Agents as Service Tax for the period 2006-07 upto June, 2012 has not been deposited in the Government Exchequer - applicability of Section 73A (2) of Finance Act, 1994 - whether assessee can enter into a contract to shift the incidence of his service tax liability? - HELD THAT - A careful reading of the said self contained provisions of Sec. 73A, and in particular Sub. Sec.(6), it can be safely inferred that the Government cannot retain the amount in excess of applicable service tax collected and deposited with the Govt., but after adjustment of the tax levied and payable in relation to the service either by the service provider or the service recipient, required to transfer the excess amount to the Consumer Welfare Fund or refund it to the person who borne the incidence of duty - What is the objective and purport of the said provision is that any amount in excess of the tax leviable is collected, the said amount should be deposited with the Govt. and the excess amount would be dealt with by the Govt. either being refunded to the person who bears the burden or being transferred to the consumer welfare Fund - The contractual obligation to reimburse the tax paid by the person designated to do so by law is, thus, not tax collected in any manner warranting recourse to Section 73A of Finance Act, 1994 - The demand under Section 73 A (2) confirmed qua the amount recovered from the agent as service tax is held not sustainable and as such is liable to be set aside. Demand of service tax - reimbursements paid to the insurance agents of expenses for trainings and overseas trainings - period of 2007-08 to 2012-13 - HELD THAT - A combined reading of Section 67 of Finance Act and Clause (ix) of Rule 6(1) of the Valuation Rules makes it evident that only such value or commission or fee would form part of the gross amount, subject to Service Tax, which is in relation to the insurance auxiliary service provided by the insurance agent - it becomes clear that even the overseas expenditure in the nature of training and cost /expenses incurred by the appellant in relation to the same cannot be said to be for solicitation or procurement of insurance business, but exclusively for the mandatory training. Hence the such cost and expenses incurred by the appellant cannot be said to be treated as a consideration for service. The proposed demand for ₹ 12,17,50,892/- for the period from October 2007 to March, 2013 is therefore, not sustainable - demand set aside. Service Tax payable on 4% debit adjustment made by the appellant - HELD THAT - Department could not produce any evidence to show that there was any amount which the insurance agents were suppose to pay back to the appellant and it is said amount which has been set out by the appellant against the commission paid to the insurance agent. In absence of any such evidence, the 4% debit adjustments from the commission as was paid to the insurance agent is nothing different than the discount as apparent from the agreed terms with such agents - The emphasis of adjudicating authority below upon rule 3 of Valuation Rules while confirming this demand is also opined erroneous, because Rule 3 (a) of Service Tax Rules is applicable only in the cases where the taxable value is not ascertainable. However, in the present case, the value is ascertainable - demand set aside. Extended period of limitation - HELD THAT - The show cause notice in the present case has been issued on 22.04.2013, which is much beyond the permissible period of one year for the purpose, there is no suppression of facts. Department cannot invoke the extended period of limitation - The show cause notice is otherwise held to be barred by time. Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Demand of amount recovered from Insurance Agents as Service Tax under Section 73A(2) of the Finance Act, 1994.
2. Service Tax on reimbursements paid to insurance agents for training expenses.
3. Service Tax on 4% debit adjustment from the insurance commission paid to agents.

Detailed Analysis:

(A) Demand of amount recovered from Insurance Agents as Service Tax in terms of Section 73A(2) of the Finance Act, 1994:

The appellant argued that the Department's claim that the insurance company should have paid the service tax out of its own pocket is patently illegal. They contended that the arrangement between the insurance company and its agents regarding the sharing of the tax burden is lawful as long as the applicable service tax is paid by the person statutorily required to pay it. The appellant relied on the Supreme Court's decision in Mafatlal Industries Ltd. vs. Union of India and the Tribunal's decision in Unison Metals Ltd. vs. CCE, which support the notion that contributions to tax liability in an agreement with the service provider are not forbidden by law.

The Department, however, argued that the service provider for life insurance services is the insurance agent, and the recipient is either the policyholder or the insurer. They contended that Section 73A(2) applies when there is a contract of sharing the service tax liability, and thus, the demand confirmed is valid.

The Tribunal, after analyzing the relevant provisions of Section 73A and related case laws, concluded that the contractual obligation to reimburse the tax paid by the person designated to do so by law is not tax collected in any manner warranting recourse to Section 73A of the Finance Act, 1994. Therefore, the demand under Section 73A(2) for the amount recovered from the agent as service tax was held not sustainable and was set aside.

(B) Service Tax on reimbursements paid to insurance agents for training expenses:

The appellant argued that the reimbursement of expenses for attending training is not liable to Service Tax under reverse charge because the training is provided to the insurance agent as per the statutory mandate of Regulation 5 of IRDA Regulation. The appellant provided lump-sum reimbursement towards conveyance, food, etc., to its insurance agents for mandatory pre-license training, and the Commissioner failed to appreciate the impracticality of reimbursing on actuals for around 1.5 lakh agents.

The Tribunal, relying on the decision of the Delhi High Court in Intercontinental Consultants & Technocrats Pvt. Ltd. v. Union of India and the Tribunal's decision in Bajaj Allianz Life Insurance Co. Ltd. v. Commissioner of C.E. & S.T., Pune-III, concluded that the expenses incurred in pre-recruitment training and post-license training of insurance agents cannot form part of the gross taxable value of commission paid to the Insurance Agents. Therefore, the proposed demand for ?12,17,50,892/- was not sustainable and was set aside.

(C) Service Tax on 4% debit adjustment from the insurance commission paid to agents:

The appellant argued that the 4% debit adjustment from the commission paid to insurance agents is akin to a discount and cannot be made taxable. They contended that there was no amount owed by the agents to the appellant that was set off against the commission, and Rule 3 of Valuation Rules is not applicable as the value is ascertainable.

The Tribunal observed that the Department could not produce any evidence to show that there was any amount which the insurance agents were supposed to pay back to the appellant. The 4% debit adjustment was deemed as a discount based on agreed terms with the agents. The Tribunal held that the emphasis on Rule 3 of Valuation Rules by the adjudicating authority was erroneous, as it applies only when the taxable value is not ascertainable. Therefore, the demand for service tax on the 4% debit adjustment was set aside.

Extended Period of Limitation:

The Tribunal noted that the appellant was regularly filing service tax returns and that the Department was aware of the appellant's practices since 2008. Given that the show cause notice was issued on 22.04.2013, beyond the permissible period of one year, and there was no suppression of facts or willful misstatement, the extended period of limitation could not be invoked. The show cause notice was held to be barred by time.

Conclusion:

The Tribunal set aside the order of the Commissioner (Appeals) and allowed the appeal, emphasizing the need for judicial discipline by following binding orders passed by higher forums. The order was pronounced in open court on 15.11.2019.