The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Bangalore, has ruled that CENVAT credit cannot be denied on service tax paid for Group Mediclaim and Group Personal Accident insurance policies provided by an employer to its employees merely by invoking the exclusion clause under Rule 2(l) of the CENVAT Credit Rules, 2004.
The bench of R. Bhagya Devi (Technical Member) observed that the exclusion relating to insurance and employee benefits applies when the services are used primarily for the personal use or consumption of an employee. In the absence of any finding that the insurance policies were taken for such personal purposes, the authorities were not justified in denying the credit.
The company was issued a show cause notice dated May 22, 2020, proposing to deny CENVAT credit availed on Group Mediclaim and Group Personal Accident policies during the period from April 2015 to June 2017.
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The department alleged that the insurance services were specifically excluded from the definition of “input service” under Rule 2(l)(C) of the CENVAT Credit Rules, 2004. The credit was consequently denied on merits as well as on the ground of limitation.
Challenging the denial, the company approached the CESTAT.
The company submitted that it was engaged in providing information technology services and exported all its services. It provided Group Mediclaim and Group Personal Accident insurance coverage to its employees in accordance with statutory requirements.
It argued that Clause (C) of Rule 2(l) did not impose an absolute prohibition on credit relating to every insurance service provided to employees. The exclusion covered life insurance, health insurance and travel benefits extended to employees when such services were used primarily for the employees’ personal use or consumption.
According to the company, the Group Mediclaim and Group Personal Accident policies in question were not benefits extended for vacations or purely personal purposes. They were employment-related insurance arrangements and, therefore, qualified as input services.
The company relied upon the Karnataka High Court’s decision in Commissioner of Service Tax v. Team Lease Services Pvt. Ltd., as well as the Tribunal’s rulings in Hydus Technologies India Pvt. Ltd. v. Commissioner of Central Excise and Dharti Dredging & Infrastructure Ltd. v. Commissioner of Central Excise.
The Revenue defended the denial of credit and relied upon the Tribunal’s earlier decisions in Bharat Fritz Werner Ltd. v. Commissioner of Central Tax, Bangalore and Sasken Technologies Ltd. v. Commissioner of Central Tax, Bangalore.
It argued that these rulings supported the department’s position that CENVAT credit was unavailable on insurance services provided in relation to employees.
The Tribunal, however, found that the authorities relied upon by the Revenue concerned SBI Life Insurance. Life insurance is expressly mentioned in the exclusion clause under Rule 2(l)(C), and those decisions could not automatically govern Group Mediclaim and Group Personal Accident policies taken in connection with employment.
The Tribunal examined the definition of “input service” applicable with effect from April 1, 2011. Clause (C) excluded specified services such as outdoor catering, beauty treatment, health services, cosmetic surgery, club membership, health and fitness services, life insurance, health insurance and vacation-related travel benefits when they were used primarily for the personal use or consumption of an employee.
CESTAT noted that the impugned order contained no finding that the insurance policies claimed by the company had been obtained for vacation-related purposes or primarily for the personal use or consumption of individual employees.
The statutory language, the Tribunal indicated, required the authorities to examine the purpose and nature of the insurance service. Credit could not be rejected merely because employees were covered by an insurance policy.
The Tribunal relied upon the Karnataka High Court’s ruling in Team Lease Services, which had followed the decisions in Stanzen Toyotetsu India (P) Ltd. and Micro Labs Ltd.
The High Court had held that an employer could face vicarious liability if an employee suffered an injury or died during the course of employment. Statutes governing employee compensation and insurance also imposed obligations on employers to provide or obtain insurance coverage.
Consequently, a Group Insurance Health Policy obtained to discharge an employer’s statutory obligation constituted an activity relating to business and fell within the inclusive portion of the definition of input service.
The High Court had further held that assessees were entitled to avail CENVAT credit on service tax paid for Group Medical and Group Insurance Health policies.
CESTAT also referred to the decision in Dharti Dredging & Infrastructure Ltd., which identified three relevant considerations while deciding the availability of credit on an insurance policy:
- The nature of the policy;
- The beneficiary under the policy; and
- The statute under which the policy is required to be obtained.
In that case, the Tribunal had held that an insurance policy covering the employer’s potential liability under employee compensation law was not meant for the personal benefit of individual employees. Its benefit flowed directly to the employer because the policy protected the employer against a statutory compensation liability.
Applying these principles, CESTAT concluded that there was no valid reason to deny CENVAT credit on the Group Mediclaim and Group Personal Accident policies obtained by the company.
The Tribunal accordingly set aside the impugned order and allowed the appeal, along with consequential relief in accordance with law.
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