INSIGHT ON ORIENTAL INSURANCE JUDGMENT
In the recent judgment of Oriental Insurance Company Ltd. (‘OIC’), the Delhi High Court has upheld the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) ruling in favour of Oriental Insurance. The decision given by the CESTAT was that re-insurance services are not excluded from the definition of ‘input services’ under Rule 2(1) of the CENVAT Credit Rules, 2004 (‘CCR’). In other words, whether OIC would be eligible to avail of CENVAT Credit of reinsurance provided by pool member companies under the insurance pool after the amendment of the definition of input service in rule 2(l). Let us gain more insight into the judgment given by the CESTAT and recently upheld by the Delhi High Court.
Oriental Insurance is engaged in the business of providing general insurance service and re-insurance services, being a registered insurer under the provisions of the Insurance Act, of 1938. It issues various kinds of insurance policies like motor vehicle insurance, fire insurance and marine insurance. It was alleged that insurance companies were wrongfully availing credit in respect of service tax paid on re-insurance premiums for discharge of service tax payable on insurance services.
As stated in the judgment that, Oriental Insurance followed the general practice, all the general insurers, registered to carry on general insurance business (including motor insurance business) or general re-insurance business, were directed to collectively participate in a pooling arrangement to share all motor third-party insurance business underwritten by any of the registered general insurers. It is in pursuance of the aforesaid directions that all general insurance companies in India entered into an agreement with GIC for creating the Insurance Pool. This Insurance Pool is a mechanism to render re-insurance services by general insurance companies to each other as regards third-party motor vehicle insurance. Under this pool arrangement, a matrix is prepared periodically to determine the amount of premium to be paid by one member to another and vice versa.
Oriental Insurance claimed that in pursuance of the aforesaid matrix, it raised an invoice on each member specifying the premium allocated to it under the matrix and charged service tax thereon. In respect of re-insurance services rendered by Indian Companies, service tax is charged from OIC and then deposited in the Government account. In respect of re-insurance services rendered by foreign companies, Oriental Insurance is discharging service tax under the reverse charge mechanism. Thus, Oriental Insurance has been availing CENVAT credit of service tax paid on such re-insurance services.
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The Commissioner has not correctly appreciated the factual position of Oriental Insurance. Oriental Insurance, under the pool arrangement, deposits the whole premium collected by it in the pool account and based on the prescribed formulae, the GIC determines the amount of re-insurance premium due to each member as against the other members. Thus, in effect, each company pays the re-insurance premium after deducting the amount due from the other member companies. The service tax liability stands discharged on the whole re-insurance premium paid to the other members. It cannot be, therefore, urged by the Department that the invoices that are issued by the pool member companies are not for any provision of service or without any payment.
Therefore, it cannot be doubted that re-insurance services are rendered by pool member companies to each other and payment of premium takes place with the pooling of the original premium into the pool. OIC would be eligible to avail of the CENVAT credit of service tax paid thereon.