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TMI Blog2015 (5) TMI 143X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nos. 11/COMMR(BKS)/LTU-M/ST/2012 dated 10/01/2013 and 01-02/COMMR(WLH)/LTU-M/CX/2014 dated 11-4-2014 passed by the Commissioner of Central Excise Service Tax, LTU, Mumbai. Vide these orders service tax demands along with interest have been confirmed and penalties imposed on the appellant, Deposit Insurance and Credit Guarantee Corporation, Mumbai (DICGC in short). The details are as under:- Appeal No ST/86491/13-MUM ST/88305/14-MUM ST/88324/14- MUM Period of dispute 1.5.2006 to 31.3.2011 1.4.2011 to 30.9.2011 6.11.2011 to 30.03.2012 6.5.2012 to 23.8.2012 Show cause notice date 24.10.2011 7.3.2012 31.1.2013 25.6.2013 Order-in-original No. 11/COMMR(BKS)/LTU-M/ST/2012 dated 10.1.2013 01-02/COMMR(WLH)/LTU-M/CX/2014 dated 11.4.2014 Demand of service tax ₹ 2075, 64,65,926/- ₹ 283,15,29 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by letter dated 05/01/2009. In the meantime, CBEC, by its letter dated 1/12/2008 confirmed that the services provided by DICGC were covered under General Insurance Business w.e.f. 01/05/2006. DICGC was reminded to furnish the information sought for from them by letter dated 16/10/2008. However, DICGC did not comply with the request but contested the levy by their letter dated 28/11/2008. Department addressed similar letters to DICGC on 10/12/2008, 1/1/2009 and 29/1/2009. 2.4. DICGC, by their letter dated 14/01/2009, took up the matter with 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 . This view was reiterated by CBEC letter dated 22/4/2009. 2.5. The LTU, Mumbai expressed reservations about the correctness of the above view and after re-examination of all the relevant issues, the 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. DICGC were accordingly addressed letter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.1.2. The Madras High Court, in Mohan Breweries Distilleries Ltd. Vs. Commercial Tax Officer - 2005 (139) STC 477 (Mad.) was, inter alia, concerned with the question as to whether purchase tax under the local Sales Tax Act is leviable on purchase of empty bottles from other states against bought notes through salesmen permits. Benevolent clarifications were issued on 09/11/1989 and 27/12/2000 holding that purchase tax is not leviable under such circumstances. These clarifications were subsequently withdrawn by a clarification dated 28/01/2002. The period for which purchase tax was demanded was 1996-97. The Hon ble High Court concluded as follows:- 8.6.10. It is, therefore, clear that even though the clarification dated November 9, 1989 is executive in nature, the same is binding on the authorities till the concessions given to the petitioner under the clarification were withdrawn, which could be done only prospectively, viz., in the instant case, with effect from January 28, 2002, and the revenue could not refuse the benefit of the clarifications dated November 9, 1989 and December 27, 2000 in respect of levy of purchase tax under section 7-A of the Act for the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of any suppression on the part of the appellants. Hence, part of the demand is barred by limitation of time. 3.3. The transaction in the present case is one of guarantee and not of insurance. 3.3.1. The transaction in the present case is one of guarantee and not of insurance as alleged. The appellants are providing guarantee to the depositors that in the event of bank unable to pay to the depositors, the appellants will pay to the depositors. It enhances the credibility of the bank and depositors are secured to the extent of guarantee given by the appellants. Therefore, such transaction is not of insurance but one of guarantee. Distinction between the guarantee and insurance is well settled. 3.3.2. The distinction between the Insurance and guarantee is also explained by R.P. Colinvaux in book The law of insurance , Second edition, page 359. The relevant portion is reproduced as under:- Whether contract one of insurance or guarantee. It is often a difficult question whether a given contract is one of guarantee or of insurance and the matter has now come before the House of Lords in Trade Indemnity Co. V. Workington Barbour Board. There an insurance company for a f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ney paid to depositors from bank. Hence, the transaction in the present case is one of guarantee. Contract of guarantees were not covered under any of the taxable services enumerated in Section 65 (105) of the Finance Act, 1994. Hence the demand is not sustainable. 3.4. Essential features of contract of insurance. 3.4.1. The definition of General Insurance Business provided in section 65 (49) of the Finance Act, 1994 is as under:- (49) general insurance business has the meaning assigned to it in clause (g) of section 3 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972); The definition of the taxable service provided in section 65 (d) of the Finance Act, 1994 is reproduced as under:- (105) taxable service means any [service provided or to be provided], - d) to a policy holder or any person, by an insurer, including re-insurer carrying on general insurance business in relation to general insurance business; The definition of general insurance business in section 3(g) of General Insurance Business (Nationalisation) Act, 1972 (hereinafter referred to as GIBA Act ) reads as under:- general insurance business means fire, marine or mis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the essential features of the contract of Insurance can be described as under:- i) There should be contractual relationship between the parties. ii) 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. iii) The insured must have an insurable interest in the subject matter of the property. iv) The Insurer is bound to pay money or provide its equivalent if any uncertain event occurs. v) Insurance is a contract of indemnity. 3.5. The Appellants are not engaged in the performance of insurance contracts as none of the essential features mentioned above in the preceding para are present in impugned transactions. 3.5.1. At the outset, there is no contractual relationship between the appellants and the bankers. The Corporation does not execute any contract with the bank, as the activity is statutory in nature. 3.5.2. There is no insurance policy as such which details out the terms of the insurance contract. Every bank has to compulsorily register and pay the premium. 3.5.3. In the present case there is no risk involved which is being insured by the appellants. The event insur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preme Court in case of Senairam Doongarmal Vs. CIT 1961 (42) ITR 392 (SC)], observed as under :- The word business is not defined exhaustively in the Income-tax Act, but it has been held both by this Court and the Judicial Committee to denote an activity with the object of earning profit. To say that a business is being carried on, means no more than that profit is to be earned by a process of production. 3.6.2. The appellant is a statutory body carrying out functions as laid down by the statute. It collects the premium as per rate approved by Reserve Bank of India. The expenditure is incurred by appellant as per the statute. The investment in various securities is made as provided in the statute. Therefore, the appellants does not have profit motive and they cannot be said to have been engaged in any business. 3.6.3. Further, the department also relied upon the Supreme Court judgment in the case of Mazgaon Dock Ltd. AIR 1958 SC 861 to allege that in fiscal statues business should be construed widely and accordingly the Corporation is engaged in business. In the said case, two non-resident shipping companies sent their ships to Mazgaon Dock for repairs in India. The cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r provision or even tautologic expressions because of ignorance of law or as a matter of abundant caution. It is not so very uncommon in Act of Parliament , said Lord MACNAGHTAN, to find special exemptions which are already covered by a general exemption. Such specific exemptions, stated LORD HERSCHELL in the same case are often introduced ex majoricautela to quiet the fears of those whole interests are engaged or sympathies aroused in favour of some particular institution, and who are apprehensive that it may not be held to fall within a general exemption. And to the similar effect, are the observations of LORD REID: It is not uncommon to find the Legislature inserting superfluous provision under the influence of what may be abundant caution. 3.7.2. The object of the GIBA act was to nationalize various companies who are engaged in the insurance business. There were many companies/corporation already owned by the Government either directly or indirectly. In the case of appellant, the RBI owns entire share capital of the appellant. The share capital of RBI is owned by the Government. Since the government entirely owns the appellant, there was no need to nationalize the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, which evidently department failed to do so and hence the demand is unsustainable in law. 3.9. The appellants are performing statutory functions and hence no service tax is leviable: 3.9.1. The appellants are performing the statutory functions as mandated by the DICGC Act. In CBEC Circular No. 89/7/2006-ST dated 18.12.2006, it is clarified that statutory functions performed in terms of specific responsibility assigned to a sovereign/ public authority under law in force, does not constitute provision of taxable service to a person and therefore, no service tax is leviable on such activities. The appellants have been established under section 3 of The Deposit Insurance and Credit Guarantee Corporation Act, 1961 as a 100% wholly owned subsidiary of RBI. 3.9.2. In terms of Section 15 of the DICGC Act, every insured bank is required to pay premium. The rate is notified by the Corporation and such premium cannot exceed the amount notified by RBI from time to time. The bank does not have any choice but to pay premium. The appellants are not providing any services to banks. The appellants were formed to take care of the small depositors. The amount charged by the appellants is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r for any considerations. Performing of such activity by a statutory/public authority under the provisions of law does not come under the taxable service and therefore no service tax is leviable on such activity. Similar views have been taken in following cases as well :- (i) UTI Technology Services Ltd Vs CST, Mumbai 2012 (26) STR 147 (T). (ii) Electrical Inspectorate vs. CST 2008 (9) STR 494 (T) (iii) HDFC bank Ltd. Vs. CST -2014- TIOL -27 (Tri-Mum) 3.10. Provisions of General Insurance Business (Nationalization) Act, 1972 are not applicable to the appellants, therefore they are not covered under the definition. 3.10.1. For the purposes of Finance Act, 1994, general insurance business shall have the same meaning as is assigned to that expression under clause (g) of section 3 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972). However, section 36 (1) of the (GIBA reproduced supra) carved out an exception that nothing contained in the GIBA act will apply on the activities undertaken by DICGC. 3.10.2. When an earlier Act or certain of its provisions are incorporated by reference into a later Act, the other provisions of that statute can b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a company established merely for the convenience of the members, conceived as an instrument to obey the mandate of the members. It can be readily conceded that an incorporated members' club, the legal personality of the club is utilised for securing an advantage and for discharging the mandates of the members. 3.11.3. The position of the appellants is identical to the above mentioned position. It was set up solely for servicing the RBI and Government of India for securing the interest of the small depositors. The veil of corporatization has been created only for the purpose of serving the government and behind this thin veil the appellants are but an arm of the RBI/government, wholly and solely dedicated to the RBI/government. 3.11.4. It is settled position of the law that exemption to the principal would be available to the agent also. This preposition is supported by the decision of the supreme court in case of State of Madras v. Cement Allocation Co-ordinating Organisation 1971 (4) SCC 599 (SC) 3.11.5. Similarly in the context of the present notification i.e. 22/2006 itself various tribunals have took a view that exemption available to RBI must be extended to thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeals are,- (a) Whether the service rendered by DICGC falls under the category of General Insurance under 65(49) read with section 65(105) (d) of FA, 1994? (b) Whether the extended period of limitation invoked in respect of tax demand for the period from 1/5/2006 to 31/3/2011 is sustainable? (c) Whether penalties u/s 76, 77 and 78 of FA, 94 are sustainable? 4.2. Whether the service rendered by DICGC falls under the category of General Insurance under 65(49) read with section 65(105) (d) of FA, 1994? 4.2.1. Section 65(105) (d) imposes Service Tax on General Insurance business ; Section 65(49) states that the term General Insurance business has the meaning assigned to it in Section 3(g) of General Insurance business (Nationalisation) Act,1975 [GIBA, 72]. As per the said section 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 . The term miscellaneous insurance business is not defined in GIBA, 72; but Section 3 (p) of that Act states that words and expressions used in this Act but not def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rusted with administering a deposit insurance system are called as Deposit Insurers (DI). In fact there is a body called International Association of Deposit Insurers [IADI] , which provides guidance to individual countries and DI s. While in majority of countries DIs are public authorities, there are countries where Private organisations, Association of banks or Non-Profit entities are entrusted the task of DI. In general, insurance is the process of transferring the risk of a financial loss to an entity willing to pay for the loss in exchange for a small guaranteed payment. Besides, insuring anything other than human life is known as General insurance as may be gleaned from the website of IRDAI. In the case of deposit insurance, the DI takes upon itself the risk of loss to the depositor in exchange of the premia collected by it from the banks. Thus, all DIs are nothing but insurers falling within the category of General insurance . 4.2.5. In terms of the Preamble to the DICGC Act, 1961, DICGC is established for the purpose of insurance of deposits and guaranteeing of credit facilities. Parliament s intention is thus clear with regard to the nature of DICGC, namely that of an i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icences. Premia collected from Banks, though compulsory, is to cover the risk of loss to the depositor. Thus, the premia collected is not in the nature of regulatory fee or statutory fee. Attention is also invited to section 21A (3) of the DICGC Act,1961 where under, when DICGC provides guarantees or indemnities to any credit institution in respect of credit facilities given by them, it levies a fee on the institution. Thus, the said Act itself makes a distinction between premium and fee. 4.4. As regards the contention that since nothing in the Companies Act, 1956 or the Insurance Act, 1938 shall apply to DICGC in terms of section 43 of DICGC Act, 1961, activities of DICGC are not covered within general insurance business , the Finance Act, 1994, has merely borrowed the definitions from other legislations. The borrowed definitions, after incorporation in the said Act constitutes an integral part of the Finance Act and when they are applied, they are applied as provisions of the said Finance Act and not as provisions of the legislation from which they have been borrowed. Reliance is placed on Justice G.P.Singh s Principles of Statutory Interpretation -12th edition-2010,(page 333) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the compulsion of law i.e., under a statute are contractual transactions. In the context of the issue whether sales made under the Sugar Control Orders, which were mandatory under a statute, constitute contracts of sale, the Court ruled that though it was true that consent makes a contract of sale, such consent may be express or implied and it cannot be said that unless the offer and acceptance are there in an elementary form, there can be no taxable sale. Accepting that there was an element of compulsion in both selling and buying, the Court held that a compelled sale is nevertheless a sale and sales often take place without volition of party. Thus, consent under the law of contract need not be express, it can be implied. Reading sections 14, 15 to18 of Contract Act together, it is seen that compulsion of law is not coercion in terms of section 15 of the Contract Act. Accordingly, the transactions between the banks and DICGC, though brought about under a statute, constitute contractual transactions with consent of both parties. As held by the Apex Court, in statutory transactions there is implicit consent to contract and this consent is given when the person sets up the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1/5/2006 to 31/3/2011 is sustainable? This issue has been extensively discussed in paras 3.4, 3.4.1,3.4.2, 3.4.3 and 3.4.4 of the order-in-original dated 10/01/2013. Findings recorded by the Respondent are reiterated. DICGC took inordinately long time to furnish the information sought by the department. They were also informed of the tax liability w.e.f 1/5/2006 soon as they applied for and came under the purview of LTU Mumbai. It may be relevant to mention here that the demand for the period from 01/4/2011 to 30/9/2011 amounting to ₹ 283.15 Cr. is, however, within the normal period of limitation and merits confirmation. 4.8. Whether penalties imposed on DICGC u/s 76,77 and 78 of FA, 94 are sustainable? This issue is discussed in paras 3.10 to 3.14.1 of the OIO. Findings recorded therein are reiterated. 5. Discussion and Findings We have carefully considered the submissions made by both the sides. Our findings and conclusions are discussed in the ensuing paragraphs. The issues for consideration and decision in the present case can be formulated as follows:- (1) Whether the activity undertaken by the appellant, DICGC, is insurance business or not and if so, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporation. (2) HISTORY The concept of insuring deposits kept with banks received attention for the first time in the year 1948 after the banking crisis in Bengal. The issue came up for reconsideration in the year 1949, but was held in abeyance till the Reserve Bank set up adequate arrangements for inspection of banks. Subsequently, in the year 1950, the Rural Banking Enquiry Committee supported the concept. Serious thought to insuring deposits was, however, given by the Reserve Bank and the Central Government after the failure of the Palai Central Bank Ltd., and the Laxmi Bank Ltd., in 1960. The Deposit Insurance Corporation (DIC) Bill was introduced in Parliament on August 21, 1961. After it was passed by Parliament, the Bill got the assent of the President on December 7, 1961 and the Deposit Insurance Act, 1961 came into force on January 1, 1962. Deposit Insurance Scheme was initially extended to all functioning commercial banks. This included the State Bank of India and its subsidiaries, other commercial banks and the branches of the foreign banks operating in India. With the enactment of the Deposit Insurance Corporation (Amendment) Act, 1968, deposit insurance was exten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctioning in the States/Union Territories, which have amended their Co-operative Societies Act, as required under the DICGC Act, 1961, empowering Reserve Bank to order the Registrar of Co-operative Societies of the respective States/Union Territories (UTs) to wind up a co-operative bank or to supersede its committee of management and requiring the Registrar not to take any action for winding up, amalgamation or reconstruction of a cooperative bank without prior sanction in writing from the Reserve Bank, are treated as eligible co-operative banks. At present, all co-operative banks are covered under the Scheme. UTs of Lakshadweep and Dadra Nagar Haveli do not have any co-operative Bank. (4) REGISTRATION OF BANKS (i) In terms of Section 11 of the DICGC Act, all new commercial banks are required to be registered by the Corporation soon after they are granted licence by the Reserve Bank under Section 22 of the Banking Regulation Act, 1949. All Regional Rural Banks are required to be registered with the Corporation within 30 days from the date of their establishment, in terms of Section 11A of the DICGC Act. (ii) A new eligible co-operative bank is required to be registered wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... January 1, 1968 5,000 (6) TYPES OF DEPOSITS COVERED The Corporation insures all bank deposits, such as savings, fixed, current, recurring, etc. except the (i) deposits of foreign governments; (ii) deposits of Central / State Governments; (iii) deposits of State Land Development Banks with the State co-operative banks; (iv) inter-bank deposits; (v) deposits received outside India, and (vi) deposits specifically exempted by the Corporation with the previous approval of the Reserve Bank. (7) INSURANCE PREMIUM The Corporation collects insurance premia from insured banks for administration of the deposit insurance system. The premia to be paid by the insured banks are computed on the basis of their assessable deposits. Insured banks pay advance insurance premia to the Corporation semi-annually within two months from the beginning of each financial half year, based on their deposits as at the end of previous half year. The premium paid by the insured banks to the Corporation is required to be borne by the banks themselves and is not passed onto the depositors. For delay in payment of premium, an insured bank is liable to pay interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f of his dues to the bank, if any [Section 16(1) read with 16(3) of the DICGC Act]. However, the payment to each depositor is subject to the limit of the insurance coverage fixed from time to time. (ii) When a scheme of compromise or arrangement or re-construction or amalgamation is sanctioned for a bank by a competent authority, and the scheme does not entitle the depositors to get credit for the full amount of the deposits on the date on which the scheme comes into force, the Corporation pays the difference between the full amount of deposit and the amount actually received by the depositor under the scheme or the limit of insurance cover in force at the time, whichever is less. In these cases too, the amount payable to a depositor is determined in respect of all his deposits held in the same capacity and in the same right at all the branches of that bank put together, subject to the set-off of his dues to the bank, if any, [Section 16(2) and (3) of the DICGC Act]. (iii) Under the provisions of Section 17(1) of the DICGC Act, the liquidator of an insured bank which has been wound up or taken into liquidation, has to submit to the Corporation a list showing separately the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Corporation. The surplus balances in all the three Funds are invested in Central Government securities. Inter-Fund transfer is permissible under the Act. The books of accounts of the Corporation are closed as on March 31 every year. The affairs of the Corporation are audited by an Auditor appointed by its Board of Directors with the previous approval of Reserve Bank. The audited accounts together with Auditor s report and a report on the working of the Corporation are required to be submitted to Reserve Bank within three months from the date on which its accounts are balanced and closed. Copies of these documents are also submitted to the Central Government, which are laid before each House of the Parliament. The Corporation follows mercantile system of accounting and it has been adopting the system of actuarial valuations of its liabilities from the year 1987 onwards. The Corporation has been paying income tax since the financial year 1987-88. The Corporation is assessed to Income Tax as a company as defined under the Income Tax Act, 1961. Moreover, the Corporation has obtained service tax registration and has started paying service tax on premium income accrued from October 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnment. The maximum rate for which provision is being made in the Bill is 15 naye paise per hundred rupees per annum. The Corporation's liability will arise and be discharged in the event of the liquidation of a bank or the enforcement in relation to it of a scheme of compromise or arrangement or reconstruction or amalgamation. The payments due to the depositors up to the limit of the insurance cover offered by the Corporation will be made in the most convenient and expedient manner which may be possible. 5.1.3. The preamble of the DICGC Act, 1961 states that it is an Act to provide for the establishment of a corporation for the purpose of insurance of deposits and guaranteeing of credit facilities and for other matters connected there with or incidental thereto . 5.1.4. It would also be useful to see the relevant provisions of the DICGC Act, 1961, which would throw light on the matter. Section 2 of the Act deals with definitions and some of the relevant clauses are extracted below:- (g) deposit means the aggregate of the unpaid balances due to a depositor (other than a foreign Government, the Central Government, a State Government, a corresponding new bank, Regi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on the date of the cancellation of the registration: Provided further that the total amount payable by the Corporation to any one depositor in respect of his deposit in that bank in the same capacity and in the same right shall not exceed one lakh rupees . .. (2) Where in respect of an insured bank a scheme of compromise or arrangement or of reconstruction or amalgamation has been sanctioned by any competent authority and the said scheme provides for each depositor being paid or credited with, on the date on which the scheme comes into force, an amount which is less than the original amount and also the specified amount, the Corporation shall be liable to pay to every such depositor in accordance with the provisions of section 18 an amount equivalent to the difference between the amount so paid or credited and the original amount, or the difference between the amount so paid or credited and the specified amount, whichever is less : 5.1.5. 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 coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sampathu Chetty another, [1962] 3 S.C.R. 786, Ram Sarup v. State, [1963] 34 SCR 858. Ram Kirpal v. State. [1970] 3 S.C.R, New Central Jute Mills Co. Ltd. v. The Assistant Collector. [1971] 2 SCR 92, State of Madhya Pradesh v. Narasimhan,[1976] 1 S.C.R. 61, Bhajva v. Gopikabai, [1978] 3 S.C.R. 561, Mahindra Mahindra Ltd. v. Union,[1979] 2 S.C.R. 10348 and Western Coal Fields v. Special Area Development Authority. [1982] 2 S.C.R. 1. It unnecessary to make a detailed reference to these decisions. It is sufficient to say that they draw a distinction between referential legislation which merely contains a reference to or citation of, a provision of another statue and a piece of referential legislation which incorporates within itself a provision of another statute. In the former case, the provisions of the second statue, along with all its amendments and variations from time to time, should be read into the first statute. In the later case, the position will be as outlined in Narasimhan, [1976] 1 S.C.R. where after referring to Secretary of State v. Hindustan Cooperative Insurance Society Ltd., [1931] 58 I.A. 259, this Court summed up the position thus: On a consideration of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed above. 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. The golden rule of statutory interpretation is the principle of strict interpretation of taxing statutes best enunciated by Rowlatt, J. in his classic statement in Cape Brandy Syndicate v. Commissioner of Inland Revenue (1921) 1 KB 64 [cited with approval in Income-tax Officer v. T.S. Devinatka Nadar [1968] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e with power to acquire, hold or dispose of property and to contract . As per section 65(13) of the Finance Act, 1994, body corporate shall have the meaning assigned to it in clause (7) of Section 2 of the Companies Act, 1956 (1 of 1956). In law, body corporate means a legal entity (such as an association, company, person, government, government agency, or institution) identified by a particular name. The authorised capital of the Corporation is ₹ 50 crore which is entirely subscribed to by the Reserve Bank. There cannot be any doubt or dispute on the fact that the power to acquire, hold or dispose of property and to enter into contract in this regard comes within the ambit/scope of commercial/business transaction which is undertaken with a profit motive. It is also an admitted position, as evident from para 12 of the Annual Report of the appellant Corporation that the appellant Corporation is assessed to Income Tax as a company as defined under the Income Tax Act, 1961 and has been paying income tax since the financial year 1987-88. As can be seen from the audited balance sheet figures, the appellant has paid income tax on the surplus of income over expenditure, derived, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f natural justice. The appellant Board raised a preliminary objection before the Labour Court that the Board, a statutory body performing what is in essence a regal function by providing the basic amenities to the citizens, is not an industry within the meaning of the expression under section 2(j) of the Industrial Disputes Act, and consequently the employees were not workmen and the Labour Court had no jurisdiction to decide the claim of the workmen. This objection being over-ruled, the appellant Board filed two Writ 'Petitions before the Karnataka High Court at Bangalore. The Division Bench of that High Court dismissed the petitions and held that the appellant Board is industry within the meaning of the expression under section 2(j) of the Industrial, Disputes Act, 1947. The appeals by Special Leave, were placed for consideration by a larger Bench of seven judges. The observations of the Court so far as it relates to the issues before us are extracted below:- The term sovereign should be reserved technically and more correctly for the sphere of ultimate decisions. Sovereignty operates on a sovereign plane, of its own. Only those services which are governed by separate r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the determining factor and that does not change according to who undertakes it. ..sovereign functions, strictly understood, (alone), qualify for exemption, not the welfare activities of economic adventures undertaken by Government or statutory bodies. Even in departments discharging sovereign functions, if there are units which are industries and they are substantially severable, then they can be considered to come within sec. 2(j). Constitutionally and competently enacted legislative provisions may well remove from the scope of the Act categories which otherwise may be covered thereby. 5.3.3. The second decision pertains to N. Nagendra Rao Co vs State Of A.P [1994 AIR 2663, 1994 SCC (6) 205]. The relevant paras from the said decision are extracted below: Is the State vicariously liable for negligence of its officers in discharge of their statutory duties, was answered in the negative by the High Court of Andhra Pradesh on the ratio laid down by this Court in Kasturi Lal Ralia Ram Jain v. State of U.P while reversing the decree for payment of ₹ 1,06,125.72 towards value of the damaged stock with interest thereon at the rate of 6% granted by the trial court for lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not profess to be justified by municipal law are what we understand to be the acts of State of which municipal courts are not authorised to take cognizance. The doctrine or the defence by the act of State , is not the same as sovereign immunity. The former flows from the nature of power exercised by the State for which no action lies in civil court whereas the latter was developed on the divine right of Kings. One of the tests to determine if the legislative or executive function is sovereign in nature is whether the State is answerable for such actions in courts of law. For instance, acts such as defence of the country, raising armed forces and maintaining it, making peace or war, foreign affairs, power to acquire and retain territory, are functions which are indicative of external sovereignty and are political in nature. Therefore, they are not amenable to jurisdiction of ordinary civil court. No suit under Civil Procedure Code would lie in respect of it. The State is immune from being sued, as the jurisdiction of the courts in such matter is impliedly barred. As far back as 1956, the First Law Commission in its Report on the liability of the State in tort, after ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. Accordingly we reject this contention as completely devoid of merits and hold that service tax is leviable on the deposit insurance activity under the taxable service category of general insurance business service . 5.4. Whether deposit insurance is a contract of insurance/contract of indemnity or a contract of guarantee? 5.4.1. The contention advanced by the appellant is that deposit insurance is a guarantee and not a contract of indemnity and the provisions of the Indian Contract Act do not apply. It is also contended that in deposit insurance, there are three parties involved, namely, the Deposit Insurance Corporation, the Insurer, the insured Bank and the depositor whereas in a normal contract of insurance, only two parties are involved, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act of insurance and a contract of indemnity. 5.4.3. In Halsbury's Laws of England, fourth edition, Vol. 25, under the heading Insurance in paragraph 3, it is observed as follows: Most contracts of insurance belong to the general category of contracts of indemnity in the sense that the insurer's liability is limited to the actual loss which is in fact proved. The happening of the event does not itself entitle the assured to payment of the sum stipulated in the policy; the event must in fact result in a pecuniary loss to the assured, who then becomes entitled to be indemnified subject to the limitations of his contract. He cannot recover more than the sum insured, for that sum is all that he has stipulated for by his premiums and it fixed the maximum liability of the insurers. Even within that limit, however, he cannot recover more than what he establishes to be the actual amount of his loss. The contract being one of indemnity, and of indemnity only, he can recover the actual amount of his loss and no more, whatever may have been his estimate of what his loss would be likely to be, and whatever the premiums he may have paid, calculated on the basis of that estimate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his liability within limits. 5.4.5. The hon ble High Court cited as authority Halsbury's Laws of England, Simonds Edn. which states in paragraph 512 that-- subrogation is a right inherent in all contracts of indemnity, and further-- the doctrine of subrogation applies to all contracts of non-marine insurance which are contracts of indemnity, such, as, for example, contracts of fire insurance, motor vehicle insurance and contingency insurance covering non-payment of money. It applies whether the loss is total or partial, and is a corollary of the principle of indemnity. By requiring any means of diminishing or extinguishing a loss to be taken into account it prevents the assured from recovering more than a full indemnity. 5.4.6. In Gajanan Moreshwar Parelkar vs Moreshwar Madan Mantri [(1942) 44 BOMLR 703] Chagla. J. (as he was then) considered a suit by the plaintiff to enforce an indemnity. The observations made in the said judgment, extracted below, are very relevant to the issue under consideration in the present case. 3. If the whole law of indemnity was embodied in Sections 124 and 125 of the Indian Contract Act, there would be considerable force in the contenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demnifier to save him from that liability and to pay it off. 5.4.7. 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. The concept is the basis of the doctrine of insurable interest and was cleared in the case of Castellain v/s Preston [(1883) 11 QBD 380]. For example, In a fire insurance policy, it is not the bricks and materials used in building the house that is insured but the interest of the Insured in the subject matter of Insurance. The subject matter of the contract is the name given to the financial interest, which a person has in the subject matter and it is this interest, which is insured. Insurable Interest is defined as the legal right to insure arising out of a financial relationship recognized under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay compensation to victims of accidents while on duty. The amount of compensation has been fixed in accordance with the extent of injury, disability and linked to the worker s salary and age on the date of accident. (b) Employee State Insurance Act 1948: The purpose behind this legislation was to provide medical aid to workers and their families working in industries located in certain notified areas. Under this act a part of the salary a small amount (at present 1.75%) is deducted from the workman s salary and some part is contributed by the Employer (at present 4.75%) and the same is deposited with the Employee State Insurance corp. With the funds thus collected and with more contributions from the State and Central Govt., Dispensaries and Hospitals have been set up all over the country where the worker members and their families are provided health care free of cost. (c) Motor Vehicle Act 1988: The Motor Vehicle Act was amended in 1988 to make Third Party Liability Insurance compulsory; thus no uninsured vehicle is allowed to ply the roads or in public place in India. The need of this enactment was felt due to the growing number of vehicles and the increasing number of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of ₹ 1,000/ - for hut ₹ 500/- for belongings shall be paid. The premium is borne by the Central Government. (iv) In addition, to the above schemes the Government has also introduced insurances at subsidized rates for farmers (cattle Insurance), for women (Raj Rajeshwari Mahila Kalyan Yojna), for the girl child (Bhagyashree child welfare policy) and Gramin Personal Accident policy etc. for the benefit of common people. 5.4.11. If we apply the above legal principles to the facts of the case in hand, 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. Insurance of the kind described in paras 5.4.9 and 5.4.10 above, which are statutorily prescribed and where there are more than two parties in many cases, the insurer, the insured and the beneficiary, are also considered as coming under the category general insurance business and nothing has been brought before us to show that they are not so considered/understood in law. By the same logi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e nature of exception is to be construed strictly and against the subject but once ambiguity or doubt about applicability is lifted and the subject falls in the notification then full play should be given to it and it calls for a wider and liberal construction. 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. The reliance placed by the appellant on a few decisions of this Tribunal in the case of Canara Bank and HDFC bank etc. is of no avail as the facts involved in those cases are different and distinguishable. In those cases, the said banks were fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. Therefore, demand of service tax can be made from the assessee only with effect from 20-9-2011 and not from an earlier date and we hold accordingly. 5.6.2. The contention of the Revenue that the appellant did not get itself registered under the Service Tax law and did not provide information about the premium collected in spite of repeated reminders does not by itself establish the fact that they intended to evade service tax. The facts on record show that they sought exemption from service tax as early as 01/08/2008 and pursued the matter with the CBEC after their request for exemption was rejected. This conduct of the appellant itself shows that there was no willful attempt on their part to evade service tax. It should be kept in mind that DICGC is a statutory corporation owned by the Reserve Bank of India and their audited records are placed before the Parliament every year through the Finance Ministry in terms of section 32(2) of the DICGC Act. This itself shows there cannot be any suppression of the activities by DICGC. We also note that they have been paying income tax since 1987-88 and is a large tax payer unit (LTU in short). All the income earned by the DICGC from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases involved therein and therefore, cannot have universal application, unless the facts are identical. The appellants have not shown to our satisfaction that the facts involved in the present appeal are identical to those involved in those decisions. Therefore, we do not consider it worth our while to discuss and rebut each of them. 6. To conclude,- (1) We hold that the deposit insurance activity undertaken by the appellant, Deposit Insurance and Credit Guarantee Corporation, falls within the taxable service category of general insurance business service as defined in section 65(49) read with section 65(105)(d) of the Finance Act, 1994 and is liable to service tax accordingly. (2) The appellant is liable to pay service tax on the said activity for the period from 20/09/2011 onwards along with interest thereon in case there is any delay in payment of tax by the due date. The service tax demand for the period prior to 20/09/2011 is set aside in view of the clarification given by the CBEC vide letter dated 24/02/2009 that the said service is not taxable which was withdrawn vide letter dated 20/09/2011. (3) The appellant is not eligible for the benefit of tax exemption u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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