Unreported Decisions – ST – July 2019

By Vinay Jain & Sachin Mishra, Advocates

1. Whether the service tax paid on commission paid to insurance agents under “Insurance Auxiliary Service” under reverse charge mechanism and then recovered from insurance agents is required to be deposited to the government as per Section 73A(2) of Finance Act, 1994? Whether pre-recruitment training and post-recruitment training expenses should be included in the taxable value of commission paid to the insurance agents for the purposes of discharging service tax?

Facts and Pleading: The appellants are inter-alia engaged in the business of providing life insurance services. The appellants appointed various individuals as insurance agents for selling life insurance products. The appellants were discharging service tax on the commission paid to such insurance agents under reverse charge mechanism. As per terms of agreement, the appellant recovered a portion of the aforesaid service tax paid by them from such insurance agents. Further, the Appellants also incurred certain expenditure on pre-recruitment training and post-licence training on insurance agents. These expenses were in the nature of booking of conference hall, arranging of faculties, travelling, etc.

(i) The department alleged that appellants have wrongly collected the said service tax from the insurance agents and have not deposited the same with government exchequer. Thus, appellants are liable to deposit the said amount to Government exchequer under Section 73A(2) of the Finance Act, 1994. (ii) Further, the department alleged that the aforesaid pre-recruitment training and post-license training expenses incurred by Appellants on the insurance agents should be included in the gross taxable value of the services rendered by such insurance agents.

(i) The Appellants argued that Section 73A(2) of the Finance Act, 1994 will apply only in cases wherein the person is not liable to pay service tax. When the person is liable to pay service tax, the same is covered under Section 73A(1) of the Finance Act, 1994. The Appellants are covered under Section 73A(1) and not under Section 73A(2). However, present demand is under Section 73A(2) and therefore, not sustainable. Otherwise also, whatever amount was collected from the insurance agents the same has been paid to the government exchequer. Therefore, the second recovery will not lie. Reliance was also placed upon Mafatlal Industries Ltd & Ors. vs. UOI, (1997)5 SCC 536 to contend that that once the excise duty is paid on clearance, it will not be payable again on collection from the buyers. Further, the Appellants contended that contractually tax liability can be shifted from one person to another and relied upon decision of Supreme Court in the case of Rashtriya Ispat Nigam Limited vs. Dewan Chand Ram Saran, 2012 (26) STR 289 (SC).

(ii) The appellants also argued that there was no bar under the law to recover tax paid by assessee from any other person. Further, the appellants argued that the pre-recruitment expenses where not liable to be included in the taxable value of the services rendered by the insurance agents on the count that the persons who received such pre-recruitment training were not registered as insurance agents under Insurance Act. Further, on post-licence training expenses, the appellants submitted that these expenses incurred by the appellant in providing training facilities to the Insurance Agents are in fact used by the appellant itself in furtherance of their own routine insurance business. The appellants also relied upon decision in Bhayana Builders Case, 2018-TIOL-66-SC-ST and Intercontinental Consultants & Technocrats Pvt. Ltd., 2018-TIOL-76-SC-ST to submit that whatever has been agreed between the parties can only form part of taxable value and in any case reimbursement of expenditure cannot form part of taxable value.

Judgment: (i) The Hon’ble Appellate Tribunal accepted the submissions of the appellants and relied upon the decision of HDFC Standard Life Insurance Co. Ltd. Vs. Commr. C.E, Mumbai-II 2017 (49) STR 301(Tri-Mum.) to grant relief to assessee. The Appellate Tribunal after extensive analysis of Section 73A(1) and (2) of the Finance Act, 1994 held in favour of assessee that once the tax has been discharged, no further liability will arise. (ii) Further, the Hon’ble appellate Tribunal agreed with the submission of the appellant that expenses incurred in pre-recruitment training and post-license training of insurance agents by the Appellants cannot form part of the gross taxable value of commission paid to the Insurance Agents in determining the service tax liability as reimbursement of expenditure cannot form part of taxable value.

Bajaj Allianz Life Insurance Co. Ltd. vs. CST, CESTAT, Mumbai, decided on 31.05.2019 in the Final Order No. A/86013- 86023/2019.

Bajaj Allianz Life Insurance Co. Ltd.

2. Whether the activity of operating power plants can be equated to “Management of Immovable Property” for the purpose of the definition of “Maintenance or Repair Service” under Section 65(64)? Whether operation fees and maintenance fees charged for operating and managing power plants is thus taxable under the Finance Act, 1994?

Facts and Pleadings: Wartsila India Ltd., (hereinafter referred to as the ‘Appellant’) is engaged in the business of operation of power plants and generation of electricity therefrom. The appellants have entered into operation and maintenance agreements with various customers at various locations, most of whom belong to the steel and automobile industry. As per the said agreements, the appellants have undertaken the primary activity of running the power plant for generation of electricity for which operation fee and maintenance fee is charged to the customer. The appellants were paying service tax on the maintenance fee so collected.

The case of the department was that the power plant is an immovable property and the operation thereof amounted to “management of immovable property”. Thus, the department contended that the “operation fee” so charged is liable to service tax under the category “Maintenance or Repair Service”.

The Appellant submitted that the principle of Noscitur A Sociis would apply to construe the term “management” as mentioned in the definition of “Maintenance or Repair Service” under Section 65(64) and would not include in its ambit operational activities. The Appellant further submitted that management and operation are distinct functions of an organization. Where the former is associated with overall superintendence of work, the latter is concerned with actual execution of daily functions. Since the Appellants were directly involved in running the power plant for the generation of electricity themselves, any maintenance work done was merely incidental to the generation of electricity. Hence, the scope of their operations could not be covered under “management of immovable property” and was thus outside the purview of being taxable under the head of “Maintenance or Repair Services”.

Judgment: The Hon’ble Appellate Tribunal held that management of immovable property does not include operation activities. The Hon’ble Appellate Tribunal held that since the sole purpose of the Appellant was the actual task of generating electricity and not the management of the power plant, any maintenance done would be incidental to the generation of electricity. Hence, the Hon’ble Appellate Tribunal held that neither is taxable under the head of “Maintenance or Repair Services”.

Wartsila India Ltd. vs. CST, CESTAT, Mumbai, decided on 14.06.2019 in the Final Order No. A/86114/2019.

Wartsila India Ltd.