whether credit of insurance premium allowed?

PJ/CASE LAW/2014-15/2503

Case:-Reliance Industries Ltd Vs Commissioner Of Central Excise & Service Tax (Ltu), Mumbai

CITATION: -2015-TIOL-181-CESTAT-MUM

Brief facts:-the appellant, reliance industries ltd., is a manufacturer of polyester yarn (poy, pta, np, benzene) and is registered with the central excise. The appellant availed cenvat credit of duty paid on inputs, capital goods and input services. Show cause notice dated 6.6.2011 was issued for the period july 2010 to december 2010 on the observation that the appellant was availing and utilizing cenvat credit on input service particularly insurance auxiliary services - general insurance.

It further appeared to the revenue that the appellant had availed and utilized cenvat credit of service tax paid on premium paid to insurance companies for group insurance/insurance of their employees including retired employees/mediclaim under category of 'insurance auxiliary services general insurance'. Accordingly, it was proposed to disallow the cenvat credit availed in respect of the insurance premium so paid and it appeared to the department that the premium paid by the appellant in respect of group insurance/insurance of their employees including retired employees/mediclaim is not covered under the definition of 'input services' and it has no direct nexus with the manufacture of the final products and the clearances and storage of the final products.

Appellant’s contention:-the appellant contested the show cause notice and made submissions wherein, among others, they submitted that the premium paid to insurance companies was group insurance and mediclaim which was nothing but component of the wages. These were part of the costing of the final product in terms of cas-4. As per cas-4, all non-monetary benefits extended to factory employees were regarded either as direct wages and salaries or as works overhead or administrative overhead, related to production activity and form part of cost of manufacture of final product.

Once the expenditure in dispute forms part of the final product, it had to be presumed that the expenses are incurred in relation to such services in relation to manufacture of final product, as was been observed by the hon'ble bombay high court in the case of coca cola india pvt. Ltd. Vs. Cce, pune-iii = 2009-tiol-449-hc-mum-st reported in 2009 (15) str 657 (bom). The hon'ble high court dealing with advertisement cost, held that credit is availed on the tax paid on the input services, which is the advertisement and not on the contents of the advertisement. Thus it was not necessary that the contents of the advertisement must be that of the final product manufactured by the person advertising, so long as the manufacturer can demonstrate that the advertisement services availed have an effect of or impact on the manufacture of the final product. Therefore, the manufacturer was entitled to avail the credit of the service tax paid by him. Once the cost incurred by the service had to be added to the cost, and was so assessed, it was recognised by revenue of the advertisement services having a connection with the manufacture of the final product. This test will also apply in the case of sales promotion. The appellant further relied on the ruling on this tribunal in the case of millipore india ltd. Vs. Cce bangalore-ii reported in 2009 (236) elt 145 (tri-bang) = 2009-tiol-490-cestat-bang, wherein this tribunal held that cenvat credit of service tax on input service i.e. Medical and personal accident policy, group personal accident policy, insurance etc., and took notice of the fact that cas-4 standards requiring all elements of costs to be included in the costing of final product, such elements are elaborated in the standards. Further in para 5.2 of the standards, it was provided that direct wages and salaries shall include house rent allowance, overtime and incentive payments made to employees directly engaged in the manufacturing activities, wherein provision for retirement benefits such as gratuity and superannuation was also provided. This tribunal also held that cas-4 had considered all the services such as medical benefit, subsidized food, education allowance etc., to form part of the cost of the final products, and accordingly held that these services which have been received were rendered only in relation to manufacture of final products. Further, it was noted that the definition of 'input service' was very broad. The said ruling was challenged by the revenue before the hon'ble karnataka high court and the hon'ble high court vide its order dated 11-4-2011 reported at 2012 (26) str 514 (kar.), observed that it was clear in view of cas-4 that those factors have to be taken into consideration while fixing the cost of the final products. If service tax was paid in respect of any of those services which forms part of the costs of the final products certainly the assessee would be entitled to the cenvat credit of the tax so paid. The hon'ble high court also noticed that the definition of 'input service' is too broad and the same is inclusive. It is further held that what is contained in the definition is only illustrative in nature. Activities relating to business and any services rendered in connection therewith would form part of the input services. Accordingly, the appellant prayed for allowing the appeal.

Respondent’s contention:-the learned ar relies on the impugned order. The learned ar further submitted that in the case of millipore india (supra), insurance premium for retired employees was not an issue. He further points out from the ruling in the case of coca cola (supra) at para 27 that the use of the word 'activities' in the phrase activities relating to business further signifies the wide import of the phrase activities relating to business. The rule making authority had not employed any qualifying words before the word activities, like main activities or essential activities etc. Therefore, it must follow that all and any activity relating to business falls within the definition of input service provided there is a relation between the manufacturer of concentrate and the activity. Therefore, the phrase 'activities relating to business' were words of wide import. The learned ar further stressed that there has to be a nexus between the expenditure and the manufacture. The element of nexus is absent with respect to insurance premium paid for securing the life/health of the retired employee.

Reasoning of judgment:-having considered the rival submissions, the commissioner agreed with the ruling of the hon'ble karnataka high court in the case of millipore india ltd. (supra), wherein, after examining the cas-4 standards, the hon'ble high court accepted that all factors had to be taken into consideration while fixing the cost of the final products. The hon'ble high court further observed that the definition of 'input services' was too broad. Further it was not disputed in the facts of the case that the premium so paid in the present appeal had formed part of the cost of excisable goods on which excise duty has been paid on removal. Therefore, the appellant is entitled to avail cenvat credit for the insurance premium paid in respect of group insurance/insurance of employees including retired employees/mediclaim which were covered under the definition of 'input services' and have a nexus.

Decision:-appeal allowed with consequential benefits.

Comment:-the gist of the case is that as per cas-4 standards all elements of costs are required to be included in the costing of final product. In para 5.2 of the standards, it provides that direct wages and salaries shall include house rent allowance, overtime and incentive payments made to employees directly engaged in the manufacturing activities, wherein provision for retirement benefits such as gratuity and superannuation are also provided. Cas-4 considers all the services such as medical benefit, subsidized food, education allowance etc., to form part of the cost of the final products, and accordingly these services which have been received were rendered only in relation to manufacture of final products. And as the premium paid is part of the cost of excisable goods on which excise duty is paid on removal. Therefore availing cenvat credit for the insurance premium paid in respect of group insurance/insurance of employees including retired employees/mediclaim is covered under the definition of 'input services'.

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PJ/CASE LAW/2014-15/2503

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