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TMI Blog2010 (5) TMI 397X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 of 2004 (Insure Policy Plus Services Ltd. v. Life Insurance Corporation). The said petition, which was similar to the earlier petition of the petitioner, was allowed by this Court by the Judgment and Order dated 22-3-2007 and the said Circulars were declared to be illegal and null and void . Though the said Judgment has been challenged by the respondent No. 1 before the Supreme Court by Special Leave Petitions, no stay has been granted to the effect of the order of this Court. In this background, the respondent No. 1 implemented the impugned Circular, dated 24-4-2006 with effect from May, 2007 and imposed a charge of Rs. 250 per assignment in favour of "Finance Organizations". The petitioners are affected by the same. According to the petitioner, the effect of the impugned Circular is to make the assignment of life insurance policies in favour of Finance Organizations, such as the petitioner No. 1, so onerous that it operates to severely restrict, if not prohibit, such legal and valid assignments in favour of the petitioner No. 1. 2. According to the petitioners, the impugned Circular is liable to be struck down on the following grounds :- (i)It is ultra vires section 38 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed on by the respondent No. 1 to its policyholders. Considerable financial cost and investment has been made in computerization of its Systems, installing a Fire Wall for prevention of hacking, training its employees to operate the same, to check whether all the essential conditions for assignment have been fulfilled, whether valid notices have been given, whether stamp duty has been paid and whether there are any other claims on the policy. Due to the huge increase in assignment of policies in the last few years, the whole system and the staff of the respondent No. 1 have come under severe stress. In view of the cumbersome administrative processes and tremendous manpower involved and consequent high cost of administration in servicing the voluminous assignments of policies, especially of the Financial Institutions like the petitioner who are doing lucrative business of assignments of life insurance policies, in the public interest, the respondent No. 1 has levied the nominal service fee of Rs. 250 per assignment. It is contended that under the provisions of section 6 of the LIC Act, 1956, a general duty has been cast on the respondent No. 1 to carry on life insurance business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or Counsel for the petitioners contended that although the respondent No. 1 is a statutory Corporation established under the Life Insurance Corporation Act, 1956, the business of life insurance carried on by the respondent No. 1 is regulated by the provisions of the Insurance Act. The LIC Act deals with the establishment of the respondent No. 1 as a statutory body and regulates the functioning of the respondent No. 1 as a company, as opposed to regulating the business of life insurance, which is governed by the Insurance Act. Section 43 of the LIC Act makes the provisions of section 38 of the Insurance Act expressly applicable to the respondent No. 1. 7. Section 38 of the Insurance Act provides for the assignment and transfer of Insurance policies. It reads as follows :- "Assignment and transfer of Insurance policies.-(1) A transfer or assignment of a policy of life insurance, whether with or without consideration, may be made only by an endorsement upon the policy itself or by a separate instrument, signed in either case by the transferor or by the assignor or his duly authorized agent and attested by at least one witness, specifically setting forth the fact of transfer or assig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insurer is bound to record the fact of such transfer or assign-ment. The only authority to levy a fee by the insurer under this section is if the insurer issues a written acknowledgement for the receipt of a notice for recording the assignment or transfer of the policy. Even in this circumstance, by statutory mandate, the fee cannot exceed one rupee. 9. Section 39(4) of the Insurance Act provides that a transfer or assignment of a policy made in accordance with section 38 shall automatically cancel a nomination. Thus, it is very clear that a transfer or assignment of policy if made after following the due procedure laid down in section 38, is the mandate of the law. In Insure Policy Plus Services Ltd. v. Life Insurance Corpn. [Writ Petition No. 2159 of 2004], the Division Bench of this Court, after considering the rival arguments of the parties, observed as follows in paras 16 and 20 :- "16. We shall now examine the various sub-sections of section 38. Section 38(1) unequivocally provides the procedure by which assignment of a policy of life insurance can be done. The contract of insurance issued by the insurer is a contract between the insured and the insurance company. Sub-secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equired by section 38 has been followed, subject to the terms of the policy. We have no hesitation in holding that section 38 is substantive and not procedural. The position in law, therefore, would be that the interest in the policy earlier held by the assignor is transferred to the assignee with all benefits attached thereto. The assignment becomes binding on the insurer recording the fact of such transfer or assignment. The submission, therefore, advanced on behalf of the respondent No. 1 herein that section 38 is merely procedural is devoid of merit. . . ." "20. . . . It is not open to respondent No. 1 to impose on the insured terms and conditions not provided in the contract or not permissible under the provisions of the Insurance Act, section 30A of the Insurance Act makes it mandatory for the Corporation to carry on its business in terms of the Insurance Act. The effect of the policy would be clearly contrary to section 38(4) of the Insurance Act. As we have held the section to be mandatory, once the insured complies with the requirement of section 38(2), the respondent No. 1 is bound in terms of section 38(5) to recognise the transferee or assignees named in the notice by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel contended that the Central Government has not exercised its rule-making power to levy a fee or charge on registration of assignments. It is further contended that section 49 of the LIC Act confers power to make regulations on the respondent No. 1 with previous approval of the Central Government and such regulations are to be notified. However, such regulations cannot be inconsistent with the provisions of the LIC Act. There is no dispute that the impugned Circular is not issued under the regulation-making power under section 49. 12. The learned Senior Counsel for the petitioners vehemently contended that no tax or a fee in the nature of tax can be imposed without any authority of law in view of article 265 of the Constitution of India. This contention is supported by several authorities. 13. In M. Chandru v. Member-Secretary, Chennai Metropolitan Development Authority [2009] 4 SCC 72. Their Lordships considered several earlier authorities with reference to the tax, fee and administrative charges. In paras 25 and 26, Their Lordships observed as follows :- "25. In Krishna Das v. Town Area Committee, Chirgaon this Court observed : (SCC p. 652, paras 22-24) "22. A fee is p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere, it is not capable of direct measurement. In the case of a tax, a particular advantage, if it exists at all, is incidental to the State's action. It is assessed on certain elements of business, such as, manufacture, purchase, sale, consumption, use, capital, etc. but its payment is not a condition precedent. It is not a term or condition of a licence. A fee is generally a term of a licence. A tax is a payment where the special benefit, if any, is converted into common burden. 41. On the other hand, a fee is based on the 'principle of equivalence'. This principle is the converse of the 'principle of ability' to pay. In the case of a fee or compensatory tax, the 'principle of equivalence' applies. The basis of a fee or a compensatory tax is the same. The main basis of a fee or a compensatory tax is the quantifiable and measurable benefit. In the case of a tax, even if there is any benefit, the same is incidental to the Government action and even if such benefit results from the Government action, the same is not measurable. Under the principle of equivalence, as applicable to a fee or a compensatory tax, there is an indication of a quantifiable data, namely, a benefit which is m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where the State is rendering no service to the consumer and is merely protecting its own rights and that when the State is in a position to place material before the Court to show what services had been rendered by it to the appellant and other similar licences, the costs or at any rate probable cost that may be said to have been incurred for rendering this service and the amount realised as fees, it has failed to do so, the levy appears to be tax and not fee. In Chhata Sugar Co. Ltd.'s case (supra), it was held that administrative charges under the U.P. Act is a tax and not a fee. After referring to all the authorities, the Supreme Court in Gupta Modern Breweries' case (supra) observed in para 28 as follows :- "28. It is, thus, clear from the aforesaid decisions that imposition of administrative services (sic charges) is a tax and not a fee. Such imposition without backing of statutes is unreasonable and unfair." 16. We may also consider some of the observations in Calcutta Municipal Corpn. v. Shrey Mercantile (P.) Ltd. [2005] 4 SCC 245, which noted that the difference between "a fee" and "a tax" is on account of the source of power. Though the expression "police power" is not m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tory fee' is not defined. Fee, therefore, may be held to be a tax if a service is rendered. While imposing a regulatory fee, although the element of quid pro quo, as understood in common parlance, may not exist but it is trite that regulatory fee may be in effect and substance a tax. (See Corpn. of Calcutta v. Liberty Cinema)." 17. In view of this legal position, if the amount of Rs. 250 charged by the respondent No. 1 for registration of every assignment of a policy is in the nature of administrative charges for general services being rendered by the LIC to its policyholders or assignees, it would amount to tax. Similarly, if it is a fee, which has no co-relation with the service being rendered to the particular customer, it will also amount to a tax and cannot be charged without the authority of law. However, if it is a fee in the nature of charges for the services rendered to the particular customer and is not for recovery of general administrative expenses of the LIC, it may be treated as a fee or service charges. Therefore, the question arises as to whether the amount being charged by the respondent No. 1 is a fee in the nature of service charges or it is in the nature of rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion that the Writ Petition is not tenable. 19. The respondent No. 1 has tried to justify the imposition of the charge of Rs. 250 by giving some data. It is contended that there are about 19 crore policyholders with the respondent No. 1 and the respondent No. 1 is required to provide services to such policyholders frequently. With a network of 2048 branches all over India, large number of requests to record and register assignments are made. For the whole of India, the data reveals that in the Western Zone comprising the States of Maharashtra and Gujarat, only the respondent No. 1 was required to record the assignments in respect of about 77,000 policies in one financial year, i.e., 2005-06 alone. The total charges distributed amongst the 2048 branches worked out to Rs. 9,399.41 per branch which is a moderate figure. It is also pointed out that the cumbersome administrative processes involves, inter alia, scrutiny, verification, confirmation of the factum of the assignment by the existing policyholders in favour of the purported assignees, carrying out verification of the signatures of the existing policyholders after discarding fraudulent and illegible signatures or those which d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce from the original policy-holders and then get the policies assigned or transferred to them to gain huge profits in future. It cannot be forgotten that during the last few years, due to the globalisation and liberal economic policies, fast financial development has taken place in the country resulting in the higher salaries of the staff, high cost of stationery, computers and network systems. The cost of correspondence by post or the courier has also substantially increased. As the workload has increased due to large number of requests for registration of assignments, the respondent No. 1 will be compelled to have extra work force and staff to meet the requirements. 21. Section 6 of the LIC Act provides for functions of the Life Insurance Corporation of India. Sub-section (3) provides that in the discharge of any of its functions, the Corporation shall act, so far as may be, on business principles. Therefore, it is submitted on behalf of the respondents that the respondents have powers to act and in fact have acted on the business principles in the matter of levying such charges as per the impugned Circular. The learned counsel for the respondent contended that when the function ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se by Shri K.R. Gupta, Dr. Rao is quoted as saying (at p. 84) : '. . . the pricing policy should be such as to promote the growth of national income and the rate of this growth. . . public enterprises must make profits and the larger the share of public enterprises in all enterprises, the greater is their need for making profits. Profits constitute the surplus available for savings and investment on the one hand and contribution to national social welfare programme on the other; and if public enterprises do not make profits the national surplus available for stepping up the rate of investment and the increase of social welfare will suffer a corresponding reduction; . . . Hence, the need for giving up the irrational belief that public enterprise should, by definition, be run on a non-profit basis.'" 22. Again in CIT v. A.P. State Road Transport Corpn. [1986] 2 SCC 3911, the Supreme Court observed as follows :- "10. The submission founded upon section 22 is based upon a misunderstanding of what that section provides. A Road Transport Corporation cannot be expected or be required to run at a loss. It is not established for the purpose of subsidizing the public in matters of transpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at service and not profit should inform its actions. It is not the function of the Board to so manage its affairs as to earn the maximum profit; even as a private corporate body may be inspired to earn huge profits with a view to paying large dividends to its shareholders." In view of this settled legal position, it is clear that the respondent LIC is expected to manage its affairs on sound economic and business principles which are as essential to public service undertakings as to the commercial ventures. 24. Section 28 of the LIC Act reads as follows :- "28. Surplus from life insurance business how to be utilized.-If as a result of any investigation undertaken by the Corporation under section 26 any surplus emerges, ninety-five per cent of such surplus or such higher percentage thereof as the Central Government may approve shall be allocated to or reserved for the life insurance policyholders of the Corporation and after meeting the liabilities of the Corporation, if any, which may arise under section 9, the remainder shall be paid to the Central Government or, if that Government so directs, be utilized for such purposes and in such manner as that Government may determine." F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue. Where, however, the service is indistinguishable from the public services and forms part of the latter it is necessary to inquire what is the primary object of the levy and the essential purpose which it is intended to achieve. While there is no quid pro quo between a taxpayer and the authority in case of a tax, there is a necessary co-relation between fee collected and the service intended to be rendered. Of course the quid pro quo need not be understood in mathematical equivalence but only in a fair correspondence between the two. A broad co-relationship is all that is necessary." 27. In Mumbai Agricultural Produce Market Committee v. Hindustan Lever Ltd. AIR 2008 SC 2215, this Court observed :- "14. The quantum for recovery, however, need not be based on mathematical exactitude as such cost is levied having regard to the liability of all the licensees or a section of them. It would, however, require some calculation." 28. From this, it is clear that while co-relation between the fee collected and the services to be rendered has to be established, the co-relation need not be understood in the sense of mathematical equivalence. Only a broad co-relation is necessary. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Supreme Court in Sri Krishna Das' case (supra) and M. Chandru's case (supra), a fee is paid for performing a function and fee is not ordinarily considered to be a tax. If the fee is levied merely to compensate an authority for the services rendered, it cannot be called a tax. Taking into consideration, the legal position and the explanation given by the respondent No. 1 for levying service charges, we have no doubt that by the impugned Circular, the respondent No. 1 has levied service charge or a fee for the services to be rendered to the person requesting for registration of assignment and, therefore, the said charges cannot be treated as tax. 31. We may first deal with the contention as raised on behalf of the respondents that considering section 6 of the LIC Act, they have to run the Corporation on business principles and the power to charge the amount flows from that power. We have noted the judgments and referred to them. Section 6, at the highest, if read in its proper perspective, would confer on the Corporation a power to price their products. It is not a power to charge a tax or a fee or any other charge. The argument, therefore, advanced on behalf of the respond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... power in the matter of exercise of fiscal power. 8. . . . It has been consistently held by this Court that whenever there is compulsory exaction of any money, there should be specific provision for the same and there is no room for intendment. Nothing is to be read and nothing is to be implied and one should look fairly to the language used." 35. In Gupta Modern Breweries' case (supra), the Supreme Court observed as under :- "It is now well-settled principle of law that the regulatory powers are generally to be widely construed. However, empowering the State Government to impose taxes, fees or duties and such demands must be authorised by the Statute and must contain sufficient guidelines." 36. It would, thus, be clear that there must be a specific provision conferred by the Act on the delegate to levy a fee. We do not find that the power to make rules under the LIC Act as also the Insurance Act, 1938 is conferred on the respondent-Corporation. Under the LIC Act, the power to make rules is conferred on the Central Government while the power to make regulations is conferred on the Corporation with the previous approval of the Central Government. The power to charge fee is speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch service charges, the assignments in favour of other public sector entities, including banks, co-operatives, financial organizations are to be charged. It is contended that non-banking financial institutions like the petitioners, banks, public sector entities form a homogeneous group with the LIC of India, LIC Housing Finance Ltd. and the Government bodies and, therefore, there can be no justification to make a difference between them. It is contended that the classification and differential apparent from the Circular renders it unconstitutional. It is contended that it makes an artificial classification of what is essentially one homogeneous class, which is not permissible under the law. In support of this contention, the learned counsel placed reliance upon State of Rajasthan v. Mukan Chand AIR 1964 SC 1633 wherein the Constitution Bench of the Supreme Court discussed the principles of article 14 of the Constitution and observed as follows :- ". . . . It is now well-settled that in order to pass the test of permissible classification, two conditions must be fulfilled, namely, (1) that the classification must be founded on an intelligible differentiation which distinguishes per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent No. 1 by making large number of requests for assignments. These are the profit-making commercial entities and they earn profit from the trade in the insurance policies. Therefore, the object of recovery of the service charges from them would be achieved if the service charges are imposed and collected from them. At the same time, for the valid reasons, the Circular seeks to exempt the first assignment between the family members and the assignments in favour of LIC of India and LIC Housing Finance Ltd. or the Government Bodies. It is material to note that while the assignment is charged, re-assignment is not charged with such service charges because by re-assignment, original policyholder will be entitled to all the benefits of the insurance policy and will also be entitled to share in the profits or surplus of the respondent No. 1. Therefore, in our considered opinion, not only there has been intelligible differentia, but also there is a rational relationship with the object to be achieved by the impugned Circular. 40. In view of the aforesaid discussion, as we have found that the impugned Circular charges a service charge/fee, without there being a power to charge a fee, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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