By TIOL News Service

CHENNAI, FEB 25, 2009: THE appellant is an insurance broker and also is a reinsurance broker. He receives the commission from the reinsurer also. The question before the Tribunal was whether this commission received from the reinsurers is taxable prior to the amendment in 2006 to the Finance Act, 1994 wherein Sections 65(58) and 60(105)(zl) have been amended to specify “ insurer includes reinsurer”.

To understand the model of the reinsuring, a sample transaction is explained. LRDE , (Electronics & Radar Development Establishment) Ministry of Defence, Govt. of India entered into a contract of insurance (marine cargo transit insurance) with M/s. New India Assurance Co. Ltd. in respect of RADAR and accessories. The sum insured was Rs. 340 crores and the insurance premium was Rs. 25.5 lakhs. 82.4% of this amount of premium(Rs. 21,01,200/-) was ceded by the Indian insurance company to overseas reinsurers; the overseas reinsurers allowed 20% discount [Rs.4,20,240/-] on this amount and consequently the net premium due to them was Rs.16,80,960/-; half of the said discount [i.e. Rs.2,10,120/-] was allowed to be retained as commission by the assessee (the appellant in the case) as reinsurance broker; in the result, the Indian insurance company paid Rs.18,91,080/- [i.e. Rs.16,80,960/- being net premium due to the overseas reinsurers and Rs.2,10,120/- being reinsurance commission due to the assessee] to the assessee by cheque dated 14.2.2006.

The issue is whether the amount of Rs 2,10,120/- received by the reinsurer from M/s New India Assurance Co Ltd ( on behalf of the overseas reinsurer as commission ) is taxable under Section 65(105(zl) of the Finance Act, 1994.

The appellant contended that:

(i) The amendments brought to Section 65 of the Finance Act, 1994 with effect from 1.5.2006 by the Finance Act, 2006 were intended to widen the tax net and accordingly, from that date, ‘insurance auxiliary service' provided by a reinsurance broker to a reinsurer in relation to general insurance business was exigible to service tax under Section 65(105)(zl) read with Section 66 of the Finance Act, 1994. Such service was not taxable prior to the said date as the amendment had no retrospective effect.

(ii) Prior to 1.5.2006, the recipient of insurance auxiliary service rendered by an insurance broker should be a person carrying on general insurance business in India . As the service in question was received by companies engaged in general insurance business outside India , it was not taxable under Section 65(105)(zl) of the Finance Act, 1994.

(iii) As no remuneration was found to have been received by the assessee from the Indian insurer, any service rendered by the assessee to the insurer in India was gratuitous and hence not chargeable to service tax under Section 66 r/w Section 67 of the Finance Act, 1994. As the assessee earned remuneration only from the foreign reinsurers for procuring reinsurance business for the Indian insurer, the service rendered by them was in the nature of export of service, which was not taxable as per the view taken by CBEC in circular dated 25.4.2003 and as per Rule 3(3)(ii)(i) of the Export of Service Rules, 2005.

The Special Counsel for revenue argued that:

The amendments brought to Section 65(58) and Section 65(105)(zl) of the Finance Act, 1994 by the Finance Act, 2006 were only clarificatory in nature and, therefore, such amendments had retrospective effect.

The definition of ‘insurer' given under Section 65(58) before its amendment was wide enough to cover ‘reinsurer' carrying on general insurance business. The overseas reinsurers in this case were doing general insurance business in India by picking up part of the general insurance cover from the Indian insurers and therefore the service rendered by the assessee as reinsurance broker to the reinsurers was exigible to service tax under Section 65(105)(zl) read with Section 66 of the Finance Act, 1994. The reinsurance commission was received by the assessee in Indian currency and therefore they cannot claim the benefit of Notifications 2/99-ST, 6/99-ST and 21/2003-ST. The service rendered by the assessee was not in the nature of export of service inasmuch as it was essentially performed in India and there was no physical receipt of payment in convertible foreign exchange.

The Tribunal held that “even without this amendment, (in 2006) the definition of ‘insurer' was wide enough to include a ‘reinsurer' and consequently ‘insurance auxiliary service' concerning general insurance business, provided to a reinsurer by an intermediary or insurance intermediary or insurance agent was taxable under Section 65(105)(zl) of the Finance Act, 1994 prior to 1.5.2006.

But, can the service be treated as export of service as contended by the assessee? Please see the full text of the order for detailed findings of the Tribunal.

(See 2009-TIOL-338-CESTAT-MAD in 'Service Tax')