Delhi High Court rules in favor of Oriental Insurance: Re-Insurance Services are Not Excluded from ‘Input Service’ defined under CENVAT Credit Rules, 2004

Delhi High Court rules in favor of Oriental Insurance: Re-Insurance Services are Not Excluded from ‘Input Service’ defined under CENVAT Credit Rules, 2004

The Delhi High Court while upholding the order passed by the Customs, Excise & Service Tax Appellate Tribunal, New Delhi (‘CESTAT’), has ruled that re-insurance services are not excluded from the definition of ‘input services’ under rule 2(1) of the CENVAT Credit Rules, 2004 (‘CCR’).

The factual matrix of the case is that the appellant- revenue department had filed an appeal under Section 35G of the Central Excise Act, 1944 read with Section 83 of the Finance Act, 1994 (‘the Act’) impugning a final order dated 28 January, 2021 (‘the impugned order’) passed by the CESTAT New Delhi.

By the impugned order, the CESTAT had held that the Oriental Insurance Company Ltd. (‘OIC’) was entitled to avail of Central Value Added Tax (‘CENVAT’) credit on re-insurance services (Indian as well as Foreign Insurance).

It was argued by the Revenue the CESTAT’s conclusion was erroneous because by Rule 2(1) of the CENVAT Credit Rules, 2004 (‘CCR’) as applicable during the period 1 April, 2011 to 20 July, 2012, CENVAT Credit was unavailable for insurance in respect of a motor vehicle.

OIC- the respondent, engaged in the business of providing general insurance service and re-insurance services, being a registered insurer under the provisions of the Insurance Act, of 1938.

The Commissioner, Central Excise Service Tax issued a Demand-cum-Show Cause Notice dated 5 December, 2014. The show cause notice was issued based on a Modus Operandi, Circular No. 29/2013-14 dated 18 March, 2014 issued by the Additional Director General, Directorate of Service Tax Mumbai.

The said Circular was in respect of wrongful availement of CENVAT Credit in respect of service tax paid on reinsurance premium. It was alleged that insurance companies were wrongfully availing credit in respect of service tax paid on re-insurance premiums for discharge of service tax payable on insurance services.

According to the Revenue, the service tax on the re-insurance premium was not covered within the definition of ‘input service’. OIC had availed input credit in respect of re-insurance premiums as well as on payments made to pool members of the Indian Motor Third Party Insurance Pool.

The CESTAT accepted that re-insurance services were not excluded from the ambit of input services under Rule 2(1) of the CCR with effect from 1 April, 2011 as the re-insurance services could not be construed as relating to a motor vehicle. The definition of ‘input services’ under Rule 2(1) of the CCR was amended vide Notification no. 3/2011 -CE (NT) dated 1 April, 2011 to specifically exclude certain services under Clause (B).

The division bench of Justices Vibhu Bakhru and Amit Mahajan observed that the show cause notice had proceeded on basis that the re-insurance services are not input services because they are received by OIC after the insurance services have been rendered; re-insurance services are not essential for providing insurance services; and re-insurance services are not directly or indirectly used for providing output services.

The Court noted that the re-insurance premium was paid by the respondent for re-insurance to mitigate its risks.

The Court remarked that the quintessential difference was that the respondent had issued policies relating to a motor vehicle, whereas the re-insurance premium was paid for re-insurance to cover or mitigate its risks.

The Court further on pursual of Section 2(16B) of the Insurance Act, 1938 which defines ‘reinsurance’, observed that, “it is clear from the definition that the re-insurance is insurance of part of the insurer’s risks by another insurer. Thus, what the reinsurer, in effect, does is to insure the risks of another insurer. This is qualitatively different from the risks of the policy holder covered by the insurance policy issued by the insurer. The insurer, in fact, covers the risks of the policy holder.”

The Court was of the view that re-insurance is a matter between one insurance company and another, where the former insurer company indemnifies the latter against part of the loss that the latter insurance company may sustain under policy or policies issued by it.

In this regard the Court observed, “Re-insurance is, essentially, to distribute the risks assumed by an insurance company. Thus, ensuring stability to the business of the insurance company that is covered by re-insurance.”

The Court viewed that OIC’s appeal was solely on the conclusion that re-insurance services were not excluded from the definition of ‘input services’ under Rule 2(l) of the CCR during the period in question (Financial Year 2011-2012), hence there was no reason for OIC to not to avail CENVAT Credit in relation to re-insurance services.

Accordingly, the appeal of the revenue was dismissed by the Court.