2015 (5) TMI 68 - HC - Service Tax

CENVAT Credit - Whether the CENVAT credit availed and utilized by the assessee on the Service Tax paid for imported Reinsurance Services is an input service within the meaning of Rule 2 (l)(i) of the CENVAT Credit Rules, 2004 for the output services, i.e., Service of insurance the assessee was providing - Held that - The process of issuance of an Insurance 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 total process. The process of insurance does not come to an end merely on the issuance of the Insurance Policy by the Insurer. In fact, it continues till the existence of the term of the policy. The re-insurance is taken by the Insurer immediately after the insurance policy is issued, as is required under Section 101A of the Insurance Act, 1938. Since re-insurance is a statutory obligation, and the same is co-terminus with the Insurance policy issued by the respondent, we are of the opinion that the stand taken by the Tribunal is correct that the transfer of a portion of the risk of the re-insurance has to be considered as having nexus with the output service, since the re-insurance is a statutory obligation and the same is co-terminus with the Insurance Policy. Service Tax is levied for certain service rendered and the provision of giving the CENVAT credit is so that there may not be double taxation. If a person has collected service tax, no doubt the same has to be deposited, but if in the process of the same transaction he has paid some service tax, which is necessary for its business, then he is entitled to the CENVAT credit to the extent of service tax which has been paid by it. In the present case, if the entire Service Tax which is collected by the Insurer, while selling its insurance policies, has to be deposited without being given the credit of the tax which is paid by it while procuring a policy of reinsurance as (mandatorily required in law), the same would be against the ethos of CENVAT credit policy, as the same would amount to double taxation, which is not permissible in law. - no interference is called for with the order of the Tribunal - Decided against Revenue.

Summary

Issues:
1. Disallowance of CENVAT credit on re-insurance services.
2. Interpretation of 'Input Service' under Rule 2(l) of the CENVAT Credit Rules, 2004.
3. Nexus between re-insurance services and output services in the insurance business.

Analysis:
1. The case involved the disallowance of CENVAT credit on re-insurance services availed by the respondent-insurer, leading to a demand for recovery and imposition of penalties. The Commissioner held that re-insurance services do not qualify as Input Service as they occur after the insurance business is affected. The Tribunal, however, allowed the appeal, prompting the revenue to challenge the decision based on the substantial question of law regarding the eligibility of CENVAT credit on reinsurance services.

2. The appellant contended that re-insurance services do not qualify as Input Service as they are obtained after issuing the insurance policy, and therefore, the insurer should not be entitled to CENVAT credit. It was argued that re-insurance is not essential for providing insurance services and does not have a direct impact on the nature of activities between the insurer and the re-insurer. On the other hand, the respondent argued that re-insurance is an integral part of the insurance business, as mandated by the statute, and the process continues until the policy's term. The Tribunal's decision to allow CENVAT credit was supported on the grounds that re-insurance is a statutory obligation and has a nexus with the output service of providing insurance.

3. The High Court upheld the Tribunal's decision, emphasizing that the process of issuing insurance policies and procuring re-insurance is a continuous one. It was noted that re-insurance is a statutory requirement under the Insurance Act, 1938, and is co-terminus with the insurance policy. The Court highlighted that disallowing CENVAT credit on re-insurance services would lead to double taxation, which goes against the purpose of the CENVAT credit policy. Therefore, the Court concluded that re-insurance services qualify as 'input service' within the meaning of Rule 2(l) of the CENVAT Credit Rules, 2004, and dismissed the appeal, stating that no substantial question of law arises for determination.