Recently, the Bombay High Court had occasion to consider an important issue regarding the transferability of life insurance policies, and the restrictions that the LIC has the powers to place on such transferability.
The background to the facts of this case is provided by another decision of the Bombay High Court in Insure Policy Plus Services v. LIC, decided in 2007. The petitioners in this case were companies engaged in the business of assignment life insurance policies. The business model involved acquiring a policy from the policy holder for consideration, and then transferring it to a third party for consideration. A life insurance policy being personal movable property, such a business has existed in India, and the world over, and has not been tainted with any illegality or irregularity. In fact, section 38 of the Insurance Act specifically provides for the assignment and transfer of insurance policies. However, in late 2003, LIC issued a circular prohibiting the transfer/assignment of life insurance policies in favour of companies trading in the policies. This circular was challenged by the companies by way of a writ petition. LIC contended that the companies had no insurable interest, rendering the transfer a wagering agreement and hence, in violation of public policy. Further, while section 38 allowed the transfer of policies, it was merely procedural, and there was nothing in the provision to suggest that such transferability was mandatory. Rejecting these contentions, the Court held that a policy holder has complete rights over the policy, including the right to transfer the policy, so long as the requirements of section 38 are satisfied. Further, the mere fact that such transfer left the original policyholder remediless in the event of his/her death, the Court held that this concern was insufficient to invalidate a transfer which was otherwise valid in law.
An SLP was filed by LIC against this decision, but no stay was granted by the Supreme Court. In response, LIC issued a circular in May 2007, imposing a charge of Rs. 250/- on the transfer of life insurance policies to financial companies. It was this circular was challenged in Dravya Finance v. LIC, as restricting the transfer/assignment of life insurance policies which had held to be legal. [Interestingly, Justice Rebello, who had delivered the decision in Insurance Policy Plus Services was also on the Bench, although the decision here was delivered by Justice Bhatia]. Further, this amounted to a tax without the authority of law, rendering it unconstitutional. However, LIC defended the imposition on the grounds that it was not a measure directed at the prevention of transfers, but merely due to the expenses which were incurred by it on account of allowing such transfers. Viewed this way, it was more in the nature of a fee, and could not held to be unconstitutional. Thus, the issue here was the distinction between a tax and a fee, and whether the fact that the levy is compensatory necessarily makes it a fee. This issue was conclusively decided by the Supreme Court in 2006 in Jindal Stainless v. Haryana. The Court there held that even if both are compensatory, there is a fundamental distinction between a compensatory tax and a fee. The former is compensatory vis-a-vis a class of people, while the latter is compensatory vis-a-vis an individual. [A case note by Niranjan is available here. Further, as Mihir discusses here, in April this year, a Constitution Bench of the Supreme Court has referred this issue to a larger bench.]
Relying on the Supreme Court’s decision in Jindal, the Court observed,
If the amount of Rs. 250/- charged by the respondent No. 1 for registration of every assignment of a policy is in the nature of administrative charges for general services being rendered by the LIC to its policy holders or assignees, it would amount to tax. Similarly, if it is a fee, which has no co-relation with the service being rendered to the particular customer, it will also amount to a tax and cannot be charged without the authority of law. However, if it is a fee in the nature of charges for the services rendered to the particular customer and is not for recovery of general administrative expenses of the LIC, it may be treated as a fee or service charges. Therefore, the question arises as to whether the amount being charged by the respondent No. 1 is a fee in the nature of service charges or it is in the nature of recovery of administrative expenses akin to tax.
The Court then examined the data provided by LIC, to conclude that its expenses had indeed increased on account of the transferability of the policies. Now, given the decision in Jindal, and the paragraph extracted above, mere correlation between the levy and the expenses would be insufficient to render the levy a fee, unless it was compensatory vis-a-vis each individual policy holder. However, the Court seems to ignore this point, in observing,
From this, it is clear that the cost of transaction of assignment of policies has considerably increased and therefore the Corporation has decided to levy service charges. As noted by the Supreme Court ... a fee is paid for performing a function and fee is not ordinarily considered to be a tax. If the fee is levied merely to compensate an authority for the services rendered, it cannot be called a tax . Taking into consideration the legal position and the explanation given by the respondent No. 1 for levying service charges, we have no doubt that by the impugned Circular, the respondent No. 1 has levied service charge or a fee for the services to be rendered to the person requesting for registration of assignment and therefore the said charges cannot be treated as tax.
As is apparent from this extract, the Court seems to have bypassed the distinction between a compensatory tax and a fee which Jindal seems to have affirmed. However, although the levy was a held to be a fee, the Court held that under section 48(2)(k), the power to levy a fee was with the Central Government, and could not be delegated to LIC without a specific provision in the Act. Such a levy, without the authority of law, would violate the petitioners’ right to carry on business under Art. 19(1)(g), as also Art. 300-A of the Constitution. Also, since the circular permitted transfers in favour of family members, LIC of India & LIC Housing Finance Ltd. and in favour of the Government bodies, it was also held to be violative of Art. 14 on grounds of unfair discrimination.
Thus, while the Court seems to have reached the right conclusion on the facts of the case, the reasoning employed in distinguishing between compensatory taxes and fees seems dubious. It is hoped that the reference to the higher bench, and the SLP in Insure Policy Plus Services, will conclusively clarify these controversies.