The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that insurance premiums collected by a microfinance company from its borrowers and remitted in full to an insurance company cannot be included in the taxable value of the company’s banking and financial services for the purpose of service tax.
The bench of Vasa Seshagiri Rao (Technical Member) and Ajayan T.V. (Judicial Member) has ruled that only the administrative charges retained by the company constituted consideration for services rendered and were liable to service tax.
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The dispute revolved around whether insurance premiums collected from customers and passed on to the insurer formed part of the taxable value of banking and financial services provided by the company.
The appellant/assessee was engaged in microfinance activities, extending loans to lower-income families. Apart from lending operations, it facilitated insurance coverage for borrowers through a group insurance scheme arranged with Kotak Mahindra Old Mutual Life Insurance Limited. Under the arrangement, the company collected insurance premiums from borrowers and remitted them to the insurer. During a part of the relevant period, it also collected separate administrative charges for facilitating the insurance coverage.
During an audit, the Service Tax Department noticed that the appellant had recorded income under the head “Insurance”. The Department took the view that since the company had collected amounts in excess of the insurance premium by charging administrative fees, it failed to satisfy the conditions of a “pure agent” under Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006. Consequently, the Department sought to levy service tax on the entire amount booked as insurance income, including the insurance premium itself.
The company accepted service tax liability on the administrative charges and paid tax along with interest before issuance of the show cause notice. Nevertheless, the Department issued a notice demanding service tax of ₹23.96 lakh on the entire insurance income for the period April 2009 to March 2012, along with interest and penalties.
Department’s Stand
According to the Department, facilitation of insurance was intrinsically linked to the appellant’s banking and financial services because the insurance coverage also protected the lender’s interest in recovering the loans advanced. Based on this reasoning, the Department treated the arrangement as a composite service whose essential character was banking and financial services, thereby including the entire insurance income within the taxable value.
Appellant’s Arguments
The appellant contended that only the administrative charges represented consideration for services rendered by it. The insurance premium, on the other hand, was merely collected from customers and transferred to the insurer without any retention or markup. It argued that the premium was a pure pass-through amount and could not be treated as consideration for services provided by the microfinance company.
The company further emphasized that it had already paid service tax and interest on the administrative charges long before the issuance of the show cause notice, demonstrating the absence of any intent to evade tax.
The Tribunal examined Section 67 of the Finance Act, 1994, which defines the value of taxable services as the gross amount charged for the service provided. It observed that the statutory provision requires a direct nexus between the amount charged and the service rendered. Amounts that merely pass through the service provider’s hands for onward payment to a third party, without forming part of the provider’s remuneration, cannot be included in the taxable value.
The Bench relied on the Supreme Court’s landmark judgment in Union of India v. Intercontinental Consultants and Technocrats Pvt. Ltd., wherein it was held that reimbursable or pass-through expenses having no nexus with the service rendered cannot be included in the taxable value through subordinate legislation.
Applying this principle, the Tribunal held that the insurance premium collected by the appellant and remitted entirely to the insurer did not constitute consideration for any service rendered by the appellant. Therefore, service tax could not be levied on the premium component.
The Tribunal further observed that since the matter involved interpretation of valuation provisions and there was no evidence of fraud, suppression, or wilful misstatement, invocation of the extended limitation period was unjustified.
On penalties, the Bench held that the ingredients necessary for imposing penalty under Section 78 of the Finance Act, 1994 were absent. The company had already discharged service tax liability on administrative charges voluntarily, and no evidence of intent to evade tax was established. Consequently, the penalty could not survive.
The CESTAT set aside the demand of service tax, interest and penalty relating to the insurance premium collected from borrowers and remitted to the insurer. The Tribunal clarified that the service tax already paid on administrative charges remained undisturbed, as that liability had never been disputed by the appellant.Â
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