Relief for Reliance Industries: CESTAT allows Proportionate CENVAT Credit on Insurance Services Spanning Pre-And Post-Taxable Period [Read Order]

The Ahmedabad Bench of the Customs, Excise, and Service Tax Appellate Tribunal ( CESTAT ) held that proportionate CENVATcredit on insurance services covering both pre-taxable and taxable periods is admissible, subject to factual verification of nexus with taxable output services.

Reliance Industries Ltd., the respondent, entered into a service agreement dated 26 December 2002 with Reliance Infocomm Ltd. for providing Business Auxiliary Services such as marketing, billing, collection, and allied support services. As part of this agreement, Reliance Industries was required to obtain insurance policies as directed by Reliance Infocomm.

Accordingly, insurance policies were taken from National Insurance Company Ltd. in May and June 2003 to cover risks related to subscriber defaults and loss of mobile handsets. These policies were valid for three years, and the insurance premium was paid as a lump sum before 1 July 2003.

Business Auxiliary Service became taxable only with effect from 1 July 2003. Reliance Industries availed CENVAT credit of service tax paid on the insurance premium on a proportionate basis for the period after 1 July 2003. A show cause notice dated 28 October 2008 was issued proposing denial of CENVAT credit, among other issues.

The adjudicating authority dropped the entire demand. Aggrieved by this order, the Revenue filed an appeal before the CESTAT, limited to the issue of CENVAT credit amounting to ₹1,15,30,018 relating to insurance services.

The revenue counsel argued that since Business Auxiliary Service was not taxable prior to 1 July 2003, insurance services received before that date could not qualify as input services under the Service Tax Credit Rules, 2002. The revenue counsel further argued that the rules did not permit proportionate availment of credit and relied on circulars and judicial decisions to submit that credit was not admissible when the input service was received before the levy of service tax on the output service.

The appellant’s counsel argued that the insurance policies covered a continuous period of three years, including the period after 1 July 2003 when the output service became taxable. It was argued that CENVAT credit was taken only on a proportionate basis for the period during which Business Auxiliary Service was taxable.

The appellant’s counsel submitted that the date of payment of premium could not be the sole factor for denying credit and relied on judicial precedents permitting proportionate credit where services spanned taxable and non-taxable periods.

The two-member bench comprising a Judicial Member and a Technical Member examined the service agreement and observed that taking insurance was an integral part of providing Business Auxiliary Services under the contract. The bench observed that the insurance services were not fully consumed before 1 July 2003 and continued to cover the period during which the output service became taxable.

The bench explained that the relevant consideration is whether the input service was used in relation to taxable output services and not merely the date on which the premium was paid.

The bench pointed out that judicial precedents allow proportionate CENVAT credit when an input service covers both taxable and non-taxable periods. At the same time, the bench observed that Reliance Industries had not produced the insurance policies before the Tribunal to clearly establish the nexus between the insurance service and the taxable output service for the post-1 July 2003 period.

In these circumstances, the tribunal held that proportionate CENVAT credit is admissible in principle, subject to verification of facts and documents. The matter was remanded to the adjudicating authority for the limited purpose of examining the insurance policies and verifying the nexus. The appeal was disposed of by way of remand.

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