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TMI Blog2015 (9) TMI 1219X X X X Extracts X X X X X X X X Extracts X X X X ..... commission/brokerage. This transaction is illustrative of series of transactions which had taken place over the period in dispute in the show cause notice. In effect, in respect of remitting the entire amount to the re-insurer and getting the brokerage separately, the assessee, in this case, in relation to the trade practice prevalent in the trade internationally and following the practice and procedure that is followed by the re-insurance brokers with the reinsurance companies, the assessee had retained that portion of the commission or brokerage and remitted the balance to the re-insurance company at London. Services rendered by the assessee in this case to the re-insurer abroad and the transaction with the foreign re-insurer would have to be necessarily accepted as 'export of service'. Once we hold that it is export of service, we will now look into the provisions of the Service Tax Act. - Decision in the case of JB Boda & Company Private Ltd. [1996 (10) TMI 70 - SUPREME Court] followed. - Decided in favor of assessee. Insofar as Notification Nos.6/99 dated 09.04.1999 and the rescinding Notification No.2/03 dated 01.03.2003 and the subsequent Notification No.21/03 dated 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requirement of such an agreement under law and the permission of the RBI has to be obtained before remitting the foreign exchange. That issue does not arise in the present case and the provisions of the Service Tax Act does not impose such a condition. In any event, as we have held that the basis of the circular, which is clarified that Notification Nos.6/99 dated 09.04.1999, 9/01 dated 16.07.2001, 13/02 dated 01.08.2002 and 2/03 dated 01.03.2003 would not apply to export of service, the question of receiving the payment in convertible foreign exchange does not arise. Even the Export of Service Rules, 2005 does not put an embargo in relation to taxable service as specified in Rule 3(3)(i), (ii) and (iii) of the Export of Service Rules. - Decided in favour of assessee. - C. M. A. Nos. 1058 and 1459 of 2009 - - - Dated:- 28-7-2015 - R. Sudhakar And K. B. K. Vasuki, JJ. For the Appellant : C.M.A.No.1058 of 2009 For 1st Respondent in C.M.A.No.1459 of 2009 : Mr. C Natarajan, S.C. for Mr. K Ravi For the Respondent : C.M.A.No.1058 of 2009 For Appellant in C.M.A.No.1459 of 2009 : Mr. M Santhanaraman Standing Counsel JUDGMENT The assessee as well as the Department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Finance Act, 1994 in respect of broking done for the insurance (direct broking) to primary insurers and also in respect of Inward Reinsurance Business, where the Indian Insurance Companies have been acting as Reinsurers having regard to the charge under Section 65(105)(zl) read with the definition of insurer under Section 65(58) of the Finance Act. The assessee was remitting service tax on primary booking done to insurers carrying on such business in India and also where inward reinsurance business was put through. The assessee did not offer for tax the brokerage received from overseas re-insurers acting through overseas brokers. 4. In the above scenario, a show cause notice came to be issued demanding service tax on the commission/brokerage received by the assessee. The Department was of the view that the commission/brokerage received by the assessee, on account of re-assurance ceded to other Insurance Companies, was liable to Service Tax under Insurance Auxiliary Service vide Section 65(46) of the Finance Act, 1994. The Show Cause Notice also proceeded on the basis that since there was suppression, the proviso to sub-section (1) to Section 73 of the Service Tax Act was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consumed in India and it was not exported. Further, there should be physical receipt of payment in convertible foreign exchange. The retention of brokerage amount before remitting the premium to foreign re-insurance company could not be termed as payment received in convertible foreign exchange. 7. The Adjudicating Authority further held that the decision of the Supreme Court in the case of JB Boda Company Private Ltd. v. CBDT reported in AIR 1997 SC 1543 relied on by the assessee did not apply to the facts of the present case as it relates to Section 80-O of the Income Tax Act and it would not have any application insofar as the provisions of the Service Tax Act. He further held that the retention of brokerage amount could not be termed as payment received in convertible foreign exchange. He, therefore, held that the services rendered by the assessee could not be treated as 'export service' and therefore not entitled to exemption under various notifications. For better clarity, the relevant findings of the Adjudicating Authority are as follows: 20. It may be seen that the services are rendered purely to insurance companies in indentifying reinsurer, rendering con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o India when he receives in India payment in rupees from the account of a bank or an exchange house situated in any country outside India, maintained with an authorized dealer. Since Suprasesh have not fulfilled any of the above requirements, I am of the view that the retention of brokerage amount cannot be termed as payment received in convertible foreign exchange and the decision in the JB Boda case by Hon'ble Supreme Court is not applicable to the present case. 22. In view of the foregoing finding that the service rendered by Suprasesh cannot be treated as Export of Service , I hold that they are not entitled for any exemptions under Notification No.6/99-ST dt.09.04.99 upto 28.02.03, Notification No.21/2003-ST dt.20.11.03 and also under Export of Service Rules, 2005, notified vide Notification No.9/2005-ST dt.03.03.2005 with effect from 15.03.05. 8. The Adjudicating Authority also upheld the allegation of the Department with regard to suppression holding as follows: 23. Since Suprasesh have suppressed the receipt of commission earned under the capacity as Reinsurance Brokers, which are liable to Service Tax under the category of Insurance Auxiliary Service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rformed by the assessee was admittedly a re-insurance broker. The Tribunal further came to the conclusion that in the present case, the assessee was acting as an intermediary between the Indian Insurance company and an overseas reinsurer and receiving commission from the overseas re-insurer. Referring to Regulation No.4 of IRDA (Insurance Brokers) Regulations 2002, the Tribunal held that the brokerage was the remuneration received by the assessee for arranging reinsurance with the foreign company for the Indian Insurance Company. 12. Yet another finding given by the Tribunal in paragraph No.11 of the decision is contradictory to the conclusion arrived at by the Tribunal. For better clarity, we extract the same as follows: .... By and large, what they provided was a service to the Indian insurance company. Of course, they also served the foreign company by remittance of the ceded premium [after deducting ceding commission and brokerage] to that company. 13. The Tribunal, distinguishing the decision of the Supreme Court in the case of JB Boda (supra), held that there was no case of Export of Service and therefore, the assessee was not entitled to the benefit of Export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e date of issue of show-cause notice cannot be sustained. However, for the period prior to 10-9-2004 [the date on which Section 73(1) of the Finance Act, 1994 was amended], mere omission or failure of the assessee in the matter of filing returns etc. was enough for the Department to invoke the larger period of limitation. Suppression of facts etc. was not necessary. In the present case, omission of the appellants to include reinsurance brokerage in the taxable value for the period from 16-7-2001 to 9-9-2004 is not in dispute and the same was enough to invoke the proviso to Section 73(1) of the Finance Act, 2006 as this provision stood prior to 10-9-2004. In the result, the tax liability of the appellants should be restricted to the normal period and beyond up to 10-9-2004 only. The learned Commissioner should requantify the demand accordingly. 15. We have however found a good case for vacating the penalties. By and large, the dispute agitated before us was highly interpretative of the various provisions of the Finance Acts 1994 and 2006, the IRDA Act, 1999 and the IRDA (Insurance Brokers) Regulations, 2002. In the circumstances, it will not be just or fair to inflict any penal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim settlement survey and loss assessment. Section 65(47) Intermediary or insurance intermediary' has the meaning assigned to it in sub-clause (f) of Clause 91) of Section 2 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999) 14.05.2003 Insurance Auxiliary Service amended by Finance ac 2003 Section 65(105)(zl) to a policy holder or insurer, by an actuary, or intermediary or insurance intermediary, or insurance agent in relation to insurance auxiliary services concerning general insurance business. Section 65(55) Insurance Auxiliary Service' provided by an actuary, an intermediary or insurance intermediary or an insurance agent in relation to general insurance business or life insurance business and includes risk assessment, claim settlement, survey and loss assessment. Section 65(56) Intermediary or insurance intermediary', has the meaning assigned to it in clause (f) of sub-section (1) of section 2 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999) 01 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emption when payment for taxable services is received in India in convertible foreign exchange - Notification No. 2/99-S.T. superseded In exercise of the powers conferred by section 93 of the Finance Act, 1994 (32 of 1994), and in supersession of the notification of the Government of India in the Ministry of Finance (Department of Revenue), No. 2/99-Service Tax, dated the 28th February, 1999, the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable services specified in sub-section (48) of section 65 of the said Act, provided to any person in respect of which payment is received in India in convertible foreign exchange, from the whole of the service tax leviable thereon under section 66 of the said Act : Provided that nothing contained in this notification shall apply when the payment received in India in convertible foreign exchange for taxable services rendered is repatriated from or sent outside India. [Notification No. 6/99-S.T., dated 9-4-1999] Service tax - Payment received in India in convertible foreign exchange - Amendment to Notification No. 6/99-S.T. In exercise of the powers conferr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s done or omitted to be done before such rescission. [Notification No. 2/2003-S.T., dated 1-3-2003] 21. Thereafter, on 25.4.2003, the Central Board of Excise and Customs issued a circular No.56/5/2003 clarifying the issue that the Service Tax is destination-based consumption tax and it is not applicable on export of services. For better clarity the said circular reads as follows: Service tax on export of services - Clarifications Circular No. 56/5/2003-S.T., dated 25-4-2003 F. No. 254/1/2003-CX-4 Government of India Ministry of Finance (Department of Revenue) Central Board of Excise Customs, New Delhi Subject : Non levy of service tax on export of services - Regarding. The Central Government has issued Notification No. 2/2003 dated 1-3-2003 in the current year's Budget rescinding the earlier Notification No. 6/99 Service Tax dated 9-4-99 which exempted taxable services from payment of service tax so long as payment for services rendered is received in convertible foreign exchange which is not repatriated outside India. Consequent to the issue of Notification No. 2/2003 cited above, service tax would be leviable on all taxable s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be issued for the information of the trade. 8. The receipt of this circular may kindly be acknowledged. 9. Hindi version will follow. 22. Subsequent to the above Circular, by Notification No.21/03, dated 20.11.2003, the Government restored Notification No.6/99 dated 09.04.1999. The said circular reads as follows: Service tax - Services for which payment received in India in convertible foreign exchange exempted In exercise of the powers conferred by Section 93 of the Finance Act, 1994 (32 of 1994), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable services specified in sub-section (105) of section 65 of the said Act, provided to any person in respect of which payment is received in India in convertible foreign exchange, from the whole of the service tax leviable thereon under section 66 of the said Act. Provided that nothing contained in this notification shall apply when the payment received in India in convertible foreign exchange for taxable services rendered is repatriated from, or sent outside, India. [Notification No. 21/2003-S.T., dated 20-11-2003] 23. In this fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pensation), an amount exceeding: (A) on direct general insurance business - (i) on tariff products: a. 10 percent of the premium on that part of the business which is compulsory under any statute or any law in force; b. 12 1/2 percent of the premium on others. (ii) on non-tariff products: 17 1/2 percent of the premium on direct business. (B) on direct life insurance business - (i) individual insurance (a) 30 percent of first year's premium (b) 5 per cent of each renewal premium (ii) annuity (a) immediate annuity or a deferred annuity in consideration of a single premium, or where only one premium is payable on the policy: 2 percent of premium (b) deferred annuity in consideration of more than one premium: (i) 7 1/2 percent of first year's premium (ii) 2 percent of each renewal premium (iii) group insurance and pension schemes: (a) one year renewable group term insurance, gratuity, superannuation, group savings linked insurance - 7 1/2 percent of risk premium Note: Under group insurance schemes there will be no remuneration for the savings component. (b) singl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to the reinsurer or to the direct insurer. (e) ensure that any refund of premium which may become due to a direct insurer on account of the cancellation of a policy or alteration in its terms and conditions or otherwise shall be paid by the reinsurer directly to the direct insurer. (f) Interest on recovery/payment received shall be for the benefit of the direct insurer or reinsurer; (g) only remove from the 'Insurance Bank account' charges, fees or commission earned and interest received from any funds comprising the account; (h) take immediate steps to restore the required position if at any time he becomes aware of any deficiency in the required segregated amount . (emphasis supplied) 26. In the above scenario, we have to consider the nature of transaction in the present case. The assessee is an insurance intermediary as defined under Section 65 (31), 65 (46) and 65(55) of the Finance Act. L.R.D.E., Government of India (Defence Department) wanted to move the radar and accessories by land on government owned Trailers/Hired Trailers - containerised cargo from Kolar Karnataka State to Chandrapur, Orissa. Hence, they approached the New In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r equipment. Will discuss with others tomorrow to obtain 100% support to the above terms unless we hear otherwise from you. We await your further advices with much interest. Kind Regards, John. 28. Thereafter, after series of negotiation, it appears that the assessee wanted to part with portion of the cover based on part of the commission to the New India Assurance Co. Ltd. to sustain the business and therefore offered to take 7.5% as cover including brokerage and passed on the benefit to the New India Assurance Co. Ltd. This is evident from the letter dated 15th November, 2005, which reads as follows: Sub: Marine Cargo Transit Insurance - A/c. L.R.D.E. Further to our communication dt. 11.11.2005 providing you Terms on XL basis, and subsequent discussions you had with our Mumbai Office Executives, we have persuaded the Underwriters to provide Terms on Proportional Basis and have now obtained concurrence for the Lead Underwriter for the same indicating 'Rate @ 0.075% (Taxes/Levies extra at actuals), ICC 'A' including SRCC. All other Terms and Conditions remain unaltered, including R/I Commission at 7.5% making the Nett Rate to you at 0.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Heath Lambert Group raised a debit on the assessee in the following manner: Accounting Reference : MB3686005/0030201 Risk No : MB3686005 Description : Cargo Reinsurance Reassured : New India Assurance Company Limited Original Assured : L.R.D.E. Government of India (Defence Department) Period : 12th December 2005 to 12th February 2006 Details : Original Premium Premium Details : INR INDIAN RUPEE 2,101,200.00 Premium 420,240.00 Less 20.000% Discount 1,680,960.00 Net Premium Due to Heath Lambert Limited 33. As a follow-up, another letter was issued by the assessee to the Chief Manager, Bank of India, Overseas Branch, Armenian Street, Chennai requesting the bank to remit the payment of Indian ₹ 1,680,960 in equivalent US Dollars, based on the debit note dated 19.1.2006. The details of the said letter reads as follows: We have to remit the payment of premium of INR1,680,960/- in respect of the above risk to M/s.Heath Lambert Ltd., London, who have sent their Debit Note No.MB3686005/0030201 dt.19.1.2006. We would request you to kindly arrange for the remittance of ₹ 1,680,960 in equivalent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... marily in relation to the client in India, namely, The New India Assurance Co. Ltd., it is not a case of export of service. To support this argument, it was contended that there is no receipt of convertible foreign exchange by the assessee in this transaction and therefore, they would not fall within the parameters of Notification No.6/99 dated 09.04.1999, 9/01 dated 16.07.2001, 13/02 dated 01.08.2002 and 2/03 dated 01.03.2003. 37. The issue raised by the Department is sought to be repelled by the assessee by placing reliance on the decision in the case of JB Boda and Co. Pvt. Ltd. V. Central Board of Direct Taxes reported in [1997] 223 ITR 271 (SC). The first contention is that the nature of services rendered by the appellant is re-insurer's brokerage and their service falls under the definition of 'export of service', as primarily their business is to get the services of the re-insurer located abroad for the benefit of the client in India. To buttress this argument that the nature of business undertaken by the assessee is in the nature of service rendered to a foreign company, the decision in the case of JB Boda's was relied upon. 38. In the case of JB Boda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the Reserve Bank of India for necessary permission to remit in U.S. dollars the reinsurance premium abroad. Based on that request, by following the procedure prescribed and based on the agreement with M/s.Sedgwick Offshore Resources Limited, London, the appellant remitted the premium of US dollars 989,887.20 on 11.1.1984 to the Union Bank of India after retaining the fee of 71,004.48 dollars for the technical services rendered. The appellant therein claimed the said amount as income in terms of foreign exchange as per Section 80-O of the Income Tax Act. The Income Tax Department, however, took a view that the income in question was generated in India and was not received in convertible foreign exchange as required under Section 80-O and declined the grant of benefit. The challenge to the said proceedings was dismissed by the Delhi High Court and the matter was persuaded before the Apex Court. 40. Section 80-O of the Income Tax Act, as it then was reads as follows: 80-O. Deduction in respect of royalties, etc., from certain foreign enterprises.-Where the gross total income of an assessee, being an Indian company, includes any income by way of royalty, commission, fees or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s rendered, would satisfy the requirement of section 80-O of the Income-tax Act. 42. The contention of the Department before the Apex Court in that case was that the Central Board of Direct Taxes was justified in declining to approve the agreement submitted by the appellant since the income under the agreement is generated in India and is not received in convertible foreign exchange as required under section 80-O of the Act. This contention of the Department has got two components. First is the income under the agreement is generated in India and the second is that the income is not received in convertible foreign exchange as required under Section 80-O of the Income Tax Act. Both the contentions were repelled by the Supreme Court holding that the nature of business undertaken by the re-insurance broker in providing re-insurance to ONGC through the foreign company, namely, Sedgwick Offshore Resources Ltd., London, who is also a broker is in the nature of services rendered outside India. 43. On the issue as to whether the retention of the commission of brokerage by the appellant - J.B.Boda, the insurance broker would amount to receipt of convertible foreign exchange as require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otifications granted exemption from payment of service tax to any person, in respect of which payment is received, specified under sub-section (48) of Section 65 of the Finance Act provided, to any person, in respect of which payment is received in India in convertible foreign exchange from whole of service tax. 46. This position does not really affect the case of taxable service. It is clarified by the Government of India, Ministry of Finance vide circular dated 25.4.2003, which we have already referred to, emphasis can be made to paragraph 3, which we reiterate hereunder: 3. The Board has examined the issue. In this connection I am directed to clarify that the Service Tax is destination based consumption tax and it is not applicable on export of services. Export of services would continue to remain tax free even after withdrawal of Notification No. 6/99, dated 9-4-99. Further it is clarified that service consumed/provided in India in the manufacture of goods which are ultimately exported, no credit of service tax paid can be availed or reimbursed at present as inter-sectoral tax credit between services and goods are not allowed. (emphasis supplied) 47. This Circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (h), (i), (j), (l), (m), (n), (o), (s), (t), (u), (w), (x), (y), (z), (zb), (zc), (zi), (zj), (zn), (zo), (zq), (zr), (zt), (zu), (zv), (zw), (zza), (zzc), (zzd), (zzf), (zzg), (zzh), (zzi), (zzj), (zzl), (zzm), (zzn), (zzo), (zzp), (zzs), (zzt), (zzv), (zzw), (zzx) and (zzy) of clause (105) of section 65 of the Act, such services as are performed outside India : Provided that if such a taxable service is partly performed outside India, it shall be considered to have been performed outside India; 50. Section 65(10) (zl) does not find place in Rule 3(2), neither it finds place in Rule 3(3), Explanatory part of Rule 3(3), namely, 3(3)(i) and 3(3)(ii). Export of taxable services include (i) such taxable service, which are provided and used in or in relation to commerce or industry and the recipient of such services is located outside India: Provided that if such recipient has any commercial or industrial establishment or any office relating thereto, in India, such taxable services provided shall be treated as export of services only if - (a) order for provision of such service is made by the recipient of such service from any of his commercial or industrial es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surer for the period in issue in the show cause notice. 53. Learned Standing Counsel appearing for the Department placed much emphasis on IRDA (Insurance Brokers) Regulations stating that the definition on 're-insurance broker' clearly means that an insurance broker, who, for a remuneration, arranges reinsurance for direct insurers with insurance and reinsurance companies. In the present case, the assessee has acted as a re-insurance broker with the New India Assurance Co. Ltd. and with the foreign company and his functioning as re-insurer is predominantly in relation to New India Assurance Co. Ltd. and not to the foreign re-insurer. 54. Though such a plea appears to be appealing, it was pointed out by the learned Senior Counsel appearing for the assessee that in Swiss Re's non-life branches manual with regard to re-insurance matters, the role of the reinsurance broker has been described as follows: 6.4 Role and function of the reinsurance broker The role of the reinsurance broker has been described as being: ....to professionally advise clients concerning the optimal reinsurance programme, proper retentions and adequate capacity based upon the bro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... works with reinsurance markets worldwide. The reinsurer pays the reinsurance broker a commission, called brokerage, which remunerates the broker for his services in placing and handling reinsurance contracts. The reinsurance brokerage is further justified since the broker saves reinsurer acquisition costs, which he would otherwise incur through direct marketing efforts. The brokerage is usually stipulated as a percentage of the reinsurance premium; it has recently started to take the form of a fee, especially in case of specialised types of reinsurance business. Brokerage rates tend to vary according to market conditions. As a rule, they are much lower for proportional than NP treaties since the latter normally generate lower premium volumes. Higher volumes of business tend to produce lower brokerage rates. In rare instances, brokerage is linked to treaty results. Brokerage is not an integral part of the contractual relationship between reinsureds and reinsurers. However, when quoting for NP business, it consitutes one of the pricing elements used by the reinsurer. Treaties placed through brokers usually include an intermediary clause for which two types with comme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt with by the broker. The terms contained in Regulation 23 speaks for itself that the role of the assessee as an insurance broker is not merely receiving and transmitting the amount as has been propounded by the Adjudicating Authority and the Tribunal. There is much more to be done by the Insurance broker even as per the IRDA (Insurance Brokers) Regulations, of which much emphasis has been made by the Tribunal in paragraph No.15. If this is the role of the assessee, we fail to understand how the Tribunal could have said that it is just forwarding the premium amount to the re-insurer company. There is also a clear finding by the Tribunal that the assessee serves the foreign company in the course of the business, but the apprehension of the Department, confirmed by the Tribunal, is that most of the work done by the assessee is in relation to the Indian Insurance Company and therefore, it is not an export of service. 57. That finding is a fallacy in the light of the findings given by the Supreme Court in JB Boda's case (supra), as also the provisions of the Service Tax Act, more particularly, the binding circular of the Reserve Bank of India dated 25.4.2003. On the issue of no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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