1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO. 1579 OF 2007 1. Dravya Finance Pvt.Ltd. ) (formerly knwn as Bachraj Finance ) Pvt.Ltd.) a Company registered ) under the Companies Act, 1956 ) and having its registered office at ) 175, Patni House, 26th Road, ) TPS III Bandra (West), ) Mumbai – 400 050. ) 2. Hasmukh Rawal of Mumbai, ) Indian inhabitant, a Director and ) Shareholder of Dravya Finance ) Pvt.Ltd. Having his office at 175, ) Patni House, 26th Road, TPS III ) Bandra (West), Mumbai 400 050. ).. Petitioners Versus 1. Life Insurance Corporation of India, ) a statutory Corporation established ) under the Life Insurance Corporation ) Act, 1956 through its Chairman ) having its registered office at ) Yogakshema,Jeevan Bima Marg, ) Mumbai – 400 021. ) 2. Insurance Regulatory Development ) Authority, a statutory authority ) established under the Insurance ) Regulatory & Development Authority) Act, 1999, having its office at ) Parishram Bhavan, 3rd Floor, ) Basheer Bagh, Hyderabad – 500 004. )..Respondents 2 Mr. N.H.Seervai, Senior Counsel, with Mr. Sharan Jagtiani, & Mr. Dhaval Kenia i/b. M & M Legal Ventures,Advocates, for the petitioner. Ms. Snehal Paranjpe with Mr. O. Mohandas & Mr. Inder Tiwana i/b. M/s. Little & Co.,Advocates, for the respondent No.1. CORAM: F.I.REBELLO & J.H.BHATIA, J. JUDGMENT RESERVED ON: 12.3.2010. JUDGMENT PRONOUNCED ON: 19-05.2010. JUDGMENT: (PER J.H.BHATIA,J.) 1. The petitioners have challenged Circular No. Mktg/CRM/558/23 dated 24.4.2006 which came into force with effect from 1.5.2007 (the impugned Circular). Petitioner No.1 is a Non-Banking Finance Company of which the petitioner No.2 is a Director. The petitioner No.1 is engaged in the business of advancing loans against the assignment of life insurance policies. According to the petitioners, the respondent No.1 – Life Insurance Corporation of India (LIC) by earlier two Circulars dated 22.12.2003 and 2.3.2005, had sought to prohibit the transfer of life insurance policies. The said circulars were challenged by the petitioner No.1 in Writ Petition No.3282 of 2004. Similar challenage was also posed in Writ Petition No.2159 of 2004 (Insure Policy Plus Services Ltd. v. Life Insurance Corporation). The said petition, which was similar to the earlier petition of the petitioner, was allowed by this Court by the Judgment and Order dated 3 22.3.2007 and the said Circulars were declared to be illegal and null and void. Though the said Judgment has been challenged by the respondent No.1 before the Supreme Court by Special Leave Petitions, no stay has been granted to the effect of the order of this Court. In this background, the respondent No.1 implemented the impugned Circular dated 24.4.2006 with effect from May, 2007 and imposed a charge of Rs.250/- per assignment in favour of “Finance Organizations”. The petitioners are affected by the same. According to the petitioner, the effect of the impugned Circular is to make the assignment of life insurance policies in favour of Finance Organizations, such as the petitioner No.1, so onerous that it operates to severely restrict, if not prohibit, such legal and valid assignments in favour of the petitioner No.1. 2. According to the petitioners, the impugned Circular is liable to be struck down on the following grounds :- (i) It is ultra vires Section 38 of the Insurance Act, 1938; (ii) it is generally without authority of law as the respondent has no power to issue the same; (iii) it is in violation of Article 265 of the Constitution of India as it levies a tax or fee without the authority of law; (iv) it is ultra vires Article 14 of the Constitution of India as 4 it is ex facie discriminatory and violates the principle of equality; (v) it is ultra vires Article 14 of the Constitution of India as it is arbitrary, unreasonable and suffers from non-application of mind; (vi) it is ultra vires Article 19(1)(g) of the Constitution of India as in its effect and operation it is an unlawful restriction of petitioner No.1’s right to carry on business; (vii) it is ultra vires Article 300A of the Constitution of India as it deprives petitioner No.1 of its property without the authority of law. 3. The respondent No.1, on the other hand, justified the said Circular. It is denied that the purpose of the said Circular was to restrict or prohibit the business of the petitioners and to restrict the transfer or assignment of the policies in favour of the Financial Institutions like the petitioner No.1. It is also denied that it is a kind of tax or fee amounting to tax imposed without any authority of law. It is contended that the respondent No.1 has 19 crore policy holders whose policies are required to be serviced frequently. As per the data collected, from only 11 Divisions of the Western Zone comprising of the States of Maharahtra and Gujarat, the respondent No.1 was required to record assignments in respect of about 77 ,000 transfers of policies in the year 2005-2006 alone. 5 None of the policy holders have protested or raised any challenge to the said administrative charge of Rs.250/-. However, the petitioners, who are in business of trading in life insurance policies, are seeking to raise baseless and vexatious challenge to the said administrative charge. It is contended that the respondent no.1 is duty-bound by the LIC Act to distribute the surplus arising from the life insurance business carried on by it in the proportion of 95% to its policy holders and 5% to the Central Government. After the Manual No.6 for Policy Servicing Department of the LIC dealing assignment was published on 31.12.1990, considerable advances have been made in the field of information and technology and some of these benefits have been passed on by the respondent No.1 to its policy holders. Considerable financial cost and investment has been made in computerization of its Systems, installing a Fire Wall for prevention of hacking, training its employees to operate the same, to check whether all the essential conditions for assignment have been fulfilled, whether valid notices have been given,whether stamp duty has been paid and whether there are any other claims on the policy. Due to the huge increase in assignment of policies in the last few years, the whole system and the staff of the respondent No.1 have come under severe stress. In view of the cumbersome administrative processes and tremendous manpower 6 involved and consequent high cost of administration in servicing the voluminous assignments of policies, especially of the Financial Institutions like the petitioner who are doing lucrative business of assignments of life insurance policies, in the public interest, the respondent No.1 has levied the nominal service fee of Rs.250/- per assignment. It is contended that under the provisions of Section 6 of the LIC Act, 1956, a general duty has been cast on the respondent No.1 to carry on life insurance business so as to secure that life insurance business is developed to the best advantage of the community and the law also enjoins respondent no.1 to act as far as may be on business principles. The respondent No.1 has acted on business principles in the matter of levy of administrative charges or the service charges as per the impugned Circular dated 24.4.2006. It is denied that by the impugned Circular, any restriction or any unreasonable restriction has been imposed on the business of the petitioners or that they are being deprived of their property. It is also denied that there has been any violation of the principles of equality before the law under Article 14 of the Constitution because the assignment in favour of the Government or its departments, in favour of LIC Housing Finance Limited and in favour of DSOP funds policies are exempted from payment of such service charges. 7 4. Heard the learned Counsel for the parties. 5. The impugned Circular reads as follows :- “At present, assignment of policies is being registered without any charges. However, the cost of the transaction of assignment /re-assignment of a policy is considerable. Therefore, it has now been decided to levy service charges of Rs.250/- per transaction for effecting assignment under a policy, provided: 1. In case of Absolute/Conditional Assignment in favour of a family member for natural love and affection, the first assignment should be registered free and all further assignments should be charged. 2. Assignments in favour of LIC of India and LIC Housing Finance Limited are free of cost. 3. Assignment in favour of Government Bodies is free but assignment in favour of other Public Sector Entities, including Banks, co-operatives, Finance Organisations, etc are to be charged. 4. DSOP Fund policies are assigned at the proposal stage itself. 5. Assignment is charged, but re-assignment is not be charged. 6. After re-assignment, the policy holder is required to give fresh nomination. Such nomination consequent to assignment/re-assignment should be registered free of cost. 7. More than one policy is to be assigned, then Rs. 250/- will be charged per policy even if all the policies are on 8 a single life and are assigned to a single assignee at a time. The provisions of this Circular will come into effect from 1st May, 2006. all Offices under your jurisdiction be advised suitably.” 6. The learned Senior Counsel for the petitioners contended that although the respondent No.1 is a statutory Corporation established under the Life Insurance Corporation Act, 1956, the business of life insurance carried on by the respondent No.1 is regulated by the provisions of the Insurance Act. The LIC Act deals with the establishment of the respondent no.1 as a statutory body and regulates the functioning of the respondent No.1 as a company, as opposed to regulating the business of life insurance, which is governed by the Insurance Act. Section 43 of the LIC Act makes the provisions of Section 38 of the Insurance Act expressly applicable to the respondent No.1. 7. Section 38 of the Insurance Act provides for the assignment and transfer of Insurance policies. It reads as follows :- “Assignment and transfer of Insurance policies (1) A transfer or assignment of a policy of life insurance, 9 whether with or without consideration, maybe made only by an endorsement upon the policy itself or by a separate instrument, signed in either case by the transferor or by the assignor or his duly authorized agent and attested by at least one witness, specifically setting forth the fact of transfer or assignment. (2) The transfer or assignment shall be complete and effectual upon the execution of such endorsement or instrument duly attested but except where the transfer or assignment is in favour of the insurer shall not be operative as against an insurer and shall not confer upon the transferee or assignee, or his legal representative, and right to sue for the amount of such policy or the moneys secured thereby until a notice in writing of the transfer or assignment and either the said endorsement or instrument itself or a copy thereof certified to be correct by both transferor and transferee or their duly authorized agents have been delivered to the insurer: Provided that where the insurer maintains one or more places of business in India, such notice shall be delivered only at the place in India mentioned in the policy for the purpose or at his principal place of business in India. (3) .... (4) Upon the receipt of the notice referred to in sub- section (2), the insurer shall record the fact of such transfer or assignment together with the date thereof and the name of 10 the transferee or the assignee and shall, on the request of the person by whom the notice was given, or of the transferee or assignee, on payment of a fee not exceeding one rupee, grant a written acknowledgment of the receipt of such notice; and any such acknowledgment shall be conclusive evidence against the insurer that he has duly received the notice to which such acknowledgment relates. (5) Subject to the terms and conditions of the transfer or assignment, the insurer shall, from the date of receipt of the notice referred to in sub-section (2), recognize the transferee or assignee named in the notice as the only person entitled to benefit under the policy, and such person shall be subject to all liabilities and equities to which the transferor or assignor was subject at the date of the transfer or assignment and may institute any proceedings in relation to the policy without obtaining the consent of the transferor or assignor or making him a party to such proceedings. (6) .... (7) ....” 8. Section 38(2) provides that for the transfer and assignment to be complete as against the insurer the endorsement or instrument or a certified copy of either have to be delivered to the insurer. Section 38(4) mandates that if the insurer receives the notice as prescribed in Section 38(2), the insurer is bound to 11 record the fact of such transfer or assignment. The only authority to levy a fee by the insurer under this section is if the insurer issues a written acknowledgment for the receipt of a notice for recording the assignment or transfer of the policy. Even in this circumstance, by statutory mandate, the fee cannot exceed one rupee. 9. Section 39(4) of the Insurance Act provides that a transfer or assignment of a policy made in accordance with section 38 shall automatically cancel a nomination. Thus, it is very clear that a transfer or assignment of policy if made after following the due procedure laid down in Section 38, is the mandate of the law. In Insure Policy Plus Services Ltd. v. Life Insurance Corporation (Writ Petition No.2159 of 2004, the Division Bench of this Court, after considering the rival arguments of the parties, observed as follows in paras 16 and 20:- “16. We shall now examine the various sub-sections of Section 38. Section 38(1) unequivocally provides the procedure by which assignment of a policy of life insurance can be done. The contract of insurance issued by the insurer is a contract between the insured and the insurance company. Sub-section (2), then sets out, that once a transfer or assignment is made in the manner prescribed by Section 38(1), the transfer or assignment is complete and effectual on the execution of the endorsement or by a separate instrument. However, such transfer or assignment is not binding as against the insurer until and unless intimation in writing of the transfer or assignment in the prescribed manner, has been delivered n the insurer. Sub-section (3) determines the priority of claims, on the insurance Policy by operation of law. Therefore, if the insured had effected the transfer or assignment and had given notice to the 12 insurer, that would be determinative as to who is entitled to the moneys payable under the policy of insurance. Once the notice is received, by virtue of Sub-section (4), the insurer is bound to record the fact of transfer or assignment together with the date thereof and the name of the transferee and the assignee and on request, grant a written acknowledgment of the receipt of such notice which will be conclusive evidence that the insurer had received the notice. The only limitation evidenced by the said Section to transfer are the terms and conditions of the transfer and necessarily the terms of policy itself. By virtue of sub-section (5) the Statute itself mandates that the insurer recognizes the transferee or assignee named in the notice as the only person entitled to the benefit under the policy and such person would be subject to all liabilities and equities. The latter part of this sub-section makes it clear that once the notice is served and the company recognizes the transfer or assignment, it is the transferee or assignee who can institute any proceedings, without obtaining the consent of the transferor or assignor or making him a party to the proceedings. Sub-section (6) provides for some other contingencies. Section 39(4) is further indicative of the mandatory character of Section 38 when it provides that transfer or assignment of policy made in accordance with Section 38 shall automatically cancel the nomination. ... We are, therefore, of the considered opinion that once the insured transfers or assigns the policy in favour of the assignee the assignment is complete between them. The provisions of the Section leave no doubt that the insurer has no choice but to accept the transfer or assignment as the case may be if the procedure required by Section 38 ha been followed, subject to the terms of the policy. We have no hesitation in holding that Section 38 is substantive and not procedural. The position in law, therefore would be that the interest int he policy earlier held by the assignor is transferred to the assignee with all benefits attached thereto. The assignment becomes binding on the insurer recording the fact of such transfer or assignment. The submission, therefore, advanced on behalf of the respondent NO.1 herein that Section 38 is merely procedural is devoid of merit.....” “20... It is not open to respondent no.1 to impose on the insured terms and conditions not provided in the contract or not permissible under the provisions of the Insurance Act, Section 30A of the Insurance Act makes it mandatory for the Corporation to 13 carry on its business in terms of the Insurance Act. The effect of the policy would be clearly contrary to Section 38(4) of the Insurance Act. As we have held the Section to be mandatory, once the insured complies with the requirement of Section 38(2), the respondent No.1 is bound in terms of Section 38(5) to recognise the transferee or assignees named in the notice by operation of law. It is not open to the respondent No.1 to issue any policy decisions or directions which are contrary to Section 38. The Circulars to the extent that they seek not to register the policies even if they comply with the requirement of Section 38, would be contrary to the mandatory provisions of Section 38(4) of the Insurance Act and consequently the Circulars would have to be struck down.” 10. The learned Senior Counsel for the petitioners vehemently contended that as observed by this Court in Insure Policy Plus Services Ltd., it is not open to the respondent N.1 to issue policy decisions or directions which are contrary to Section 38. The learned Counsel vehemently contended that Section 38 only provides for imposition of fee of rupee one for the purpose of acknowledgment of receipt of notice on transfer or assignment of a policy, but Section 38 does not provide for charging of any fee for the purpose of registration of transfer or assignment of a policy. It is contended that even para 23 of the LIC Manual issued on 31.12.1990 makes it clear that no fee could be charged for registration of assignment or re-assignment. Para 23 reads as follows :- “No fee to be charged for Registering Assignment/Reassignment and for acknowledging Notices. Assignments and Reassignments are registered and notices thereof 14 acknowledged by the Corporation free of charge. No charge is, therefore, required to be paid to the Corporation in this behalf and if any amount is paid by a Policyholder as fee for registration etc. of an Assignment/Reassignment, the same should be refunded to him less remittance charges.” 11. The learned Senior Counsel for the petitioners further contended that Section 114 of the Insurance Act empowers the Central Government to make rules in respect of certain matters and Section 114A of the Insurance Act empowers the Insurance Regulatory and Development Authority to make regulations. Such rules and regulations have to be notified in the official gazette. These powers are not vested in the respondent No.1. The learned Counsel also contended that under Section 48 of the LIC Act, the Central Government is empowered to make rules. Sub-section (k) of Section 48 expressly empowers the Central Government to make rules with respect to “the fees payable under the Act and the manner in which they are to be collected.”. The learned Counsel contended that the Central Government has not exercised its rule-making power to levy a fee or charge on registration of assignments. It is further contended that Section 49 of the LIC Act confers power to make regulations on the respondent No.1 with previous approval of the Central Government and such regulations are to be notified. However such 15 regulations cannot be inconsistent with the provisions of the LIC Act. There is no dispute that the impugned Circular is not issued under the regulation-making power under Section 49. 12. The learned Senior Counsel for the petitioners vehemently contended that no tax or a fee in the nature of tax can be imposed without any authority of law in view of Article 265 of the Constitution of India. This contention is supported by several authorities. 13. In M.Chandru vs. Member-Secretary, Chennai Metropolitan Development Authority and Anr. (2009) 4 SCC 72, Their Lordships considered several earlier authorities with reference to the tax, fee and administrative charges. In paras 25 and 26, Their Lordships observed as follows :- 25. In Krishna Das v. Town Area Committee, Chirgaon this Court observed: (SCC p.652, paras 22-24) “22. A fee is paid for performing a function. A fee is not ordinarily considered to be a tax. If the fee is merely to compensate an authority for services performed or as compensation for the services rendered, it can 16 hardly be called a tax. However, if the object of the fee is to provide general revenue of the authority rather than to compensate it, and the amount of the fee has no relation to the value of the services, the fee will amount to a tax. In the words of Cooley, `A charge fixed by statute for the service to be performed by an officer, where the charge has no relation to the value of the services performed and where the amount collected eventually finds its way into the treasury of the branch of the Government whose officer or officers collect the charge is not a fee but a tax.’ 23. Under the Indian Constitution the State Government’s power to levy a tax is not identical with that of its power to levy a fee. While the powers to levy taxes is conferred on the State Legislatures by the various entries in List II, in it there is Entry 66 relating to fees, empowering the State Government to levy fees `in respect of any of the matters in this list, but not including fees taken in any court’. The result is that each State Legislature has the power, to levy fees, which is co-extensive with its powers to legislate with respect to substantive matters and it may levy a fee with reference to the services that would be rendered by the State under such law. The State may also delegate such a power to a local 17 authority. When a levy or an imposition is questioned, the court has to inquire into its real nature inasmuch as though an imposition is labelled as a fee, in reality it may not be a fee but a tax, and vice versa. The question to be determined is whether the power to levy the tax or fee is conferred on that authority and if it falls beyond, to declare it ultra vires.” In Jindal Stainless Ltd. v.State of Haryana (2006) 7 SCC 241 observed thus: “26. In Jindal Stainless Ltd. (2) v. State of Harayana a Constitution Bench of this Court stated: (SCC p.267, paras 40-41) “40. Tax is levied as a part of common burden. The basis of a tax is the ability or the capacity of the taxpayer to pay. The principle behind the levy of a tax is the principle of ability or capacity. In the case of a tax, there is no identification of a specific benefit and even if such identification is there,