CESTAT Grants Relief to Essjay Ericsson: Cenvat Credit Availed by Company on Insurance Policies for its Employees is Permissible

CESTAT Grants Relief to Essjay Ericsson: Cenvat Credit Availed by Company on Insurance Policies for its Employees is Permissible

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Principal bench, comprising of Rachna Gupta (Judicial Member) and Hemambika R. Priya (Technical Member) while granting relief to M/s. Essjay Ericsson (P) Ltd. (appellant), ruled that the Cenvat credit availed by the company on insurance policies for its employees is permissible.

In the present case, the appellant- M/s. Essjay Ericsson (P) Ltd. had entered into an agreement with Ericsson India Private Limited for providing certain services.

During an audit, the department questioned the appellant’s eligibility for Cenvat credit on insurance policies such as Group Personal Accident, Group Term Life, and Group Mediclaim taken for its employees.

The Adjudicating Authority believed that these credits did not meet the definition of input service as per Rule 2(l) of Cenvat Credit Rules, 2004 (CCR), 2004).

The Appellant stressed that the exclusion of certain services from input services is only when such services are purely for personal use or consumption of any employee. Moreover, it was submitted that the insurance policy was obtained with respect to the employees who work on the site. Otherwise also, it was taken for the group of the employees and it was a statutory mandate, the availement has wrongly been refused, pleaded the Appellant.

The bench analyzed the definition of ‘Input service’ and emphasized its broad scope. The coram referred to the case of Reliance Industries Ltd. Vs. Commr. of C. Ex. & S.T. (LTU) (2022), where it was established by the larger bench of the Tribunal that the definition covered input services related to the manufacture of final products, as well as those falling under other limbs of the definition. Each limb was considered independent, and fulfilling any one of them made the Cenvat credit eligible.

In this regard the CESTAT observed, “So far as the first limb is concerned, the requirement of establishing a nexus between the input services and the process of manufacture would stand satisfied if the expenditure incurred for the ‘input service’ forms part of the cost of production/value of the final product on which duty of the excise is levied. In this view of the matter, the appellant would be entitled to avail Cenvat credit on the service tax paid on insurance premium for employees who had opted for the ‘Voluntary Separation Scheme.”

Therefore, the CESTAT held that the Cenvat credit availed by the appellant on the various insurance policies taken for its employee were eligible for availement to be permissible. The order of reversing/disallowing the same was set aside.

Next, coming to the objection about methodology adopted by the appellant under Rule 6 of CCR, 2004, the CESTAT observed, “that the adjudication authority has held that appellant is required to reverse the Cenvat credit on common input services on the ground that the appellant has also provided non-taxable services in the State of Jammu & Kashmir. Since, there is no denial that appellant was providing taxable as well as non-taxable services, the proportionate reversal of Cenvat credit has to be done in accordance of Rule 6(3) of CCR, 2004.”

Upon perusal of f Rule 6(3) of CCR, 2004, the CESTAT was of the opinion that Rule 6 cannot be used as tool of oppression to extract the amount which is much beyond the remedial measure and what cannot be collected directly and cannot be collected indirectly, as well.

Accordingly, the bench held that in case of substantive compliance made by the assessee i.e., calculation of the amount of Cenvat credit proportionate reversal on annual basis and payment of the amount before the prescribed date, substantial benefit cannot be denied as it tantamount to not availing of input service credit on common inputs which are going into exempted services.

In light of the above discussion, the CESTAT held that reversal of Cenvat credit on common input services had wrongly been ordered by the adjudicating authority.

The last issue was with respect to the penalty of tax liability discharged under Reverse Charge Mechanism on legal services.

The CESTAT noted that since there was no evidence on record about the discharge of said liability beyond the reasonable time. The question of payment of interest could not arise.

Moreover, the bench remarked that, “the issue of levy of service tax on legal services is undisputedly a question of law pending consideration before the Hon’ble High Court of Delhi. Imposition of penalty in these circumstances, does not at all arises.”

With the above observations, the bench held that the appellant was not at fault regarding the alleged shortcomings raised against them. As a result, the order confirming the demand was set aside.