Reverse charge CENVAT credit on insurance auxiliary service allowed where Rule 6(3)(c) cap did not apply

CENVAT credit was treated as usable for payment of service tax under reverse charge on Insurance Auxiliary Service because a person liable to pay tax under reverse charge is deemed to be the provider of the output service. The Tribunal noted that the omission of the Explanation to Rule 2(p) did not change the meaning of "output service", "provider of taxable service" or "person liable for paying service tax", and that no one-to-one correlation is required between input and output services under the CENVAT scheme. It also held that the 20% utilisation cap in Rule 6(3)(c) did not apply where the service fell within Rule 6(5), making the demand unsustainable.

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Issues: Whether CENVAT credit could be utilised for payment of service tax on Insurance Auxiliary Service under the reverse charge mechanism and whether the 20% cap under Rule 6(3)(c) of the CENVAT Credit Rules, 2004 applied.

Analysis: The Tribunal followed the settled position that the omission of the Explanation to Rule 2(p) did not alter the meaning of "output service", "provider of taxable service" or "person liable for paying service tax". A person made liable to pay tax under the reverse charge provisions is deemed to be the provider of the output service, and therefore is entitled to avail and utilise CENVAT credit on input services. The Tribunal also held that no one-to-one correlation is required between input services and output services under the CENVAT scheme. Since Insurance Auxiliary Service falls within the category covered by Rule 6(5), the restriction in Rule 6(3)(c) limiting utilisation to 20% did not apply.

Conclusion: The applicant was entitled to utilise CENVAT credit for discharge of service tax on Insurance Auxiliary Service, and the demand was unsustainable. Pre-deposit was waived and recovery was stayed during pendency of the appeal.

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