Brief of the Case
In the case of Suparesh General Insurance Services and Brokers Pvt. Ltd. v Commissioner of Service Tax, Hon’ble Madras High Court held that whenever, a transaction of rendering services is taken out by the re- insurance broker in India in order to get the services of re-insurer abroad for assisting the client in India, will come under the definition of “Export of Services”.
Facts of the Case
The assessee is an Insurance Broker as well as Re-insurance Broker who got a Composite Licence under the Insurance Regulatory and Development Authority (Insurance Brokers) Regulations, 2002. The assessee is remitting service tax for the “Insurance Auxiliary Services” under Section 65(55) of 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 tax for the brokerage received from overseas re-insurers acting through overseas brokers.
Order of the Adjudicating Authority
According to the Adjudicating Authority, the nature of the services rendered by the assessee in the present case are identified as re-insurer rendering consultancy and risk management services for re-insurance negotiation with reinsurer on behalf of the Insurance company and that the only service rendered to the re-insurer is remittance of premiums for the re-insurance, for which he retains the commission. The services were rendered and 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.
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.
Held by the Hon’ble Tribunal
The Hon’ble Tribunal, observed that 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.
Also, it was observed by the Hon’ble Tribunal that there was no case of “Export of Service” and therefore, the assessee was not entitled to the benefit of Export of Service Rules, 2005 nor Notification Nos.2/99 dated 28.2.1999, 6/99 dated 09.04.1999 and 21/2003 dated 20.11.2003. The Tribunal further held that to enable the assessee to get the benefit of the Notifications, there must be physical receipt of remuneration in convertible foreign exchange and this did not took place in the present case.
Contention of the Assessee
According, to the ld. Counsel for the Assessee the nature of services rendered by the assessee is “export of service” and therefore, the Board’s circular dated 25.4.2003 would squarely apply to the transaction in question, as the service tax is destination based consumption tax and it will not get attracted to ‘export of service’, more particularly re-insurers as an intermediary falling under Insurance Ancillary Service. According to the assessee, he performs the duties of a re insurance broker as defined under Regulation No.4 of the IRDA (Insurance Brokers) Regulations 2002.
Contention of the Revenue
The ld. Counsel for the Revenue contended that the service is rendered to the re-insured within India. According to the Department, the amount was paid by New India Assurance Co. Ltd. for the services rendered to them and since the nature of transaction undertaken by the assessee is primarily 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 1/3/2003.
Held by the Hon’ble High Court
The Hon’ble High Court observed that the assessee, in relation to the trade practice prevalent in the trade internationally and following the practice and procedure followed by the reinsurance brokers with the reinsurance companies, the assessee had retained that portion of the commission or brokerage and remitted the balance to the reinsurance company at London.
The Hon’ble High Court discussed and relied upon the case of JB Boda and Co. Pvt. Ltd. V. Central Board of Direct Taxes  223 ITR 271 (SC) where it was contended 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. In this case, the appellant therein was engaged in the brokerage business as reinsurance brokers, as in the present case. The appellant in that case arranged for re-insurance of a portion of the risk with various reinsurance companies either directly or through foreign brokers. In return, the appellant company received a percentage of premium received by the foreign company as its share of brokerage.
In respect of this insurance risk, the appellant contacted brokers in London for placement of reinsurance business. The appellant therein furnished all the details. The said London brokers contacted various underwriters and after getting confirmation about the portion of the risk the foreign reinsurers were prepared to undertake, informed the appellant about such reinsurance coverage. Thereafter, the Indian ceding company handed over the total premium to be paid by it to the foreign reinsurance company, to the appellant for onward transmission. When this amount was given to the appellant, the appellant approached the Reserve Bank of India with a statement showing the amount of foreign currency payable as reinsurance premium to the foreign parties after deducting the amount of brokerage due to the appellant. This balance amount after deducting the brokerage, was remitted to the London brokers with the permission of the Reserve Bank of India.
In that case it was contended on behalf of the assessee that amount of commission retained by it was a receipt of convertible foreign exchange. In that case, the Indian insurers make payment in Rupees to the appellant – JB Boda for the amount of reinsurance premium to be remitted to the foreign company, furnishing all particulars with an advice to the appellant to approach the Reserve Bank of India for necessary permission to remit in U.S. dollars the reinsurance premium abroad.
The appellant herein claimed the said amount as income in terms of foreign exchange as per Section 80-O of the Income Tax Act. The Hon’ble Supreme Court in that case held that the nature of business undertaken by the re-insurance broker in providing re-insurance through the foreign company, namely, Sedgwick Offshore Resources Ltd., London, who is also a broker is in the nature of services rendered outside India. The Hon’ble 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.
Therefore, it was 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’.
After discussing the above case, the Hon’ble High Court proceeded further and held that the Circular clarifies 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 these notifications will have no effect. This clarification gets the stamp of approval by the Supreme Court in the decision reported in 2007 (7) SCC 527 (All India Federation of Tax Practitioners V. Union of India),
A reading of the said circular issued by the Government of India which is binding on the Department makes it clear that the applicability of service tax will be only in relation to services provided within the country and not in relation to export of service. As a matter of fact, the substantial portion of the demand in the show cause notice and the adjudication order falls outside the purview of the Export of Service Rules. On and from 15.3.2005, Export of Service Rules comes into operation. The period between 15th March, 2005 to 31st March, 2006, the Rules may apply and in the instant case upto 31.3.2006.
The proviso to Rule 3(3) does not get attracted to the present case, as the recipient of the taxable service is not located in India. According to the proviso, the recipient of such taxable services does not have commercial or industrial establishment or office relating thereto in India. In the present case, the re-insurance broker has rendered service outside India and does not fall within Rule 3(3) and that fact is not disputed. Therefore, there is no requirement of payment of service tax.
Also, it was observed by the Hon’ble High Court that the nature of transaction in question it is an export of service.
At the end the Hon’ble High Court held that the role of the assessee is collecting and remitting the premium. IRDA (Insurance Brokers) Regulations further casts a duty on the assesee as to how the money collected in relation to the re-insurance contract should be dealt 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 but is much more to be done by the Insurance broker even as per the IRDA (Insurance Brokers) Regulations, There is also a clear finding by the Tribunal that the assessee serves the foreign company in the course of the business.
In any event, 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.
Therefore, by this discussion the Hon’ble High Court decided in the favour of the assessee.