By TIOL News Service

NEW DELHI , MAY 26, 2014: THE period of dispute in these appeals is from October, 2004 to December, 2008. The Audit officers of the C & AG were of the view that the appellant would not be eligible for CENVAT credit of the service tax paid on the various insurance services availed by them for insurance of plant and machinery, marine insurance, insurance of cash in transit, vehicle and laptop insurance as these services are not covered by the definition of 'input service', as given in Rule 2 (l) of the CENVAT Credit Rules, 2004. Based on this Audit objection, a show cause notice dated 30.01.2009 was issued to the appellant for recovery of allegedly wrongly availed CENVAT credit amounting to Rs.3 ,05,98,072 /- in respect of insurance services during the period from October, 2004 to December, 2007 along with interest thereon under Section 11 AB of the Central Excise Act, 1944 and also for imposition of penalty on the appellant under Rule 15 of the CENVAT Credit Rules read with Section 11 AC of the Central Excise Act, 1944 and also under Rule 25 of the Central Excise Rules, 2002.

The Commissioner confirmed the demands on the following grounds :-

(1) There was no intention of the legislature to allow the cenvat credit of service tax on insurance services, as, if this had been so, the same would have been specified in the list of "activities relating to business", though other services have been listed therein. This finds support from the amendment made in the definition of 'input service' vide notification no.03 /2011-CE (NT) dated 1.3.2011 with effect from 1.4.2011 by which the expression "activities relating to business" has been deleted. This amendment has to be treated as retrospective amendment, in view of the judgement of the Larger Bench of the Tribunal in the case of Vandana Globla Ltd . reported in 2010-TIOL-624-CESTAT-DEL- LB , wherein the Tribunal while examining the scope of the amendment made in the definition of "input" by insertion of Explanation II to Rule 2 (K) of the Cenvat Credit Rules, 2004 vide notification no.16 /2009-CE (NT) dated 7.7.2009, had observed that the amendment made under the notification dated 7.7.2009 was clarificatory in nature and the same would have been retrospective effect.

(2) "Input Service" must have nexus with process of manufacture and for determining the eligibility of 'service' for cenvat credit, it must be shown that the service is used in or in relation to the manufacture of final products. The insurance services do not meet this test.

The appeals before the Tribunal are against the orders of the Commissioner.

The Tribunal noted that the main difference between the definition of 'input service' as it existed during the period prior to 1.4.2011 and it existed during the period w.e.f . 1.4.2011 is that expression is "activities relating to business" in the inclusive portion has been deleted and some services have been specifically excluded from the purview of the term "input service". However, the period of dispute in this case is the period prior to 1.4.2011. The Commissioner has disallowed the cenvat credit in respect of various insurance services on the two grounds -

(a) A service for being qualified as "input service" in terms of its definition as given in Rule 2 (1) of the Cenvat Credit Rules, 2004 must have been used in or in relation to the manufacture of final product i.e. should have nexus with the manufacture of final products and insurance services, in question, do not have any nexus whatsoever with the manufacture of final product.

(b) Though the term 'activities relating to business' has been deleted w.e.f . 1.4.2011, this amendment has to be treated as of clarificatory nature and accordingly, even for the period prior to 1.4.2011, the "activities relating to business" would not be covered by the definition of 'input services.

The Tribunal found that the finding of the Commissioner that a service for being cenvatable , must have been used in or in relation to the manufacture of final product and that insurance services having no nexus whatsoever with the manufacture of final product are not eligible for cenvat credit, is contrary to the law laid down by the Bombay High Court in the case of CCE Vs. Ultra Tech Cement.

In this judgement , the Bombay High Court also considered the Apex Court's judgement in the case of Maruti Suzuki Ltd. reported in 2009- TIOL -94-SC-CX and observed that Revenue's contention based on this judgement of the Apex Court that 'input service' in order to qualify for cenvat credit must be only those services which have nexus with the manufacture of final products is not correct, as unlike the definition of 'input' which is restricted to the input used directly or indirectly in or in relation to the manufacture of final products, the definition of 'input service' not only means service used directly or indirectly in or the relatives to the manufacture of the final products but also includes services used in relation to business of manufacturing.

In view of this judgement of the Bombay High Court the Commissioner's finding that a service for being cenvatable must be used in or in relation to the manufacture of final product whether directly or indirectly is not correct and any service having nexus with the business of manufacture which has been used by a manufacturer would qualify as an input service. Insurance of plant and machinery, goods in transit, cash in transit and insurance of vehicles, and laptop, is an integral part of manufacturing business, as no manufacturer would carry on manufacturing operations without insurance of plant & machinery, cash in transit, goods in transit, vehicles & computers, etc. against any loss due to accident, natural calamities, etc. In view of this, the services of plant and machinery, transit insurance of goods, insurance of cash in transit, laptop, etc. have to be treated as an activity related to the business and would be eligible for cenvat credit.

As regards, the Group Insurance of all Employees against sickness or accident, the same has been held as cenvatable by the judgements of Karnataka High Court in the cases of Stanzen Toyotetsu India (P) Ltd., Micro Labs Ltd. and M/s. Millipore India Ltd. Moreover, Group insurance of the employees against accident or sickness is the requirement of Section 38 of the Employees State Insurance Act, 1948, which a manufacturer has to comply with and accordingly, this service would have to be treated as a service used in or in relation to the manufacture of final products whether directly or indirectly, as a manufacturer would not be allowed to carry on manufacturing operations unless he complies with the requirements of Section 38 of the Employees State Insurance Act, 1948.

Coming to the second ground on which the Commissioner has disallowed the cenvat credit in respect of the insurance services, the Tribunal noted that the Commissioner's view is that the amendment to Rule 2(l) of Cenvat Credit Rules, 2004 w.e.f . 1.4.2004 is a clarificatory amendment and hence, the amended provisions would have retrospective applications. The reasoning in this regard given by the Commissioner is the judgement of the Larger Bench of the Tribunal in the case of Vandana Global Ltd wherein the Tribunal has held amendment to Rule 2 (k) of Cenvat Credit Rule, 2004 by adding Explanation-II to be of clarificatory nature. But the Tribunal in case of Vandana Global Ltd had given reasons explaining why the amendment to Rule 2 (k) have to be treated as of clarificatory nature while in this case the Commissioner, other than citing the judgements of the Tribunal in the case of Vandana Global Ltd and J & K Synthetics has not given any reason whatsoever as to how the deletion of the expression "activities relating to business" in Rule 2 (l) and its amendment w.e.f . 1.4.2011 has to be treated as of clarificatory nature and hence, having retrospective validity.

So, the Tribunal held that the impugned order is not only sustainable but is an absurd order passed without any application of mind . ( Maybe what the Tribunal meant was that the order was not only unsustainable but also & .. ) What the Tribunal found more disturbing was that though the judgments of Tribunal and High Court with regard to eligibility of various insurance services for Cenvat Credit had been cited before the Commissioner (as mentioned in para 11 of the order-in-original), he has either ignored these judgments and not given any findings as to how these judgments are not applicable or has made observations contrary for the judgments of the Tribunal/High Court and has decided the question of eligibility of various insurance services for Cenvat credit on the basis of his own interpretation of Rule 2 (l) of Cenvat Credit Rules, 2004 observing that amendment to this rule w.e.f . 01.04.2011 is a retrospective amendment and the insurance services, in question, have no nexus with manufacture of final products.

The conduct of the Learned Commissioner amounts to clear judicial indiscipline and irresponsible exercise of adjudication function. Such exercise of adjudication powers in blatant violation of Apex Court's judgment in case of Union of India Vs. Kamlakshi Finance Corporation Ltd., reported in 2002- TIOL -484-SC-CX- LB requires to be censured as, if allowed to go unchecked, would lead to collapse of entire dispute resolution mechanism. Such adjudication orders burden not only the Assessee who has to incur avoidable expenses on challenging such order before the Courts/Tribunal, but also impose clearly avoidable costs for the Government, as the Tribunal's/Court's valuable time is also consumed in hearing appeals against such clearly erroneous and indisciplined orders, which should never have been passed.

The Tribunal set aside the impugned order and allowed the appeal. It also imposed costs of Rs.5 ,000 /- on the Respondent which would be payable to appellant/assessee. The Registry is also directed to enclose a copy of this order to the Chairman, Central Board of Excise & Customs, for information and consideration.

(See 2014-TIOL-855-CESTAT-DEL)