2014 (8) TMI 298 - AT - Service Tax

CENVAT Credit - input service - Tax paid on re-insurance service - credit denied on the ground that reinsurance takes place after the insurance business is effected - Held that - Since reinsurance is a statutory obligation and the reinsurance is coterminous with the insurance policy, stand taken by the Revenue that the transfer of a portion of the risk to the reinsurer which is all the reinsurance means has to be considered as having a nexus with the output service namely provision of insurance to the customers - percentage of insurance to be reinsured is directly connected to the premium collected from the persons who are insured with insurer and it is basically transfer of a portion of the risk and therefore it can be definitely said that the reinsurer is providing the service to the insurance company when he accepts to reinsure a portion of the insurance undertaken by the insurer. Therefore, impugned order cannot be sustained on merits. - Decided in favour of assessee.

Summary

Issues:
1. Consideration of CENVAT credit on reinsurance services for a life insurance business.

Analysis:
The case involved the appellant, engaged in life insurance business, availing CENVAT credit on service tax paid for reinsurance services procured from overseas companies. The impugned order disallowed the CENVAT credit, stating that reinsurance takes place after the insurance business is effected.

The appellant argued that as per Section 101A of the Insurance Act 1938, insurers are mandated to reinsure a specified percentage of sum assured with another insurance company. The appellant contended that reinsurance falls under the definition of insurance service subject to service tax. Referring to Circular No. 120(a)/2/2010-S.T., the appellant highlighted that reinsurers provide insurance service to insurance companies, justifying the CENVAT credit availed.

The Revenue, represented by the learned A.R., reiterated the arguments presented by the Commissioner in the order-in-original. However, the Tribunal, after considering the submissions from both sides, analyzed Section 101A of the Insurance Act 1938. It noted that reinsurance is a statutory obligation connected to the insurance policy, with the transfer of risk to the reinsurer being integral to the provision of insurance to customers. The Tribunal emphasized that reinsurers offer a service to insurance companies by accepting to reinsure a portion of the risk, directly linked to the premium collected from insured individuals. Consequently, the Tribunal concluded that the impugned order disallowing the CENVAT credit on reinsurance services could not be sustained on merits. Therefore, the impugned order was set aside, and the appeal was allowed, with any consequential relief granted to the appellants.

In the final judgment, the Tribunal waived the requirement of predeposit and proceeded to make a final decision on the matter, as agreed upon by both parties. The Tribunal's detailed analysis of the statutory provisions and the nexus between reinsurance and insurance services formed the basis for overturning the initial decision disallowing the CENVAT credit for reinsurance services in the context of a life insurance business.