2025 (4) TMI 1066 - AT - Service Tax

Liability to service tax on CENVAT Credit availed for input services used exclusively for providing exempted services specifically the commission paid for exempted insurance policies - CENVAT Credit for services rendered in the non-taxable territory of Jammu Kashmir - Extended period of limitation. CENVAT Credit for services rendered in the non-taxable territory of Jammu Kashmir - HELD THAT - From the License it is seen that it is a general license to operate as an Insurance Agent. Such agent may procure Insurance business requiring Service Tax payment or which may be exempt from payment of Service Tax. Thus this License is used as a whole and there are no separate Licenses issued for procuring taxable and exempt insurance business - It is observed that in respect of insurance of the person under Kisan Credit Scheme the Service Tax is exempted. Liability to service tax on CENVAT Credit availed for input services used exclusively for providing exempted services specifically the commission paid for exempted insurance policies - HELD THAT - When the input service is commonly used for providing both the taxable and exempt services then the CENVAT Credit should either be reversed on proportionate basis in terms of Rule 6 (3A) or the assessee should pay six percent of the value of the exempted services in terms of Rule 6(3)(i) of the said Rules. Thus there is no bar to take the CENVAT Credit in respect of commonly used input services so long as one of these two options are followed by the assessee. The only bar is when the service is used exclusively for providing exempted services. In the present case from the documentary evidence it is clear that the Agent is providing both the services commonly. Therefore the Invoice raised by him showing the Service Tax component may consist of both the taxable and exempt insurance services. This would fall under the category of common service and not under the category of exclusively exempt service. The Revenue has not brought in any specific evidence to show that the Insurance Agent is rendering services to such exempted product for which they have raised any Invoice showing the Service Tax payment thereon which has been taken as CENVAT Credit by the appellant. Extended period of limitation - HELD THAT - There are considerable force in the arguments of the appellant about the non-applicability of suppression clause in their case. First of all they are a reputed Public Sector Undertaking. They have filed all their statutory Returns under Service Tax and Income Tax and under the Companies Act provisions before the respective authorities. Knowing fully well they are not in a position to maintain separate accounts they have taken the CENVAT credit commonly accruing to them in respect of the taxable and exempt insurance services and have been regularly reversing the CENVAT Credit in terms of Rule 6 (3)(i) which is also reflected in the ST-3 Returns. Hence no case whatsoever has been made against the appellant for wilful suppression with an intent to evade payment of Service Tax. Therefore the confirmed demand to the extent of the extended period is legally not sustainable. Conclusion - i) In respect of common input services the appellants have been regularly reversing the CENVAT Credit in terms of Rule 6(3)(i) of CCR 2004. ii) The Department has not brought in any evidence to the effect that the appellant has taken CENVAT Credit in respect of any input service which is exclusively used in the provision of exempted services. iii) The documentary evidence brought in by the appellant shows that the Insurance Agent is authorized to take up both the taxable and exempted insurance services. iv) The confirmed demand to the extent of the extended period is legally not sustainable. The appeal is allowed on merits and partly on account of time bar.

Summary

The core legal questions considered by the Tribunal in this appeal are as follows:

1. Whether the appellant is liable to pay service tax on CENVAT Credit availed for input services used exclusively for providing exempted services, specifically the commission paid for exempted insurance policies.

2. Whether the appellant could avail CENVAT Credit for services rendered in the non-taxable territory of Jammu & Kashmir.

3. Whether the demand raised for the period 2008-09 and 2009-10 is barred by limitation under the Finance Act, 1994, and whether the extended period of limitation can be invoked on grounds of suppression or wilful misstatement.

4. Whether the reversal of CENVAT Credit already undertaken by the appellant has been appropriately considered in the demand calculation.

5. The applicability and interpretation of Rule 6(3) of the CENVAT Credit Rules, 2004, especially regarding the treatment of input services used partly for taxable and partly for exempted services.

Issue 1: Liability to pay service tax on CENVAT Credit availed for input services used exclusively for exempted services

The relevant legal framework comprises Rule 6 of the CENVAT Credit Rules, 2004, particularly sub-rule (1) and sub-rule (3)(i), and Rule 2(e) defining "exempted services." Rule 6(1) prohibits CENVAT Credit on inputs used exclusively for exempted services but allows credit on commonly used inputs subject to reversal or payment of an amount equal to six percent of the value of exempted services under Rule 6(3)(i). Explanation II to Rule 6 clarifies the bar on credit for inputs used exclusively for exempted services.

The appellant contended that the commission agents engaged are licensed by the Insurance Regulatory and Development Authority (IRDA) to market all types of insurance policies, both taxable and exempt, and are not restricted to exempted policies alone. The appellant argued that the input services (commission agents' services) are therefore commonly used for taxable and exempt services and not exclusively for exempt services.

The Tribunal examined the sample IRDA license and found it to be a general license without segregation for taxable or exempt insurance business, supporting the appellant's claim of common usage. The Tribunal also reviewed sample invoices indicating that agents provide services for both taxable and exempt policies.

Reliance was placed on a precedent where the Tribunal held that the appellant's service is a single, composite service (general insurance business), with part of the premium taxable and part exempt, and thus does not constitute an exempted service for the purpose of denying CENVAT Credit. The Tribunal noted that the Department failed to produce evidence that the input services were exclusively used for exempted services.

Applying the law to the facts, the Tribunal concluded that since the appellant had opted for Rule 6(3)(i) and paid six percent of the exempted premium value as service tax (totaling Rs. 85.5 crores over the relevant period), the CENVAT Credit availed was legitimate. The demand based on the premise of exclusive use of input services for exempted services was therefore unsustainable.

The Tribunal rejected the Department's contention that the entire credit on commission paid for exempted policies was disallowed, noting the absence of evidence to support that the input services were exclusively for exempted policies.

Issue 2: CENVAT Credit availed for services rendered in the non-taxable territory of Jammu & Kashmir

The appellant admitted the error pointed out by the Audit team regarding CENVAT Credit availed for services in Jammu & Kashmir, a non-taxable territory for service tax. The appellant reversed the credit amounting to Rs. 1,62,259 along with interest and informed the Department before issuance of the Show Cause Notice.

Section 73(3) of the Finance Act, 1994, allows a person to pay the tax or reverse credit on their own ascertainment and avoid issuance of a notice thereafter. Since the reversal and payment of interest were made before the Show Cause Notice was issued, the Tribunal held that the notice was unnecessary for this amount and set aside the penalty imposed on this ground.

Issue 3: Limitation and invocation of extended period for demand in 2008-09 and 2009-10

The appellant challenged the demand for these years on the ground that it was barred by limitation under Section 73 of the Finance Act, 1994, as the Show Cause Notice was issued beyond the prescribed period. The appellant argued that the extended period can be invoked only if there is suppression or wilful misstatement with intent to evade tax, which must be proved by the Department.

The appellant submitted that no such suppression or fraud was established, and cited judicial precedents holding that mere failure to discharge tax liability does not constitute suppression, especially for a public sector undertaking (PSU). The appellant emphasized its compliance with statutory returns and the absence of any evidence of wilful misstatement.

The Tribunal agreed with the appellant, noting the absence of evidence of wilful suppression or intent to evade tax. It held that the extended period could not be invoked merely on the basis of alleged mis-declaration without proof of mens rea. The Tribunal set aside the demand for the period 2008-09 and 2009-10 on the ground of time bar.

Issue 4: Consideration of reversal of CENVAT Credit in demand calculation

The appellant submitted that the demand was calculated on the basis of the turnover of exempt supplies without accounting for the reversal of CENVAT Credit already undertaken (Rs. 85.5 crores). It also pointed out that in certain exempt policies, no commission was paid, thus no reversal was required for such policies.

The Tribunal found that the adjudicating authority ignored the reversal payments made by the appellant and did not consider the actual nature of input services and commission payments. This omission rendered the demand calculation incorrect and unsustainable.

Issue 5: Interpretation of Rule 6(3) of the CENVAT Credit Rules, 2004

The appellant relied on Rule 6(3)(i), which allows a provider of output service not maintaining separate accounts to pay six percent of the value of exempted services instead of reversing credit on inputs used commonly for taxable and exempt services. The appellant followed this option and paid the requisite amount.

The Tribunal emphasized that credit is disallowed only when input services are used exclusively for exempted services. Where input services are common, the option to pay six percent of exempted service value applies. The Tribunal found that the appellant complied with this provision and that the Department failed to prove exclusive use of input services for exempted services.

The Tribunal rejected the Department's reliance on Explanation II to Rule 6(3), holding that it applies only when multiple services are rendered and one is exempt, which was not the case here as the appellant provided a single composite service.

Conclusions and Significant Holdings

The Tribunal held:

"The credit shall not be allowed on inputs used exclusively in or in relation to the manufacture of exempted goods or for provision of exempted services... However, where the input service is commonly used for providing both taxable and exempt services, CENVAT Credit is admissible subject to reversal or payment of an amount as per Rule 6(3)(i)."

"The appellant's insurance agents, licensed under IRDA, provide services for both taxable and exempt insurance policies, and no evidence was brought to show exclusive use for exempt services."

"The appellant has been regularly reversing CENVAT Credit by paying six percent of the value of exempted services as service tax, amounting to Rs. 85.5 crores, which was ignored by the adjudicating authority."

"The demand for the period 2008-09 and 2009-10 is barred by limitation as there is no evidence of suppression or wilful misstatement with intent to evade tax."

"The reversal of CENVAT Credit for services rendered in Jammu & Kashmir was made prior to issuance of Show Cause Notice, rendering the notice and penalty on this amount unsustainable."

"The confirmed demand on account of CENVAT Credit availed for input services used exclusively for exempted services is set aside as legally untenable and unsupported by evidence."

"The appeal is allowed on merits and partly on account of time bar, with consequential relief as per law."