Whether credit of service tax wrongly paid admissible?

Case:- BAJAJ ALLIANZ GENERAL INSURANCE CO. LTD. VersusCOMMR. OF C. EX., PUNE-III

Citation:-2015 (37) S.T.R. 316 (Tri. - Mumbai)

Brief facts:- The appellant was in appeal against the impugned order denying Cenvat credit taken by them. Brief facts of the case were that the appellant were engaged in the business of providing General Insurance Service throughout India. The head office of the appellants was located at Pune and was centrally registered with the Service Tax department for discharge of Service Tax liability on general insurance services. The appellant had appointed independent insurance auxiliary agents to promote their business. These insurance agents were providing services to the appellant and the said service was taxable under the category of insurance auxiliary services under Section 65(105)(zl) of the Finance Act, 1994. In terms of Rule 2(1)(d)(iii) of the Service Tax Rules, 1994, the liability to pay the Service Tax on insurance auxiliary services had been shifted to service receiver i.e. on insurance company. Accordingly, the appellants discharged the Service Tax liability as a receiver of service from the insurance auxiliary agents. After paying the Service Tax on the said service, the appellants took Cenvat credit of the Service Tax paid by them. The appellants also rendered general insurance services for the clients and assets located in the Jammu and Kashmir through its own branches located in Jammu & Kashmir. The appellants were not liable to pay Service Tax on the general insurance services so provided in the Jammu & Kashmir, as the provisions of the Finance Act, 1994 did not extend to Jammu and Kashmir. Therefore, the appellants were not liable to pay Service Tax on general insurance provided in the State of Jammu and Kashmir and therefore, the appellants were not paying Service Tax on the services provided by them in the State of Jammu and Kashmir. The appellants also appointed insurance agents in Jammu & Kashmir. The said agents were procuring the policies for the clients/assets located in Jammu and Kashmir. Though the services provided by the agents in Jammu and Kashmir were also not taxable, the appellants had wrongly discharged the Service Tax as a recipient of service and taken Cenvat credit of the same as input service. During the course of audit, the department took objection that the appellants had wrongly availed the Cenvat credit on Service Tax paid on insurance auxiliary services rendered in Jammu & Kashmir on the ground that the services are exclusively used in the State of Jammu & Kashmir on which no Service Tax has been discharged by the appellants. Therefore, these services have been exclusively used in providing non-taxable insurance service in State of Jammu & Kashmir. Accordingly, two show cause notices were issued and the Cenvat credit availed by the appellants for the Service Tax paid by them was denied. Aggrieved by the said order, the appellants filed appeal.

Appellant’s contention:- The learned Counsel for the appellant submitted that in this case the branches located in the State of Jammu & Kashmir had received the services of insurance auxiliary agents for the policies of clients/assets located in Jammu & Kashmir only. Therefore, they were not liable to pay Service Tax on the said services. The Service Tax which was paid by them was refundable accordingly; they had taken the credit of the same. Therefore, taking credit on the Service Tax which was not required to be paid does not amounts to CENVAT Credit wrongly availed. To support his contention the learned Counsel relied on the decision of the Hon’ble Apex Court in the case of CIT v. Mahalakshmi Textile Mills Ltd. - 1967 (66) ITR 710 (S.C.). He also relied on the decision in the case of Nitco Tiles Ltd. v. CCE, Mumbai - 2007 (220)E.L.T.837 (Tri. - Mum.). He further submitted that the extended period of limitation was not applicable to the facts of the case, hence the impugned order should be set aside and the appeal allowed with consequential relief.

Respondent’s contention:- On the other hand, the learned AR appearing on behalf of the Revenue submitted that in this case the insurance auxiliary service agents were located in the State of Jammu & Kashmir and provided services of procuring the policies for the clients/assets located in Jammu and Kashmir but the services received by the appellants were to be seen. Therefore, as the services have been provided in the State of Jammu and Kashmir the said services were exempt from the Service Tax. In that context, the Service Tax if at all paid by the appellant was not available as Cenvat credit to the appellant. Therefore, the learned Commissioner had rightly denied the Cenvat credit to the appellant. In these circumstances, the impugned order was required to be upheld.

Reasoning of judgement:- Considered the submissions made by both the sides. It was held that in this case the facts which were not in dispute were that the insurance auxiliary agents had provided insurance auxiliary service for the clients/assets located in the State of Jammu and Kashmir to the branches of the appellants located in Jammu and Kashmir which means the place of providing the service was Jammu and Kashmir and the service provider was located in the State of Jammu and Kashmir and the service recipient was also located in Jammu and Kashmir. To confirm the demand for a service, the place of provision of services had to be seen. The place of provision could be either one of the following :-

(a)        It could be place of the provider of service;
(b)        It could be place of recipient of service;
(c)        It could be place of performance of service i.e. where the risk of insurance i.e. assets were located.

It was apparent that the place of provider and place of performance were in J & K. But the learned AR disputed the fact that the service recipient was the appellant and they were located in Pune. Therefore, the core issue was that whether the service was received by the appellant at Pune or not?

In C.B.E. & C. Circular No. B1/6/2005-TRU, dated 27-7-2005, which gives the explanation regarding the fixed establishment, business establishment, etc., would be as under:-

“This Circular clarifies that in cases where either the service provider or service recipient had multiple establishment, then the establishment, who is directly concerned with the provision/receipt of the service will be the deciding factor.”

Explanation in Section 65(105) of the Finance Act, 1994 provides as under :-

“Explanation.-For the removal of doubts, it is hereby declared that where any service provided or to be provided by a person, who has established a business or has a fixed establishment from which the service is provided or to be provided, or has his permanent address or usual place of residence in a country other than India and such service is received or to be received by a person who has his place of business, fixed establishment, permanent address or as the case may be, usual place of residence, in India, such service shall be deemed to be taxable service for the purpose of this clause.”

From the above said provisions, it was clear that the service provider, the branches are recipient of the services and are directly concerned with the receipt of the service. With effect from 18-4-2006, the provisions of Section 66A of the Finance Act, had been introduced which is reproduced hereunder :-

“66A. (1) Where any service specified in clause (105) of section 65 is -

(a) provided or to be provided by a person who has established a business or has a fixed establishment from which the service is provided or to be provided or has his permanent address or usual place of residence, in a country other than India, and

(b) received by a person (hereinafter referred to as the recipient) who has his place of business, fixed establishment, permanent address or usual place of residence, in India, such service shall, for the purposes of this section, be taxable service, and such taxable service shall be treated as if the recipient had himself provided the service in India, and accordingly all the provisions of this Chapter shall apply :

Providedthat where the recipient of the service is an individual and such service received by him is otherwise than for the purpose of use in any business or commerce, the provisions of this sub-section shall not apply :

Providedfurther that where the provider of the service has his business establishment both in that country and elsewhere, the country, where the establishment of the provider of service directly concerned with the provision of service is located, shall be treated as the country from which the service is provided or to be provided.
(2) Where a person is carrying on a business through a permanent establishment in India and through another permanent establishment in a country other than India, such permanent establishments shall be treated as separate persons for the purposes of this section.

Explanation 1.- A person carrying on a business through a branch or agency in any country shall be treated as having a business establishment in that country.

Explanation 2.- Usual place of residence, in relation to a body corporate, means the place, where it is incorporated or otherwise legally constituted.

The said provisions were not directly related to the facts of this case but concept of establishment most directly concerned with the receipt of the service will be equally applicable to the facts of this case and therefore the J & K branches were recipient of the service.

From the above discussion, it was very much clear that the insurance auxiliary services provided by the agents in the State of Jammu & Kashmir were not taxable. Therefore, the appellants were not liable to pay Service Tax for the said services of the insurance agents. In these terms, whatever credit was taken by the appellant was nothing but the refund of tax erroneously paid by them. Similar issue came before the Hon’ble Supreme Court in the case of CIT v. Mahalakshmi Textile Mills Ltd. - 1967 (66) ITR 710 (SC) wherein the Hon’ble Supreme Court held that -

“5. By the first question the jurisdiction of the Tribunal to allow a plea inconsistent with the plea raised before the departmental authorities is canvassed. Under sub-s. (4) of s. 33 of the Indian IT Act, 1922, the Tribunal is competent to pass such orders on the appeal “as it thinks fit”. There is nothing in the IT Act which restricts the Tribunal to the determination of questions raised before the departmental authorities. All questions whether of law or of fact which relate to the assessment of the assessee may be raised before the Tribunal : If for reasons recorded by the departmental authorities in rejecting a contention raised by the assessee, grant of relief to him on another ground is justified, it would be open to the departmental authorities and the Tribunal, and indeed they would be under a duty to grant that relief.”

We further find that in the case of Nitco Tiles Ltd. v. CCE, Mumbai - 2007 (220) E.L.T. 827 (Tri. - Mum.), this Tribunal observed as under :-

“Further, the bar of unjust enrichment will also not apply in the present case. The appellants had taken credit of the tax paid by them; therefore the same cannot be said to be passed on to the customers.”

In these circumstances it was held that the Cenvat Credit taken by the appellant was nothing but refund of the Service Tax paid by them on the services on which they were not required to pay Service Tax.

With these observations, it was held that the appellant was entitled to take the Cenvat Credit in the facts and circumstances of the case. Accordingly, the impugned order was set aside and the appeal was allowed with consequential relief.

Decision:-Appeal allowed.

Comment:- The gist of this case is that there is no embargo in availing cenvat credit of service tax paid even when it was not required to be paid. As in the present case, service was provided in J&K i.e. non taxable territory, the same was not taxable to service tax. However, if service tax has been mistakenly paid on the said service, there was nothing wrong in availing the credit of the same because the credit taken by the assessee was as good as taking refund of erroneous service tax paid. It is also worth noting that section 5A (1A) of the Central Excise Act, 1944 does not apply to service tax laws and so even on that point, there is no restriction in availing the cenvat credit of service tax wrongly paid.

Prepared by:- Prayushi Jain

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