ORDER SHEET

IN THE HIGH COURT OF SINDH, KARACHI

Spl. STRA No.364 of 2007.

BEFORE:

            Mr. Justice Gulzar Ahmed, and

            Mr. Justice Irfan Saadat Khan

Date of hearing:         02.12.2009.

Applicant:       State Life Insurance Corporation, through Mr. Ghulam

Ali, Advocate.

Respondent:   Collector of Sales Tax and Central Excise, through

Mr.Raja Muhammad Iqbal, Advocate.

ORDER

IRFAN SAADAT KHAN, J:-  The applicant is aggrieved by the order dated 4.5.2007 passed by Customs, Excise and Sales Tax Appellate Tribunal, Karachi in Central Excise Appeal No.K-110/2001/16053 and through the instant Reference Application (R.A) has referred the following questions of law for determination by this Court:

".1       Whether the cash withdrawal which the Petitioner allows to its policy holders, out of their own funds paid by them to the Petitioner in the form of premiums (upto 90% of the surrender value of their policies), can be treated as services provided or rendered in respect of advances and loans and liable to payment of Excise Duty under item 14.14 of Part II of the First Schedule to Central Excise Duty Act, 1944 (hereinafter called "the Act, 1944)?

2. Whether the cash withdrawal upto 90% of surrender value of the policy which the Petitioner allows to its policy-holders as mentioned at para 1 above, is not the service provided or rendered in respect of loan but a service provided in respect of an insurance policy, and the same is distinguishable from the advances or loans as contemplated in the Act, 1944?

3. Whether the decision dated 3.3.1999 of the Ministry of Law, Justice and Human Rights is conclusive and binding upon the Respondent keeping in view the Notification No.F 5(5)TR.II/98 dated 27.4.1998 of the Government of Pakistan, Finance Division (Tax Revenue Wing) and the CBR's letter No.3(55)CEJ/97 dated 7.6.1999 (directing the Respondent that the amount of Excise duty as claimed should be considered as settled in view of the decision of Law and Justice Division), as mentioned in the order dated 31.8.2000 of the Collector (Adjudication) Central Excise?

4. Whether or not the Respondent's demand raised on the Petitioner for payment of Excise Duty is valid."

            Mr. Ghulam Ali, learned counsel for the applicant, stated that the applicant as per its policy allows its policyholders to withdraw upto 90% of the amount deposited by them with the applicant as premium in respect of their policies.  He referred to section 89 of the Insurance Ordinance and stated that as the amount so advanced to the policyholders by the applicant is out of his own surrendered amount hence the same is not a loan. He submitted that since the amount withdrawn by a policyholder is his own amount deposited by him with the applicant as premium, and not a loan advanced by the applicant, therefore, the applicant does not file any recovery proceedings for the recovery of the same and the respondent is wrongly treating it as services liable to excise duty.

            On the other hand, Mr. Raja Muhammad Iqbal, learned counsel for the respondent, submits that the applicant by advancing money to its policyholders is providing services on which it is liable to pay excise duty.  In support of his contention the learned counsel relied on the cases of Hirjina & Company v. Islamic Republic of Pakistan and another (1993 SCMR 1342) and ICC Textile Ltd. Vs. Federation of Pakistan & others (2003 PTD 1017).

            Brief facts of the case are that the applicant is a statutory corporation established under the Life Insurance (Nationalization) Order, 1972 and its main function is to do life insurance business. By Finance Act (XXII) of 1991, subsequently amended by Finance Act, 1994, the First Schedule to the Central Excise Act, 1944 was amended by adding item No.14.14, which was subsequently replaced by heading No.9813.0000 through Finance Act (XII) 1984, providing for levy of excise duty on services provided or rendered by, inter alia, insurance companies. The respondent sent demand notice dated 3.7.1991 to the applicant demanding payment of excise duty on the insurance policy loans which was replied by the applicant vide its letter dated 8.7.1991.  Thereafter some other demand notices were sent by the respondent to the applicant which were also replied to by the applicant.  Finally a show  cause notice was issued by the respondent to the applicant which was challenged through C.P. No.D-1861 of 1996 which was admitted for regular hearing.  However, under the directions of the Ministry of Commerce contained in letter dated 30.10.1998, whereby all the cases pending in various courts were to be withdrawn and dispute with CBR (now FBR) were to be resolved in terms of Circular No.Fin.Div's U.O. No.F.5(5)TR.II/98 dated 27.4.1998, the said petition was withdrawn. The dispute which was subject matter of the said petition was referred to the Secretary, Ministry of Law, Justice and Human Rights, who decided the case in favour of the applicant.  In the meantime another show cause notice dated 21.4.1999, was issued by the respondent to the applicant  which was challenged  before Collector (Adjudication), Central Excise, who, vide order dated 31.8.2000, discharged the same inter alia, on the basis of the above decision of the Secretary, Ministry of Law, Justice and Human Rights as well as on the ground that FBR, vide its letter C.No.3(55)CEJ/97 dated 7.6.1999, had already conveyed to the respondent that "the amount demanded should be considered as settled in the light of the decision of the Law and Justice Division".  The respondent challenged the order dated 31.8.2000 before the Customs, Excise and Sales Tax Appellate Tribunal vide appeal    No.K-110/2001/16053 which was allowed by the Tribunal vide its order dated 4.5.2007 on the basis of judgment of the Hon'ble Supreme Court of Pakistan dated 22.2.2006 passed in Civil Appeal Nos.2296 to 2412 of 2001 and several other appeals.  Hence, this R.A.

            We have heard the learned counsel for the parties and have gone through the record of the case as well as the case law and the law cited before us.

            Vide Finance Act, 1991 a new item No.14.14 was inserted in the First Schedule, Part II of the Central Excise and Salt Act, 1944, which reads as under:

14.14

Services provided or rendered by banking companies, financial institutions, insurance companies, co-operative financing societies, other lending banks or institutions and other persons dealing in advancing of loans, in respect of advances made to any person.  (emphasis supplied)

1/12^th of 1% of the amount of each advance outstanding on the last working day of each calendar month."

Subsequently, the above quoted item 14.14 was replaced by Heading 9813.0000 by Finance Act 1994 but without any changes in respect of the subject matter of this case i.e. insurance companies as vide the said amendment some other financial institutions like mudarabas, musharikas etc. were also included in the list.

            The dispute arising out of this R.A. is whether in the above narrated facts, the applicant, a life insurance company,  is liable to pay the central excise duty on the loans/advances provided by the applicant to its customers.

            A plain reading of item 14.14 and heading 9813.0000 reveals that "services provided or rendered by banking companies, insurance companies …" have been subjected to levy of central excise duty at the rate prescribed therein.  Learned counsel for the applicant has argued that since the amount paid to a policy holder is his own surrendered amount, therefore, the same cannot be treated as loan and subject to central excise duty as envisaged under item 14.14 and heading 9813.000.  

The controversy regarding item No.14.14 was discussed in detail in the case of Federation of Pakistan v. Muhammad Sadiq & others (PLD 2007 SC 133) wherein it was held as under:

"The word 'services' in plural sense is sufficient to conclude that it covers all services provided by the institutions named in Column-II to its customers, therefore, the legislation instead of spelling out each kind of the service comparing to the item of the schedule which were discussed in Hirjina's case, a comprehensive expression 'Services' has been employed."  (emphasis supplied).

Thus, as per the above authoritative pronouncement by the Hon'ble Supreme Court, 'Services' provided by insurance companies have been made liable to levy of central excise duty.

The only question which remains to be answered is whether the amount so advanced/paid to a policy holder by the applicant/insurance company can be termed as "loan" or "advance" or not.

During the course of his arguments, Mr. Ghulam Ali, learned counsel for the applicant submitted that the amount so advanced by the applicant to its policy holders is not a loan as in case of default in repayment of the same no recovery proceedings are initiated by the applicant.  However, he candidly admitted that mark up at the rate of half percent is charged on such advances by the applicant.  Thus, it would be seen that the transaction between the insurance company and his policy holder in respect of payment of such amount is not that of a bank and its customer in respect of the amount lying in the account of an account holder.  While in the former case after advancing the amount to its policy holder the insurance company keeps on charging mark up on the same, which is an indication that the insurance company, even after parting with the money which is claimed to be that of the policy holder himself, has some connection with the same and the policy holder is obliged to pay such mark up to the insurance company.  On the other hand, in case an account holder withdraws any amount from his account neither he is obliged to refund such amount to the bank nor is he liable to pay any mark up to the bank.  This amount, withdrawn by an account holder from his own account, cannot, therefore, be termed as a loan or advance falling within the ambit of the term "services" used in item 14.14 or heading 9813.0000.  However, this cannot be said in respect of the amount paid by the insurance company to its policy holder as (i) the policy holder is required to pay back the amount to the insurance company, and (ii) the policy holder is liable to pay certain amount as mark up to the insurance company. 

In the case of Federation of Pakistan v. Muhammad Sadiq & others (ibid), referring to Corpus Juris Secundum, Volume 2, pages 496-97, the word "advances" was described as under:

"in legal parlance the word used to indicate advances of a pecuniary nature and includes money or chattels or both, although it may employed as referring only to money."

            In the decision given by the Honourable Apex Court quoted supra it has clearly been stated that “levy of duty would depend upon services being provided in respect of advances to a person. In the instant case also admittedly the service is being provided by rendering advances to the policy holders. Therefore, for all practical purposes, the amount paid by the applicant to its policy holders is a 'service' provided or rendered by the insurance company in making an advance or advancing of loan to its policy holders and, as held by the Hon'ble Supreme Court in the above cited Judgment, the same is  a service liable to the levy of Central Excise Duty as per item 14.14 and heading 9813.0000.

In the impugned order itself the learned Tribunal had held as under :

"It is found that the Honourable Supreme Court of Pakistan in Civil Appeal No.2296 to 2412 of 2001 and Civil Appeals Nos.2707-2717 of 2001 has already held that the Central Excise Duty on advances and loans was correctly levied under Item No.9813.0000 on services provided or rendered by the Banking Companies, Insurance Companies, Cooperative Financing Companies and other persons dealing in such services."

It is, indeed, surprising to note that although the learned Tribunal while allowing the appeal filed by the Department relied upon  judgment of the Hon'ble Supreme Court in Civil Appeal Nos.2296 to 242 of 2001 and Civil Appeal Nos. 2707 to 2717 of 2001, which was reported as Federation of Pakistan v. Muhammad Sadiq & others (PLD 2007 SC 133), but none of the learned counsel for the parties referred to the same.  At least the learned counsel for the applicant was required to show as to how this judgment was not applicable to the present case.

In view of the above discussion, and the pronouncement by the Hon'ble Supreme Court, we answer the questions referred through this R.A. as under:

1. In the affirmative.

2. In the negative and it is held that the service is provided or rendered is in respect of loan/advance.

3. In the negative.

4. In the affirmative.

Judge

Karachi, the ____ January, 2010.                                       Judge