No limitation period extension if no malafide intention to suppress & misrepresent facts

Oriental Insurance Company Limited Vs Commissioner, LTU (CESTAT Delhi)

Conclusion: Even when an assessee had suppressed facts, the extended period of limitation could be evoked only when suppression^‟ was shown to be willful and with an intent to evade payment of service tax. Commissioner had not recorded any finding that even if assessee had suppressed the fact of having received the amount, it was willful and with an intent evade payment of service. In fact, the Commissioner observed that there was no malafide intention on the part of assessee to suppress the facts.

Held:  Assessee-company was a registered insurer under the provisions of the Insurance Act, 1938 and was engaged in providing general insurance services. It was also registered with the Service Tax Department. A recently developed form of insurance was  Terrorism insurance which was an insurance purchased by property owners to cover their potential losses and liabilities that might occur due to terrorist activities. It was considered to be a difficult product for insurance companies, as the odds of terrorist attacks were very difficult to predict, and the potential liability was enormous. After the withdrawal of insurance and reinsurance capacity for terrorism risk in the international market post 9/11, all the non­life insurers in India along with the General Insurance Corporation of India formed the Indian Market Terrorism Risk Insurance Pool‘ in April, 2002 to cover property damage and consequential loss arising out of any terror strike. The Insurance Pool was administered by the GIC and it enabled non-life insurance companies to provide insurance cover against terrorism risk in India on the combined underwriting capacity of the members and the GIC. Apart from the inward premium in respect of reinsurance provided by each member to other members, the GIC also took excess of loss cover so as to protect the members from any excess of loss arising from risks. This was also apportioned amongst the members in the same manner as inward premium. Over and above the inward premium and excess of loss premium, the GIC also obtained excess of loss insurance cover from foreign insurance companies. The period of dispute in the present appeal was from April 2009 to March 2014 and the issue was the point of time when liability to pay service tax on re-insurance services provided under the pool agreement arises. It was for this reason that the only dispute in this appeal was about the liability to pay interest. A show cause notice was, however, issued to assessee alleging that there was a delay in payment of service tax as it paid service tax after receipt of matrixes from GIC. The extended period of limitation, as contemplated under the first provision to section 73(1) of the Finance Act was also invoked. It was held that even when an assessee had suppressed facts, the extended period of limitation could be evoked only when suppression^‟ was shown to be willful and with an intent to evade payment of service tax. Commissioner had not recorded any finding that even if assessee had suppressed the fact of having received the amount, it was willful and with an intent evade payment of service. In fact, the Commissioner observed that there was no malafide intention on the part of assessee to suppress this fact.  It had also been pointed out that the service tax to be paid by assessee on reinsurance services provided to member companies was available as CENVAT credit to assessee. Likewise, the service tax paid by assessee on reinsurance services received. The issue, therefore, that arose for consideration was when service was rendered and service tax was due but assessee was not able to pay it until the accounts were squared up and thereby delays paying the service tax, than whether in such a situation assessee was liable to pay interest on the delayed payment, considering that the delay was not on account of the fault of assessee.  Although this was a service tax matter, the provisions were pari materia and if service tax was due on a date but was paid much later because data was not available with assessee, interest had to be paid. Thus, the demand of interest from assessee for the period post March 2013 upto March 2014 was justified.

FULL TEXT OF THE CESTAT DELHI ORDER

M/s Oriental Insurance Company Limited¹ has filed this appeal to assail the order dated September 07, 2016 passed by the Commissioner LTU (Audit), Delhi², by which the demand of service tax of Rs. 28,69,74,247/- has been confirmed and appropriated. An order for recovery of interest under section 75 of the Finance Act, 1994³ has also been passed and penalty has been imposed under the first proviso to section 78 of the Finance Act.

2. The period of dispute in the present appeal is from April 2009 to March 2014 and the issue is the point of time when liability to pay service tax on re-insurance services provided under the pool agreement arises. It is for this reason that the only dispute in this appeal is about the liability to pay interest.

3. The appellant is a registered insurer under the provisions of the Insurance Act, 1938⁴ and is engaged in providing general insurance services. The appellant is also registered with the Service Tax Department.

4. A recently developed form of insurance is terrorism Terrorism insurance is an insurance purchased by property owners to cover their potential losses and liabilities that may occur due to terrorist activities. It is considered to be a difficult product for insurance companies, as the odds of terrorist attacks are very difficult to predict, and the potential liability is enormous.

5. After the withdrawal of insurance and reinsurance capacity for terrorism risk in the international market post 9/11, all the non­life insurers in India along with the General Insurance Corporation of India⁵ formed the ^‗Indian Market Terrorism Risk Insurance Pool‘⁶ in April, 2002 to cover property damage and consequential loss arising out of any terror strike.

6. The Insurance Pool is administered by the GIC and it enables non-life insurance companies to provide insurance cover against terrorism risk in India on the combined underwriting capacity of the members and the GIC.

7. Under the Insurance Pool, a member company can issue insurance policies to insure properties against terrorism risk. After retaining a specified percentage, the whole of the premium collected from the terrorism insurance policies is required to be ceded to the pool. Thereafter, in proportion to the capacity of each member, the GIC (the pool administrator), decides the inward premium to be ceded by one member company to the other member companies. In other words, to the extent of individual inward premium, one member company acts as a reinsurer to the other member companies. The share of each member is determined on the basis of its proportion to the total premium received in the Insurance Pool.

8. Apart from the inward premium in respect of reinsurance provided by each member to other members, the GIC also takes excess of loss cover so as to protect the members from any excess of loss arising from risks. This is also apportioned amongst the members in the same manner as inward premium. Over and above the inward premium and excess of loss premium, the GIC also obtains excess of loss insurance cover from foreign insurance companies.

9. Thus, each member company provides reinsurance service to other member companies, for which it receives inward premium and excess of loss cover premium (domestic). The foreign reinsurers provide re-insurance services to member companies, for which they are paid excess of loss cover premium (foreign). The above premiums are adjusted on the basis of settlement of accounts resulting in booking adjustment premiums in a year in respect of adjustments pertaining to the last financial year. This premium is, thus, nothing but a part and parcel of the reinsurance services provided! received.

10. In terms of Clause 17 of the Insurance Pool Agreement, GIC used to send quarterly statements to member companies, containing details of the total premium received by the pool along with details of service charges, claims paid, excess of loss cover premium, other charges, etc. and the net premium due to members. Further, the percentage of each member was determined on the basis of its premium ceded to the pool. The net premium is apportioned amongst the members in proportion to their percentage in capacity of the pool. While this amount represented the total amount as inward premium ! excess of loss cover premium etc. to be received by one member Company from the other member companies, it was not known from the quarterly statements as to what was the share! amount to be received by one member company from another individual member company.

11. This amount, according to the appellant, is actually known only on receipt of detailed matrix for each financial year from the GIC, wherein the actual amount to be received as premium by one-member company from other member companies in respect of reinsurance provided under the pool was provided. The sending of matrix for determining the share of each member qua other member was a practice developed by the GIC. These matrixes were not contemplated under the Pool Agreement and were agreed between the members as a matter of practice of working of the pool.

12. It is stated that as it was only from the matrixes that the individual premiums from each company was known, the member companies deposited the service tax after receipt of the matrix, in respect of such reinsurance services rendered by them to the other member companies as well as liability under reverse charge in respect of excess of loss cover premium payable to foreign

13. A show cause notice was, however, issued to the appellant alleging that there was a delay in payment of service tax by the appellant as it paid service tax after receipt of matrixes from GIC. The extended period of limitation, as contemplated under the first proviso to section 73(1) of the Finance Act was also invoked.

14. The appellant filed a detailed reply to the show cause notice.

15. The Commissioner passed an order dated September 07, 2017 for recovery of interest and imposition of penalty after rejecting the plea of the appellant that the extended period of limitation could not have been invoked.

16. The findings of the Commissioner in regard to the invocation of the extended period of limitation are as follows:

^”29.1 In this regard, I find that the noticee has failed to disclose the facts of receiving various premiums such as inward premium, OIL premium and Adjustment premium, in their periodical returns filed with the department. It appears that they started the process of identifying their Service tax liability only after thematic audit of the records of the GIC Re in the year 2013 by CERA. In fact, they have paid most of the applicable amount of Service Tax on their own, before the issue of show cause notice in the instant case. In other words, they were aware of their liability for the extended period and accordingly paid their due Service Tax on their own. It may be that they have no malafide intention in not paying the Service Tax in time but they have failed to include, in their periodical returns filed with the department, the correct amount of premiums received on various counts. I find that their act of not showing the correct amount of various Premium in their periodical returns amount to suppression as the department has no other way of knowing the authenticity of the periodical returns. Noticee had not disclosed the material facts of non-payment of service tax on retrocession premium, excess of loss premium and foreign cession of the excess of loss premium related with terrorism reinsurance services in their Service Tax Returns submitted to the Department or by any other way. It, therefore, appears that the Noticee has deliberately suppressed the same with intention to evade payment of Service Tax. Had the audit team not visited the premises of the GIC Re and not conducted audit of the records of the GIC Re, the National Reinsurer, the above facts would have remained unearthed. In view of this, I have no doubt in concluding that extended period of limitation of five years under proviso to Section 73(1) and 73(4) of the Finance Act, 1994 is invokable upon the noticee.”

(emphasis supplied)

17. In regard to the liability to pay interest at the appropriate rate under section 75 of the Finance Act, the Commissioner observed as follows :

^”30. As far as realisation of interest is concerned, the Noticee has submitted that taxable event takes place only when they raise invoice based on Pool administrator^‟s information and that the compliance of rule 6 of the Service Tax Rules, 1994 is difficult as they get statement of Matrix from GIC only after 3 years and their agreement to the Pool also does not provide for payment of Service Tax on monthly basis: that they faced genuine hardships of getting matrix from GIC well in time and therefore they are not liable to pay penalty or interest. In this regard, I find that the noticee has deposited the Service Tax of Rs. 28,69,74,247/- for the period 2009-10 to 2013-14 on their own. However, they have not deposited the same within the period prescribed under Rule 6 of the Service Tax Rules, 1994. In view of the above discussion, I find that the noticee is liable to pay interest at appropriate rates under Section 75 of the Finance Act, 1994.”

(emphasis supplied)

18. The Commissioner also imposed penalty under section 78 of the Finance Act. The relevant observations are as follows:

^”32. Now I come to the question of imposition of penalty upon the noticee under section 77 and 78 of the Finance Act, 1994. I find that no specific contravention has been pointed out by the department against the notice except that the correct amount of Service Tax on various premiums received by them has not been paid. In view of above, I find no ground for impositions of penalty under section 77 of the Finance Act, 1994. As regards imposition of penalty under section 78 of the Finance Act, 1994 is concerned, I find that the noticee had not disclosed the material fact of non-payment of service tax on retrocession premium, excess of loss premium and foreign cession of the excess of loss premium related with terrorism reinsurance services in their Service Tax Returns submitted to the Department or by any other way. They have deliberately suppressed the same with intention to evade payment of Service Tax. In view of above, I conclude that there is sufficient ground for imposition of penalty under section 78 of the Finance Act, 1994 on the assessee.^‖

(emphasis supplied)

19. Shri Narender Singhvi, learned Counsel for the appellant, made the following submissions:

(i) There is no delay in payment of service tax by the appellant and thus, the demand of interest is not sustainable;

(ii) The point of time when the liability to pay service tax arises, is governed by provisions of rule 6 of the Service Tax Rules, 1994⁷;

(iii) For the period till March 2011, rule 6(1) required payment of service tax by 5th/ 6^th of the month immediately following the month in which the payments are received towards the value of taxable services;

(iv) For the period from April, 2011, the Point of Taxation Rules, 2011⁸ were enacted for determination of the point of taxation, i.e. the point in time when a service shall be deemed to have been provided. Rule 3 of the 2011 Rules provides for the point of taxation;

(v) The date of receipt of premium is the date of provision of insurance services in an insurance transaction as was observed by the Tribunal in Bajaj Allianz General Insurance Co Ltd v. CCE, Pune⁹;

(vi) In the instant case, the appellant does not know on monthly basis, the details of premium receivable by it from respective member companies. These details are known only on receipt of the matrix from the GIC. On receipt of such matrix, the appellant raised invoices on the respective member companies and made book entries in its books of accounts;

(vii) It is impossible for the appellant to pay service tax on monthly basis before receipt of matrix, as it does not know the consideration receivable by it from respective member companies. Till then, as the identification of ^‗another person‘ and consideration‘ is not possible, it cannot be said that the appellant provided any ^‗service‘ in terms of section 65B(44) of the Finance Act;

(viii) Thus, in the absence of any delay in payment of service tax by the appellant, the confirmation of demand of interest is not sustainable and the same is liable to be set aside;

(ix) The extended period of limitation could not have been invoked and so the demand of interest for the period upto March, 2013 is time-barred. It has been accepted by the Adjudicating Authority in the impugned order that there was no malafide intention on the part of the It has, however, been held that failure of the appellant to show these amount in its ST-3 returns for the relevant period would amount to suppression of facts;

(x) Once there was no malafide intention on part of the appellant, the question of invocation of the extended period does not arise. Mere failure to mention in ST-3 return does not amount to suppression of facts, which requires presence of a positive act on part of the The impugned Order also fails to establish any positive act of suppression on the part of the appellant; and

(xi) In any case, the question of point of time for payment of service tax on the subject services was an industry­wide issue, being faced by all member companies and discussed at the level of GIC. The service tax paid by the appellant on reinsurance services provided to member companies was available as CENVAT credit to them. Similarly, the service tax paid by the appellant on reinsurance services received from foreign companies was available as CENVAT credit to the appellant. In such a case, it cannot be said that there was suppression of facts with any intention to evade payment of service tax.

20. Radhey Tallo, learned Authorized Representative of the Department, however, supported the impugned order and submitted that it does not call for any interference in this appeal. Learned Authorized Representative also submitted that in the facts and circumstances of the case, interest was rightly imposed upon the appellant under section 75 of the Finance Act and the extended period of limitation was correctly invoked in the present case.

21. The submissions advanced by the learned Counsel for the appellant and learned Authorized Representative of the Department have been considered.

Extended Period of Limitation

22. The invocation of the extended period of limitation needs to be taken up first. According, to learned counsel for the appellant, the extended period of limitation could not have been invoked for demanding interest for any period up to March 2013. In this context, it has been submitted that the applicability of limitation period is relevant not only to the demand of service tax, but also to the demand of interest for late payment of service tax.

23. It is true that the same principle would apply to invocation of the extended period of limitation for demanding interest for late payment of service tax as they would apply to the demand of service tax.

24. It was so held by the Delhi High Court in Kwality Ice Cream Company Union of India¹⁰ and the relevant portion of the judgment is reproduced below:

^”5. It is, therefore, clear that the principle adopted by the Supreme Court was that the period of limitation, unless otherwise stipulated by the statute, which applies to a claim for the principal amount should also apply to the claim for interest thereon. If that be the position, the period of limitation prescribed for demand of duty under Section 11A is normally one year and, in exceptional circumstance of a case falling under the proviso to Section 11A(1), the period of limitation is five years. But that would be applicable only in case of misstatement, fraud, concealment etc., which is not the case here. As such, in the present case, the period of limitation for the demand for duty would be one year. By the same logic, the period of limitation for demand of interest thereon would be one year. Inasmuch as the demand for interest has been made beyond a period of one year, the demand would be clearly hit by the principle of limitation as laid down by the Supreme Court. Even if, we take the letter dated 25-10-2004 as the first demand of interest, although that letter was in respect of a demand for differential duty, the demand would still be beyond a period of three years.^‖

(emphasis supplied)

25. In Bank of Baroda Commissioner of Service Tax, Mumbai¹¹ a Division Bench of the Tribunal also observed that the limitation for demanding interest on delayed payment of tax would be the same as for demanding service tax. The relevant portion of the decision is as follows:

^”9. As regards the interest, we find that the claim of the department that once payment of tax is made, interest liability would arise, is legally contrary to the views as has been laid down by the Hon‘ble High Court of Gujarat in the case of Gujarat Narmada Fertilizers Co. Ltd. (supra). In that case, though the period of limitation had expired, the assessee therein has discharged the duty liability, but did not discharge the interest. Revenue proceeded against the assessee therein for the recovery of interest claiming that having discharged duty, interest liability arises. Tribunal set aside the impugned order before it, holding that if the assessee would have contested the matter on limitation, he would have succeeded and no duty liability would have arisen, holding so, set aside the interest liability. Aggrieved by such an order Revenue preferred an appeal before Hon‘ble High Court. Hon‘ble High Court in their judgment at paragraph numbers 11, 12 and 13 held that the order of the Tribunal was correct. With respect, we reproduce the said paragraphs.

^”11. In the present case, when the period of limitation had already expired and when the extended period beyond one year was not available to the department as held by the Commissioner himself in his order-in-original, to our mind the respondent was not liable to pay even the basic duty. But for the respondent voluntarily making payment of such duty short-paid, it was not open for the Department to recover the same under sub-section (1) of Section 11A of the Act. In absence of any such voluntary payment, recovery of the unpaid duty would not have been possible. In that view of the matter, we do not find the case would fall under sub-section (2B) of Section 11A of the Act. Sub­section (2B) of Section 11A of the Act applies in a case where there is voluntary payment of unpaid duty before issuance of show cause notice under sub-section (1) of Section 11A. When the provision refers to show cause notice, it means a show cause notice which could have been validly issued and surely not a notice which had become time-barred. If by efflux of time and in absence of availability of extended period of limitation, such show cause notice itself had become time-barred, any payment made voluntarily by the manufacturer cannot be viewed as one made under sub-section (2B) of Section 11A of the Act.

12. In the present case, we have already held that time for issuing such a notice was one year, which period had already expired.

13. Accepting the stand of the Department that even in such a case once the payment of duty is made, interest liability would follow would bring about an incongruent situation. The recovery of the unpaid or short paid duty would become time-barred. If the manufacturer does not pay it voluntarily, it would not be possible for the Department to recover the same. But if he does it voluntarily despite completion of period of limitation, he would, further be saddled with the liability to pay statutory interest. Surely, this was not the intention of the Legislature while sub-section (2B) was introduced in Section 11A of the ^‖

10. It can be seen from the above reproduced relevant paragraphs the ratio would squarely apply in the case in hand, as on limitation, we do find that the appellant could have succeeded and the findings of the adjudicating authority in paragraph No. 39 of the impugned order also indicates that there was no intention on appellant‘s part of evading the service tax liability, which would mean that demand of service tax liability can be only within the limitation period, that is the one year from the date of issuance of show cause notice.

(emphasis supplied)

26. It is in paragraph 29.1 of the impugned order that the Commissioner has recorded findings regarding the invocation of the extended period of limitation. This paragraph has been reproduced above in paragraph 16 of this order. The Commissioner noticed that though the appellant had failed to disclose receipt of various premiums in the periodical returns and it started identifying the service tax liability only after the audit of the record was undertaken in the year 2013, but the appellant had paid most of the amount of service tax on its own, even before the issuance of the show cause notice. An inference was, however, drawn by the Commissioner from the aforesaid facts that the appellant was aware of the liability to pay service tax. It is thereafter that the Commissioner observed: ^‗It may be that they have no malafide intention in not paying the service tax in time but they have failed to include, in their periodical returns filed with the department‘ the correct amount of premium received on various counts. The Commissioner, therefore, held that this would amount to suppression‘ as the department had no other way of knowing the authenticity on the periodical returns. The Commissioner, ultimately, concluded that it appeared that the appellant had deliberately ^„suppressed^‟ facts with an intention to evade payment of service tax.

27. The submission advanced by the learned counsel of the appellant is that when there was no malafide intention on the part of the appellant, the extended of limitation could not have been invoked, as mere failure to mention the receipts in the ST-3 return would          not amount to suppression‘ of facts. The contention of learned counsel of the appellant is that there should have been some positive act of suppression‘ on the part of the appellant, which act, the impugned order has failed to establish.

28. Radhe Tallo learned Authorized Representative of the Department however, submitted that the Commissioner committed no illegality in invoking the extended period of limitation and in this connection placed reliance upon the decisions of the Tribunal in Timken India Limited vs. Commissioner of Central Excise, Jamshedpur¹² and Bharti Hexcom Ltd. vs. Commissioner of Central Excise, Jaipur-I¹³ and of the Bombay High Court in McKinsey & Company Inc. vs. Commissioner of Central Excise¹⁴.

29. Section 73(1) of the Finance Act deals with recovery of service tax not levied or paid or short levied or short paid. The extended period of limitation can be invoked under the proviso to section 73(1) of the Finance Act, in which case notice can be served within five years. If the extended period of limitation is not invoked in the present case, any demand of service tax up to March 2013 would be time barred. One circumstance mentioned in the proviso to section 73(1) of the Finance Act, is when there has been a ^‗suppression of facts‘.

30. The Supreme Court and the Delhi High Court have held that ^‗suppression of facts‘ has also to be ^‗wilful‘ and with an intent to evade payment of service tax.

31. In Pushpam Pharmaceutical Co. vs. Commissioner of Central Excise, Bombay¹⁵, the Supreme Court examined whether the Department was justified in initiating proceedings for short levy after the expiry of the normal period of six months by invoking the proviso to section 11A of the Excise Act. The proviso to section 11A of the Act carved out an exception to the provisions that permitted the Department to reopen proceedings if the levy was short within six months of the relevant date and permitted the Authority to exercise this power within five years from the relevant date under the circumstances mentioned in the proviso, one of which was ^‗suppression of facts‘. It is in this context that Supreme Court observed that since ^―suppression of fact^‟ had been used in the company of strong words such as fraud, collusion, or willful default, suppression of facts must be deliberate and with an intent to escape payment of duty. The observations are as follows;

^”4. Section 11A empowers the Department to re-open proceedings if the levy has been short-levied or not levied within six months from the relevant date. But the proviso carves out an exception and permits the authority to exercise this power within five years from the relevant date in the circumstances mentioned in the proviso, one of it being suppression of facts. The meaning of the word both in law and even otherwise is well known. In normal understanding it is not different that what is explained in various dictionaries unless of court the context in which it has been used indicates otherwise. A perusal of the proviso indicates that it has been used in company of such strong words as fraud, collusion or wilful default. In fact it is the mildest expression used in the proviso. Yet the surroundings in which it has been used it has to be construed strictly. It does not mean any omission. The act must be deliberate. In taxation, it can have only one meaning that the correct information was not disclosed deliberately to escape from payment of duty. Where facts are known to both the parties the omission by one to do what he might have done and not that he must have done, does not render it suppression.”

(emphasis supplied)

32. This decision was referred to by the Supreme Court in Anand Nishikawa Company Ltd. Commissioner of Central Excise¹⁶ and the observations are as follows:

26…………………………….. This Court in the case of Pushpam Pharmaceutical Company v. Collector of Central Excise, Bombay, while dealing with the meaning of the expression “suppression of facts” in proviso to Section 11A of the Act held that the term must be construed strictly. It does not mean any omission and the act must be deliberate and willful to evade payment of duty. The Court, further, held:-

^”In taxation, it (^―suppression of facts^‖) can have only one meaning that the correct information was not disclosed deliberately to escape payment of duty. Where facts are known to both the parties the omission by one to do what he might have done and not that he must have done, does not render it suppression.^‖

27. Relying on the aforesaid observations of this Court in the case of Pushpam Pharmaceutical Co. v. Collector of Central Excise, Bombay [1995 Suppl. (3) SCC 462], we find that “suppression of facts” can have only one meaning that the correct information was not disclosed deliberately to evade payment of duty. When facts were known to both the parties, the omission by one to do what he might have done not that he must have done would not render it suppression. It is settled law that mere failure to declare does not amount to willful suppression. There must be some positive act from the side of the assessee to find willful suppression. Therefore, in view of our findings made herein above that there was no deliberate intention on the part of the appellant not to disclose the correct information or to evade payment of duty, it was not open to the Central Excise Officer to proceed to recover duties in the manner indicated in proviso to Section 11A of the Act.”

(emphasis supplied)

33. These two decisions of the Supreme Court in Pushpam Pharmaceuticals and Anand Nishikawa Company Ltd. were followed by the Supreme Court in a subsequent decision rendered in Uniworth Textile Limited Commissioner of Central Excise, Raipur¹⁷ and the observation is:

18. We are in complete agreement with the principal enunciated in the above decisions, in light of the proviso to section 11A of the Central Excise Act, 1944.^‖

34. The Supreme Court in Continental Foundation Joint Venture Holding Commissioner of Central Excise, Chandigarh-I¹⁸ also held as follows:

^”10. The expression “suppression” has been used in the proviso to Section 11A of the Act accompanied by very strong words as ‘fraud’ or “collusion” and, therefore, has to be construed strictly. Mere omission to give correct information is not suppression of facts unless it was deliberate to stop the payment of duty. Suppression means failure to disclose full information with the intent to evade payment of duty. When the facts are known to both the parties, omission by one party to do what he might have done would not render it suppression. When the Revenue invokes the extended period of limitation under Section 11-A the burden is cast upon it to prove suppression of fact. An incorrect statement cannot be equated with a willful misstatement. The latter implies making of an incorrect statement with the knowledge that the statement was not correct.

(emphasis supplied)

35. The Delhi High Court in Bharat Hotels Limited Commissioner of Central Excise (Adjudication)¹⁹ also examined at length the issue relating to the extended period of limitation under the proviso to Section 73 (1) of the Act and held as follows;

^”27. Therefore, it is evident that failure to pay tax is not a justification for imposition of penalty. Also, the word ^―suppression^‟ in the proviso to Section 11A(1) of the Excise Act has to be read in the context of other words in the proviso, i.e. ^―fraud, collusion, wilful misstatement^‖. As explained in Uniworth (supra), ^―misstatement or suppression of facts^‖ does not mean any omission. It must be deliberate. In other words, there must be deliberate suppression of information for the purpose of evading of payment of duty. It connotes a positive act of the assessee to avoid excise duty.

xxxxx

Thus, invocation of the extended limitation period under the proviso to Section 73(1) does not refer to a scenario where there is a mere omission or mere failure to pay duty or take out a license without the presence of such intention.

xxxxx

The Revenue has not been able to prove an intention on the part of the Appellant to avoid tax by suppression of mention facts. In fact it is clear that the Appellant did not have any such intention and was acting under a bonafide belief^‖

36. It is, therefore, clear that even when an assessee has suppressed facts, the extended period of limitation can be evoked only when suppression^‟ is shown to be willful and with an intent to evade payment of service tax.

37. The Commissioner has not recorded any finding that even if the appellant had suppressed the fact of having received the amount, it was willful and with an intent evade payment of service In fact, the Commissioner observed that there was no malafide intention on the part of the appellant to suppress this fact.

38. This apart, it has been pointed out by learned counsel for the appellant that the issue relating to the point of time for payment of service tax on the services in question was prevailing in the industry and was being discussed with GIC. It has also been pointed out that the service tax to be paid by the appellant on reinsurance services provided to member companies was available as CENVAT credit to the appellant. Likewise, the service tax paid by the appellant on reinsurance services received from foreign companies was also available as CENVAT credit. Such being the position, the appellant is correct in contending that there was no suppression of facts with any intention to evade payment of service tax.

39. Learned Authorized Representative of the Department has, however, placed reliance upon the decisions of the Tribunal in Timken India Limited and Bharti Hexcom Limited.

40. In Timken India Limited, the Tribunal observed as follows:

^”12. On the issue of limitation we feel that the appellant being an old assessee were very well aware about the provisions of Service Tax Act we feel that if they had any doubt regarding the classification of the services availed by them, in that case they should have approached the department for necessary clarification on the issue. As the assessee is working in the era of self-assessment and therefore the responsibility lies with them to classify the service availed/provided by them correctly and if any confusion or difficulty they are certainly free to approach the revenue authorities for necessary clarifications. We feel that the appellant has not come clean on this aspect and therefore we feel that the extended time proviso for demanding service tax has rightly been involved in their case.^‖

41. The Tribunal found as a fact there was a positive act on the part of the appellant in suppressing facts. This decision would, therefore, not help the department.

42. Likewise, the decision of the Bombay High Court in McKinsey & Company Inc. would also not help the Department as it was based on its own facts and a categorical finding that there was an intention to evade payment service tax.

43. Thus, in the facts and circumstances of the present case, the extended period of limitation could not have been invoked. Any demand up to March 2013 would, therefore, barred by limitation.

Merit- Delay in Payment of Service Tax

44. The contention advanced by learned counsel for the appellant is that since there has been no delay in payment of service tax, the demand of interest is not sustainable.

45. The details of the matrixes for the relevant period that were received from GIC have been provided by the appellant as under:

46. The submission of learned Counsel for the appellant is that as per the Insurance Act, the insurer cannot assume the risk unless the premium is paid, which is the consideration for the service of assuming the risk and indemnifying the loss. As in the present case, premium is paid to them only after the receipt of the matrix from GIC, that date should be reckoned as the date of provision of service and so there is no delay in payment of service tax.

47. It is true that the general principle under Insurance Act is that unless the premium is paid, the insurer cannot assume the risk (which is the service of Insurance). It is for this reason that, no policy is issued unless the premium is paid in advance and no risk is assumed by the insurer before this date. However, this is not the case with reinsurance.

48. In the first instance, unlike in normal insurance policies, the risk in re-insurance is assumed by the appellant as soon as the re­insurance treaty is signed. On a specific querry put to the learned counsel for the appellant that if there was a claim after the re­insurance treaty was signed but before the premium was actually received, than whether the appellant would be liable to pay their share of the claim, the learned counsel stated in the positive. This clearly means that the service re-insurance company provides to the insuring company starts as soon as the treaty/ contract is The share of the premium with respect to each insurance policy issued by the insuring company is fixed, but this share is received much later, usually once the accounts are squared up and this may often happen even after the period of insurance specified in the treaty / contract is over.

49. In the present case, the accounts were squared up after three years much after the relevant period for which the insurance was issued. The service could have been provided only during the period of insurance and it could not have been provided after the period is over. Thus, the re-insurer assumes his share of the risk with respect to every policy issued by the insuring company as soon as the policy is issued.

50. Secondly, if no risk is assumed until the premium is paid, it will be impossible for any reinsurance to operate. If A(the insured) obtains a policy from B (the insurer) who has, as per the re­insurance treaty, ceded, say, 10% of the premium and risk to C (the reinsurer), the risk is assumed by B (to indemnify A) and C (to indemnify B) as soon as the policy is issued by B to A. It will be impractical for the insurer B to keep sharing a portion of the premium with the re-insurer C every time a policy is issued or seek a portion of the claim from C every time a claim is settled by the insurer B. Therefore, the accounts are squared up only at the end of the period.

51. Thirdly, and most importantly, section 64VB of the Insurance Act, which is relevant, does not apply to re-insurance. It reads as follows:

“64VB. No risk to be assumed unless premium is received in advance.^—

(1) No insurer shall assume any risk in India in respect of any insurance business on which premium is not ordinarily payable outside India unless and until the premium payable is received by him or is guaranteed to be paid by such person in such manner and within such time as may be prescribed or unless and until deposit of such amount as may be prescribed, is made in advance in the prescribed manner.

(2) For the purposes of this section, in the case of risks for which premium can be ascertained in advance, the risk may be assumed not earlier than the date on which the premium has been paid in cash or by cheque to the insurer.

Explanation. ^—Where the premium is tendered by postal money order or cheque sent by post, the risk may be assumed on the date on which the money order is booked or the cheque is posted, as the case may be.

(3) Any refund of premium which may become due to an insured on account of the cancellation of a policy or alteration in its terms and conditions or otherwise shall be paid by the insurer directly to the insured by a crossed or order cheque or by postal money order and a proper receipt shall be obtained by the insurer from the insured, and such refund shall in no case be credited to the account of the agent.

(4) Where an insurance agent collects a premium on a policy of insurance on behalf of an insurer, he shall deposit with, or dispatch by post to, the insurer, the premium so collected in full without deduction of his commission within twenty-four hours of the collection excluding bank and postal holidays.

(5) The Central Government may, by rules, relax the requirements of sub-section (1) in respect of particular categories in insurance policies.

(6) The Authority may, from time to time, specify, by the regulations made by it, the manner of receipt of premium by the insurer.^‖

52. Sub-section (5) authorizes the Central Government to relax this requirement of receiving premium in advance. Rule 59 of the Insurance Rules, 1939 relaxes this requirement for several types of cases, including re-insurance policies. The relevant portion of Rule 59, which deals with relaxation, is reproduced below:-

^”Rule 59. In respect of the categories of insurance policies mentioned there under the requirements of sub-section (1) of Sec. 64-VB shall stand relaxed to the extent and in the manner mentioned against each category of policy, subject to the conditions mentioned therein:

(a)

(b) ….

(m) Policies of re-insurance.-

(i) Risk may be assumed without payment of premium in advance on insurances accepted under automatic re­insurance contracts.

(ii) In the case of facultative re-insurances accepted, risk maybe assumed without payment of premium in advance if the ceding insurer has given an undertaking to pay his share of the premium, installment of premium, premium subject to delayed payment or, where a deposit premium, or provisional premium was paid on the original policy, the adjusted premium, or, in the case of premiums subject to delayed payment, the delayed premium as the case may be, before the end of the calendar month succeeding the month in which the premium is due under the original policy.^‖

53. Thus, section 64VB (5) of the Insurance Act read with rule 59 of the Insurance Rules, clearly excludes re-insurance from the general rule that no risk should be assumed until the premium is paid. The consideration in re-insurance policies can be like in any other contract (past, present or future).

54. The issue, therefore, that arises for consideration is when service is rendered and service tax is due but the appellant is not able to pay it until the accounts are squared up and thereby delays paying the service tax, than whether in such a situation the appellant is liable to pay interest on the delayed payment, considering that the delay is not on account of the fault of the appellant.

55. A similar issue comes up often in Central Excise matters when the transaction value of the goods is unknown, either partly or fully when the goods are cleared. This happens with Government contracts which fix the price based on a formula, several elements of which (say cost of raw material or minimum wages of the labour) are not known at the time of clearance. Later, when they get the details, they pay the differential excise duty. The question whether interest needs to be paid even in such cases for the period when the excise duty is due and when it is actually paid was answered in the affirmative by a Constitution Bench of the Supreme Court in Steel Authority of India Ltd. vs Commissioner of Central Excise Raipur²⁰. The observations of the Supreme Court are as follows:

^”63. we are of the view that the reasoning of this court in the order referring the cases to us (to this Bench) that for the purpose of Section 11AB, the expression ^―ought to have been paid^‖ would mean the time when the price was agreed upon by the seller and the buyer does not square with our understanding of the clear words used in Section 11AB and as the rules proclaim otherwise and it provides for the duty to be paid for every removal of goods on or before the 6^th day of the succeeding month. Interpreting the words in the manner contemplated by the Bench which referred the matter would result in doing violence to the provisions of the Act and the Rules which we have interpreted. We have already noted that when an assessee in similar circumstances resorts to provisional assessment upon a final determination of the value

20. Civil Appeal No. 2150 of 2012 decided on May 08, 2019

consequently, the duty and interest dates back to the month ^―for which^‖ the duty is determined. Duty and interest is not paid with reference to the month in which final assessment is made. In fact, any other interpretation placed on Rule 8 would not only be opposed to the plain meaning of the words used but also defeat the clear object underlining the provisions. It may be true that the differential duty becomes crystalised only after the escalation is finalized under the escalation clause but it is not a case where escalation is to have only prospective operation. It is to have retrospective operation admittedly. This means the value of the goods which was only admittedly provisional at the time of clearing the goods is finally determined and it is on the said differential value that admittedly that differential duty is paid. We would think that while the principle that the value of the goods at the time of removal is to reign supreme, in a case where the price is provisional and subject to variation and when it is varied retrospectively it will be the price even at the time of removal. The fact that it is known, later cannot detract from the fact, that the later discovered price would not be value at the time of removal. Most significantly, section 11A and section 11AB as it stood at the relevant time did not provide read with the rules any other point of time when the amount of duty could be said to be payable and so equally the interest. We would concur with the views expressed in SKF case (supra) and International Auto (supra).^‖

56. In CCE vs SKF India Ltd²¹, the Supreme Court held as follows:

^”17. We are unable to subscribe to the view taken by the High Court in Rucha Engg. [First Appeal No. 42 of 2007 decided on 3-4- 2007] It is to be noted that the assessee was able to demand from its customers the balance of the higher prices by virtue of retrospective revision of the prices. It, therefore, follows that at the time of sale the goods carried a higher value and those were cleared on short-payment of duty. The differential duty was paid only later when the assessee issued supplementary invoices to its customers demanding the balance amounts. Seen thus, it was clearly a case of short-payment of duty though indeed completely unintended and without any element of deceit, etc. The payment of differential duty thus clearly came under sub-section (2-B) of Section 11-A and attracted levy of interest under Section 11-AB f the Act.^‖

57. Although this is a service tax matter, the provisions are pari materia and if service tax is due on a date but is paid much later because data is not available with the assessee, interest has to be paid. Thus, the demand of interest from the appellant for the period post March 2013 upto March 2014 is justified.

Penalty

58. The Commissioner has imposed penalty under section 78 of the Finance Act for the reason that the appellant had deliberately suppressed or had not disclosed the material fact of non-payment of service tax on retrocession premium, excess of loss premium and foreign cession of the excess of loss premium related to terrorism reinsurance services with an intention to evade payment of service tax. While dealing with the issue as to whether the extended period of limitation under the first proviso to section 73 of the Finance Act could have been invoked in the facts and the circumstances of the case, it has been found as a fact that the suppression of facts was not willful nor was there any intent to evade payment of service tax. Thus, for all the reasons stated while dealing with the extended period of limitation, penalty under section 78 of the Finance Act could not have been imposed upon the appellant. The Commissioner was, therefore, not justified in imposing penalty under section 78 of the Finance Act as there was no deliberate suppression of facts with intention to evade payment of service tax.

59. In the result it is held that since the extended period of limitation could not have been invoked the demand of any interest up to March 2013 is not justified. However, the demand of interest for the period post March 2013 up to March 2014 is sustained. Penalty could also not have been imposed under section 78 of the Finance Act.

61. The appeal, therefore, succeeds in part. The impugned order dated September 7, 2016 passed by the Commissioner is set aside to the extent it has demanded interest for the period up to March 2013 and has imposed penalty under section 78 of the Finance Act. The demand of interest for period post March 2013 up to March 2014, however, is sustained.

(Pronounced on 25.05.2021)

Notes:-

1. the appellant

2. the Commissioner

3. the Finance Act

4. the Insurance Act

5. GIC

6. Insurance Pool

7. 1994 Rules

10. 2012 (27) S.T.R. 8 (Del.)

11. 2015 (40) S.T.R. 1069 (Tri. –Mumbai)

12. 2019 (22) G.S.T.L. 282 (Tri. –Kolkata)

13. 2019 (24) G.S.T.L. 588 (Tri. Del.)

14. 2019 (20) G.S.T.L. 198 (Bom.)

15. 1995 (78) E.L.T. 401 (S.C.)

16. 2005 (188) E.L.T. 149 (SC)

17. 2013 (288) E.L.T. 161 (S.C.)

18. 2007 (216) E.L.T. 177 (S.C.)

19. 2018 (12) GSTL 368 (Del.)

20. Civil Appeal No. 2150 of 2012 decided on May 08, 2019

21. (2009) 13 SCC 461