2025 (6) TMI 1360 - AT - Service Tax

Classification of services - Insurance Auxiliary Services (IAS) or Business Auxiliary Services (BAS)? - payments made by the assessee to insurance agents termed as Overriding Commission (ORC) for services such as providing operating space reimbursement of marketing expenses and customer database - discharge of service tax under the Reverse Charge Mechanism (RCM) on such payments to insurance agents - admissibility of CENVAT credit availed by the assessee on self-generated invoices which were not issued by the service providers - revenue neutrality. Classification of services - Insurance Auxiliary Services (IAS) or Business Auxiliary Services (BAS)? - payments made by the assessee to insurance agents termed as Overriding Commission (ORC) for services such as providing operating space reimbursement of marketing expenses and customer database - HELD THAT - It was informed by the Tax Payer that the agents were discharging service tax on the said amounts under Business Auxiliary services category. However investigations conducted revealed that only some major agents were paying service tax on the ORC as claimed by Chola MS classifying the same as Business Auxiliary Service and whereas in respect of the smaller agents Chola MS themselves were raising invoices of their agents in their own computer system charging service tax also but were not sure whether the service tax portion was being paid by the said agents. As admitted in the depositions of the agents in earlier paragraphs the invoices for ORC had not been issued by them and the signature on the said documents were also forged and except for a few none of them had paid service tax on the said amounts on the plea that they were within the minimum exemption limit. In order to determine the correct classification of the services rendered by their agents the relevant provisions of the statute have to be looked at Para 20 of SCN. It would also be clear from the depositions of various dealers of which the agent receives agrees to receive payment by way of commission or other business relating to the continuance renewal or revival of policies of insurance for the insurance agent is that of soliciting or procuring insurance business. Following evidences collected during investigation clearly indicate that the services provided by their insurance agents as per the referral agreement are in relation to general Insurance business only and hence it appears that the service would more appropriately be classified as Insurance auxiliary service and not as Business Auxiliary Service - It seen from the data provided that M/s Chola MS were paying ORC to all their agents (both licensed under IRDA as well as not licensed by IRDA) who act as insurance agents for promoting the General insurance products of M/s Chola MS. Generation of ORC bills by the service receiver themselves establish the point that M/s.Chola MS are deliberately misclassifying the activity as mentioned in the referral agreement with their agents as Business Auxiliary Service for payment of OR commission instead of as Insurance Auxiliary service else payment of OR commission additionally would be a transgression of the cap of 10% or 15% commission as fixed by the IRDA. It appears that M/s.Chola MS have deliberately suppressed material facts from the department/generated invoices of services providers in their own computers and by forging signatures thereon which shows their wilful intent to evade tax. Availment of credit based on self-generated invoices - HELD THAT - From a plain reading of Rule 9 it is clear that credit of service tax can only be availed based on invoices bills or challans issued by the input service provider (Rule 9(1) of the CCR 2004 . It is also seen that self-generated Invoices are not among the list of eligible documents prescribed under the said Rule. Availability of prescribed documents under Rule 9 of the CCR 2004 is a necessary prerequisite for availment of credit and cannot be said to be a mere procedural requirement - the learned Adjudicating Authority has proposed to disallow the credit based on self-generated invoices in respect of overriding commission paid to the agents and other Intermediaries under Rule 14 of the Cenvat Credit Rules 2004. In spite of being fully aware of the fact that cenvat credit cannot be taken without proper documents as stipulated under Rule 9(1)(1) of CCR 2004 Chola MS have engineered a novel method of generating invoices themselves of the invoices/challans of their service providers for the purpose of availing CENVAT credit. The invoices were also forged with signatures of the service providers so as to appear as if they were issued by them. M/s.Chola MS also failed to ascertain whether the service tax mentioned in the invoices was paid to the exchequer or not but availed credit instantly after making payment to the agent. It thus appears that Chola MS have availed ineligible CENVAT credit of service tax on self-generated forged Invoices of input service providers for the period from October 2007 to August 2010 in contravention to Rule 3 and Rule 9(1)(f) of CCR 2004. It appears that the above amount of input service credit wrongly taken by them is liable to be recovered along with appropriate interest. Issue of Tax already been remitted by Service Providers/Agents - HELD THAT - The wording of Section 73A(2) are clear and unambiguous and should not have left any room for doubt in the mind of the assessee. However the assessee having sought clarity by making argument that their agents/entities have deposited certain amount as tax it is further stated that any tax collected retained or not refunded by the department in accordance with the provisions of a statute must be held to be collected retained or not refunded as the case may be under the authority of law. Hence any excess money collected as tax and paid to government is seen to have been retained under the authority of law. It is submitted by the assessee that the agreement between the assessee and the agents mentions that the payment would be mutually decided. However it is a hard fact that depositions and documentary evidences unravel the modus of forged invoices by the Assessee and Service Providers agree that there was no mutuality in the decision of raising fake invoices. The predicament in dealing with forged invoices is serious enough to encourage investigators to examination the nature of services in detail. The description in fake/forged invoice is for nomenclature only. Nature of transaction/service has direct nexus with insurance business. Even measure adopted to pay a consideration has direct nexus to insurance business. The exact activity has been discussed in above paras and service has been classified accordingly. Relevance of statements - HELD THAT - The evidences collected during investigation clearly indicate that the services provided by their insurance agents as per the referral agreement are in relation to general Insurance business only and hence it appears that the service would more appropriately be classified as Insurance auxiliary service and not as Business Auxiliary Service. CNPF bears the indication that OR Commission is paid to their agents even though the supporting invoices generated by Chola MS themselves indicated the activity of use of office space furniture infrastructure computer etc.; ORC was paid as a % of the premium collected; monthly commission statements sent to their agents by showing the amount of IRDA Commission and ORC paid for each policy; none of the agents have rented room or rented computer as per their depositions; the agents had no other business connection except for acting as their agents for their insurance products; % of ORC paid to agents are proportional to the premium discounts given to the customer for the policy sold. It seen from the data provided that M/s Chola MS were paying ORC to all their agents (both licensed under IRDA as well as not licensed by IRDA) who act as insurance agents for promoting the General insurance products of M/s Chola MS. Unless the assessment made by the jurisdictional officer of the Agents is revised the credit at the recipient s end cannot be denied - HELD THAT - From going through the facts in issue it is found that this is not a case of the Department seeking to change the classification of a service at the recipient s end. It s a case where as per the proviso to Rule 9(2) of CENVAT Credit Rules 2004 (CCR 2004) the assessee being the provider of output service is required to satisfy the Deputy Commissioner of Central Excise or the Assistant Commissioner of Central Excise as the case may be that the input services on which CENVAT credit is sought to be taken has been received and is covered by the description given in the invoice which has been received and accounted for in the books of the assessee - The principle that the burden of proof regarding the admissibility of CENVAT while taking input credit falls on the recipient is further made clear by Rule 9(5) of CCR 2004. There cannot be a compromise regarding the actual receipt of service according to the description in the invoice. The mode and method of availing CENVAT credit is provided for in the CCR 2004. Contractual supply may be the essence of applicability of service tax only if there is a proper agreement which is executed in letter in spirit by the parties concerned. Illegality cannot get the cover of an agreement/ contract and succeed. Further no taxable activity was performed by the Agents as described in the invoice as discussed above hence the question of eligibility for the mis-declared invoice to qualify as an input service-related document does not arise. Conclusion - i) The payments termed as Overriding Commission were taxable as Insurance Auxiliary Services under the Finance Act 1994. ii) The assessee was liable to pay service tax on these payments under the Reverse Charge Mechanism. iii) The CENVAT credit availed on self-generated and forged invoices was inadmissible and rightly denied under the CENVAT Credit Rules 2004. iv) The demand of service tax interest and penalty was justified due to the irregularities and tax evasion attempts by the assessee. v) The burden of proof for admissibility of credit lies on the service recipient which the assessee failed to discharge. Appeal of assessee allowed.

Summary

The core legal questions considered in these appeals revolve around the classification and taxability of payments made by the assessee to insurance agents, the validity of CENVAT credit availed on self-generated invoices, and the implications of service tax payment by service providers on the eligibility of credit to the service recipient. Specifically, the issues are:

1. Whether the payments termed as "Overriding Commission" (ORC) made to insurance agents for providing operating space, marketing reimbursements, and customer database access constitute taxable "Insurance Auxiliary Services" (IAS) or "Business Auxiliary Services" (BAS) under the Finance Act, 1994.

2. Whether the assessee is liable to pay service tax under the Reverse Charge Mechanism (RCM) on such payments to insurance agents.

3. The legality and admissibility of CENVAT credit availed by the assessee on the basis of self-generated or forged invoices purportedly issued by the service providers (insurance agents and intermediaries).

4. The effect of the service providers' payment of service tax on the assessee's liability and credit claims.

5. The burden of proof on the assessee as the recipient of service in establishing the genuineness of services received and compliance with statutory provisions for credit availment.

6. The applicability and interpretation of relevant statutory provisions, including the Finance Act, 1994, Service Tax Rules, 1994, CENVAT Credit Rules, 2004, and Insurance Acts, as well as judicial precedents concerning classification, credit admissibility, and burden of proof.

Issue-wise Detailed Analysis

1. Classification of Overriding Commission (ORC) Payments and Taxability under RCM

The legal framework involves the definitions under the Finance Act, 1994: Section 65(55) defines "Insurance Auxiliary Service" as any service provided by an insurance agent in relation to the general or life insurance business. Section 65(54) defines "Insurance Agent" consistent with Section 2(10) of the Insurance Act, 1938, which includes persons licensed under Section 42 of the Insurance Act and receiving commission or remuneration for soliciting or procuring insurance business.

The assessee contended that payments classified as ORC were not commission for soliciting insurance business but payments for distinct services such as providing office space, marketing reimbursements, and customer databases, which should be classified as "Business Auxiliary Services" (BAS) and not attract service tax under RCM. The assessee relied on precedents supporting the distinction between commission for insurance solicitation and other service payments.

The Revenue argued that the definition of "Insurance Agent" and "Insurance Auxiliary Service" is broad and includes all remuneration received for soliciting or procuring insurance business, thus encompassing ORC payments. Investigations revealed that the ORC payments were made as a percentage of premium collected, linked to insurance business procurement, and that agents had no other business activities. The service providers were often not licensed under IRDA, and invoices for ORC were generated by the assessee itself, with forged signatures, indicating deliberate misclassification to evade tax and exceed IRDA commission caps.

The Court examined Section 65A on classification, emphasizing that the most specific description should prevail and that composite services should be classified according to their essential character. Since the predominant activity of the agents was soliciting or procuring insurance business, the payments fall under IAS rather than BAS.

The Court rejected the assessee's argument that ORC payments were for separate services, holding that the payments were remuneration for insurance-related activities and thus taxable under IAS. The deliberate concealment and generation of invoices by the assessee further supported the Revenue's case.

2. Liability to Pay Service Tax under Reverse Charge Mechanism (RCM)

Rule 2(1)(d)(iii) of the Service Tax Rules, 1994, mandates that service tax on insurance auxiliary services provided by agents is payable by the service recipient under RCM. The Court noted that the payments to agents for soliciting insurance business attract service tax under RCM. The adjudicating authority had dropped the demand on certain payments where liability was not established, but upheld it for ORC payments classified as IAS.

3. Admissibility of CENVAT Credit on Self-Generated/Forged Invoices

The CENVAT Credit Rules, 2004, particularly Rule 9(1), require that credit can only be availed on invoices, bills, or challans issued by the input service provider. The assessee admitted that invoices for ORC were generated by its own branch/regional offices, not by the agents, and included forged signatures. The service tax component was availed as credit without verifying actual payment by agents to the exchequer.

The Court relied on precedents establishing that credit availed on non-genuine or self-generated invoices is not permissible. Mere production of invoices or payment by cheque is insufficient; the recipient must satisfy the proper officer of the genuineness of the transaction and compliance with statutory requirements. The Court held that the assessee had irregularly availed credit in violation of Rule 3 and Rule 9(1)(f) of CCR, 2004.

4. Effect of Service Providers' Payment of Service Tax on Credit Eligibility

The assessee argued that since service providers had paid service tax, credit should not be denied. The Court clarified that the burden lies on the recipient to establish credit eligibility. The mere fact of tax payment by service providers does not automatically entitle the recipient to credit if the invoices are forged or services not rendered as described. The Court referred to the landmark Supreme Court decision in Mafatlal Industries Ltd. v. Union of India, which held that tax collection and retention must be under authority of law and refund claims require statutory compliance.

The Court emphasized that refund or credit claims are not fundamental rights but subject to statutory conditions. Taxpayers cannot claim credit on the basis of non-genuine documents or without proper proof of service receipt. The Court also noted that the department is not obligated to reassess or refund taxes paid by service providers suo moto; aggrieved parties must initiate refund claims.

5. Burden of Proof on the Assessee for Credit Admissibility

Rule 9(5) of CCR, 2004, places the burden of proof on the recipient of service to satisfy the proper officer regarding the correctness of credit claimed. The Court referred to a recent Apex Court judgment in State of Karnataka v. M/s Ecom Gill Coffee Trading Pvt. Ltd., which, although under VAT law, has principles applicable to service tax credit. The Court held that the assessee, as the service recipient, failed to discharge this burden, especially given the fraudulent scheme of generating forged invoices and availing credit thereon.

The Court rejected the assessee's reliance on prior orders where the issue of burden of proof was not considered, noting that precedents must be applied in context and that factual distinctions are critical. The Court underscored that a person cannot profit from their own wrong and that credit on forged invoices is impermissible.

6. Treatment of Competing Arguments and Judicial Precedents

The assessee relied on various judgments supporting credit availability where tax was paid by service providers and on the distinction between commission and other payments. The Revenue relied on statutory definitions, investigation findings, and judgments emphasizing strict compliance with credit rules and burden of proof.

The Court critically examined the precedents, distinguishing cases where service tax payment by providers was undisputed and invoices genuine, from the present case involving forged invoices and misclassification. The Court also referred to High Court orders setting aside certain Tribunal orders that disregarded burden of proof principles, reinforcing the need for strict adherence to statutory provisions.

Conclusions

The Court concluded that:

• The payments termed as ORC to insurance agents are taxable as Insurance Auxiliary Services under the Finance Act, 1994, and attract service tax liability under RCM.
• The assessee's attempt to classify these payments as Business Auxiliary Services to evade tax is unfounded and contrary to statutory definitions and facts.
• The CENVAT credit availed on self-generated and forged invoices is inadmissible under Rule 9(1) and Rule 14 of the CENVAT Credit Rules, 2004.
• The mere payment of service tax by service providers does not entitle the assessee to credit unless the recipient satisfies the proper officer of the genuineness of the service and compliance with statutory requirements.
• The burden of proof lies on the assessee to establish the correctness of credit claimed, which was not discharged in this case.
• Precedents cited by the assessee were distinguished on facts and legal principles, particularly regarding burden of proof and invoice genuineness.
• Revenue's appeal is dismissed, and the assessee's appeals are allowed with consequential benefits, following the binding High Court order.

Significant Holdings

"The cumulative reading of the provisions makes it clear that the statute covers not only the commission amounts paid to 'Insurance agents' but also specifically includes all other remuneration received in consideration of their soliciting or procuring insurance business for the principal insurance company."

"Credit can be claimed and availed only on genuine transactions. Mere production of the invoices and/or payment by cheque is not sufficient and cannot be said to be proving the burden as required by the Rules."

"The assessee being the receiver of output service, while taking CENVAT credit on the forged invoices, has not satisfied the proper officer regarding the admissibility of the credit, as required under proviso to Rule 9(2) of the CCR 2004 and the credit has hence been irregularly availed."

"The burden of proving to the Deputy Commissioner of Central Excise or the Assistant Commissioner of Central Excise, as the case may be, the correctness of CENVAT credit sought to be claimed/availed remains upon the output service provider who seeks to take such credit. Such burden of proof cannot get shifted to Revenue."

"A person ought not to be able to profit from his or her own wrong."

"Each case depends on its own facts and a close similarity between one case and another is not enough because even a single significant detail may alter the entire aspect."

"The Constitution only guarantees that the levy should be legal and that the collection should be in accordance with law. There is no constitutional right to refund."