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PJ/Case Law/2020-2021/3649

Whether brokerage received from overseas reinsurance qualifies as export of service?

M/s Bharat Re-insurance Brokers (P.) Ltd. v. Commissioner of Central Excise Customs and Service Tax - [2020] 1365 of 2011 (Hyderabad - CESTAT) dated 10th June 2020

Brief Facts: - The taxpayer acts as a reinsurance brokers and arranges for reinsurance for Indian insurance companies with overseas reinsurers. The assessee identifies appropriate reinsurers located abroad for the Indian Insurance companies and negotiates terms of contracts with them. For this service, they get a commission called Reinsurance Brokerage from the overseas insurers in Indian currency. The assessee had not paid service tax on the brokerage received from overseas reinsurance on the ground that the service falls under the category of export of service.

Issue: Whether brokerage received from overseas reinsurance qualifies as export of service?

Reasoning of the judgement: -The Tribunal observed that in the case of reinsurers, the reinsurance broker is approached by the insuring company which finds the risk of the policy to handle alone and is seeking reinsurance. The broker, in turn, explores potential reinsurers and presents the options to the insuring company. Thereafter, the broker also negotiates the terms with the reinsurance company. An unusual feature of the mode of payment in this case is the payments to the reinsurer as well as settlement of claim of the insured companies are routed through the insurance brokers. Thus, when a reinsurance is taken by an Indian insurance company with a foreign reinsurance company, the payments to the foreign company are made by Indian company through the reinsurance broker. After deducting his commission, the reinsurance broker then passes on the premium to the reinsuring foreign company. This is contrary to the normal practice with brokers.

Held: -CESTAT in its judgement made a reference to the order of Hon'ble High Court of Madras in the case of Suprasesh General Insurance Services & Brokers Pvt. Ltd. -2015 wherein the tribunal held that the given transaction qualifies as export of service and that the amounts which have been retained as brokerage in Indian Rupees by deducting instead of remitting the entire amount abroad and receiving back foreign currency should be treated as receipts for export in foreign currency. Hence, no service tax is liable to be paid in the said transaction.

Comment: - In the case of National Engineering Industries v. CCE [2012] 36 STT 753/24 taxmann.com 328 (New Delhi – CESTAT). The assessee, a commission agent, booked business for foreign supplier M/s. GMC for export of goods to Indian Railways. Instead of GMC paying commission in foreign exchange to assessee, Indian Railways paid equivalent rupee value commission to assessee and deducted such amount from payment made to GMC foreign exchange. Assessee contended that service provided by it to foreign supplier was ‘export of service’ and eligible for refund of service tax paid thereon. Department contended that there was no export of service as commission had not been received by assessee in convertible foreign exchange. It was held that instead of foreign exchange going out of India, there was conservation of foreign exchange in India to extent of commission earned by assessee service provider in view of the arrangement made by GMC through Indian Railways. This had fulfilled objective of export of service. Hence, assessee’s claim of refund was allowable.
It is evident from the provisions of Rule 6A of Service Tax Rules that service can be considered as export of service when the amount is received in foreign convertible currency. In case the amount is not received in foreign convertible currency, the service will not be considered as export of service, but service provider also will not be liable to pay service tax. It will be considered as exempt service and therefore he will have to proportionately reverse the credit as provided under rule 6(1) of the Cenvat credit rules, 2004.

 Prepared By: CA. Kartik Singhvi

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