2020 (3) TMI 1295 - AT - Service Tax

CENVAT Credit - input services or not - general insurance policies like motor insurance, fire insurance, marine insurance and others - re-insurance service from Indian as well as foreign reinsurance companies in respect of these insurance policies also availed - Effect of amendment to the definition of input service‟ in rule 2(l) w.e.f. April 1, 2012 - Extended period of limitation. Whether re-insurance services are used for provision of insurance services and, therefore, would qualify as input service‟ for the Appellant? - HELD THAT - An insurer issues insurance policy to insure and assumes the risks arising thereunder. The insurance of such risks assumed by the insurer by another insurer is called re-insurance, which would, therefore, be insurance of insurance. Re-insurance, thus, is an insurance of insurer‟s risks. An insurance policy is issued for a specific term and it is for whole term of the policy that the insurer assumes the risk on the insured subject. This business of the insurer is insured by any insurer called a re-insurer and for this purpose the insurer pays a premium to the re-insurer - both insurance and re-insurance services are covered under the scope of the general insurance service classifiable under section 65(105)(d) of the Finance Act and chargeable to service tax. The Appellant has stated that it has paid service tax on the output service‟ rendered by it. The re-insurers providing re-insurance services also pay service tax on output re-insurance service rendered by them to the Appellant and charge service tax form the Appellant. It is, therefore, clear that such reinsurance services are used by the insurer for providing output insurance service. Without the use of such re-insurance services, it may not be commercially prudent for any insurance company to assume such high risks under the original insurance policies. It is the assumed risks of the original insurer that are insured under the re-insurance policies. It is, therefore, difficult to hold that reinsurance services are not used by the insurer for providing the output services‟. It would also not be correct to hold that since reinsurance services are availed after the provision of insurance services, CENVAT credit of service tax paid on re-insurance services cannot be availed. The insurance policy is issued for particular term during which the risks are assumed by the insurer and the re-insurance availed by the insurer is co-terminus with the original risks assumed by the insurer. The issue that came up for consideration before the Karnataka High Court in PNB METLIFE INDIA INSURANCE COMPANY LTD VERSUS COMMISSIONER OF CENTRAL EXCISE, SERVICE TAX AND CUSTOMS 2014 (8) TMI 298 - CESTAT BANGALORE where the issue was whether an assessee can avail CENVAT credit of service tax paid on reinsurance services by treating the said service as an input service . The Karnataka High Court examined whether CENVAT credit availed and utilized by the insurance company on service tax paid for re-insurance service is an input service for the output service of insurance that the company was providing and held that the process of issuance of the policy by the insurer and subsequent procurement of re-insurance policy from another company, which is a statutory requirement, is an integral part of the entire process and the insurance process does not come to end merely on the issuance of the insurance policy since it continues till the existence of the term of the policy. The High Court noted that since reinsurance has to be taken under section 101A of the Insurance Act, it is a statutory obligation and, therefore, has to be considered as having nexus with the output service and, therefore, would be an input service , for which CENVAT credit can be availed. Whether the amendment to the definition of input service‟ in rule 2(l) w.e.f. April 1, 2012 would affect the eligibility of the Appellant to CENVAT credit on reinsurance services during the relevant period? - HELD THAT - It needs to be noted that motor vehicles have been excluded from the definition of capital goods‟. For this reason, the general insurance services relating to such motor vehicles have also been excluded from the purview of input service‟. The purpose of this amendment , thus, is to restrict the credit on insurance services availed in respect of motor vehicles to only two class of persons, i.e. (a) manufacturer of a motor vehicle in respect of a motor vehicle manufactured by such person; and (b) an insurance company in respect of a motor vehicle insured or re-insured by such person. This exclusion clause cannot be read to cover reinsurance services, which are not insurance services in respect of a motor vehicle. What is excluded under the said exclusion clause is general insurance services in respect of a motor vehicle. Insurance services received by an owner of motor vehicle for insurance of such vehicle stands excluded from the definition of input service‟. However, a re-insurance service is not in respect of a motor vehicle, but is in respect of the assumed risks of an original insurer and thus, the aforesaid exclusion clause has no application to qualification of re-insurance services as input service‟. Whether the Appellant is eligible to avail CENVAT credit of re-insurance service provided by pool member companies under the Insurance Pool? - HELD THAT - Under the pool arrangement, the Appellant deposits the whole premium collected by it in the pool account and based on the prescribed formulae, the GIC determines the amount of re-insurance premium due to each member as against the other members. Thus, in effect, each company pays the re-insurance premium after deducting the amount due from the other member companies. The service tax liability stands discharged on the whole re-insurance premium paid to the other members. It cannot be, therefore, be urged by the Department that the invoices that are issued by the pool member companies are not for any provision of service or without any payment. The re-insurance services are provided by the pool member companies and it is for this reason that the Insurance Pool was formed by IRDA - it cannot be doubted that re-insurance services are rendered by pool member companies to each other and payment of premium takes place with the pooling of the original premium into the pool. The Appellant would, therefore, be eligible to avail the CENVAT credit of service tax paid thereon. The impugned orders denying such CENVAT credit cannot, therefore, cannot be sustained. It is not necessary to examine whether the extended period of limitation could have been invoked in the facts and circumstances of the case. Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Eligibility of CENVAT credit on re-insurance services as "input service."
2. Impact of the amendment to the definition of "input service" in Rule 2(l) of the CENVAT Credit Rules, effective April 1, 2012.
3. Eligibility of CENVAT credit on re-insurance services provided by pool member companies under the Insurance Pool.
4. Invocation of the extended period of limitation and imposition of penalties.

Issue-wise Detailed Analysis:

1. Eligibility of CENVAT credit on re-insurance services as "input service":
The appellant, a registered insurer under the Insurance Act, 1938, provides various general insurance policies and avails re-insurance services from both Indian and foreign companies, claiming CENVAT credit on the service tax paid for these re-insurance services. The Adjudicating Authority denied this credit on the grounds that re-insurance services are not essential for providing insurance services, are availed after the issuance of insurance policies, and are not included in the definition of "input service" prior to April 1, 2012. However, the Tribunal held that re-insurance services are integral to the insurance process, as they mitigate the high risks assumed by the insurer and are co-terminus with the original insurance policies. The Karnataka High Court's decision in PNB Metlife India Insurance Co. Ltd., which the Department accepted, supports this view, confirming that re-insurance services qualify as "input service" and are eligible for CENVAT credit.

2. Impact of the amendment to the definition of "input service" in Rule 2(l) of the CENVAT Credit Rules, effective April 1, 2012:
The amendment to Rule 2(l) excluded general insurance services related to motor vehicles from the definition of "input service." However, the Tribunal clarified that this exclusion pertains only to insurance services for motor vehicles and does not extend to re-insurance services, which are insurance of the insurer's risks and not directly related to motor vehicles. The Commissioner of Central Excise, Jaipur, in a subsequent order, also held that the amendment does not affect the eligibility of CENVAT credit on re-insurance services for "other than motor vehicles."

3. Eligibility of CENVAT credit on re-insurance services provided by pool member companies under the Insurance Pool:
The Tribunal found that the finding in the impugned order, which denied CENVAT credit on the basis that the appellant did not actually pay any amount to the member companies, was beyond the scope of the show cause notice and factually incorrect. The Insurance Pool, created under IRDA's directions, involves pooling premiums collected by each member, and service tax is discharged on the whole re-insurance premium. The Tribunal concluded that re-insurance services are indeed rendered by pool member companies to each other, and the appellant is eligible to avail CENVAT credit on the service tax paid.

4. Invocation of the extended period of limitation and imposition of penalties:
Given that the impugned orders were set aside on substantive grounds, the Tribunal found it unnecessary to examine the issue of the extended period of limitation and the imposition of penalties.

Conclusion:
The Tribunal allowed the appeals, setting aside the impugned orders and confirming the eligibility of the appellant to avail CENVAT credit on re-insurance services. The Tribunal's decision was pronounced in open court.