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CENVAT - Reinsurance service is an 'Input service' for appellant engaged in life insurance business: CESTAT

By TIOL News Service

BANGALORE, JULY 23, 2014: THE appellant is engaged and licensed to carry out life insurance business and had procured reinsurance service from overseas companies.

The service tax paid on such services was availed as CENVAT credit by them.

It is the case of the Revenue that the credit taken is not admissible as it is not an input service. Inasmuch as reinsurance had taken place after the insurance business was effected, the department added.

Before the CESTAT, the appellant adverted to the Board Circular 120(a)/2/2010-ST., Dated: April 16, 2010 issued in the context of “ Service tax on re-insurance commission”and wherein it is mentioned that -

+ In terms of Section 101A (Part IV-A) of the Insurance Act, 1938, every insurer dealing in insurance business is required to re-insure a specified percentage of sum assured with another insurance company. [para 1]

+ In fact, it is the reinsurer which provides insurance service to the insurance company. [para 4]

It is, therefore, submitted that in view of the above clarification, availment of CENVAT credit by the appellant is in order.

The Revenue representative ensured that he stick to the findings contained in the order-in-original.

The Bench held -

++ According to Section 101A of the Insurance Act 1938, every insurer shall insure with Indian re-insurers, such percentage of sum assured on each policy as may be specified by the Authority with the previous approval of the Central Government under sub-section (2).

++ Since reinsurance is a statutory obligation and the re-insurance is coterminous with the insurance policy, we consider that the stand taken by the Revenue that the transfer of a portion of the risk to the re-insurer which is all that the reinsurance means has to be considered as having a nexus with the output service namely provision of insurance to the customers.

++ The percentage of insurance to be reinsured is directly connected to the premium collected from the persons who are insured with insurer and it is basically transfer of a portion of the risk and, therefore, it can be definitely said that the re-insurer is providing the service to the insurance company when he accepts to reinsure a portion of the insurance undertaken by the insurer.

Holding that the order cannot be sustained on merits, the order-in-original was set aside and the appeal was allowed with consequential relief.

(See 2014-TIOL-1314-CESTAT-BANG)


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