Oriental Insurance Company Ltd. Vs Commissioner, LTU (CESTAT Delhi)
In the instant case, the reinsurance services availed by the Appellant are for insuring its business risks and not in respect of any particular motor vehicle. Reinsurance, by its nature, pertains to the insurance of business of the Appellant. Reinsurance services have never been availed by the Appellant in respect of a particular motor vehicle. In such a case, the exclusion clause in in Rule 2(l) has no applicability to the present case and denial of CENVAT credit on basis of such a clause is not sustainable.
The Division Bench of this Tribunal in Shriram General Insurance Company also examined whether the appellant would be eligible to avail CENVAT Credit of reinsurance provided by pool member companies under the insurance pool after the amendment of the definition of input service in rule 2(l) w.e.f. April 01, 2011 and observed that the appellant would be eligible to avail CENVAT credit of service tax paid thereon. The relevant portion of decision is reproduced below:
26. It now remains to be examined whether the Appellant is eligible to avail CENVAT credit of re-insurance service provided by pool member companies under the Insurance Pool. In the first instance, the finding in the impugned order that the Appellant is not eligible for CENVAT credit of service tax paid under the Insurance Pool since the Appellant has not actually paid any amount to the member companies is beyond the scope of the show cause notice. Even otherwise, the factual position has not been correctly appreciated by the Commissioner. As noticed above, 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. Clause 3 of the direction dated December 4, 2012 (should be 2011) are relevant and are reproduced below:-
“3. Pooling Mechanism: The pooling of business among all insurers will be achieved through a multi-lateral reinsurance arrangement between the underwriting insurer and all the other registered insurers carrying on general insurance business (including motor insurance business) and general insurance reinsurers.”
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28. Thus, 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.”
Thus, even after the amendment of the definition of “input service” in rule 2(l) of the CENVAT Rule w.e.f. April 01, 2011, the appellant would be eligible to avail CENVAT credit on both the aforesaid reinsurance services.
FULL TEXT OF THE CESTAT JUDGEMENT
The Commissioner of Central Excise & Service Tax, New Delhi1 has confirmed the demand of CENVAT credit of Rs. 196,46,97,360/-with interest and penalty and dropped the demand of CENVAT credit of Rs. 430,70,99,163/- by order dated February 19, 2016. This part of the order confirming the demand of CENVAT credit with penalty and interest has been assailed in the present appeal.
2. The Appellant is a registered insurer under the provisions of Insurance Act 19382 and is engaged in providing general insurance services. It issues various kinds of insurance policies like motor vehicle insurance, fire insurance and marine insurance. The insurance business in India is regulated by the Insurance Act. Section 3 deals with registration and sub-section (1) of section 3 provides that no person shall, after commencement of the Insurance Act, carry on any class of insurance business in India and no insurer carrying on any class of insurance business in India shall, after the expiry of three months from the commencement of the Insurance Act, continue to carry on any such business, unless he has obtained from the Authority a certificate of registration for the particular class of insurance business. Section 3(4)(f) provides that the authority shall cancel the registration of an insurer, either wholly or in so far as it relates to a particular class of insurance business, if the insurer makes default in complying with, or acts in contravention of any requirement of the Insurance Act or of any rule or any regulation or order made or any direction issued thereunder. Section 101A of the Insurance Act deals with reinsurance with Indian re-insurers. It provides that every insurer shall re-insure with Indian reinsurers such percentage of the sum assured on each policy as may be specified by the Insurance Regulatory and Development Authority of India3 that has been established under sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act 19994. The Government of India has constituted IRDA with a view to protect the interest of holders of insurance policies and to regulate, promote and ensure orderly growth of the insurance industry. The Appellant claims that because of the requirement set out under section 101A of the Insurance Act and as a prudent business practice it has been availing re-insurance services from Indian as well as foreign reinsurance companies in respect of the insurance policies.
3. Section 114A of the Insurance Act empowers the IRDA to make regulations in respect of various matters including matters relating to re-insurance under sections 101A and 101B of the Insurance Act. In due exercise of the aforesaid powers, IRDA has issued the Re-insurance Regulations for re-insurance of general insurance business.
4. Section 146 of the Motor Vehicles Act, 19885 mandates taking of an insurance cover against third party risks by a person using a motor vehicle in a public place. The rate for third party insurance premium is regulated by the Insurance Act. It is stated that problems were faced by companies in issuing insurance cover against these policies as very high risks arose therefrom.
5. Directions dated December 4, 2006, were issued by IRDA, in due exercise of powers conferred under section 34 of the Insurance Act, for creation of an Insurance Pool. All the general insurers, registered to carry on general insurance business (including motor insurance business) or general re-insurance business, were directed to collectively participate in a pooling arrangement to share all motor third party insurance business underwritten by any of the registered general insurers. It is in pursuance of the aforesaid directions that all general insurance companies in India entered into an agreement with GIC for creating the Insurance Pool. This Insurance Pool is a mechanism to render re-insurance services by general insurance companies to each other as regards third party motor vehicle insurance. Under this pool arrangement, a matrix is prepared periodically to determine the amount of premium to be paid by one member to another and vice versa.
6. The Appellant claims that in pursuance of the aforesaid matrix, it raised an invoice on each member specifying the premium allocated to it under the matrix and charged service tax thereon. Likewise, invoices were raised by all pool members on each other. The service tax charged in such invoices is availed as credit by each member. The Appellant has also availed CENVAT credit of service tax paid on such re-insurance service provided by the pool member companies under the Insurance Pool.
7. In respect of re-insurance services rendered by Indian Companies, service tax is charged from the Appellant and then deposited in the Government account. In respect of re-insurance services rendered by foreign companies, the Appellant is discharging service tax under the reverse charge mechanism. The Appellant has been availing CENVAT credit of service tax paid on such re-insurance services. This CENVAT credit can broadly be categorized as under:-
(a) Re-insurance services rendered by pool member companies which charge service tax from the Appellant on their invoices;
(b) Re-insurance services rendered by other Indian reinsurers which charge service tax from the Appellant on their invoices; and
(c) Re-insurance services rendered by foreign reinsurance, on which service tax is paid by the Appellant under the reverse charge.
8. The following three questions were framed by the Commissioner for determination.
i. “Whether CENVAT Credit of Rs. 627,17,96,523/- (Six Hundred Twenty seven Crores Seventeen Lakh Ninety Six Thousand Five Hundred Twenty Three Only) should be disallowed and recovered from the Noticee under Rule 14 of the CENVAT Credit Rules, 2004 read with proviso to Section 73(1) and Section 73(4) of the Finance Act, 1994;
ii. Whether interest as applicable should be charged and recovered from them under Section 75 of the Finance Act, 1994;
iii. Whether penalty should be imposed under rule 15(4) effective up to 26.02.2010 or 15(3) effective from 27.02.2010 of the CENVAT Credit Rules, 2004 read with section 78 of the Finance Act, 1994.”
9. CENVAT Credit of Rs. 627,17,96,523 proposed to be disallowed for the period 2008-09 and 2011-12 in the show cause notice comprises following components:
a. Reinsurance services obtained directly from the Indian reinsurers.
b. Reinsurance services obtained directly from the foreign reinsurers.
c. Reinsurance service obtained under Indian Motor Third Party Insurance Pool.
10. The Commissioner drew a distinction between the aforesaid services rendered prior to April 01, 2011 and w.e.f. April 01, 2011 for the reason that an amendment had been made in the definition of “input service” in the CENVAT Credit Rules 20046 w.e.f. April 01, 2011. According to the Commissioner, the definition of „input service‟ in rule 2 (l) of the CENVAT Rules included within its ambit all such services which can reasonably be used for providing any output service. Thus, before April 01, 2011, the issue of nexus of input service viz-a-viz output service has to be examined. However, w.e.f. April 01, 2011, an amendment was made in the definition of „input services‟ in rule 2 (l) by adding an exclusive clause, excluding service of general insurance business and this exclusion clause is reproduced below:-
“2 (l) „input service‟ means any service –
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but excludes
“(B) specified in sub-clauses (d),(o),(zo) and (zzzzj) of clause (105) of section 65 of the Finance Act, in so far as they relate to a motor vehicle except when used for the provision of taxable services for which the credit on motor vehicle is available as capital goods: or”
11. In connection with period prior to April 01, 2011, the Commissioner noted that there was no difference between reinsurance services obtained directly from the Indian reinsurers, reinsurance services obtained directly from the Foreign reinsurers and reinsurance services obtained under Indian Third Party Insurance Pool in as much as that all the three components relate to the service of reinsurance and, therefore, what was important to examine was whether reinsurance services fall within the ambit of “input service” as defined in rule 2(l) of the CENVAT Rules. The Commissioner found that reinsurance service has a nexus with the output service.
12. It is for this reason that the Commissioner dropped the demand for the period prior to April 01, 2011 and the observations are;
“21.7.14 Hence, in view of the above, for the period prior to 01.04.2011, the said “reinsurance service” within the ambit of definition of “input service” as given under Rule 2(1) of the CENVAT Credit Rules, 2004 in as much as that the same has been obtained by the Noticee for the purpose of providing/ rendering output service, viz. general insurance service and the same has a nexus with the output service of the Noticee.
21.7.15 Hence, in view of the above decisions and discussion, I hold that the Noticee herein has correctly availed CENVAT Credit during the period from 2008-09 tom 2010-11 on the reinsurance service in relation to general insurance services as the said reinsurance service is covered within the ambit of the definition of “input service” as given under Rule 2(1) of CENVAT Credit Rules, 2004 and also has a nexus with the output service being provided by the Noticee. The quantum of CENVAT Credit correctly availed by the Noticee is as follows:-”
