By TIOL News Service

CHENNAI, SEPT 24, 2015: THIS is an appeal by the assessee against the order of the Tribunal which went against them on merits (2009-TIOL-338-CESTAT-MAD). Revenue is also in appeal against restricting the demand to normal period and vacating penalties.

The appellant acted as broker for re-insuring between New India Assurance Co. Ltd and a Foreign Insurance Company. The appellant deducted his commission amount and paid the net premium to the Foreign Insurance Company (Re-insurer) in foreign currency. (For more details of the transactions, please see Commission received from 'reinsures' is taxable even before amendment to Finance Act in 2006: CESTAT ).

It is the case of revenue that as the appellant had rendered service to Indian Insurance Company and also received the commission in Indian Rupees, the same cannot be treated as export of service. The Tribunal also confirmed the demand, with partial relief on limitation and penalties. The assessee is now before the High Court.

After thoroughly examining the transactions among the three entities, i.e., both the insurance companies and the broker, and by drawing reference to the judgment of the Supreme Court in case of JB Boda & Company Private Ltd. v. CBDT, the High Court held :

++ 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 required under Section 80-O of the Income Tax Act, the Supreme Court placing reliance on the circular No.731 dated 20.12.1995 held that the premium that is payable to the re-insurer abroad is transferred through the medium of Reserve Bank of India in foreign exchange terms and the retention of the fee due to the appellant - J.B.Boda is in dollars for the services rendered. According to the Supreme Court, the retention of the amount by J.B.Boda would be a receipt of income in convertible foreign exchange to avoid unnecessary two-way traffic, i.e., to avoid formal remittance to the foreign insurers first and thereafter to receive the commission from the foreign reinsurer, as it may be an empty formality and a meaningless ritual. It is to be noted that in J.B.Boda's case, the amount was received by the appellant re-insurance broker in Indian rupees and thereafter by approaching the Reserve Bank of India necessary permission was sought for to convert the same into US dollars. In the present case, the amount is received by the assessee in Indian Rupees and through the banking channels, the premium less the commission/brokerage is sent in foreign exchange to the re-insurer abroad.

++ In answer to the issue raised before the Supreme Court in J.B.Boda's case, taking note of the nature of transaction, the Supreme Court clearly held that the view of the respondent/Department therein that in respect of re-insurance service, there is no generation of income in India, but it is only in relation to the services rendered outside India. This finding of the Supreme Court, which is in two components, has not been taken note of by the Adjudicating Authority as well as the Tribunal. Hence, it is held that the 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'

++ It is clarified by the Government of India, Ministry of Finance vide circular dated 25.4.2003, that service tax is destination based consumption tax and it is not applicable to export of service. They have clarified that export of service would continue to remain tax-free even after withdrawal of notification No.6/99 dated 9.4.99. In effect, if the destination based consumption tax is relatable to export of service, all notifications will have no effect. This clarification gets the stamp of approval by the Supreme Court in the decision reported in 2007-TIOL-149-SC-ST

++ 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.

++ That finding is a fallacy in the light of the findings given by the Supreme Court in JB Boda's case, as also the provisions of the Service Tax Act, more particularly, the binding circular dated 25.4.2003. On the issue of non-receipt of the commission or brokerage in convertible foreign exchange, the Adjudicating Authority as well as the Tribunal have time and again misdirected themselves to hold that since the New India Assurance Co. Ltd. have paid the premium amount, it cannot be treated as receipt of amount in convertible foreign exchange.

Accordingly, the High Court allowed the appeal filed by the assessee and dismissed the appeal by revenue.

(See 2015-TIOL-2225-HC-MAD-ST)