Leviability of Service Tax to (DICGC) has been reexamined in the light of observations received from Chief Commissioner (LTU), Mumbai - Service Tax - F.No.187/135/2008-CX.4

Government of India Ministry of Finance Department of Revenue Central Board of Excise and Customs New Delhi Dated: September 20, 2011 Subject: Leviability of Service Tax to (DICGC) has been reexamined in the light of observations received from Chief Commissioner (LTU), Mumbai This letter addresses the issue of leviability of service tax on the activities of Deposit Insurance Credit Guarantee Corporation (DICGC). On this issue the Ministry vide its letters F.No. 354/164/2008 - TRU dated 24.02.2009 and 13.04.2009 had earlier clarified that the activities of DICGC would not be leviable to service tax. The issue has been reexamined in the light of observations received from Chief Commissioner (LTU), Mumbai vide letter F.No. LTU/MUM/CX/DICGC/23/2008 Pt. I dated 21.07.2011. Background: 2. Section 65(105) (d) of the Finance Act, 1994 ( Finance Act, 1994 ) imposes service tax on "general insurance business". Section 65(49) of the Finance Act, 1994 states that the term "general insurance business" has the meaning assigned to it in Section 3(g) of General Insurance Business (Nationalization) Act, 1972. (GIBA, 1972). Section 3(g) of GIBA 1972 states. '"general insurance business' means fire, marine or miscellaneous insurance business, whether carried on singly or in combination with one or more of them but does not include capital redemption business and annuity certain business". 3. The only term in this definition that could conceivably apply to DICGC is "miscellaneous insurance business". But, the term "miscellaneous insurance business" is not defined in GIBA, 1972. However, Section S(p) of the GIBA, 1972 states that: "words and expressions used in this Act but not defined herein, and defined in the Insurance Act, shall have the meanings respectively assigned to them in that Act". 4. Thus in order to know the meaning of the term "miscellaneous insurance service" we turn to Insurance Act, 1938 (Insurance Act, 1938). Section 2 (13B) of the Insurance Act, 1938 states. "miscellaneous insurance business" means the business of effecting contracts of insurance which is not principally or wholly of any kind or kinds included in clause (6A), (11) and (13A);" Note: Clauses (6A), (11) and (13A) refer to fire insurance, life insurance and marine insurance business respectively. 5. In addition, before we reach any conclusion on this issue we also need to reckon with Section 43 of the Deposit Insurance and Credit Guarantee Act, 1961 (DICGC Act, 1961) which states: "Nothing in the Companies Act, 1956 or the Insurance Act, 1938 shall apply to the Corporation". Note: The word "Corporation" here refers to DICGC Earlier Clarifications: 6. Against the backdrop of the above stated statutory definitions, the letters from the Ministry dated 24.02.2009 and 13.04.2009 have concluded that the activities of DICGC do not fall within the ambit of the term "general insurance business". Three reasons have been adduced for reaching this conclusion: (i) Firstly, it has been concluded that the activity of DICGC cannot fall under Section 2 (13B) of the Insurance Act, 1938 because Section 43 of DICGC, Act, 1961 excludes application of Insurance Act, 1938 to DICGC. The reasoning then goes that if the activity does not Call under Section 2 (13B) of the Insurance Act, 1938 then it cannot fall under Section 3(g) of GIBA 1972 and consequently it cannot fall under Section 65(105)(d) of the Finance Act, 1994. (ii) Even if we are able to cross the hurdle mentioned at (i) above we encounter further difficulty when we attempt to apply the definition of "miscellaneous insurance business" to the activity of DICGC. This difficulty springs from two contentions: (a) For an activity to fall within the ambit of "miscellaneous insurance business" a pre-requisite is that the activity should, in the first place, be "business". However, in the earlier clarification from the Ministry it has been concluded that the activity of DICGC is not "business" but rather that of a watchdog or a "regulator which registers the banks with the objective of securing the interest of the depositors." (b) Lastly, for an activity to satisfy the definition of "miscellaneous insurance business" it is necessary that it should entail "effecting contracts of insurance". The earlier clarification from the Ministry has concluded that the "activity of providing insurance to the banks by DICGC is initiated by automatic registration of the banks and there is no contract of insurance involved in the same." Review and Modification 7. The matter has been reviewed and in the review it has been concluded that DICGC does fall within the ambit of Section 65(105)(d) of the Finance Act, 1994 and is chargeable to service tax for providing service in relation to general insurance business. The reasons for stating that DICGC would be chargeable to Service tax are as follows: (i) The forgoing makes it amply clear that service tax would be chargeable on the activity of DICGC if the activity falls within the scope of Section 3(g) of GIBA, 1972. Section 36 (1) (e) of the GIBA, 1972 provides a strong basis for averring that the legislature has viewed the activity of DICGC as that of "general insurance business". Section 36 (1) (e) of the GIBA, 1972 is as follows: 36. Exemptions. (1) Nothing contained in this Act shall apply in relation to- (e) the insurance business carried on by the Export Credit and Guarantee Corporation Limited and the Deposit Insurance Corporation established under section 3 of the Deposit Insurance Corporation Act, 1961 (47 of 1961) The very fact that legislature deemed it necessary to insert this exclusion in the GIBA, 1972 implies that the legislature was of the opinion that in the absence of such an exclusion, activity of DICGC would, get captured by the definition of "general insurance business" that was given in Sec 3(g) of GIBA, 1972. Sec 36 (1) (e) is rendered otiose if it is conceded that the activity of DICGC does not fall within the four corners of Sec 3(g) of GIBA, 1972. It is a cardinal principle of statutory interpretation that a statute has to be read as a whole and an interpretation that gives meaning to every provision of the statute is to be preferred over an interpretation that renders any provision of law otiose or redundant. Secondly, Section 36 (1) (e) itself is describing the activity of DICGC as "insurance business". As the statute itself has characterized the activity of DICGC as that of "insurance business", it follows, as a corollary, that the activity of DICGC would fall within the ambit of Section 65(105)(d) of the Finance Act, 1994. The principle of ex visceribus actus plainly applies which was explained by Lord Coke as "It is the most natural and genuine exposition of a statute to construe one part of a statute by another part of the same statute, for that best espresseth the meaning of the makers." (ii) The three reasons given above for not taxing DICGC are now addressed in seriatim (a) In the first, reason mentioned above, it seems that the issue has been misconstrued. It may be noted that the subject of discussion is the applicability of the Finance Act, 1994 and not of Insurance Act, 1988. The DICGC Act gives no protection from the applicability of the Finance Act, 1994. Finance Act, 1994 has merely borrowed definitions from other legislations. The borrowed definitions, after the borrowing, constitute an integral part of the Finance Act, 1994 and when they are applied they are applied as provisions of Finance Act, 1994 and not as provisions of the legislation from which they have been borrowed. In the authoritative text "Principles of Statutory Interpretation" by G P Singh (ninth edition) page 273 it has been stated: "Incorporation of an earlier Act into a later Act is a legislative device adopted for the sake of convenience in order to avoid verbatim reproduction of the provisions of the earlier Act into the later. When an earlier Act or certain of its provisions are incorporated by reference into a later Act, the provisions so incorporated became part and parcel of the later Act as if they had been "bodily transposed into it". The effect of incorporation is admirably stated by LORD ESHER, M.R.: "If a subsequent Act brings into itself by reference some of the clauses of a former Act, the legal effect of that, as has often been held, is to write those sections into the new Act as if they had been actually written in it with the pen, or printed in it." (b) The second reason taken for not taxing DICGC was that the activity of DICGC was determined to be not a "business". This view seems to be erroneous. Black's Law Dictionary defines the word "business" as - "that which habitually busies or occupies or engages the time, attention, labour, and efforts of persons as a principle serious concern or interest or for livelihood of profit. "DICGC quite clearly falls within this definition. We may also bear in mind the observation of Supreme Court in Mazagaon Dock Ltd. v. CIT 1958 -TMI - 49640 - SUPREME COURT, wherein it was states that "the word 'business' is one of wide import and in fiscal statutes, it must be construed in abroad rather than a restricted sense." (c) Lastly, it was held in the earlier clarification that the transaction between DICGC and the banks is not contractual in nature (as it is not voluntary) and hence does not answer the definition of "miscellaneous insurance business" given in Section 2 (13B) of the Insurance Act, 1988. This contention has sprung from a misapprehension of law. Supreme Court in a catena of judgments has determined transactions done under compulsion of law (statutory transactions) to be contractual transactions. The reasons for treating statutory transactions as contractual transactions are as follows: Firstly, consent as per- section 14 of the Indian Contract Act, 1872 is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation or mistake which are defined in sections 15, 16, 17, 18 respectively. Since compulsion of law is not coercion within the meaning of section 15, so under the provisions of Indian contract. Act, 1872 a statutory transaction is a transaction that has been made with free consent. Secondly, Supreme Court has held that in statutory transactions there is implicit consent to contract and this consent is given when the person sets up the occupation or trade which is regulated by law. By setting up the occupation or trade the person signifies his consent to enter into contracts which law commands him to contract. 8. In view of the above discussion it is clarified that the insurance activity of DICGC falls within the ambit of Section 65(105)(d) of the Finance Act, 1994 ( Finance Act, 1994 ) and is chargeable to service tax. 9. This clarification may be given wide publicity. F.No.187/135/2008-CX.4 (Deepankar Aron) Director (Service Tax) Central Board Excise Customs