By TIOL News Service

MUMBAI, APR 01, 2014: THE appellants are M/s TATA AIG Life Insurance Co. Ltd., M/s ICICI Prudential & M/s Birla Sun Life.

While granting stay in the matter of Tata AIG Life Insurance, the CESTAT had passed the following order –

On hearing both sides on the application for waiver of pre deposit of Service Tax of Rs. 8,77,50,424/- and a penalty of Rs. 2000/- imposed under the provisions of Section 77 of the Finance Act, 1944, we find that prima facie the issue in dispute in the present case, where the demand has been confirmed by denying facility of availment of CENVAT Credit on input service towards payment of service tax on agency commission falling under the category of 'Insurance Auxiliary Service' and 'Management Consultancy Service' on the basis of CBEC Circular dated 23.8.2007 is covered in favour of the applicants by Tribunal's order No S/247/08/C-II/CSTB dated 21.5.2008 in the case of M/s Birla Sunlife Insurance Co Ltd vs Commissioner of Service Tax, Mumbai, relying upon Tribunal's decision in CCE, Chandigarh vs Nahar Industrial Enterprises Ltd - (2007-TIOL-555-CESTAT-DEL), Pune vs Thermax Ltd (2007-TIOL-1819-CESTAT-MUM) and M/s Aditya Flexipack vs CCE (2008-TIOL-124-CESTAT-DEL).

2. Following the ratio of the above orders, we waive pre deposit of the amounts in question and stay recovery thereof pending the appeal.

This was reported by us as 2008-TIOL-1249-CESTAT-MUM.

In the referred order of Birla Sun Life, the CENVAT credit involved was Rs.2,49,19,776/- and we havereported this as 2008-TIOL-1354-CESTAT-MUM.

The long and short of these cases involving the period September, 2004 to March, 2008 goes thus -

++ The appellants are providers of General and Life Insurance service.They also appoint Insurance Agents for canvassing business and such services fall under the taxable service category of 'Insurance Auxiliary Service'. Service Tax liability on the 'Insurance Auxiliary Service' is on the service recipient on reverse charge basis and the appellants are required to discharge Service Tax liability.

++ The question for consideration is whether for discharging Service Tax liability on Insurance Auxiliary service (on reverse charge basis) the appellant can utilize CENVAT Credit available with them.

++ A connected question is since the 'Insurance Auxiliary Service' is specified in Rule 6(5) of the CENVAT Credit Rules, whether the appellant can avail CENVAT Credit on the inputs services without any limit or in terms of Rule 6(3) of the CENVAT Credit Rules, 2004, the credit should be restricted to 20% of the Service Tax payable for the period prior to 1.4.2008.

Quick Reference

6(3)(c) - the provider of output service shall utilize credit only to extent of an amount not exceeding twenty per cent. of the amount of service tax payable on taxable output service.

6(5) - Notwithstanding anything contained in sub-rules (1), (2) and (3), credit of the whole of service tax paid on taxable service as specified in sub-clause (g), (p), (q), (r), (v), (w), (za), (zm), (zp), (zy), (zzd), (zzg), (zzh), (zzi), (zzk), (zzq) and (zzr) of clause (105) of section 65 of the Finance Act shall be allowed unless such service is used exclusively in or in relation to the manufacture of exempted goods or providing exempted services.

On this issue, the adjudicating authorities have taken contrary views.

++ Be that as it may, as regards utilization of CENVAT Credit for payment of Service Tax on Insurance Auxiliary Service, all the adjudicating authorities have taken a common view that the CENVAT Credit cannot be utilized for payment of Service Tax w.e.f. 10.9.2004 and the appellants were required to pay the Tax in cash on or after 10.9.2004.

The appeals were heard recently.

The appellant submitted –

+ 'Output Service' as defined in Rule 2(p) at the material time is as follows:-

"output service" means any taxable service provided by the provider of taxable service, to a customer, client, subscriber, policy holder or any other person, as the case may be, and the expression 'provider' and 'provided' shall be construed accordingly."

+ As per the explanation-

"for removal of doubts, it is hereby clarified that if a person liable for paying Service Tax does not provide any taxable service or does not manufacture final products, the service for which he is liable to pay Service Tax shall be deemed to be the "output service".

+ The explanation was omitted from 19.4.2006 by CENVAT Credit (Third Amendment) Rules, 2006. As per Rule 2(q), the term "person liable for paying Service Tax" has the meaning as assigned to it in clause (d) of sub-rule (1) of rule 2 of the Service Tax Rules, 1994". As per Rule 2(r) of the said Rules "provider of taxable service" includes a person liable for paying Service Tax.

+ The appellants are liable to pay Service Tax on Insurance Auxiliary Service received by them in terms of Rule 2(1)(d) (iii) of the Service Tax Rules, 1994 read with Section 63(2) of the Finance Act, 1994. A combined reading of Rules, 2(p),(q), (r) makes the position absolutely clear that for the purposes of Service Tax Act, the appellants are the providers of Insurance Auxiliary Service and liable to pay Service Tax and, therefore, they are rightly entitled to avail input service tax credit on the various input services received by them.

+ Reliance is placed inter alia on the decisions in Nahar Industrial Enterprises Ltd. – (2007-TIOL-555-CESTAT-DEL), 2010-TIOL-547-HC-P&H-ST, Nahar Spinning Mills 2011-TIOL-413-HC-P&H-ST, Nahar Exports Ltd. - 2007-TIOL-1907-CESTAT-DEL to buttress their argument that once the appellant become the output service provider in view of the legal provisions then they are eligible for utilizing the credit taken on input services for discharge of Service Tax liability on the output service. Mention is also made of the decision in Federal Express Corporation (2013-TIOL-1137-CESTAT-MUM) wherein it is held that the 20% cap fixed for utilization of CENVAT Credit under Rule 6(3)(c) prior to 1.4.2008 is only with respect to utilization and if the credit has been utilized prior to 1.4.2008, what can be demanded is only the interest and not the credit amount taken. Inasmuch as the Insurance Auxiliary Service is notified under Rule 6(5), the provisions of Rule 6(3)(c) would not apply.

The Revenue representative adverted to the decisions in ITC Ltd. – 2011-TIOL-568-CESTAT-BANG where a view is taken that a person deemed as 'provider of taxable service' received by him cannot be treated as a provider of taxable service under Rule 2 (r) and, therefore such a person, has to pay Service Tax in cash and not by utilization of CENVAT Credit. Reliance is also placed on the decisionsin Panch Mahal Steel Ltd. – 2008-TIOL-1606-CESTAT-AHM, Alstom Projects India Ltd. – 2008-TIOL-2853-CESTAT-MAD to emphasize that the appellants were not entitled to use input service credit for payment of Service Tax on the output service of Insurance Auxiliary Service.

In the matter of Explanation appearing in rule 2(p) and its deletion w.e.f 19.04.2006, the Bench observed -

++ An Explanation only clarified the position. By omission of the explanation, the meaning does not undergo any change. Therefore, both prior to 19.4.2006 as also w.e.f. 19.4.2006, the meaning of the expression 'output service', 'provider of taxable service' and 'person liable for paying service tax' remain the same.

++ Since in the case of Insurance Auxiliary Service, the liability to pay Service Tax is on the service recipient in terms of Rule 2 (1)(d)(iii) of the Service Tax Rules, 1994, the appellants are the providers of the output service as defined in law. Therefore, the appellants are entitled to avail CENVAT Credit on the input services used for providing the output service.

++ Consequently, there is no bar in utilization of CENVAT Credit for payment of Service Tax on Insurance Auxiliary Service by the appellants.

The Bench also held that in view of the settled legal position as enunciated by the decisions in Nahar Industrial Enterprises, Nahar Spinning Mills, Auro Spinning Mills etc., the decisions of the Tribunal relied upon by the Revenue become irrelevant. Inasmuch as the appellants were entitled to utilize CENVAT Credit of the Service Tax paid on various input services for discharge the Service Tax liability on the output service of "Insurance Auxiliary Service", the CESTAT held.

It was also noted that since there is no one to one correlation required between the input service and the output service under the CENVAT Credit Scheme the demands confirmed against the appellants for recovery of CENVAT Credit availed by them for discharging Service Tax liability on Insurance Auxiliary Service is clearly unsustainable and accordingly, the demands were set aside.

As for the connected question as to whether the appellant can avail CENVAT Credit on the inputs services without any limit or in terms of Rule 6(3) of the CENVAT Credit Rules, 2004, the credit should be restricted to 20% of the Service Tax payable for the period prior to 1.4.2008, the CESTAT observed that 'Insurance Auxiliary Service' falls under sub-clause (zy), which is specified in sub-rule (5) of Rule 6 and hence the cap of 20% fixed under rule 6(3)(c) would not apply to the said Insurance Auxiliary Service in the sense that the entire Service Tax credit can be utilized for discharge of ST.

In fine, the appeals filed by Tata AIG, Birla Sun Life & ICICI Prudential were allowed and the Revenue appeal filed in the order relating to ICICI Prudential was rejected.

With you always…Hum hain na…

Also read - Output service - does deletion of explanation in Rule 2(p) changes the intention of the Rule?

(See 2014-TIOL-487-CESTAT-MUM)