SUPREME COURT HOLDS THAT LIFE INSURANCE CORPORATION OF INDIA DOES NOT HAVE AUTHORITY TO IMPOSE TAXES ON TRANSFER/ASSIGNMENT OF INSURANCE POLICY
In a recent case of Life Insurance Corporation of India vs. Dravya Finance Pvt. Ltd. & Ors. Civil Appeal No.4095 of 2012, a two Judge Bench of the Supreme Court comprising of Justice Abhay S Oka and Justice Pankaj Mithal passed a Judgment dated 06.09.2023 and held that the Life Insurance Corporation of India had no authority to levy fees of Rs.250 for recording of assignment or transfer of a policy.
i) That in the present case, the Respondent no.1, Dravya Finance Pvt. Ltd, is a Non-Banking Finance Company (R1 Company) and the Respondent no.2, Mr.Hasmukh Rawal is the Chairman of the R1 Company. The Respondents are engaged in the business of advancing loans against the assignment of life insurance policies.
ii) According to the Respondents, the Appellant – Life Insurance Corporation of India (LIC) by releasing two Circulars dated 22.12.2003 and 02.03.2005, had sought to prohibit the transfer of life insurance policies.
iii) These Circulars were challenged by the Respondents in Writ Petition No.3282 of 2004 in the Bombay High Court.
iv) A similar challenge was also posed in Writ Petition No.2159 of 2004 (Insure Policy Plus Services Ltd. v. Life Insurance Corporation) which was allowed by the High Court vide judgment and Order dated 22.3.2007 and the said LIC Circulars were declared to be illegal and null and void.
v) The said judgment by the Bombay High Court was challenged by the Appellant before the Supreme Court by Special Leave Petitions, wherein no stay was granted against the order of the High Court.
vi) Subsequently, the Appellant implemented the Circular dated 24.04.2006 with effect from 1.5.2007 and imposed a charge of Rs.250/- per assignment in favour of “Finance Organizations” so as to restrict and prohibit assignments in favour of the Respondents.
vii) The Respondents challenged the Circular No. Mktg/CRM/558/23 dated 24.04.2006 before the Bombay High Court in Writ Petition No. 1579 OF 2007 on the ground that firstly, it is contrary to Section 38 of the Insurance Act,1938 (Assignment and transfer of Insurance policies) and secondly, it is in violation of Article 265 of the Constitution of India (Taxes not to be imposed save by authority of law). There were other challenges, such as violation of Articles 14 of the Constitution of India (Equality before law), 19(1)(g) of the Constitution of India (Protection of certain rights regarding freedom of speech, etc.).
viii) However, the High Court of Bombay, vide judgement and Order dated 19.05.2010 held that the levy of a sum of Rs.250/- for registration of assignment under the impugned Circular was the levy of service charge or fee without there being any power to do so. Therefore, the impugned Circular was held to be unconstitutional and was, accordingly, struck down.
Supreme Court Observations
Aggrieved, the Appellant i.e. Life Insurance Corporation of India filed Civil Appeal No. 4095 of 2012 before the Hon’ble Supreme Court against the High Court Order dated 19.05.2010. The Apex Court vide Order dated 06.09.2023, made the following observations:
(1) That in this case the Apex Court dealt with the impugned Circular dated 24.04.2006 which read as follows:
“At present, the assignment of policies is being registered without any charges. However, the cost of the transaction of assignments/re-assignment of a policy is considerable. Therefore, it has now been decided to levy service charges of Rs.250/- transaction of effecting assignment under a policy .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ..”
(2) That it was observed that the Appellant did not have a lawful authority to levy a service charge or fee for the transaction of assignment or transfer of policy as the assignment or transfer of policy is governed by statutory provisions in the form of Section 38 of the Insurance Act,1938 and it does not allow levy of any such fee.
(3) Moreover, the Apex Court also went through Regulations 3 and 4 of the Insurance Regulatory and Development Authority of India (Fee for granting written acknowledgement of the receipt of Notice of Assignment or Transfer) Regulations, 2015 and held that the said Regulations prohibit the levy of any fee for recording the assignment of policies.
Hence, based on the aforesaid observations, the Supreme Court held that there was no error in the view taken by the High Court that the Appellant–Insurer had no right to claim fees of Rs.250/- for recording the endorsement of assignment or transfer of insurance policy, and the Appeal was accordingly, dismissed. As a result, the High Court Order dated 19.05.2010 was upheld.
Shaurya Mani Pandey
The Indian Lawyer
(1) A transfer or assignment of a policy of life insurance, whether with or without consideration, may be 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, 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, any 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) The date on which the notice referred to in sub-section (2) is delivered to the insurer shall regulate the priority of all claims under a transfer or assignment as between persons interested in the policy; and where there is more than one instrument of transfer or assignment the priority of the claims under such instruments shall be governed by the order in which the notices referred to in sub-section (2) are delivered.
(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 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 acknowledgement of the receipt of such notice; and any such acknowledgement shall be conclusive evidence against the insurer that he has duly received the notice to which such acknowledgement relates.
(5) Subject to the terms and conditions of the transfer or assignment, the insurer shall, from the date of the receipt of the notice referred to in sub-section (2), recognise 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.
 “Fee for granting acknowledgement of Notice of Assignment or Transfer:
(3) An Insurer is permitted to collect the following fee for granting a written acknowledgement of the receipt of notice of assignment or transfer.
(a) In respect of those policies that are issued in electronic form as specified by the regulations under the provisions of Section 14(2) of the Act the fee collected shall not exceed Rs.50 (Rupees fifty only) inclusive of applicable taxes;
(b) In respect of policies issued other than those referred under Regulation (3)(a) above the fee collected shall not exceed Rs.100 (Rupees Hundred Only) inclusive of applicable taxes;
(4) No other fee shall be collected for rendering any other services such as, recording the fact of the transfer or assignment or any other services connected to the assignment or transfer prescribed in Section 38 of the Act.”