MODVAT Credit of service tax paid under the premium of Key_man Policy, Central Excise

[Anil Roy]

We have a issue with the Central Excise Department. The matter is as under:

In F-Y 2008-2009 we have paid a sum of rupees towards key man insurance policy of one of the executive director of our company (Company is engaged in manufacturing of Auto Component), in which service tax is also included, and the service tax paid under the said premium, CENVAT CREDIT has been claimed by us under central excise return.

Now, in departmental audit the amount of CENVAT CREDIT claimed by us, has not allowed by the Superintendent of Excise & Customs and he ask for any circular / notification / Case Law in this regard.

Can any body get me any help in this regard?

Posts / Replies

[vijay kumar]

you are not eligible to take credit since insurance policy for the Director is not 'activity related to business' in terms of Rule 2(l) of the Cenvat Credit Rules, 2004 as it stood prior to amendment vide Finance Act, 2011. Presently, this category falls under the negative category under the definition of 'input service'. In general, activities which are meant for personal use or consumption of employees do not consitute 'input service' within the meaning of the term under the said rule.

[ROHAN THAKKAR]

Dear Sir, Prior to the amendment introduced by the budget, 2011 Rule 2(l) defines input service which reads as (l) "input service" means any service,- (i) used by a provider of taxable service for providing an output service; or (ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products, upto the place of removal, and includes • services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, • advertisement or sales promotion, • market research, • storage upto the place of removal, • procurement of inputs, • activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal; Thus, the first limb of the definition starts with the word ‘means’, reveals that the definition is restrictive in nature and thus exhaustive. However, thereafter, the definition opens with the word includes. Thus, the second part of the definition expands the meaning. Further, if we analyze the wordings ‘activities relating to the business such as’ **********. The word ‘such as’ indicates that the list stated is merely illustrative in nature. Apart from the services given like accounting, recruitment, auditing, financing, credit rating, share registry and security etc, if any other activity is relating to the business, then such an activity will be considered as ‘input service’, and consequently, its credit shall be admissible, subject to other provisions as stated in the Cenvat Credit Rules, 2004 and Service Tax Rules, 1994. The query that has been asked is whether the credit of service tax paid on keyman insurance policy for the director can be taken as cenvat credit or not. It is to be noted that this opinion will be applicable only to the pre-budget 2011 cases. Before we proceed, let us understand the meaning of term ‘Keyman Insurnace Policy’. It is as an insurance policy taken out by a business to compensate that business for financial losses that would arise from the death or extended incapacity of the member of the business specified on the policy. The policy’s term does not extend beyond the period of the key person’s usefulness to the business. The aim is to compensate the business for losses and facilitate business continuity. Key person insurance does not indemnify the actual losses incurred but compensates with a fixed monetary sum as specified on the insurance policy. An employer may take out a key person insurance policy on the life or health of any employee whose knowledge, work, or overall contribution is considered uniquely valuable to the company. The employer does this to offset the costs (such as hiring temporary help or recruiting a successor) and losses (such as a decreased ability to transact business until successors are trained) which the employer is likely to suffer in the event of the loss of a key person. Thus, it is one of the activity relating to the business. Insurance is one of the activity relating to business wherein the main aim is to protect the loss. Neither the definition of input service nor the Central Excise Act, 1944 or Cenvat Credit Rules, 2004 or Service Tax Rules, 2004 or the Finance Act, states that the credit of insurance taken on the life of keyman cannot be taken. Certainly, it is also one of the activity relating to the business. What is to be seen is the activity relating to the ‘business’ and not the activity relating to earning ‘profit’. Even the cenvat credit on telephones installed at the premises of the Directors has also been allowed by the department considering the same as activity relating to business [Para 8.3 of Circular No 97/8/2007-ST dated 23-08-2007 & also , then why there is restriction on the credit of service tax on the insurance of keyman. In ‘Commissioner of Central Excise, Jaipur – II V. J.K. Cement Works’ – 2009 (14) STR 538 (Tri. Del) the tribunal held that service tax paid on mobile phone service is available to service providers of output service and manufacturer. The respondent’s plea that the mobile phones given to their service offices and staff for company’s work and personal use of such phones has to be paid for the employee has not been disputed by the Revenue. Therefore there is no ground for denying the credit of service tax paid on cellular mobile phones provided by the respondent to their employees for company’s work. In ‘Commissioner of Central Excise, Bangalore – I V. Conzerv Systems Private Limited’ – 2009 (13) STR 638 (Tri. Bang) the tribunal held that the mobile phones standing in the name of the company and used by employees in relation to work only and incidentally can be used for personal work but that it by itself no ground to deny credit there on in view CBEC Circular No. 97/8/2007-ST, dated 23.08.2007. Thus, in my view, the activity of taking an insurance of a keyman is also one of the activity of the business and accordingly, its credit shall be admissible based on the discussion stated in supra. Regards, Rohan Thakkar 9228720536

[ROHAN THAKKAR]

Dear Sir,

 

Prior to the amendment introduced by the budget, 2011 Rule 2(l) defines input service which reads as

 

(l) "input service" means any service,-

(i) used by a provider of taxable service for providing an output service; or

(ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products, upto the place of removal,

 

and includes

• services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises,
•  advertisement or sales promotion,
• market research,
• storage upto the place of removal,
• procurement of inputs,
• activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal;

 

Thus, the first limb of the definition starts with the word ‘means’, reveals that the definition is restrictive in nature and thus exhaustive. However, thereafter, the definition opens with the word includes. Thus, the second part of the definition expands the meaning.

 

Further, if we analyze the wordings ‘activities relating to the business such as’ **********. The word ‘such as’ indicates that the list stated is merely illustrative in nature. Apart from the services given like accounting, recruitment, auditing, financing, credit rating, share registry and security etc, if any other activity is relating to the business, then such an activity will be considered as ‘input service’, and consequently, its credit shall be admissible, subject to other provisions as stated in the Cenvat Credit Rules, 2004 and Service Tax Rules, 1994.

 

The query that has been asked is whether the credit of service tax paid on keyman insurance policy for the director can be taken as cenvat credit or not. It is to be noted that this opinion will be applicable only to the pre-budget 2011 cases.

 

Before we proceed, let us understand the meaning of term ‘Keyman Insurnace Policy’. It is as an insurance policy taken out by a business to compensate that business for financial losses that would arise from the death or extended incapacity of the member of the business specified on the policy. The policy’s term does not extend beyond the period of the key person’s usefulness to the business. The aim is to compensate the business for losses and facilitate business continuity. Key person insurance does not indemnify the actual losses incurred but compensates with a fixed monetary sum as specified on the insurance policy.

An employer may take out a key person insurance policy on the life or health of any employee whose knowledge, work, or overall contribution is considered uniquely valuable to the company. The employer does this to offset the costs (such as hiring temporary help or recruiting a successor) and losses (such as a decreased ability to transact business until successors are trained) which the employer is likely to suffer in the event of the loss of a key person.

Thus, it is one of the activity relating to the business. Insurance is one of the activity relating to business wherein the main aim is to protect the loss. Neither the definition of input service nor the Central Excise Act, 1944 or Cenvat Credit Rules, 2004 or Service Tax Rules, 2004 or the Finance Act, states that the credit of insurance taken on the life of keyman cannot be taken. Certainly, it is also one of the activity relating to the business. What is to be seen is the activity relating to the ‘business’ and not the activity relating to earning ‘profit’.

 

Even the cenvat credit on telephones installed at the premises of the Directors has also been allowed by the department considering the same as activity relating to business [Para 8.3 of Circular No 97/8/2007-ST dated 23-08-2007 & also , then why there is restriction on the credit of service tax on the insurance of keyman.

 

In ‘Commissioner of Central Excise, Jaipur – II V. J.K. Cement Works’ – 2009 (14) STR 538 (Tri. Del) the tribunal held that service tax paid on mobile phone service is available to service providers of output service and manufacturer. The respondent’s plea that the mobile phones given to their service offices and staff for company’s work and personal use of such phones has to be paid for the employee has not been disputed by the Revenue. Therefore there is no ground for denying the credit of service tax paid on cellular mobile phones provided by the respondent to their employees for company’s work.

 

In ‘Commissioner of Central Excise, Bangalore – I V. Conzerv Systems Private Limited’ – 2009 (13) STR 638 (Tri. Bang) the tribunal held that the mobile phones standing in the name of the company and used by employees in relation to work only and incidentally can be used for personal work but that it by itself no ground to deny credit there on in view CBEC Circular No. 97/8/2007-ST, dated 23.08.2007.

 

Thus, in my view, the activity of taking an insurance of a keyman is also one of the activity of the business and accordingly, its credit shall be admissible based on the discussion stated in supra.

 

Regards,

 

Rohan Thakkar

9228720536

 

[Anil Roy]

Thanks a lot for this orgumental advice and the same shall be put to the concerned officer.

Anil Roy

8806801064

[pradeep khatri]

Any service for consumption of human will not be treated as input service.  In my view, CENVAT credit will not be available as per the amended definition of Input Service under amended CENVAT credit Rules,2004.