2008 (10) TMI 72 - AT - Service Tax

General insurance services - Finance Act, 2004, increased the rate of service tax to 10% from the earlier rate of 8% - revenue contend that appellants are required to pay service tax at the revised rate - held that enhanced rate is not applicable for the amounts subsequently collected as EMI - as the premium is received in advance and no further amount is collected, tax in force on date of payment of premium in advance is leviable therefore, demand is set aside - Appeal is allowed.

Issues Involved:
1. Applicability of revised service tax rate on premiums received in advance for insurance policies covering future periods.
2. Interpretation of taxable events and service rendering in the context of general insurance business.
3. Validity of CBEC circulars and their applicability to the case.
4. Relevance and applicability of precedent judgments and circulars.

Issue-wise Detailed Analysis:

1. Applicability of Revised Service Tax Rate:
The core issue was whether the revised service tax rate, effective from 10/09/2004, applies to premiums received in advance for insurance policies covering future periods. The lower authorities demanded differential service tax liability and education cess for policies continuing after the rate change. The appellants argued that they had discharged their service tax liability based on the rate in force at the time of premium receipt and policy issuance. The Tribunal found that the service tax should be paid at the rate applicable when the service was rendered, i.e., when the premium was received and the policy issued, not at the revised rate during the policy term.

2. Interpretation of Taxable Events and Service Rendering:
The appellants contended that the service was rendered when the insurance policy was issued, and the premium was received, thus fixing the taxable event at that point. The Tribunal agreed, noting that under Section 64VB of the Insurance Act, 1938, the insurer's risk begins only after receiving the premium. Therefore, the service is considered rendered on the date of premium receipt, making the applicable service tax rate that prevailing on that date.

3. Validity of CBEC Circulars:
Both parties referenced various CBEC circulars to support their arguments. The appellants cited Circular No. 6/1/95, which clarified that service tax applies only to premiums covering risks from 01/07/1994 onwards, and Circular No. 65/14/2003, which stated that services entering the tax net later were not taxable for periods before the tax's applicability. The Tribunal found these circulars relevant, supporting the appellants' position that service tax should be based on the rate at the time of service rendering. The Tribunal also referenced Circular No. 62/11/2003, reinforcing that services rendered before a tax rate change should not be subject to the new rate.

4. Relevance and Applicability of Precedent Judgments:
The Tribunal examined precedent judgments, notably the Art Leasing Ltd. case, where it was held that service tax should be based on the rate at the time of contract execution, not on subsequent rate changes. This logic was applied to the current case, affirming that the service tax rate applicable at the time of premium receipt and policy issuance should prevail. The Tribunal also referenced the LFC Hire Purchase Company Ltd. case, which supported the same principle.

Conclusion:
The Tribunal concluded that the appellants were not liable to pay the enhanced service tax rate for policies issued before the rate increase. The impugned order was set aside, and the appeal was allowed, affirming that the service tax should be based on the rate at the time of the premium receipt and policy issuance, not on subsequent rate changes. The Tribunal's decision was pronounced in court on 21.10.2008.

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