Custom, Excise & Service Tax Tribunal
Deposit Insurance & Credit Guarantee ... vs Mumbai on 5 February, 2015
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
WEST ZONAL BENCH AT MUMBAI
APPEALS NOS: ST/86491/2013 & ST/88305 & 88324/2014
[Arising out of Orders-in-Original Nos: 11/COMMR(BKS)/LTU-M/ST2012 dated 10/01/2013 & 01-02/COMMR(WLH)/LTU-M/CX/2014 dated 11-4-2014 passed by the Commissioner of Central Excise & Service Tax, LTU.]
For approval and signature:
Honble Shri M.V. Ravindran, Member (Judicial)
Honble Shri P.R. Chandrasekharan, Member (Technical)
1.
Whether Press Reporters may be allowed to see the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982?
:
No
2.
Whether it should be released under Rule 27 of CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?
:
No
3.
Whether Their Lordships wish to see the fair copy of the Order?
:
Seen
4.
Whether Order is to be circulated to the Departmental authorities?
:
Yes
Deposit Insurance & Credit Guarantee Corporation
Appellant
Vs
Commissioner of Central Excise & Service Tax
Mumbai
Respondent
Appearance:
Shri V. Sridharan, Sr. Advocate with Shri S.S. Gupta and Shri Vinay Jain, Chartered Accountants for the appellant
Shri P.R.V. Ramanan, Spl. Counsel for the respondent
CORAM:
Honble Shri M.V. Ravindran, Member (Judicial)
Honble Shri P.R. Chandrasekharan, Member (Technical)
Date of hearing: 05/02/2015
Date of decision: 11/03/2015
ORDER NO: ____________________________
Per: P.R. Chandrasekharan:
There are 3 appeals arising from Ordersin-Original Nos. 11/COMMR(BKS)/LTU-M/ST/2012 dated 10/01/2013 and 01-02/COMMR(WLH)/LTU-M/CX/2014 dated 11-4-2014 passed by the Commissioner of Central Excise & Service Tax, LTU, Mumbai. Vide these orders service tax demands along with interest have been confirmed and penalties imposed on the appellant, Deposit Insurance and Credit Guarantee Corporation, Mumbai (DICGC in short). The details are as under:-
Appeal No
ST/86491/13-MUM
ST/88305/14-MUM
ST/88324/14- MUM
Period of dispute
1.5.2006 to 31.3.2011 &
1.4.2011 to 30.9.2011
6.11.2011 to 30.03.2012
6.5.2012 to 23.8.2012
Show cause notice date
24.10.2011 & 7.3.2012
31.1.2013
25.6.2013
Order-in-original No.
11/COMMR(BKS)/LTU-M/ST/2012 dated 10.1.2013
01-02/COMMR(WLH)/LTU-M/CX/2014 dated 11.4.2014
Demand of service tax
` 2075, 64,65,926/-
& ` 283,15,29,750/-
-
-
Interest Not quantified.
` 19,17,54,309/-
` 12,12,383/-
Penalties imposed
(i) ` 2075,64,65,926/-
+ ` 283,13,29,750 u/s 78;
` 12,96,11,708/- u/s. 76 & Rs. 29,000/-
u/s. 77 of the Finance Act, 1994.
` 8,19,481/-
u/s. 76 & ` 10,000/-
u/s. 70 of the Finance Act, 1994.
(ii) ` 200/- per day or @ 2% per month whichever is higher for the period 1-5-06 to 15-5-08 u/s 76;&
(iii) ` 10,000/- u/s 70, of Finance Act, 1994 Aggrieved of the same, the appellant is before us.
2. Brief Facts Brief facts relating to these cases are as follows:-
2.1. DICGC is a subsidiary of RBI established under the DICGC Act, 1961 for the purpose of providing insurance of deposits and guaranteeing credit facilities. It insures all bank deposits, savings, fixed, current and recurring deposits up to the limit of Rs.1 lakh of each deposit in a Bank. Deposits held by all commercial Banks, including branches of foreign banks functioning in India, Local Area Banks, Regional Rural Banks and all eligible co-operative banks as defined under the DICGC Act,1961 are covered by the Deposit Insurance Scheme.
2.2. The legal framework for DICGC is provided by the DICGC Act, 1961 and the DICGC General Regulations,1961. Pursuant to opting for Large Taxpayer Unit (LTU) membership for tax purposes by DICGC, in the year 2008, the question of coverage of deposit insurance services rendered by DICGC came to be examined by the department. They were asked, vide letter dated 7/7/2008 to take out service tax registration and pay service tax and also furnish information relating to income earned by them from 1/5/2006.
2.3. DICGC sought exemption from service tax by their letter dated 01/08/2008, which was rejected by the Finance Ministry by letter dated 05/01/2009. In the meantime, CBEC, by its letter dated 1/12/2008 confirmed that the services provided by DICGC were covered under General Insurance Business w.e.f. 01/05/2006. DICGC was reminded to furnish the information sought for from them by letter dated 16/10/2008. However, DICGC did not comply with the request but contested the levy by their letter dated 28/11/2008. Department addressed similar letters to DICGC on 10/12/2008, 1/1/2009 and 29/1/2009.
2.4. DICGC, by their letter dated 14/01/2009, took up the matter with Finance Ministry, who issued a clarification vide letter dated 24/2/2009 to the effect that the charges collected by DICGC are not taxable under the taxable service of General Insurance Service. This view was reiterated by CBEC letter dated 22/4/2009.
2.5. The LTU, Mumbai expressed reservations about the correctness of the above view and after re-examination of all the relevant issues, the CBEC, vide letter dated 20/9/2011 clarified that the insurance activity of DICGC falls within the ambit of section 65(105) (d) of Finance Act,1994 and is chargeable to service tax under general insurance business. DICGC were accordingly addressed letters on 22/9/2011, 5/10/2011 and 10/10/2011.
2.6. DICGC obtained Service Tax registration thereafter and started paying Service Tax w.e.f. the half year ending March 2013. They furnished the information on gross charges recovered up to 31/3/2011 on 13/10/2011 & 19/10/2011.
2.7. Show cause notice demanding Service Tax amounting to ` 2075.65 Cr. invoking extended period of limitation was issued on 24/10/2011 for the period from 1/5/2006 to 31/3/2011 and demanding Service Tax amounting to ` 283.15 Cr. was issued on 07/03/2012, for the period from 1/4/2011 to 30/9/2011 within normal time limit. Two more show cause notices were issued for recovery of interest for the belated payment of service tax and for imposition of penalties on 31/01/2013 and 25/06/2013. These notices were adjudicated as indicated in the opening paragraph and the demands confirmed and penalties imposed. Hence the appeals before us.
3. Submissions on behalf of the appellant The submissions advanced on behalf of the appellant are detailed below:-
3.1. Adverse Circulars withdrawing certain benefit/relief are prospective in operation.
CBEC (Board in short) had vide letter dated 24/02/2009 clarified that the services provided by the appellants were not taxable. Subsequently the said clarification was revised vide letter dated 20-9-2011 wherein it was stated that the activity undertaken by the appellant is taxable under the taxable service of general insurance business. This clarification, being adverse in nature, will have prospective effect only.
3.1.1. In Suchitra Components Ltd. v. Commissioner of Central Excise, Guntur 2006(12) SCC 452, the Honble Supreme Court categorically held that any revision which is against the assessee is effective only prospectively. The observations of the Supreme Court in this connection are as under:-
The point raised by the learned counsel for the appellant is covered by the recent judgment of this Court in Civil Appeal No. 4488 of 2005, Commissioner of Central Excise, Bangalore v. M/s. Mysore Electricals Industries Ltd., reported in 2006 (204) E.L.T. 517 (S.C.). In the said Judgment, this Court held that a beneficial circular has to be applied retrospectively while oppressive circular has to be applied prospectively. Thus, when the circular is against, the assessee, they have right to claim enforcement of the same prospectively. 3.1.2. The Madras High Court, in Mohan Breweries & Distilleries Ltd. Vs. Commercial Tax Officer - 2005 (139) STC 477 (Mad.) was, inter alia, concerned with the question as to whether purchase tax under the local Sales Tax Act is leviable on purchase of empty bottles from other states against bought notes through salesmen permits. Benevolent clarifications were issued on 09/11/1989 and 27/12/2000 holding that purchase tax is not leviable under such circumstances. These clarifications were subsequently withdrawn by a clarification dated 28/01/2002. The period for which purchase tax was demanded was 1996-97. The Honble High Court concluded as follows:-
8.6.10. It is, therefore, clear that even though the clarification dated November 9, 1989 is executive in nature, the same is binding on the authorities till the concessions given to the petitioner under the clarification were withdrawn, which could be done only prospectively, viz., in the instant case, with effect from January 28, 2002, and the revenue could not refuse the benefit of the clarifications dated November 9, 1989 and December 27, 2000 in respect of levy of purchase tax under section 7-A of the Act for the impugned assessment year 1996-97.
8.7. For all these reasons, we are convinced that even though the purchase turnover with respect to the purchase of empty bottles from the unregistered dealers under bought note can be charged for purchase tax under section 7-A of the Act, the petitioner is entitled for the benefit of the clarifications dated November 9, 1989 and December 27, 2000 till the same is withdrawn prospectively by the clarification dated January 28, 2002 and therefore, the impugned levy of purchase tax on the purchase turnover for the purchase of empty bottles from unregistered dealers under section 7-A of the Act is illegal. 3.1.3. Similar views have been taken in - (i) Simplex Castings Ltd. Vs. CC 2003 (155) ELT 5 (SC); and (ii) CCE Vs. Maruti Foam 2004 (164) ELT 394 (SC). In both these cases, withdrawal circular was given prospective effect only.
3.1.4. Applying the ratio of the above cases, service tax, if any, can be levied only after issuance of adverse circular, i.e., after 20/09/2011. This is without prejudice to the submission that no tax is payable at all as appellants have not rendered any taxable service.
3.2. Extended period of limitation is not invokable in the present case The first show cause notice has been served on 24/10/2011 demanding service tax for the period 01/05/2006 to 31/03/2011. The appellant had bona fide belief that they were a statutory corporation performing statutory functions and not rendering any services. The appellants were not engaged in the business as their activity did not involve any profit motive. The appellants were not executing any contract of insurance. Further, the very fact that the board itself issued conflicting circulars shows that the matter requires interpretation of statutory provisions. Further, CBEC circular dated 24.2.2009 were clearly in their favor as no service tax is payable on the activity undertaken by the appellants. In such circumstances, invocation of extended period of limitation is totally unjustified and unsustainable. However, the Ld. Commissioner, in the impugned order held that the appellants had misrepresented before the Board to obtain favorable clarification. This conclusion is preposterous. From the bare reading of the Para 7 of the circular dated 20.9.2011 it can be seen that clarification is based on the review /change of opinion on part of the CBEC and not on account of any suppression on the part of the appellants. Hence, part of the demand is barred by limitation of time.
3.3. The transaction in the present case is one of guarantee and not of insurance.
3.3.1. The transaction in the present case is one of guarantee and not of insurance as alleged. The appellants are providing guarantee to the depositors that in the event of bank unable to pay to the depositors, the appellants will pay to the depositors. It enhances the credibility of the bank and depositors are secured to the extent of guarantee given by the appellants. Therefore, such transaction is not of insurance but one of guarantee. Distinction between the guarantee and insurance is well settled.
3.3.2. The distinction between the Insurance and guarantee is also explained by R.P. Colinvaux in book The law of insurance, Second edition, page 359. The relevant portion is reproduced as under:-
Whether contract one of insurance or guarantee. It is often a difficult question whether a given contract is one of guarantee or of insurance and the matter has now come before the House of Lords in Trade Indemnity Co. V. Workington Barbour Board. There an insurance company for a financial consideration subscribed to a money bond conditioned for the performance of a contract, and it was held that the contract was a guarantee and not an insurance policy. This case, however, provides little guidance in principle, and Romer L.Js judgement in Season v. Heath remains the most detailed pronouncement on the matter.
The difference between the two classes of contract, he states, does not depend on the mere use of the words insurance or guarantee, but they can generally be distinguished by the way in which they are effected. Contracts of insurance are generally matters of speculation, where the person desiring to be insured has means of knowledge as to the risk, and the insurer has not the means or not the same means. The insured generally puts the risk before the insurer as a business transaction, and the insurer on the risk stated fixes a proper price to remunerate him for the risk to be undertaken; and the insurer engages to pay the loss incurred by the insured in the event of certain specified contingencies occurring. On the other hand [in contracts of guarantee] the creditor does not himself go to the surety, or represent, or explain to the surety, the risk to be run. The surety often takes the position from motives of friendship, and generally not as the result of any direct bargaining between him and the creditor, or in consideration of any remuneration passing to him from the creditor.
The question must ultimately depend on the expressed intention of the parties in each case. Where the intention is that the surety should, on default of the debtor, pay the original debt, the contract is one of guarantee: where the intention is that a new debt should arise on default, payable by the insurer, the contract is one of insurance.
3.3.3. In the present case also, the contract, if any, is one of guarantees as the present transaction satisfy all the ingredients of the contract of guarantees. Some of them are elaborated as under:-
(i) In the present case, also there are three parties involved i.e. DICGC-guarantor, Bank- Debtor and Depositors Creditor.
(ii) The appellants protect the depositors and not banks.
(iii) There is already a subsisting debt between the bank and the depositors.
(iv) The liability of the DICGC is secondary. The primary liability to pay depositors always lies on banks.
(v) The DICGC will recover the money paid to depositors from bank.
Hence, the transaction in the present case is one of guarantee. Contract of guarantees were not covered under any of the taxable services enumerated in Section 65 (105) of the Finance Act, 1994. Hence the demand is not sustainable.
3.4. Essential features of contract of insurance.
3.4.1. The definition of General Insurance Business provided in section 65 (49) of the Finance Act, 1994 is as under:-
(49) general insurance business has the meaning assigned to it in clause (g) of section 3 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972); The definition of the taxable service provided in section 65 (d) of the Finance Act, 1994 is reproduced as under:-
(105) taxable service means any [service provided or to be provided], -
.
d) to a policy holder or any person, by an insurer, including re-insurer carrying on general insurance business in relation to general insurance business;
The definition of general insurance business in section 3(g) of General Insurance Business (Nationalisation) Act, 1972 (hereinafter referred to as GIBA Act) reads as under:-
general insurance business means fire, marine or miscellaneous insurance business, whether carried on singly or in combination with one or more of them but does not include capital redemption business and annuity certain business. The above definition also does not provide what the miscellaneous insurance business is. However, Section 3 (p) of the GIBA Act provide as under:-
(p) words and expression used in the act but not defined herein and defined in the insurance Act, shall have the meaning respectively assigned to them in that act.
Section 2(13B) of the Insurance Act, 1938 defines miscellaneous insurance business as:-
miscellaneous insurance business means the business of effecting contracts of insurance which is not principally or wholly of any kind or kinds included in clauses (6A), (11) and (13A); Sub-sections (6A), (11) and (13A) of Section 2 of the Insurance Act, 1938 deals with fire insurance business, life insurance business and marine insurance business respectively.
3.4.2. The definition of insurance as given in well-known text books is reproduced as under:-
(i) Colinvauxs Law of insurance, Eights Edition, page 4 an agreement to confer upon the insured a contractual right which, prima facie, comes in to existence immediately when loss is suffered by the happening of an event insured against, to be put by the insurer in to the same position in which the insured would have been had the event not occurred, but in to no better position.
(ii) Srinivasans Principal of Insurance Law , 8th Edition , 2006 1. Nature of the Insurance Contract Contract of insurance is basically governed by rules, which form part of the general law of contract. In a contract of Insurance, one party agrees to indemnify loss that would be sustained by another. The first party is bound to pay money or provide its equivalent if any uncertain event occurs. The other party, namely, insured must have an insurable interest in the property, life or liability which is subject to insurance. The absence of the required relationship will render contract illegal, void or simply unenforceable, depending on type of insurance.
..
4. Contract of insurance a contract of indemnity A contract of insurance is primarily a contract of indemnity, even though it may be framed otherwise, in terms, whereof the insurer has certain other obligations too.. 3.4.3. On the perusal of the above definitions, the essential features of the contract of Insurance can be described as under:-
i) There should be contractual relationship between the parties.
ii) There should be some event the happening of which is uncertain. In other words there should be some risk for which insurance is being sought.
iii) The insured must have an insurable interest in the subject matter of the property.
iv) The Insurer is bound to pay money or provide its equivalent if any uncertain event occurs.
v) Insurance is a contract of indemnity.
3.5. The Appellants are not engaged in the performance of insurance contracts as none of the essential features mentioned above in the preceding para are present in impugned transactions.
3.5.1. At the outset, there is no contractual relationship between the appellants and the bankers. The Corporation does not execute any contract with the bank, as the activity is statutory in nature.
3.5.2. There is no insurance policy as such which details out the terms of the insurance contract. Every bank has to compulsorily register and pay the premium.
3.5.3. In the present case there is no risk involved which is being insured by the appellants. The event insured in the present case, if any, is the inability of the bank to pay to the depositors. This is not the risk of the banks as they are otherwise liable to pay to the depositors.
3.5.4. In the present case, bank is not having any insurable interest in the subject matter of the transaction, i.e. deposits. Deposits are not the assets of the bank but it is its liability. Bank is otherwise liable to pay to the depositors.
3.5.5. Section 43 of the DICGC Act specifically provides that nothing in the Companies Act, 1956 or the Insurance Act, 1938 shall apply to the corporation. The functions of the appellants are not governed by IRDA.
3.5.6. Insurance company can refuse insurance on various grounds; however, DICGC cannot refuse insurance to insured banks.
3.5.7. In normal insurance, premium depends on the risk involved in each case whereas in the present case DICGC Act, the standard amount is paid by virtue of section 15 of the DICGC Act.
3.5.8. In normal insurance, the amount of claim is paid to policy holders and not to any other person whereas in the present case, DICGC shall pay the amount payable under sec 16 in respect of the deposit of each depositor directly to the depositor and not to banks.
Thus, none of the ingredients of the contract of insurance is present in the impugned case and hence the appellants are not providing any insurance services.
3.6. The appellants are not engaged in any business.
3.6.1. The word business has not been defined in chapter V of the Finance Act, 1994. However, it has been interpreted consistently by Supreme Court under Income Tax and Sales Tax laws.
(a) The Honble Supreme Court in State of Andhra Pradesh Vs. H. Abdul Bakshi and Bros. reported at (15) STC 644 (SC), inter alia, held as under:
we are unable to agree with the view of the High Court. A person to be dealer must be engaged in the business of buying and selling or supplying the goods. The Expression business through extensively used in a word of indefinite import, in taxing statues it is used in the sense of an occupation , or profession which occupies the time, attention and labour of a person normally with the object of making profit. To regard an activity as business there must be a course of dealings, either actually continued or contemplated to be continued with a profit motive, and not for sport or pleasure.
(b) The Honble Supreme Court in case of Senairam Doongarmal Vs. CIT 1961 (42) ITR 392 (SC)], observed as under :-
The word "business" is not defined exhaustively in the Income-tax Act, but it has been held both by this Court and the Judicial Committee to denote an activity with the object of earning profit. To say that a business is being carried on, means no more than that profit is to be earned by a process of production. 3.6.2. The appellant is a statutory body carrying out functions as laid down by the statute. It collects the premium as per rate approved by Reserve Bank of India. The expenditure is incurred by appellant as per the statute. The investment in various securities is made as provided in the statute. Therefore, the appellants does not have profit motive and they cannot be said to have been engaged in any business.
3.6.3. Further, the department also relied upon the Supreme Court judgment in the case of Mazgaon Dock Ltd. AIR 1958 SC 861 to allege that in fiscal statues business should be construed widely and accordingly the Corporation is engaged in business. In the said case, two non-resident shipping companies sent their ships to Mazgaon Dock for repairs in India. The court was concerned with the question as to whether the activity of repairs by Mazgaon docks will amount to undertaking of business. It was in that context the Honble Court observed that the in fiscal statues business should be construed widely. In the said case, the issue before Supreme Court did not relate to a question as to whether profit motive is necessary for treating an activity as business. The said decision has no application in the present case.
3.6.4. Similarly, reliance placed on the decisions in the case of Andhra Sugar [AIR 1968 SC 599] and others are also not applicable in the facts of the present case. In all those cases, there were indeed a contract between the two parties to the contract. Some elements of consensus like sale price and quantity were created by statutory control order. Assessees contended that since there was no free consent, on all aspects, there is no contract at all. Supreme Court held that other elements like product meeting specifications, terms of delivery, actual placing of order by customer are enough to constitute a contract. The limited question in all those cases was whether the contract was fulfilling the conditions of a valid contract viz. free consent etc. However, in the present case there is no contract at all between the appellants and the banks.
3.7. Reliance placed by the department on section 36 (e) of the GIBA Act to hold that the appellants are carrying on insurance business is misplaced.
3.7.1. Section 36 (e) of the GIBA act is 1972 reads as under:-
36. Exemptions. (1) nothing contained in this act shall apply in relation to ..
(e) the insurance business carried on by the export credit and guarantee Corporation Limited and the deposit insurance corporation established under section 3 of the deposit insurance corporation Act, 1961 (47 of 1961). Department is relying on the above section to contend that legislature had also considered the activities of the appellants as insurance business. The above exception in the GIBA act is carved out as an abundant caution; in other words the exception is an ex-majoricautela provision. The Maxim is better explained in the Principles of Statutory interpretation by Justice G.P.Singh, Seventh Edition page 66. The relevant portion is reproduced as under:-
Treating words or provisions as superfluous.-The Legislature sometimes uses superfluous words or provision or even tautologic expressions because of ignorance of law or as a matter of abundant caution. It is not so very uncommon in Act of Parliament, said Lord MACNAGHTAN, to find special exemptions which are already covered by a general exemption. Such specific exemptions, stated LORD HERSCHELL in the same case are often introduced ex majoricautela to quiet the fears of those whole interests are engaged or sympathies aroused in favour of some particular institution, and who are apprehensive that it may not be held to fall within a general exemption.And to the similar effect, are the observations of LORD REID: It is not uncommon to find the Legislature inserting superfluous provision under the influence of what may be abundant caution 3.7.2. The object of the GIBA act was to nationalize various companies who are engaged in the insurance business. There were many companies/corporation already owned by the Government either directly or indirectly. In the case of appellant, the RBI owns entire share capital of the appellant. The share capital of RBI is owned by the Government. Since the government entirely owns the appellant, there was no need to nationalize the appellant and hence there was no need to carve out such an exception in section 36 of the GIBA Act. Thus, mere words insurance business in clause (e) does not indicate that the appellants are doing any business.
3.8. It is settled law that beliefs and assumption of makers of the law does not make the law.
It is well settled law that beliefs and assumptions of makers of law do not make law.
i) Principles of Statutory Interpretation by G.P. Singh 9th edition page 269 to 273, refer:
.But a legislation proceeding upon an erroneous assumption of the existing law without directly amending or declaring the long is ineffective to change the law. The beliefs or assumptions of those who frame Acts of Parliament cannot make the law and a mere assumption exhibited in a statute as to the state of the existing law is ineffective to express an intention to change the law. If by such a statute the idea is to change the law, it will be said that the Legislature has plainly missed fire. As has been observed by S. K. Das, J : - Legislation founded on a mistaken or erroneous assumption has not the effect of making that the law which the Legislature had erroneously assumed to be so. The court will disregard such a belief or assumption and also the provision inserted in that belief or assumption This submission is squarely covered by the decision of the Supreme Court in case of ITO Vs. Mani Ram 1969 (72) ITR 203 (SC).
3.8.1. The department is placing reliance on the term insurance used in the preamble of the DICGC Act to conclude that the appellants are rendering insurance services. The appellants are not rendering insurance services. At best, the services if any provided by the appellants can be in the nature of the guarantee. The department ought to go into the real nature of the transaction and not merely into the nomenclature insurance used in preamble and other places of the DICGC Act. It is a settled principle of law that the nomenclature alone would not determine the nature of transaction. Reliance is placed on the decision of the Honble Supreme Court in the case of :-
(i) Moped India Limited reported at 1986 (23) ELT 8 (SC), Para 6.
(ii) Bhopal Sugar Industries Ltd. Vs Sales tax Officer, Bhopal [1977 SCC (3) 147] Hence, de hors the nomenclature used in the Act, the department had to independently prove that the appellants are rendering insurance services, which evidently department failed to do so and hence the demand is unsustainable in law.
3.9. The appellants are performing statutory functions and hence no service tax is leviable:
3.9.1. The appellants are performing the statutory functions as mandated by the DICGC Act. In CBEC Circular No. 89/7/2006-ST dated 18.12.2006, it is clarified that statutory functions performed in terms of specific responsibility assigned to a sovereign/ public authority under law in force, does not constitute provision of taxable service to a person and therefore, no service tax is leviable on such activities. The appellants have been established under section 3 of The Deposit Insurance and Credit Guarantee Corporation Act, 1961 as a 100% wholly owned subsidiary of RBI.
3.9.2. In terms of Section 15 of the DICGC Act, every insured bank is required to pay premium. The rate is notified by the Corporation and such premium cannot exceed the amount notified by RBI from time to time. The bank does not have any choice but to pay premium. The appellants are not providing any services to banks. The appellants were formed to take care of the small depositors. The amount charged by the appellants is not compensatory for the alleged services to be provided to the banks. Hence, premium collected by the appellants is in the nature of Statutory/regulatory fees. The appellants are performing their duties with a view to provide stability and guarantee to small depositors who have deposited their hard earned money with the bank. Thus, the activities of the appellants are in the nature of public interest.
3.9.3. In case of MIDC Vs. CCE 2014-TIOL- 2022 (Tri-Mum] the appellants have been constituted by the Government of Maharashtra to develop industrial areas in the State of Maharashtra by acquiring land from the land owners and plotting it into suitable industrial plots. Thereafter, these plots are sold/leased out under a lease agreement to individuals/companies desirous of setting up industries. As per the lease agreement, certain infrastructural facilities like roads, water, drainage, street light, etc. are provided by MIDC to plot owners. The MIDC collect certain charges from the plot owners for providing the above facilities e.g. water charges, delay payment charges, service charges (for maintenance of street lights, roads, gardens, plantation, etc.). The service charges so collected by MIDC are for the purpose of maintenance of roads, street lights etc. Revenue alleged that the above activity falls under the category of Management, Maintenance or Repair Service'. After considering the various provisions of the MIDC Act, the Honble tribunal came to a conclusion that the MIDC is performing the statutory function and therefore not liable to service tax. Relevant portion of the decision is reproduced as under:-
After going through the provisions of MID Act, 1961, we find that the appellant is discharging their statutory function cast on them by MID Act and Rules framed there-under.
7.1 We further find that the CBEC Circular No. 89/7/2006 dated 18.12.2006 clarifies that the activities performed by sovereign/public authority under the provisions of law are in nature of statutory obligations which are to be fulfilled in accordance with law. The fee collected by them for performing such activity is in nature of compulsory/statutory levy as per the provisions of relevant statute and it is deposited into the Govt. treasury. Such activity is undertaken as mandatory and statutory functions. These are not in nature of service to any particular individual or for any considerations. Performing of such activity by a statutory/public authority under the provisions of law does not come under the taxable service and therefore no service tax is leviable on such activity.
Similar views have been taken in following cases as well :-
(i) UTI Technology Services Ltd Vs CST, Mumbai 2012 (26) STR 147 (T).
(ii) Electrical Inspectorate vs. CST 2008 (9) STR 494 (T)
(iii) HDFC bank Ltd. Vs. CST -2014- TIOL -27 (Tri-Mum) 3.10. Provisions of General Insurance Business (Nationalization) Act, 1972 are not applicable to the appellants, therefore they are not covered under the definition.
3.10.1. For the purposes of Finance Act, 1994, general insurance business shall have the same meaning as is assigned to that expression under clause (g) of section 3 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972). However, section 36 (1) of the (GIBA reproduced supra) carved out an exception that nothing contained in the GIBA act will apply on the activities undertaken by DICGC.
3.10.2. When an earlier Act or certain of its provisions are incorporated by reference into a later Act, the other provisions of that statute can be referred to construe such provision. This view is approved by the Supreme Court in case of Surana Steels Pvt. Ltd. reported at (1999) 4 SCC 306. In this judgment, the Supreme Court quoted with approval a passage from Portsmouth Corporation Vs. Smith reported at (1885) 10 AC 364 (HL), which is reproduced below:
". When a single section of an Act of Parliament is introduced into another Act, I think, it must be read in the sense it bore in the original Act from which it was taken, and that consequently it is perfectly legitimate to refer to all the rest of that Act in order to ascertain what the section meant, though those other sections are not incorporated in the new Act"
Thus, if the provisions of clause (g) of the section 3 GIBA Act 1972 read with section 36 (e) is to be applied, it will lead an unanimous conclusion that the clause (g) of section 3 of the GIBA act will not apply to appellants and consequently provision of section 65 (49) of the Finance Act, 1994 will also not apply.
3.11. Service provided, if any, by the appellants are exempt under notification no. 22/2006 ST dated 31.5.2006 3.11.1. Assuming that the appellants are providing taxable service, even then, the same will be exempt in terms of notification no. 22/2006 ST dated 31.5.2006. The aforesaid notification provides exemption in respect of service provided by RBI. The same is reproduced as under:-
Reserve Bank of India Exemption to taxable services hereby exempts the following taxable services from the whole of the service tax leviable thereon under section 66 of the said Finance Act, namely :-
(i) taxable services provided or to be provided to any person, by the Reserve Bank of India; The appellants are an extended arm of the RBI and discharging statutory functions under DICGC Act and therefore, the service provide by the appellants will also be exempt.
3.11.2. Honble Supreme Court in case of Jt. CTO Vs. Young Mens Indian Association,1970 (1) SCC 462 affirmed the judgment of Madras High court in AIR 1964 Mad 63 by holding that where a company has been established for the convenience of its members then it is merely an agent created to discharge the mandate of its members. The High Court while observing that the club is merely constituted to obey the mandate of its members held as follows:
The second of the three features set out above shows that there can be a company established merely for the convenience of the members, conceived as an instrument to obey the mandate of the members. It can be readily conceded that an incorporated members' club, the legal personality of the club is utilised for securing an advantage and for discharging the mandates of the members. 3.11.3. The position of the appellants is identical to the above mentioned position. It was set up solely for servicing the RBI and Government of India for securing the interest of the small depositors. The veil of corporatization has been created only for the purpose of serving the government and behind this thin veil the appellants are but an arm of the RBI/government, wholly and solely dedicated to the RBI/government.
3.11.4. It is settled position of the law that exemption to the principal would be available to the agent also. This preposition is supported by the decision of the supreme court in case of State of Madras v. Cement Allocation Co-ordinating Organisation 1971 (4) SCC 599 (SC) 3.11.5. Similarly in the context of the present notification i.e. 22/2006 itself various tribunals have took a view that exemption available to RBI must be extended to their agent also. Reliance is placed on the following decision:-
(i) Canara Bank Vs. CST -2012 (28) STR 369 (Tri-Ahd). In this case Canara Bank provided services of operating a bank account on behalf of government in respect of payment of pension, transactions of various government departments, public deposit, RBI Bonds, EPF, special deposit scheme, senior citizens saving scheme, compulsory deposit scheme etc. The department raised demand interalia alleging that the activities of the Canara bank is taxable under Banking and Financial services. The assessee contended that service provided are exempted from payment of service tax in view of the fact that the appellant is performing the functions which were to be performed by RBI and therefore the appellant is entitled to exemption which is provided to RBI vide Notification No. 22/2006 dated 13-4-2006. The tribunal inter alia held that the exemption available to RBI has to be extended to Canara Bank as well as Canara Bank is acting as agent of the RBI. Relevant portion of the order is reproduced herewith:-
13.?The above observations of the Honble Supreme Court make it clear that exemption to the principal would be available to the agent also. For this purpose, since the agent is eligible for the exemption which is available to the principal in terms of the relationship with the principal of the agent and not because of exemption granted specifically to the agent or principal, we have to hold that the appellant is eligible for exemption. If RBI were to undertake the activity there would have been no question of levy of service tax. It was also brought to our notice that RBI is not paying service tax. Same functions being carried out by RBI are exempted. Therefore, we hold that the benefit of exemption available to RBI would be available to the agent i.e. Canara Bank. The above decision was subsequently followed in the following decisions as well :-
(i) HDFC Bank Ltd. Vs. CST -2014 TIOL -27 (Tri-Mum
(ii) Union bank of India Vs CCE&ST 2013-TIOL-343.
In the light of the above submissions, the ld. Counsel for the appellant pleads for allowing the appeal by setting aside the impugned order.
4. Submissions on behalf of Revenue The submissions made by Sri. P.R.V. Ramanan, Special Consultant, appearing for the Revenue, can be summarized as follows:-
4.1. Issues for consideration in the captioned appeals are,-
(a) Whether the service rendered by DICGC falls under the category of General Insurance under 65(49) read with section 65(105) (d) of FA, 1994?
(b) Whether the extended period of limitation invoked in respect of tax demand for the period from 1/5/2006 to 31/3/2011 is sustainable?
(c) Whether penalties u/s 76, 77 and 78 of FA,94 are sustainable?
4.2. Whether the service rendered by DICGC falls under the category of General Insurance under 65(49) read with section 65(105) (d) of FA, 1994?
4.2.1. Section 65(105) (d) imposes Service Tax on General Insurance business; Section 65(49) states that the term General Insurance business has the meaning assigned to it in Section 3(g) of General Insurance business (Nationalisation) Act,1975 [GIBA,72]. As per the said section general insurance business, means fire, marine or miscellaneous insurance business, whether carried on singly or in combination with one or more of them but does not include capital redemption business and annuity certain business. The term miscellaneous insurance business is not defined in GIBA,72; but Section 3 (p) of that Act states that words and expressions used in this Act but not defined herein and defined in the Insurance Act, shall have the meanings respectively assigned to them in that Act.
4.2.2. The arguments advanced on behalf of the appellant are that,-
(a) DICGC is performing a sovereign function for the RBI in terms of an Act intended specifically for performing a regulatory function of deposit insurance.
(b) Premia collected by DICGC from the banks is more in the nature of a regulatory fee or statutory fee.
(c) Nothing in the Companies Act, 1956 or the Insurance Act, 1938 shall apply to DICGC in terms of section 43 of DICGC Act, 1961
(d) Deposit insurance is not a contract of Insurance; it is a guarantee 4.2.3. DICGC, though a subsidiary of RBI, is not performing any sovereign function. As ruled by the Apex Court in the case of Chief Conservator of Forests (1996 2 SCC 293) one of the tests to determine whether the executive function is sovereign in nature is to find out whether the State is answerable for such action in courts of law. The deposit insurance business of DICGC does not meet this test. Similarly, in the case of functions of an Agricultural Produce Market Committee established by Karnataka State through a statute for the benefit of agriculturist, it has been held by the Apex Court that such functions do not come within sovereign functions of the State.[AIR 2000 SC 3116]. On the other hand, DICGC is a statutory authority established under an Act of the Parliament. This does not mean that DICGC is performing a regulatory function. In fact SBI is set up under SBI Act, 1955 to do business as a Bank; similarly, the General Insurance Corporation was set up under Section 9 (1) of GIBA, 1972 as a Government Corporation to do general insurance business. Hence, the fact that DICGC is set up under an enactment does not confer sovereign or regulatory status on DICGC. A deposit insurance system clarifies the authoritys obligations to depositors (or if it is a private system, its members), limits the scope for discretionary decisions, can promote public confidence, helps to contain the costs of resolving failed banks and provides an orderly process for dealing with bank failures and a mechanism for banks to fund the cost of failures. This does not make a Deposit Insurer like DICGC a sovereign or regulatory body.
4.2.4. Literature available in the public domain clearly indicates that agencies/authorities entrusted with administering a deposit insurance system are called as Deposit Insurers (DI). In fact there is a body called International Association of Deposit Insurers [IADI], which provides guidance to individual countries and DI s. While in majority of countries DIs are public authorities, there are countries where Private organisations, Association of banks or Non-Profit entities are entrusted the task of DI. In general, insurance is the process of transferring the risk of a financial loss to an entity willing to pay for the loss in exchange for a small guaranteed payment. Besides, insuring anything other than human life is known as General insurance as may be gleaned from the website of IRDAI. In the case of deposit insurance, the DI takes upon itself the risk of loss to the depositor in exchange of the premia collected by it from the banks. Thus, all DIs are nothing but insurers falling within the category of General insurance.
4.2.5. In terms of the Preamble to the DICGC Act, 1961, DICGC is established for the purpose of insurance of deposits and guaranteeing of credit facilities. Parliaments intention is thus clear with regard to the nature of DICGC, namely that of an insurer. In terms of definitions as at section 2 (i) and (j) of the Act, the Bank which is required to get registered upon issue of licence under section 22 of BRA,1949 is named insured bank and the deposit or any portion thereof whose repayment is insured by DICGC is called the insured deposit. Thus, read with section 15 of DICGC Act, it comes out clearly, that the property insured is the specified deposit/s of a depositor up to a limit. The banks have a statutory obligation to pay a premium towards insurance of deposits held by them. DICGC holds the premia collected thus from Banks in Funds for reimbursement to depositors in the event of winding up or liquidation of a bank. Insured banks pay premia on behalf of depositors for the risk of loss faced by them in respect of their property viz. deposits on account of winding up or liquidation of a bank. Thus, all the essentials of an insurance transaction, namely, the definition of the risk, duration of the risk, premium and amount of insurance are present in the deposit insurance activity of DICGC. Accordingly, DICGC has to be regarded as an insurer.
4.2.6. In key respects, deposit insurance is comparable to Motor Third-Party Insurance. Firstly, it is made compulsory/mandatory under a statute. Secondly, three parties are involved in the transaction. The premium is paid by banks (Owner of the vehicle in the case of MTPI ) to the Insurer i.e, DICGC ( Insurance company in the case of MTPI ) and the beneficiary is a third party i.e the depositor ( Affected third party in the case of MTPI ). In the MTPI the contract is express and in the case of deposit insurance it is implied. But in both cases, the statutory provisions have primacy.
4.2.7. Section 36 of GIBA, 1972 also refers to the activity of DICGC as insurance business. As an insurer, DICGC provides insurance service to the depositor and effects reimbursement- though may be in part- of a financial loss that would have been suffered by him. Since such insurance is other than life insurance, it is covered by the term General Insurance.
4.3. As regards the question as to whether the premia collected by DICGC from the banks is in the nature of a regulatory fee or statutory fee, the answer to this question is No. A regulatory fee or statutory fee is levied to cover administrative expenses or transfer of certain rights such as fee for grant of liquor licences. Premia collected from Banks, though compulsory, is to cover the risk of loss to the depositor. Thus, the premia collected is not in the nature of regulatory fee or statutory fee. Attention is also invited to section 21A (3) of the DICGC Act,1961 where under, when DICGC provides guarantees or indemnities to any credit institution in respect of credit facilities given by them, it levies a fee on the institution. Thus, the said Act itself makes a distinction between premium and fee.
4.4. As regards the contention that since nothing in the Companies Act, 1956 or the Insurance Act, 1938 shall apply to DICGC in terms of section 43 of DICGC Act, 1961, activities of DICGC are not covered within general insurance business, the Finance Act, 1994, has merely borrowed the definitions from other legislations. The borrowed definitions, after incorporation in the said Act constitutes an integral part of the Finance Act and when they are applied, they are applied as provisions of the said Finance Act and not as provisions of the legislation from which they have been borrowed. Reliance is placed on Justice G.P.Singhs Principles of Statutory Interpretation -12th edition-2010,(page 333) wherein the Apex Courts judgment in the case of Onkarlal Nandlal vs. State of Rajasthan is cited as follows: Therefore, when only sub-section (2) of a section of an earlier Act was incorporated in a later Act, sub-section (1) which had a restrictive effect on the operation of sub-section (2 ) was not allowed to be read for purpose of construing sub-section (2) as incorporated in the later Act [1986 AIR SC 2146]. Thus, it is not permissible to apply the provisions of section 43 of DICGC Act,1961 to restrict the scope of section 65(49) of Finance Act, 1994, read with Section 3(g) and 3(p) of General Insurance business (Nationalisation) Act,1975 [GIBA,72] and the provisions of Insurance Act ,1938. Alternatively, assuming that the provisions of Insurance Act are not applicable in view of section 43 of DICGC Act, it may only mean that section 3(p) of GIBA, 1972 read with section 2 (13B) of the Insurance Act would not be applicable. Section 3 (g) of GIBA, 1972 would still be applicable and the expression miscellaneous insurance business would then have to be interpreted in the light of the common parlance understanding. Viewed in this light, and drawing on section 3(g) of GIBA, 1972, the expression miscellaneous insurance business should cover all types of insurance other than life insurance, fire and marine insurance, capital redemption business and annuity certain business. Deposit insurance would thus be covered under section 65(49) of Finance Act,1994, even if the argument advanced by the appellant is conceded.
4.5. As regards the question as to whether Deposit insurance is a contract of Insurance, since it is mandatory and not voluntary or is it a guarantee, the arguments advanced in this regard is that the relationship between the banks and DICGC is not a contract since, it is not made out of the free consent of the parties; that there is no consensuality in the transaction and accordingly no contract exists. The legal compulsion exercised by the statute over the parties, both as to the creation of the relationship and fixing its terms, is inconsistent with the existence of a contract ; hence, the definition of miscellaneous insurance business is not met in the case of DICGC. The Supreme Court has, in a catena of judgments [ AIR 1968 SC 599; AIR 1972 SC87; AIR 1978 SC 499- Vishnu Agencies; AIR 1988 SC 1487- Coffee Board], decided that transactions done under the compulsion of law i.e., under a statute are contractual transactions. In the context of the issue whether sales made under the Sugar Control Orders, which were mandatory under a statute, constitute contracts of sale, the Court ruled that though it was true that consent makes a contract of sale, such consent "may be express or implied and it cannot be said that unless the offer and acceptance are there in an elementary form, there can be no taxable sale. Accepting that there was an element of compulsion in both selling and buying, the Court held that "a compelled sale is nevertheless a sale" and "sales often take place without volition of party. Thus, consent under the law of contract need not be express, it can be implied. Reading sections 14, 15 to18 of Contract Act together, it is seen that compulsion of law is not coercion in terms of section 15 of the Contract Act. Accordingly, the transactions between the banks and DICGC, though brought about under a statute, constitute contractual transactions with consent of both parties. As held by the Apex Court, in statutory transactions there is implicit consent to contract and this consent is given when the person sets up the occupation or trade which is regulated by law. By setting up the occupation or trade the person signifies his consent to enter into contracts which the law commands him to contract. DICGC having been set up as a DI and the banks having been mandated to pay the premia for protecting the specified deposits, the present instance is an example of an implied contract with an implied offer and implied acceptance by the parties as per the DICGC Act, 1961. The preamble to the DICGC Act, the definitions and provisions incorporated in that Act clearly point to the fact that the transactions between the banks and DICGC though, brought about under a statute, constitute contractual transactions of the nature of insurance. Further, there are separate and independent provisions in the said Act relating to guaranteeing operations of DICGC. The Act itself distinguishes between an insurance transaction and a guarantee transaction. Thus, the implied contract that exists between the banks and DICGC is not in the nature of a guarantee.
4.6. Coming to the question as to whether the activity of DICGC be called a business, the expression business is of wide import and as observed by the Apex Court in the case of Mazgaon Dock Ltd.[1958 34 ITR 368(SC)] in fiscal statutes, it must be construed in a broad rather than a restricted sense. At Page 912 of Major Law Lexicon , a compilation of definitions from general and law dictionaries has been given, which indicates that the said expression extends to all cases of work, which occupies the time, attention and labour of men for profit or otherwise. In re: Narain Swadeshi Mills v. Commr. of Excess Profits (AIR 1955 SC 176) the Apex Court explained the expression business as follows: Business connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. Further, Section 36 of GIBA, 1972 also refers to the activity of DICGC as insurance business. Hence, the deposit insurance activity of DICGC meets the general understanding of the expression business.
In view of the above submissions, the service rendered by DICGC clearly falls under the category of General Insurance business (of the kind miscellaneous insurance business) under 65(49) read with section 65(105) (d) of Finance Act, 1994.
4.7. Whether the extended period of limitation invoked in respect of tax demand for the period from 1/5/2006 to 31/3/2011 is sustainable?
This issue has been extensively discussed in paras 3.4, 3.4.1,3.4.2, 3.4.3 and 3.4.4 of the order-in-original dated 10/01/2013. Findings recorded by the Respondent are reiterated. DICGC took inordinately long time to furnish the information sought by the department. They were also informed of the tax liability w.e.f 1/5/2006 soon as they applied for and came under the purview of LTU Mumbai. It may be relevant to mention here that the demand for the period from 01/4/2011 to 30/9/2011 amounting to ` 283.15 Cr. is, however, within the normal period of limitation and merits confirmation.
4.8. Whether penalties imposed on DICGC u/s 76,77 and 78 of FA,94 are sustainable?
This issue is discussed in paras 3.10 to 3.14.1 of the OIO. Findings recorded therein are reiterated.
5. Discussion and Findings We have carefully considered the submissions made by both the sides. Our findings and conclusions are discussed in the ensuing paragraphs. The issues for consideration and decision in the present case can be formulated as follows:-
(1) Whether the activity undertaken by the appellant, DICGC, is insurance business or not and if so, does it fall within the ambit of general insurance business as defined in Section 65 (49) read with 65 (105) (d) of the Finance Act, 1994?
(2) Whether the activity of DICGC is a business or not?
(3) Whether the activity of deposit insurance undertaken by the appellant is a sovereign/statutory function not amenable to service taxation or is it a commercial activity which can be subjected to tax?
(4) Whether deposit insurance is a contract of insurance/contract of indemnity or a contract of guarantee?
(5) Whether the appellant is eligible for the benefit of tax exemption under notification No. 22/2006-ST dated 31/05/2006?
(6) Whether the appellant could be alleged to have suppressed facts with an intent to evade tax and whether extended period of time could be invoked to confirm the service tax demand?
(7) Whether the appellants are liable to penalty?
5.1. Whether the activity undertaken by the appellant, DICGC, is insurance business or not and if so, does it fall within the ambit of general insurance business as defined in Section 65 (49) read with 65 (105) (d) of the Finance Act, 1994?
5.1.1. In order to appreciate the rival contentions made, it will be useful to make a brief reference to the history of deposit insurance in India and the provisions of the Deposit Insurance and Credit Guarantee Corporation Act, 1961 and the Deposit Insurance Scheme in place on account of the enactment of the said Act. The Annual Report of the Corporation for the year 2013-2014 (downloaded from the web-site of the appellant) contains a brief on the above matter and has been placed before the Parliament under section 32(2) of the said Act. Therefore, the accuracy and authenticity of the document is beyond any doubt. The relevant portions from the said report is extracted below:-
(1) INTRODUCTION The functions of the DICGC are governed by the provisions of The Deposit Insurance and Credit Guarantee Corporation Act, 1961 (DICGC Act) and The Deposit Insurance and Credit Guarantee Corporation General Regulations, 1961, framed by the Reserve Bank in exercise of the powers conferred by sub-section (3) of Section 50 of the said Act. As no credit institution is participating in any of the credit guarantee schemes administered by the Corporation, presently it is not operating any of the schemes and deposit insurance remains the principal function of the Corporation.
(2) HISTORY The concept of insuring deposits kept with banks received attention for the first time in the year 1948 after the banking crisis in Bengal. The issue came up for reconsideration in the year 1949, but was held in abeyance till the Reserve Bank set up adequate arrangements for inspection of banks. Subsequently, in the year 1950, the Rural Banking Enquiry Committee supported the concept. Serious thought to insuring deposits was, however, given by the Reserve Bank and the Central Government after the failure of the Palai Central Bank Ltd., and the Laxmi Bank Ltd., in 1960. The Deposit Insurance Corporation (DIC) Bill was introduced in Parliament on August 21, 1961. After it was passed by Parliament, the Bill got the assent of the President on December 7, 1961 and the Deposit Insurance Act, 1961 came into force on January 1, 1962. Deposit Insurance Scheme was initially extended to all functioning commercial banks. This included the State Bank of India and its subsidiaries, other commercial banks and the branches of the foreign banks operating in India. With the enactment of the Deposit Insurance Corporation (Amendment) Act, 1968, deposit insurance was extended to co-operative banks also and the Corporation was required to register eligible co-operative banks as insured banks under the provisions of Section 13 A of the DICGC Act. The Government of India, in consultation with the Reserve Bank, introduced a credit guarantee scheme in July 1960. The Reserve Bank was entrusted with the administration of the scheme, as an agent of the Central Government, under Section 17 (11 A)(a) of the Reserve Bank of India Act, 1934 and was designated as the Credit Guarantee Organisation (CGO) for guaranteeing the advances granted by banks and other credit institutions to small scale industries. The Reserve Bank operated the scheme up to March 31, 1981. The Reserve Bank also promoted a public limited company on January 14, 1971, named the Credit Guarantee Corporation of India Ltd. (CGCI).The credit guarantee schemes introduced by the Credit Guarantee Corporation of India Ltd., aimed at encouraging the commercial banks to cater to the credit needs of the hitherto neglected sectors, particularly the weaker sections of the society engaged in non-industrial activities, by providing guarantee cover to the loans and advances granted by the credit institutions to small and needy borrowers covered under the priority sector as defined by the RBI. With a view to integrating the functions of deposit insurance and credit guarantee, the two organisations, viz., the DIC and the CGCI, were merged and the Deposit Insurance and Credit Guarantee Corporation (DICGC) came into existence on July 15, 1978. The Deposit Insurance Act, 1961 was thoroughly amended and it was renamed as The Deposit Insurance and Credit Guarantee Corporation Act, 1961. With effect from April 1, 1981, the Corporation extended its guarantee support to credit granted to small scale industries also, after the cancellation of the Government of Indias credit guarantee scheme. With effect from April 1, 1989, guarantee cover was extended to the entire priority sector advances.
(3) INSTITUTIONAL COVERAGE
(i) All commercial banks including the branches of foreign banks functioning in India, Local Area Banks (LABs) and Regional Rural Banks (RRBs) are covered under the Deposit Insurance Scheme.
(ii) All eligible co-operative banks as defined in Section 2(gg) of the DICGC Act are covered under the Deposit Insurance Scheme. All State, Central and Primary co-operative banks functioning in the States/Union Territories, which have amended their Co-operative Societies Act, as required under the DICGC Act, 1961, empowering Reserve Bank to order the Registrar of Co-operative Societies of the respective States/Union Territories (UTs) to wind up a co-operative bank or to supersede its committee of management and requiring the Registrar not to take any action for winding up, amalgamation or reconstruction of a cooperative bank without prior sanction in writing from the Reserve Bank, are treated as eligible co-operative banks. At present, all co-operative banks are covered under the Scheme. UTs of Lakshadweep and Dadra & Nagar Haveli do not have any co-operative Bank.
(4) REGISTRATION OF BANKS
(i) In terms of Section 11 of the DICGC Act, all new commercial banks are required to be registered by the Corporation soon after they are granted licence by the Reserve Bank under Section 22 of the Banking Regulation Act, 1949. All Regional Rural Banks are required to be registered with the Corporation within 30 days from the date of their establishment, in terms of Section 11A of the DICGC Act.
(ii) A new eligible co-operative bank is required to be registered with the Corporation soon after it is granted a licence by the Reserve Bank.
(iii) When the owned funds of a primary cooperative credit society reach the level of Rs. 1 lakh, it has to apply to the Reserve Bank for a licence to carry on banking business as a primary co-operative bank and is to be registered with the Corporation within 3 months from the date of its application for licence.
(iv) A co-operative bank which has come into existence after the commencement of the Deposit Insurance Corporation (Amendment)Act, 1968, as a result of the division of any other co-operative society carrying on business as a co-operative bank, or the amalgamation of two or more co- operative societies carrying on banking business at the commencement of the Banking Laws (Application to Co-operative Societies)Act, 1965 or at any time thereafter, is to be registered within three months of its making an application for licence. However, a cooperative bank will not be registered, if it has been informed by the Reserve Bank, in writing, that a licence cannot be granted to it. In terms of Section 14 of the DICGC Act, after the Corporation registers a bank as an insured bank, it is required to send, within 30 days of such registration, intimation in writing to the bank to that effect. The letter of intimation, apart from the advice of registration and registration number, gives details of the requirements to be complied with by the bank, viz., the rate of premium payable to the Corporation, the manner in which the premium is to be paid, the returns to be furnished to the Corporation, etc. (5) INSURANCE COVERAGE Under the provisions of Section 16(1) of the DICGC Act, the insurance cover was originally limited to Rs. 1,500/- only per depositor for deposits held by him in the same capacity and in the same right at all the branches of a bank taken together. However, the Act also empowers the Corporation to raise this limit with the prior approval of the Central Government. Accordingly, the insurance limit was enhanced from time to time as follows:
Effective from Insurance Limit (In `) May 1, 1993 1,00,000 July 1, 1980 30,000 January 1, 1976 20,000 April 1, 1970 10,000 January 1, 1968 5,000 (6) TYPES OF DEPOSITS COVERED The Corporation insures all bank deposits, such as savings, fixed, current, recurring, etc. except the (i) deposits of foreign governments; (ii) deposits of Central / State Governments; (iii) deposits of State Land Development Banks with the State co-operative banks; (iv) inter-bank deposits; (v) deposits received outside India, and (vi) deposits specifically exempted by the Corporation with the previous approval of the Reserve Bank.
(7) INSURANCE PREMIUM The Corporation collects insurance premia from insured banks for administration of the deposit insurance system. The premia to be paid by the insured banks are computed on the basis of their assessable deposits. Insured banks pay advance insurance premia to the Corporation semi-annually within two months from the beginning of each financial half year, based on their deposits as at the end of previous half year. The premium paid by the insured banks to the Corporation is required to be borne by the banks themselves and is not passed onto the depositors. For delay in payment of premium, an insured bank is liable to pay interest at the rate of 8 per cent above the Bank Rate on the default amount from the beginning of the relevant half-year till the date of payment.
Date from Premium (in Rs.) Premium Rates per deposit of Rs. 100 (Rs.) 1-04-2005 0.10 1-04-2004 0.08 1-07-1993 0.05 1-10-1971 0.04 1-01-1962 0.05 (8) CANCELLATION OF REGISTRATION Under Section 15A of the DICGC Act, the Corporation has the power to cancel the registration of an insured bank if it fails to pay the premium for three consecutive half-year periods. However, the Corporation may restore the registration if the deregistered bank makes a request, paying all the dues in default including interest, provided the bank is otherwise eligible to be registered as an insured bank. Registration of an insured bank may be cancelled if the bank is prohibited from accepting fresh deposits; or its licence is cancelled or a licence is refused to it by the Reserve Bank; or it is wound up either voluntarily or compulsorily; or it ceases to be a banking company or a co-operative bank within the meaning of Section 36A(2) of the Banking Regulation Act, 1949; or it has transferred all its deposit liabilities to any other institution; or it is amalgamated with any other bank or a scheme of compromise or arrangement or of reconstruction has been sanctioned by a competent authority where the said scheme does not permit acceptance of fresh deposits. In the case of a co-operative bank, its registration also gets cancelled if it ceases to be an eligible co-operative bank. In the event of the cancellation of registration of a bank, for reason other than default in payment of premium, deposits of the bank as on the date of cancellation remain covered by the insurance.
(10) SETTLEMENT OF CLAIMS
(i) In the event of the winding up or liquidation of an insured bank, every depositor is entitled to payment of an amount equal to the deposits held by him at all the branches of that bank put together in the same capacity and in the same right, standing as on the date of cancellation of registration (i.e., the date of cancellation of licence or order for winding up or liquidation) subject to set-off of his dues to the bank, if any [Section 16(1) read with 16(3) of the DICGC Act]. However, the payment to each depositor is subject to the limit of the insurance coverage fixed from time to time.
(ii) When a scheme of compromise or arrangement or re-construction or amalgamation is sanctioned for a bank by a competent authority, and the scheme does not entitle the depositors to get credit for the full amount of the deposits on the date on which the scheme comes into force, the Corporation pays the difference between the full amount of deposit and the amount actually received by the depositor under the scheme or the limit of insurance cover in force at the time, whichever is less. In these cases too, the amount payable to a depositor is determined in respect of all his deposits held in the same capacity and in the same right at all the branches of that bank put together, subject to the set-off of his dues to the bank, if any, [Section 16(2) and (3) of the DICGC Act].
(iii) Under the provisions of Section 17(1) of the DICGC Act, the liquidator of an insured bank which has been wound up or taken into liquidation, has to submit to the Corporation a list showing separately the amount of the deposit in respect of each depositor and the amount of set off, in such a manner as may be specified by the Corporation and certified to be correct by the liquidator, within three months of his assuming charge as liquidator
(iv) In the case of a bank/s under scheme of amalgamation / reconstruction, etc. sanctioned by competent authority, a similar list has to be submitted by the chief executive officer of the concerned transferee bank or insured bank, as the case may be, within three months from the date on which the scheme of amalgamation/ reconstruction, etc. comes into effect [Section 18(1) of the DICGC Act].
(v) The Corporation is required to pay the amount due under the provisions of the DICGC Act in respect of the deposits of each depositor within two months from the date of receipt of such lists prepared in accordance with guidelines issued by the corporation and complete / correct in all respects. The Corporation gets the list certified by a firm of Chartered Accountants which conducts onsite verification.
(vi) The Corporation generally makes payment of the eligible claim amount to the liquidator/ chief executive officer of the transferee/insured bank, for disbursement to the depositors. However, the amounts payable to the untraceable depositors are held back till such time as the Liquidator/Chief Executive Officer is in a position to furnish all the requisite particulars to the Corporation.
(11) RECOVERY OF SETTLED CLAIMS In terms of Section 21(2) of the DICGC Act read with Regulation 22 of the DICGC General Regulations, the liquidator or the insured bank or the transferee bank, as the case may be, is required to repay to the Corporation out of the amounts realised from the assets of the failed bank and other amounts in hand after making provision for the expenses incurred.
(12) FUNDS, ACCOUNTS AND TAXATION The Corporation maintains three distinct Funds, viz., (i) Deposit Insurance Fund (DIF); (ii) Credit Guarantee Fund (CGF), and (iii) General Fund (GF). The first two Funds are created by accumulating the insurance premia and guarantee fees respectively and are applied for settlement of the respective claims. The authorised capital of the Corporation is `500 million which is entirely subscribed to by the Reserve Bank. The General Fund is utilised for meeting the establishment and administrative expenses of the Corporation. The surplus balances in all the three Funds are invested in Central Government securities. Inter-Fund transfer is permissible under the Act. The books of accounts of the Corporation are closed as on March 31 every year. The affairs of the Corporation are audited by an Auditor appointed by its Board of Directors with the previous approval of Reserve Bank. The audited accounts together with Auditors report and a report on the working of the Corporation are required to be submitted to Reserve Bank within three months from the date on which its accounts are balanced and closed. Copies of these documents are also submitted to the Central Government, which are laid before each House of the Parliament. The Corporation follows mercantile system of accounting and it has been adopting the system of actuarial valuations of its liabilities from the year 1987 onwards. The Corporation has been paying income tax since the financial year 1987-88. The Corporation is assessed to Income Tax as a company as defined under the Income Tax Act, 1961. Moreover, the Corporation has obtained service tax registration and has started paying service tax on premium income accrued from October 1, 2011.
OPERATIONAL HIGHLIGHTS - III : DEPOSIT INSURANCE (` In Billion) PARTICULARS 2013-14 2012-13 2011-12 2010-11 2009-10 2008-09 Premium Income 73.12 57.18 56.40 48.44 41.55 34.53 Investment Income 33.90 27.68 23.53 18.01 15.13 12.89 Net Claims (0.93) 4.20 3.57 1.71 4.07 9.09 Revenue Surplus Before Tax 91.52 86.27 60.01 61.45 37.53 39.73 Revenue Surplus After Tax 60.72 58.27 40.54 41.32 28.93 26.89 5.1.2. The Statement of Objects and Reasons to the DICGC Act, 1961 records that,-
The question of establishing a statutory corporation for insuring deposits in commercial banks has been under consideration for some time. Various suggestions or the proposals in this connection, including the recommendations made by the Shroff Committee on Finance for the private sector which reported in 1954, have been examined in consultation with the Reserve Bank and the representatives of the commercial banks, and it is now considered desirable that the scheme should be implemented at a very early date. The Deposit Insurance Corporation will be established as a wholly-owned subsidiary of the Reserve Bank with a paid-up capital of a crore of rupees. It will insure all deposits in commercial banks including the State Bank and its subsidiaries, other than the deposits belonging to the Central Government or to a State or foreign Government or to the insured banks. The limit of the insurance cover will be Rs.1,500 but this limit may be raised by the Corporation with the previous approval of the Central Government.
The premium rate will be determined by the Corporation from time to time with the previous approval of the Central Government. The maximum rate for which provision is being made in the Bill is 15 naye paise per hundred rupees per annum. The Corporation's liability will arise and be discharged in the event of the liquidation of a bank or the enforcement in relation to it of a scheme of compromise or arrangement or reconstruction or amalgamation.
The payments due to the depositors up to the limit of the insurance cover offered by the Corporation will be made in the most convenient and expedient manner which may be possible. 5.1.3. The preamble of the DICGC Act, 1961 states that it is an Act to provide for the establishment of a corporation for the purpose of insurance of deposits and guaranteeing of credit facilities and for other matters connected there with or incidental thereto.
5.1.4. It would also be useful to see the relevant provisions of the DICGC Act, 1961, which would throw light on the matter. Section 2 of the Act deals with definitions and some of the relevant clauses are extracted below:-
(g) deposit means the aggregate of the unpaid balances due to a depositor (other than a foreign Government, the Central Government, a State Government, a corresponding new bank, Regional Rural Bank or a banking company or a co-operative bank) in respect of all his accounts, by whatever name called, with a corresponding new bank or with a Regional Rural Bank or with a banking company or a co-operative bank and includes. credit balances in any cash credit account but does not include, ..
(i) insured bank means a corresponding new bank or a banking company or a Regional Rural Bank or an eligible co-operative bank for the time being registered under the provisions of this Act and includes for the purposes of sections 16, 17, 18 and 21, - (i) a banking company referred to in clause (a) or clause (b) of subsection (1) of section 13, or (ia) a corresponding new bank to which the provisions of clause (a) of sub-section (1) of section 13 apply, or (ii) a co-operative bank referred to in clause (a) or clause (b) of section13C, the registration whereof has been cancelled under section 13; or as the case may be, under section 13C; (j) insured deposit means the deposit or any portion thereof the repayment whereof is insured by the Corporation under the provisions of this Act;
(l) premium means the sum payable by an insured bank under section 15 of this Act;
Section 15 of the Act deals with the premium liable to be paid by the insured bank and reads as follows:
15. (1) Every insured bank shall, so long as it continues to be registered, be liable to pay a premium to the Corporation on its deposits at such rate or rates as may, with the previous approval of the Reserve Bank, be notified by the Corporation, from time to time, to the insured banks and different rates may be notified for different categories of insured banks. Section 16 deals with the liability of the Corporation in respect of insured deposits and the relevant extracts are as below:
16. (1) Where an order for the winding up or liquidation of an insured bank is made, the Corporation shall, subject to the other provisions of this Act, be liable to pay to every depositor of that bank in accordance with the provisions of section 17 an amount equal to the amount due to him in respect of his deposit in that bank at the time when such order is made: Provided that the liability of the Corporation in respect of an insured bank referred to in clause (a) or clause (b) of sub-section (1) of section (13) or clause (a) or clause (b) of section 13C shall be limited to the deposits as on the date of the cancellation of the registration: Provided further that the total amount payable by the Corporation to any one depositor in respect of his deposit in that bank in the same capacity and in the same right shall not exceed one lakh rupees .
..
(2) Where in respect of an insured bank a scheme of compromise or arrangement or of reconstruction or amalgamation has been sanctioned by any competent authority and the said scheme provides for each depositor being paid or credited with, on the date on which the scheme comes into force, an amount which is less than the original amount and also the specified amount, the Corporation shall be liable to pay to every such depositor in accordance with the provisions of section 18 an amount equivalent to the difference between the amount so paid or credited and the original amount, or the difference between the amount so paid or credited and the specified amount, whichever is less : 5.1.5. From the Annual Report of the Corporation ( a document placed before the Parliament), there cannot be any doubt that Deposit Insurance is a social welfare measure to provide financial stability to the banking system in the country. The Corporation is engaged in the business of deposit insurance and credit guarantee functions assigned to it and is run on a commercial basis. The Corporation is assessed to Income Tax as a company. Thus the Corporation functions as an Insurer, the insured are the various banks who pay the insurance premium and the beneficiaries are the depositors of the insured banks.
5.1.6. From the pre-amble to the DICGC Act as well as from the Statement of Objects and Reasons thereto, the Corporation was established for insuring deposits in commercial banks.
5.1.7. The legal provisions contained in Sections 2, 15 and 16 extracted above clearly show who and what is insured, the consideration for insurance, and when does the liability to pay the insurance amount arise.
5.1.8. Thus when the appellant (through its annual report), the legislature (through the Statement of Objects and Reasons and the Pre-amble) and the law (through the various provisions of the enactment), have, clearly, unambiguously and loudly, stated that the activity undertaken by the appellant is insurance, there cannot be any scintilla of doubt in this regard. Any contention to the contrary has to be rejected outright and in toto and we do so.
5.1.9. The next question to be addressed is whether the appellant is carrying on general insurance business as defined in the Finance Act, 1994. Finance Act, 1994 has defined general insurance business by reference to section 3(g) of the General Insurance Business (Nationalisation) Act, 1972, (GIB Act in short). The meaning and scope of referential legislation has been laid down by the honble apex court in State of Kerala vs. Attesee (Agro Industrial Trading Corporation)[1988 (38) ELT 720 (SC)] wherein a question arose for consideration as to whether the Kerala General Sales Tax Act (1963) brings in the definitions of the Central Excises and Salt Act, 1944 by way of reference or citation and/or by way of incorporation and the honble held as follows:-
To appreciate the contentions urged, it is necessary to make a brief reference to the principles of interpretation of an enactment which for purposes of convenience, refers to or incorporates a provision of another. These have been discussed in various earlier decisions viz, Secretary of State v. Hindustan Cooperative Insurance Society Ltd., [1931] 58 I .A. 259, Collector of Customs v. Nathella Sampathu Chetty & another, [1962] 3 S.C.R. 786, Ram Sarup v. State, [1963] 34 SCR 858. Ram Kirpal v. State. [1970] 3 S.C.R, New Central Jute Mills Co. Ltd. v. The Assistant Collector. [1971] 2 SCR 92, State of Madhya Pradesh v. Narasimhan,[1976] 1 S.C.R. 61, Bhajva v. Gopikabai, [1978] 3 S.C.R. 561, Mahindra & Mahindra Ltd. v. Union,[1979] 2 S.C.R. 10348 and Western Coal Fields v. Special Area Development Authority. [1982] 2 S.C.R. 1. It unnecessary to make a detailed reference to these decisions. It is sufficient to say that they draw a distinction between referential legislation which merely contains a reference to or citation of, a provision of another statue and a piece of referential legislation which incorporates within itself a provision of another statute. In the former case, the provisions of the second statue, along with all its amendments and variations from time to time, should be read into the first statute. In the later case, the position will be as outlined in Narasimhan, [1976] 1 S.C.R. where after referring to Secretary of State v. Hindustan Cooperative Insurance Society Ltd., [1931] 58 I.A. 259, this Court summed up the position thus:
"On a consideration of these authorities, therefore, it seems that the following proposition emerges:
Where a subsequent Act incorporates provisions of a previous Act then the borrowed provisions become an integral and independent part of the subsequent Act and are totally unaffected by any repeal or amendment in the previous Act. . In Onkarlal Nandlal vs. State of Rajasthan [1986 AIR 2146], this principle has been explained with lucidity and clarity by citing an English decision as follows:
The doctrine of incorporation by reference has been succinctly explained by Lord Esher M R in In re Woods Estate(1886) 31. Ch. D.607 in the following words:
It is to put them into the Act of 1885, just as if they had been written into it for the first time. If a subsequent Act brings into itself by reference some of the clauses of a former Act, the legal effect of that, as has often been held, is to write those sections into the new Act just as if they had been actually written in it with the pen, or printed in it, and, the moment you have those clauses in the later Act, you have no occasion to refer to the former Act at all. In the light of above decisions of the apex Court , it has to be held that the definition general insurance business given in GIB Act has become an integral part of the Finance Act, 1994 and has to be understood accordingly.
5.1.10. The contention raised that since as per the provisions of Section 43 of the DICGC Act, 1961, nothing in the Companies Act, 1956 or the Insurance Act, 1938, shall apply to the Corporation, the Corporation cannot be construed as carrying on general insurance business as defined in section 3(g) of the General Insurance Business (Nationalisation) Act, 1972, (GIB Act in short) as such business is carried on by companies registered under the Companies Act, 1956, is not tenable for the following reason. As per section 3(g) of the GIB Act, general insurance business means fire, marine or miscellaneous insurance business, whether carried on singly or in combination with one or more of them, but does not include capital redemption business and annuity certain business. A plain reading of the definition makes it absolutely clear that anything other than fire or marine insurance would come within the purview of miscellaneous insurance business. Thus deposit insurance comes within the scope of miscellaneous insurance business as mentioned above. As per section 65 (49) of the Finance Act, general insurance business has the meaning assigned to it in clause (g) of section 3 of the General Insurance Business (Nationalisation) Act, 1972. As per section 65 (105)(d), taxable service means any service provided or to be provided to a policy holder or any person by an insurer or re-insurer, carrying on general insurance business in relation to general insurance business. In the preceding paragraphs, we have held that DICGC is in the business of providing deposit insurance service to banks on payment of insurance premium. Nowhere in section 65(49) or 65(105)(d) is there any restriction placed that such service should be provided by an entity as defined in the Insurance Act, 1938 or Companies Act, 1956. In the absence of any such stipulation, the said provisions cannot be construed or interpreted in a restrictive manner. The golden rule of statutory interpretation is the principle of strict interpretation of taxing statutes best enunciated by Rowlatt, J. in his classic statement in Cape Brandy Syndicate v. Commissioner of Inland Revenue (1921) 1 KB 64 [cited with approval in Income-tax Officer v. T.S. Devinatka Nadar [1968] 68 ITR 252 (SC); AIR 1968 SC 623] as follows:
".....,...in a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used."
In the light of the above, it is clear that deposit insurance undertaken by the appellant falls within the ambit of general insurance business as defined in section 65(49) read with 65(105)(d) of the Finance Act, 1994 and we hold accordingly.
5.2. Whether the activity of DICGC is a business or not?
5.2.1. The contention of the appellant is that it is a statutory body carrying out functions as laid down by the statute and collects the premium as per rate approved by Reserve Bank of India. The expenditure is incurred by the appellant as per the statute and the investment in various securities is made as provided in the statute. Therefore, the appellants does not have profit motive and they cannot be said to have been engaged in any business. Reliance has been placed on a number of case laws in support of this contention.
5.2.2. The above contention is both factually and legally incorrect. As per section 3 of the DICGC Act, extracted below,-
3. (1) The Central Government shall, by notification in the Official Gazette, establish a Corporation by the name of the Deposit Insurance Corporation which shall be a body corporate having perpetual succession and a common seal with power, subject to the provisions of this Act, to acquire, hold or dispose of property and to contract, and may, by the said name, sue or be sued.
4. (1) The authorised capital of the Corporation shall be one crore of rupees but the Central Government may, in consultation with the Reserve Bank, increase such capital from time to time, so however, that the total authorised capital shall not exceed fifty crores of rupees. (2) The issued capital for the time being of the Corporation shall be fully paid-up and shall stand allotted to the Reserve Bank.
5. The general superintendence, direction and the management of the affairs and business of the Corporation shall vest in a Board of directors which may exercise all powers and do all acts and things which may be exercised or done by the Corporation. Thus the DICGC has been established as a body corporate with power to acquire, hold or dispose of property and to contract. As per section 65(13) of the Finance Act, 1994, "body corporate" shall have the meaning assigned to it in clause (7) of Section 2 of the Companies Act, 1956 (1 of 1956). In law, body corporate means a legal entity (such as an association, company, person, government, government agency, or institution) identified by a particular name. The authorised capital of the Corporation is Rs.50 crore which is entirely subscribed to by the Reserve Bank. There cannot be any doubt or dispute on the fact that the power to acquire, hold or dispose of property and to enter into contract in this regard comes within the ambit/scope of commercial/business transaction which is undertaken with a profit motive. It is also an admitted position, as evident from para 12 of the Annual Report of the appellant Corporation that the appellant Corporation is assessed to Income Tax as a company as defined under the Income Tax Act, 1961 and has been paying income tax since the financial year 1987-88. As can be seen from the audited balance sheet figures, the appellant has paid income tax on the surplus of income over expenditure, derived, inter alia, from the insurance premium collected from the insured banks, which is otherwise called profit of the corporation. When this is the factual position, we are quite surprised at the contention raised in this regard that the appellant is not carrying on any business.
5.2.3. As per the Major Law Lexicon [4th Edition, 2010], the word business extends to all cases where work, involving the recourse of numerous persons to the premises, is done for payment, or even without payment where the result is in effect the same as if a charge were made. The making of profit is not essential to constitute a business; nor, on the other hand, does payment necessarily constitute one. [Halsbury, 4th Edn. Vol.27, para 325, p. 273]. In Narain Swadeshi Mills v. Commissioner of Excess Profits Tax [AIR 1955 SC 176], the honble Apex Court explained the expression business as follows:-
Business connotes some real, substantial and systematic or organized course of activity or conduct with a set purpose.
In terms of the law expounded by the apex court, the appellant is engaged in the business of insuring deposits of commercial banks for a consideration by way of premium paid by the insured banks.
5.2.4. In the light of the foregoing analysis, we answer the question in favour of Revenue and against the appellant and hold that the appellant Corporation is engaged in the business of insuring deposits for a consideration with a profit motive.
5.3. Whether the activity of deposit insurance undertaken by the appellant is a sovereign/statutory function not amenable to service taxation or is it a commercial activity which can be subjected to tax?
5.3.1. To understand what a sovereign function is and whether statutory functions can be subjected to service tax, we shall refer to two classical decisions on the concept of sovereign function by the honble Apex Court. The first is the case of Bangalore Water-Supply & ... vs R. Rajappa & Others [1978 AIR 548] wherein the question was whether State is an industry as defined in Section 2(j) of the Industrial Disputes Act, 1947.
5.3.2. The respondent employees were fined by the Appellant Board for misconduct, and various sums were recovered from them. Therefore, they filed a Claims Application under Section 33C (2) of the Industrial Disputes Act, alleging that the said punishment was imposed in violation of the principles of natural justice. The appellant Board raised a preliminary objection before the Labour Court that the Board, a statutory body performing what is in essence a regal function by providing the basic amenities to the citizens, is not an industry within the meaning of the expression under section 2(j) of the Industrial Disputes Act, and consequently the employees were not workmen and the Labour Court had no jurisdiction to decide the claim of the workmen. This objection being over-ruled, the appellant Board filed two Writ 'Petitions before the Karnataka High Court at Bangalore. The Division Bench of that High Court dismissed the petitions and held that the appellant Board is "industry" within the meaning of the expression under section 2(j) of the Industrial, Disputes Act, 1947. The appeals by Special Leave, were placed for consideration by a larger Bench of seven judges. The observations of the Court so far as it relates to the issues before us are extracted below:-
The term "sovereign should be reserved technically and more correctly for the sphere of ultimate decisions. Sovereignty operates on a sovereign plane, of its own. Only those services which are governed by separate rules and constitutional provisions such as Articles 310 and 311 should, strictly speaking be excluded from the sphere of industry by a necessary implication.
The State today increasingly undertakes commercial functions and economic activities and services as part of its duties in a welfare state. Hence to artificially exclude state-run industry from the sphere of the Act, unless the statutory provisions expressly or by necessary implication have that effect, would not be correct. There is no justification for excepting the categories of public utility activities undertaken by the Government in the exercise of its inalienable function, under the constitution, call it regal or sovereign or by any other name, from the definition of "industry". If it be true that one must have regard to the nature of the activity and not to who engages in it, it is beside the point to enquire whether the activity is undertaken by the State, and further, if so, whether it is undertaken in fulfilment of the State's constitutional obligations or in discharge of its constitutional functions. In fact, to concede the benefit of an exception to the State's activities which are in the nature of sovereign functions is really to have regard not so much to the nature of the activity as to the consideration who engages in that activity; for, sovereign functions can only be discharged by the State and not by a private person. If the State's inalienable functions are excepted from the sweep of the definition contained in section 2(j),one shall have it is the nature of the activity is an industry. Indeed, in this respect, it should make no difference whether on the one hand, an activity is undertaken by a corporate body in the discharge of its statutory functions or, on the other, by the State itself in the exercise of its inalienable functions. If the water supply and sewerage schemes or fire fighting establishments run by a Municipality can be industries so be the manufacture of coins and currency, arms and ammunition and the winning of oil and uranium. The fact that these latter kinds of activities are, or can only be, undertaken by the State does not furnish any answer to the question whether these activities are industries. When undertaken by a private individual they are industries, therefore, when undertaken by the State, they are industries. The nature of the activity is the determining factor and that does not change according to who undertakes it.
sovereign functions, strictly understood, (alone), qualify for exemption, not the welfare activities of economic adventures undertaken by Government or statutory bodies. Even in departments discharging sovereign functions, if there are units which are industries and they are substantially severable, then they can be considered to come within sec. 2(j). Constitutionally and competently enacted legislative provisions may well remove from the scope of the Act categories which otherwise may be covered thereby. 5.3.3. The second decision pertains to N. Nagendra Rao & Co vs State Of A.P [1994 AIR 2663, 1994 SCC (6) 205]. The relevant paras from the said decision are extracted below:
Is the State vicariously liable for negligence of its officers in discharge of their statutory duties, was answered in the negative by the High Court of Andhra Pradesh on the ratio laid down by this Court in Kasturi Lal Ralia Ram Jain v. State of U.P while reversing the decree for payment of Rs 1,06,125.72 towards value of the damaged stock with interest thereon at the rate of 6% granted by the trial court for loss suffered by the appellant due to non-disposal of the goods seized under various control orders issued under the Essential Commodities Act, 1955 . But for determining correctness of the view taken by it, the High Court granted certificate under Article 133(1) of the Constitution of India as the case involved "substantial questions of law, of general importance". Although the claim of the appellant was negatived mainly on the sovereign power of the State, but, that was only one of the reasons, as the High Court further held that the goods of the appellant having been seized in the exercise of statutory power for violation of the Control Orders and the seizure having been found, by the appropriate authorities, to be valid at least for part, no compensation was liable to be paid to the appellant for the goods which were directed to be returned. The further questions, therefore, that arise for consideration are, whether seizure of the goods in exercise of statutory powers under the Act immunizes the State, completely, from any loss or damage suffered by the owner. Whether confiscation of part of the goods absolves the State from any claim for the loss or damage suffered by the owner for the goods which are directed to be released or returned to it.
It was dissented to by the Madras High Court in Secretary of State for India in Council v. Hari Bhanji and it was observed that Nobin Chunder Dey did not properly comprehend the law laid down in Peninsular. The Chief Justice of the Madras High Court, after dealing with Peninsular and its erroneous application in Nobin Chunder Dey, observed that defence of sovereign immunity was available in those limited cases where the State could not be sued for its acts, such as making war or peace, in Municipal Courts. Relevant observations are extracted below :
"Acts done by the Government in the exercise of the sovereign powers of making peace and war and of concluding treaties obviously do not fall within the province of municipal law, and although in the administration of domestic affairs the Government ordinarily exercises powers which are regulated by that law, yet there are cases in which the supreme necessity of providing for the public safety compels the Government to acts which do not pretend to justify themselves by any canon of municipal law. Acts thus done in the exercise of sovereign powers but which do not profess to be justified by municipal law are what we understand to be the acts of State of which municipal courts are not authorised to take cognizance." The doctrine or the defence by the "act of State", is not the same as sovereign immunity. The former flows from the nature of power exercised by the State for which no action lies in civil court whereas the latter was developed on the divine right of Kings.
One of the tests to determine if the legislative or executive function is sovereign in nature is whether the State is answerable for such actions in courts of law. For instance, acts such as defence of the country, raising armed forces and maintaining it, making peace or war, foreign affairs, power to acquire and retain territory, are functions which are indicative of external sovereignty and are political in nature. Therefore, they are not amenable to jurisdiction of ordinary civil court. No suit under Civil Procedure Code would lie in respect of it. The State is immune from being sued, as the jurisdiction of the courts in such matter is impliedly barred.
As far back as 1956, the First Law Commission in its Report on the liability of the State in tort, after exhaustive study of the law and legislations in England, America, Australia and France, concluded :
"In the context of a Welfare State it is necessary to establish a just relation between the rights of the individual and the responsibilities of the State. While the responsibilities of the State have increased, the increase in its activities has led to a greater impact on the citizen. For the establishment of a just economic order industries are nationalised. Public utilities are taken over by the State. The State has launched huge irrigation and flood control schemes. The production of electricity has practically become a Government concern. The State has established and intends to establish big factories and manage them. The State carries on works departmentally. The doctrine of laissez-faire which leaves everyone to look after himself to his best advantage has yielded place to the ideal of a Welfare State which implies that the State takes care of those who are unable to help themselves."
The Commission after referring to various provisions in the. Legislation of other countries observed :
"The old distinction between sovereign and non-sovereign functions or governmental and nongovernmental functions should no longer be invoked to determine the liability of the State. As Professor Friedman observes : 'It is now increasingly necessary to abandon the lingering fiction of a legally indivisible State, and of a feudal conception of the Crown, and to substitute for it the principle of legal liability where the State, either directly or through incorporated public authorities engages in activities of a commercial, industrial or managerial character. The proper test is not an impracticable distinction between governmental and non-governmental functions, but the nature and form of the activity in question'. 5.3.4. From the decisions of the apex court discussed in the preceding paragraphs, it is clear that only those functions of the State where the State cannot be sued in a court of law can be called sovereign functions. All other activities of the State which are undertaken by the State or the corporations established by the State to achieve various socio-economic objectives cannot be regarded as sovereign functions and are therefore amenable to civil and criminal laws, including taxation. Further section 3 (1) of the DICGC Act, 1961 provides that Deposit Insurance Corporation shall be a body corporate having perpetual succession and a common seal with power, subject to the provisions of this Act, to acquire, hold or dispose of property and to contract, and may, by the said name, sue or be sued. In view of this explicit provision in law, we find no merit in the contention that the activity of deposit insurance is a sovereign/statutory function not amenable to service taxation. Accordingly we reject this contention as completely devoid of merits and hold that service tax is leviable on the deposit insurance activity under the taxable service category of general insurance business service.
5.4. Whether deposit insurance is a contract of insurance/contract of indemnity or a contract of guarantee?
5.4.1. The contention advanced by the appellant is that deposit insurance is a guarantee and not a contract of indemnity and the provisions of the Indian Contract Act do not apply. It is also contended that in deposit insurance, there are three parties involved, namely, the Deposit Insurance Corporation, the Insurer, the insured Bank and the depositor whereas in a normal contract of insurance, only two parties are involved, that is the insurer and the insured. Since service tax levy is a contract based levy, deposit insurance will not come under the purview of service tax. It has also been argued that deposit insurance is a statutory obligation under the Deposit Insurance and Credit Guarantee Corporation Act, 1961 and the insured bank has no choice but to compulsorily obtain insurance by force of law.
5.4.2. We have carefully considered these submissions. However, we find no merit in these contentions as the law laid down by the various Courts in India is otherwise. We have already held that the deposit insurance activity undertaken by the appellant falls within the scope and ambit of general insurance business as defined in section 65(49) read with 65(105)(d) of the Finance Act, 1994. Even if we take the criteria laid down by the appellant to qualify as a contract of insurance, the activity of deposit insurance meets all the criteria. The first criterion is contractual relationship between the parties. The same exists between the DICGC and the insured bank. The contract need not always be written or explicit. It can be oral and implicit. The second criterion is there should be some event the happening of which is uncertain. In other words there should be some risk for which insurance is being sought. The uncertain event in the deposit insurance is liquidation or winding up of the insured bank. It is this risk which might impair the capacity of the insured bank to repay it debt/liability to the depositor, that is being insured upto a certain limit (Rs. 1 lakh per depositor). The third criterion is that the insured must have an insurable interest in the subject matter of the property. The insurable interest is the liability of the insured in respect of the deposits it has received from various depositors. The fourth criterion is the Insurer is bound to pay money or provide its equivalent if any uncertain event occurs. In the event of liquidation of the bank, the Insurer, that is, DICGC, makes good the liability upto a maximum limit of Rs.1 lakh per depositor. The last criterion is insurance should be a contract of indemnity. The insurer indemnifies discharge of liability to the extent of deposit made subject to a cap of Rs.1 lakh per depositor. Thus, all the criterion of an insurance contract is satisfied in the case of deposit insurance and therefore, it is a contract of insurance and a contract of indemnity.
5.4.3. In Halsbury's Laws of England, fourth edition, Vol. 25, under the heading "Insurance" in paragraph 3, it is observed as follows:
"Most contracts of insurance belong to the general category of contracts of indemnity in the sense that the insurer's liability is limited to the actual loss which is in fact proved. The happening of the event does not itself entitle the assured to payment of the sum stipulated in the policy; the event must in fact result in a pecuniary loss to the assured, who then becomes entitled to be indemnified subject to the limitations of his contract. He cannot recover more than the sum insured, for that sum is all that he has stipulated for by his premiums and it fixed the maximum liability of the insurers. Even within that limit, however, he cannot recover more than what he establishes to be the actual amount of his loss. The contract being one of indemnity, and of indemnity only, he can recover the actual amount of his loss and no more, whatever may have been his estimate of what his loss would be likely to be, and whatever the premiums he may have paid, calculated on the basis of that estimate."
The above passage has been quoted with approval in many decisions of the High Courts and of the honble Apex Court in India while considering the nature of insurance contracts and the liability arising therefrom. To cite an example, the decision of the honble Madras High Court - Leo Machodo vs. Commissioner of Income Tax [1988 (172) ITR 744 (Madras)].
5.4.4. In Vasudev Mudaliar vs Caledonian Insurance Co. And Anr. [AIR 1965 Mad 159], the honble Madras High Court considered an important question as to the rights of an insurer to sue in his own name to recover damages from a third party, by whose negligence the assured's car met with an accident and was totally damaged, but who was fully indemnified by the insurer under a comprehensive policy. The honble High Court observed as follows while considering the nature of motor insurance.
(4) A contract of motor insurance, like marine or accident insurance, is, in essence, one of indemnity. The underwriter, for consideration, guarantees the assured compensation against loss or risks, the limits of the guarantee against accident or loss or risks, the limits of the guarantee against accident or loss or damage suffered, totally or partially, being subject to the maximum stipulated in the contract of insurance. Conversely, the rights of the assured are not to profit out of the bargain. It is implied in the very nature of the contract of indemnity that the indemnifier is entitled to recoup or minimise the damages he is obliged to pay the assured, by ways and means the assured himself could resort to, in order to reimburse himself against loss caused to him by third party negligence. Such a right of the insurer is, of course, conditional upon his having already indemnified the assured. In other words, arising out of the nature of a contract of indemnity, the insurer, when he has indemnified the assured, is subrogated to his rights and remedies against third parties who have occasioned the loss. This right of the insurer to subrogation or to get into the shoes of the assured as it we, need not necessarily flow from the terms of the motor insurance policy, but is inherent in and springs from the principles of indemnity. This is as a matter of law relating to indemnity, and the basis of the right is justice, equity and good conscience, namely, the indemnifier should be in a position to reduce the extent of his liability within limits. 5.4.5. The honble High Court cited as authority Halsbury's Laws of England, Simonds Edn. which states in paragraph 512 that--"subrogation" is a right inherent in all contracts of indemnity, and further--"the doctrine of subrogation applies to all contracts of non-marine insurance which are contracts of indemnity, such, as, for example, contracts of fire insurance, motor vehicle insurance and contingency insurance covering non-payment of money. It applies whether the loss is total or partial, and is a corollary of the principle of indemnity. By requiring any means of diminishing or extinguishing a loss to be taken into account it prevents the assured from recovering more than a full indemnity."
5.4.6. In Gajanan Moreshwar Parelkar vs Moreshwar Madan Mantri [(1942) 44 BOMLR 703] Chagla. J. (as he was then) considered a suit by the plaintiff to enforce an indemnity. The observations made in the said judgment, extracted below, are very relevant to the issue under consideration in the present case.
3. If the whole law of indemnity was embodied in Sections 124 and 125 of the Indian Contract Act, there would be considerable force in the contention of Mr. Tendolkar ; but that is obviously not so. The Indian Contract Act is both an amending and a consolidating Act, and it is not exhaustive of the law of contract to be applied by the Courts in India. Section 124 deals only with one particular kind of indemnity which arises from a promise made by the indemnifier to save the indemnified from the loss caused to him by the conduct of the indemnifier himself or by the conduct of any other person, but does not deal with those classes of cases where the indemnity arises from loss caused by events or accidents which do not or may not depend upon the conduct of the indemnifier or any other person, or by reason of liability incurred by something done by the indemnified at the request of the indemnifier.
7. It is true that under the English common law no action could be maintained until actual loss had been incurred. It was very soon realized that an indemnity might be worth very little indeed if the indemnified could not enforce his indemnity till he had actually paid the loss. If a suit was filed against him, he had actually to wait till a judgment was pronounced, and it was only after he had satisfied the judgment that he could sue on his indemnity. It is clear that this might under certain circumstances throw an intolerable burden upon the indemnity-holder. He might not be in a position to satisfy the judgment and yet he could not avail himself of his indemnity till he had done so. Therefore the Court of equity stepped in and mitigated the rigour of the common law. The Court of equity held that if his liability had become absolute then he was entitled either to get the indemnifier to pay off the claim or to pay into Court sufficient money which would constitute a fund for paying off the claim whenever it was made. As a matter of fact, it has been conceded at the bar by Mr. Tendolkar that in England the plaintiff could have maintained a suit of the nature which he has filed here; but, as I have pointed out, Mr. Tendolkar contends that the law in this country is different. I have already held that Sections 124 and 125 of the Indian Contract Act are not exhaustive of the law of indemnity and that the Courts here would apply the same equitable principles that the Courts in England do. Therefore, if the indemnified has incurred a liability and that liability is absolute, he is entitled to call upon the indemnifier to save him from that liability and to pay it off. 5.4.7. One of the essential ingredients of an Insurance contract is that the insured must have an insurable interest in the subject matter of the contract. Insurance without insurable interest would be a mere wager and as such unenforceable in the eyes of law. The subject matter of the Insurance contract may be a property, or an event that may create a liability but it is not the property or the potential liability which is insured but it is the pecuniary interest of the insured in that property or liability which is insured. The concept is the basis of the doctrine of insurable interest and was cleared in the case of Castellain v/s Preston [(1883) 11 QBD 380]. For example, In a fire insurance policy, it is not the bricks and materials used in building the house that is insured but the interest of the Insured in the subject matter of Insurance. The subject matter of the contract is the name given to the financial interest, which a person has in the subject matter and it is this interest, which is insured. Insurable Interest is defined as the legal right to insure arising out of a financial relationship recognized under the law between the insured and the subject matter of Insurance. There are four essential components of Insurable Interest:- 1) There must be some property, right, interest, life, limb or potential liability capable of being insured; 2) Any of these above i.e. property, right, interest etc. must be the subject matter of Insurance; 3) The insured must stand in a formal or legal relationship with the subject matter of the Insurance, whereby he benefits from its safety, well-being or freedom from liability and would be adversely affected by its loss, damage existence of liability; and 4) The relationship between the insured and the subject matter must be recognized by law.
5.4.8. There are a number of ways by which Insurable Interest arises or is restricted. (a) By Common Law: Cases where the essential elements are automatically present can be described as Insurable Interest having arisen by common law. Ownership of a building, car etc, gives the owner the right to insure the property. (b) By Contract: In some cases a person will agree to be liable for something which he would not be ordinarily for. A lease deed for a house for example may make the tenant responsible for the repair and maintenance of the building. Such a contract places the tenant in a legally recognized relationship with the house or the potential liability and this gives him the insurable interest. (c) By Statute: Sometimes an Act of the Parliament may create an insurable interest by granting some benefit or imposing a duty and at times removing a liability may restrict the Insurable Interest. Insurable Interest is applicable in the Insurance of property, life and liability.
5.4.9. Some of the legislation passed by the Govt. of India to protect the rights and to provide benefits to the common man as a part of its efforts to provide social security to its dominions is discussed in brief below:
(a) Workman Compensation Act 1923: This perhaps was the earliest act to be enacted for the benefits of the workers. Before this Act was passed workers who met with accidents while performing their duty not only lost their limbs or lives but also were denied any medical aid and more often than not were simply removed from the job and lost their livelihood placing them and their families in great difficulty. By passing this act the liability of employer was fixed and he is now required by law to pay compensation to victims of accidents while on duty. The amount of compensation has been fixed in accordance with the extent of injury, disability and linked to the workers salary and age on the date of accident.
(b) Employee State Insurance Act 1948: The purpose behind this legislation was to provide medical aid to workers and their families working in industries located in certain notified areas. Under this act a part of the salary a small amount (at present 1.75%) is deducted from the workmans salary and some part is contributed by the Employer (at present 4.75%) and the same is deposited with the Employee State Insurance corp. With the funds thus collected and with more contributions from the State and Central Govt., Dispensaries and Hospitals have been set up all over the country where the worker members and their families are provided health care free of cost.
(c) Motor Vehicle Act 1988: The Motor Vehicle Act was amended in 1988 to make Third Party Liability Insurance compulsory; thus no uninsured vehicle is allowed to ply the roads or in public place in India. The need of this enactment was felt due to the growing number of vehicles and the increasing number of accidents causing injury and death of the people involved in the accident and not being able to get relief from the owner/ driver of the vehicle because of long protracted legal battle involved, which many victims could not afford. The Act now provides that irrespective of the fact that the fault was of the driver/ owner or not (No fault) the victim of an accident will be entitled to a payment of Rs. 50,000/- in case of death and Rs. 25,000/- in the case of grievous bodily injury.
(d) Public Liability Act 1991: The Bhopal Gas tragedy of 1984, which resulted in many deaths and caused untold suffering to lakhs of people prompted the enactment of this legislation. The public liability act now makes it compulsory for all individuals, companies, industries involved in handling of hazardous substances to insure against any untoward happening so that immediate succor is made available to the victims from the Insurance companies.
5.4.10. Other than passing legislations to improve social security, the Government also initiated certain schemes under which Insurance is provided to the economically and socially backward people and workers of the unorganized sector at highly subsidized rates. Some of the schemes introduced by the Govt. of India are,-
(i) Personal Accident Social Security Scheme (PASSS): Introduced in 1985 for the benefit of Poor families i.e. (whose income does not exceed Rs. 7,200 per year). The scheme provided for a payment of Rs.3,000/- in the event of death due to an accident of any person in the age group of 18 to 60 who is the earning member of the poor family. The premium is borne by the Central Government and the expenses for implementation of the scheme by the state Government.
(ii) National Agricultural Insurance Scheme or the (RKBY) Rashtriya Krishi Bima Yojna (NAIS) introduced in 1999 with the objective of providing Insurance coverage and financial support to farmers in the event of failure of crops as a result of calamities, pests and diseases. The premium is low and 50% subsidy in premium is allowed to small & marginal farmers which are shared by the Central and State Government.
(iii) Hut Insurance Scheme: Introduced in 1988, for the benefit of very poor families (i.e. those whose annual income does not exceed Rs.4,800/-p.a.). The scheme provides that in case of destruction of Hut due to fire, compensation of Rs.1,000/ - for hut & Rs.500/- for belongings shall be paid. The premium is borne by the Central Government.
(iv) In addition, to the above schemes the Government has also introduced insurances at subsidized rates for farmers (cattle Insurance), for women (Raj Rajeshwari Mahila Kalyan Yojna), for the girl child (Bhagyashree child welfare policy) and Gramin Personal Accident policy etc. for the benefit of common people.
5.4.11. If we apply the above legal principles to the facts of the case in hand, there is no scintilla of doubt that deposit insurance like other insurance is a contract of indemnity and is amenable to the provisions of the Indian Contract Act. Merely because it has been made compulsory under the DICGC Act, 1961, it does not cease to be a contract of insurance. Insurance of the kind described in paras 5.4.9 and 5.4.10 above, which are statutorily prescribed and where there are more than two parties in many cases, the insurer, the insured and the beneficiary, are also considered as coming under the category general insurance business and nothing has been brought before us to show that they are not so considered/understood in law. By the same logic, Deposit Insurance Contract is also a general insurance contract as defined in law and merely because they are statutorily prescribed, they do not cease to be contract of insurance. The insurer is the Corporation, the insured are the banks and the beneficiary is the depositor(s).
5.5. Whether the appellant is eligible for the benefit of tax exemption under notification No. 22/2006-ST dated 31-5-2006?
5.5.1. An argument has been advanced that even if deposit insurance is held as coming within the purview general insurance, exemption from service tax is available under notification 22/2006-ST dated 31/05/2006. The argument runs as follows. The said notification, inter alia, exempts from service tax taxable services provided or to be provided to any person, by the Reserve Bank of India. Since DICGC, the appellant herein, is a subsidiary of the RBI, the benefit of the said exemption should be extended to the appellant. This argument is completely mis-placed. The exemption from service tax is in respect of services provided by the RBI and not by the subsidiaries of RBI. RBI and the appellant are separate legal entities established under different statutes, the former under the Reserve Bank of India Act, 1934 and the latter under the Deposit Insurance and Credit Guarantee Corporation Act, 1961. Functionally also they are different. The Preamble of the Reserve Bank of India Act describes the basic functions of the Reserve Bank as: "...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage" while the preamble of the Deposit Insurance and Credit Guarantee Corporation Act, 1961, reads as - an act to provide for the establishment of a corporation for the purpose of insurance of deposits and guaranteeing of credit facilities and for other matters connected therewith or incidental thereto.
5.5.2. The honble Apex Court in the case of Union of India vs. Wood Papers Ltd. [AIR 1991 SC 2049] has laid down the principle of interpretation of an exemption notification as follows:-
..truly speaking liberal and strict construction of an exemption provision is to be invoked at different stages of interpreting it. When the question is whether a subject falls in the notification or in the exemption clause then it being in the nature of exception is to be construed strictly and against the subject but once ambiguity or doubt about applicability is lifted and the subject falls in the notification then full play should be given to it and it calls for a wider and liberal construction. Since the exemption is available to the taxable services rendered by RBI, the exemption clause has to be strictly interpreted to see as to whether DICGC will fall within the said exemption. Since DICGC is both legally and functionally distinct and different from RBI, it will not be eligible for the exemption under notification 22/2006-ST. The said difference exists even in the case of direct taxes. While RBI is exempt from payment of income tax under section 48 of the RBI Act, no such exemption from income tax is available in the case of DICGC, which is admittedly paying income tax under the Income Tax Act, 1961 since 1987-88 as stated in para 12 of the Annual Report for 2013-2014. The reliance placed by the appellant on a few decisions of this Tribunal in the case of Canara Bank and HDFC bank etc. is of no avail as the facts involved in those cases are different and distinguishable. In those cases, the said banks were functioning as an agent of RBI, in respect of functions assigned to RBI, whereas in the present case, the appellant is not an agent of the RBI and is performing a totally different function assigned to it exclusively. Therefore, this contention raised merits rejection.
5.6. Whether the appellant could be alleged to have suppressed facts with an intent to evade tax and whether extended period of time could be invoked to confirm the service tax demand?
5.6.1. From the records, it is seen that in response to DICGCs letters dated 05/01/2009 and 14/01/2009, the applicability of service tax to DICGC was examined by the Central Board of Excise & Customs (Board in short). After examination of the provisions of the DICGC Act, 1961, it was clarified by the Board vide letter No.354/164/2008-TRU dated 24/02/2009 that DICGC is not performing the function of a watchdog and guarantor of the banking activities by any bank operating in India and hence their activity is not taxable under the taxable service of general insurance business. However, the matter was re-examined by the Board in the light of the observations received from the Chief Commissioner (LTU), Mumbai vide his letter dated 21/07/2011. On re-examination, the Board came to the conclusion that the insurance activity of DICGC falls within the ambit of section 65(105)(d) of the Finance Act, 1994, and is chargeable to service tax. This revised view was communicated to the appellant vide letter F.No.137/135/2008-CX-4 dated 20th September, 2011. Thereafter on 24/10/2011 show cause notice was issued to the appellant demanding service tax for the period from 01/05/2006 to 31/03/2011 alleging suppression/mis-representation of facts and invoking the extended period of time. Thus when the Board, the apex indirect tax enforcement authority itself was not clear or entertained doubts about the taxability of the deposit insurance activity, how can it be alleged that the appellant suppressed or mis-represented the facts? In our considered view, this charge, made in the show cause notice and confirmed in the impugned order, cannot be legally sustained. Our view is supported by the decision of the honble Apex Court in Suchitra Components Ltd. v. Commissioner of Central Excise, Guntur, (supra) wherein it was categorically held that any revision which is against the assessee is effective prospectively and not retrospectively. Therefore, demand of service tax can be made from the assessee only with effect from 20-9-2011 and not from an earlier date and we hold accordingly.
5.6.2. The contention of the Revenue that the appellant did not get itself registered under the Service Tax law and did not provide information about the premium collected in spite of repeated reminders does not by itself establish the fact that they intended to evade service tax. The facts on record show that they sought exemption from service tax as early as 01/08/2008 and pursued the matter with the CBEC after their request for exemption was rejected. This conduct of the appellant itself shows that there was no willful attempt on their part to evade service tax. It should be kept in mind that DICGC is a statutory corporation owned by the Reserve Bank of India and their audited records are placed before the Parliament every year through the Finance Ministry in terms of section 32(2) of the DICGC Act. This itself shows there cannot be any suppression of the activities by DICGC. We also note that they have been paying income tax since 1987-88 and is a large tax payer unit (LTU in short). All the income earned by the DICGC from the deposit insurance function, credit guarantee function and other activities are clearly and separately recorded in their annual balance sheet and should necessarily form part of their income tax returns.
5.6.3. As per the CBEC web-site, the concept of an LTU is that it is a self-contained tax administration office under the Department of Revenue acting as a single window clearance point for all matters relating to central excise, income tax/corporate tax and service tax. Entities would be able to file their excise return, direct taxes returns and service tax return at such LTUs and for all practical purposes will be assessed to all these taxes at these LTUs. Such units would be equipped with modern facilities and trained manpower to assist the tax payers in all matters relating direct and indirect tax / duty payments, filing of documents and returns, claim of rebates/refunds, settlement of disputes etc. The scheme aims at reducing tax compliance cost and delays, and bringing out uniformity in the matters of tax/duty determination. Since the adjudicating/assessing authority is a part of the LTU where the appellant is filing their income tax returns, we do not understand how the service tax department could not have obtained/accessed information regarding the premium collected on deposit insurance activity. The audited financial report of the appellant is put on the public domain and can be freely downloaded from the appellants web-site. In these circumstances, we are unable to accept the contention of the Revenue that the appellant suppressed/withheld information from the department with an intent to evade service tax. Consequently, the invocation of extended period of time for demand of service tax cannot be sustained in law and we hold accordingly.
5.7. Whether the appellants are liable to penalty?
It is a settled position in law that imposition of penalty is not justifiable in matters involving interpretation and classification. In any case, section 80 of the Finance Act, 1994 provides for waiver of penalty on sufficient cause being shown. In our considered view, the facts of the present case warrant invoking the discretion provided under section 80 and we do so.
5.8. The appellant has referred to a large number of case laws in support of their various contentions. In our considered view, these decisions have been rendered in the facts of the cases involved therein and therefore, cannot have universal application, unless the facts are identical. The appellants have not shown to our satisfaction that the facts involved in the present appeal are identical to those involved in those decisions. Therefore, we do not consider it worth our while to discuss and rebut each of them.
6. To conclude,-
(1) We hold that the deposit insurance activity undertaken by the appellant, Deposit Insurance and Credit Guarantee Corporation, falls within the taxable service category of general insurance business service as defined in section 65(49) read with section 65(105)(d) of the Finance Act, 1994 and is liable to service tax accordingly.
(2) The appellant is liable to pay service tax on the said activity for the period from 20/09/2011 onwards along with interest thereon in case there is any delay in payment of tax by the due date. The service tax demand for the period prior to 20/09/2011 is set aside in view of the clarification given by the CBEC vide letter dated 24/02/2009 that the said service is not taxable which was withdrawn vide letter dated 20/09/2011.
(3) The appellant is not eligible for the benefit of tax exemption under notification 22/2006-ST dated 31/05/2006, as amended.
(4) We set aside the penalty imposed on the appellant invoking the powers conferred under Section 80 of the Finance Act, 1994.
(Pronounced in Court on 11/03/2015) (M.V. Ravindran) Member (Judicial) (P.R. Chandrasekharan) Member (Technical) */as 2