Case Law Details
Reliance Life Insurance Company Ltd. Vs Commissioner of Service Tax (CESTAT Mumbai)
We are of the view that the ULIP surrender charges are not part of taxable service of management of funds. Rather it is in the nature of penalty or liquidated damages which is not a service and hence cannot be made liable for tax during the period involved .
FULL TEXT OF THE CESTAT JUDGMENT
The appeal is directed against Order-in-Original dt. 26.11.2014 passed by the Commissioner of Service Tax, Mumbai wherein the demand against appellant was confirmed alongwith penalty and interest.
2. The facts of the case are that the appellant, M/s. Reliance Life Insurance Company Ltd. is engaged in Life Insurance Business and is registered under service tax in category of “Life Insurance Service”, ‘Insurance Auxiliary Service’ and ‘Management of Investment under Unit Linked Insurance Plan (ULIP) . Pursuant to investigation they were issued show cause notice demanding service tax on ground that the surrender/ partial withdrawal charges are liable for service tax under the taxable service category of Management of Investment under ULIP Services for the period 01.04.2009 to 30.06.2012. As per the IRDA Guidelines the surrender charges are recoveries made to recoup the expenses incurred towards procurement, administration of policy and incidential thereto and thus has nexus with the service provided by the insurer to policy holder. That surrender charges are similar to pre-closure/ foreclosure charges and are neither in the nature of interest nor collected for delayed payment. These charges are recovered to cover the past expenses incurred towards provision of services and hence liable to tax. The demand of service tax on surrender charges of ULIP was confirmed by the impugned order. Hence the present appeal by the Appellant.
3. Shri Gopal Mundra, Ld. C.A. appearing for the Appellant submits that the surrender and partial withdrawal charges are in the nature of penalty as it is imposed to encourage the policy holder to continue with the contract for the full terms of the policy. Even if assumed that the surrender charges are to recoup the expenses against the consequent loss due to premature termination of policy, it would be in the nature of liquidated damages and in no manner be considered towards performance of any service. The activity of premature termination of policy cannot be considered as ‘provision of any service’ but an event which results in discontinuation of an already existing service of risk cover and investment related service provided by insurance company, therefore the surrender charges/ partial withdrawal charges not being consideration for the performance of a specific activity but as consideration for discontinuation thereto cannot be liable for service tax. That even if the surrender charges are considered as ‘liquidated damages’ it is not a consideration towards the provision of service. That if the contention of the revenue that the surrender charges are to recoup the expenses incurred towards procurement and administration of the policy and incidental thereto and that it should be regarded as consideration towards the provision of the services is accepted in that case it has to be accepted that the same are in the form of liquidated damages. The termination of policy by the policy holder causes losses or damages to the Appellant and are mentioned in policy contract and recovered as surrender charges from the policy holder and therefore are in the nature of liquidated damages. It falls under the scope of section 74 of the Contract act. The Recovery of surrender charges are not main source of revenue i.e. provision of ULIP Service but merely compensation against premature termination of a contract in full or in part which was made between the Appellant and policy holder. Even the same is shown as miscellaneous income in their books of accounts and are different from the other charges which are related to policy such as mortality charges, rider charges, switching charges etc and which are collected by the Appellant constitute the service consideration as agreed upon in the agreement with the policy holder. He submits that the surrender charges cannot be treated as service as it has got no nexus with the taxable service provided. He submits that in terms of explanation to Section 65 (105 ) (zzzzf) the gross amount charged under ULIP service does not include surrender charges. The surrender charges is neither allocated towards the risk cover, investment or management of funds/ investment and therefore cannot form part of gross amount charged towards ULIP Service. He also submits that the demand is barred by limitation of time as there is no suppression, fraud, collusion or willful mis statement.
4. Shri M. Suresh, Ld. Deputy Commissioner (AR) appearing on behalf of Revenue reiterates the findings of the impugned order. He takes us through the relevant definitions and details of charges under ULIP. He submits that the surrender charges are also liable for tax. He relies upon the Board Circular No. 334/1/2010 – TRU dt. 26.02.2010 in this respect. Further he also relies upon the judgments on taxability of services in similar nature in case of HDFC Standard Life Insurance Co. Ltd. Vs. CST, Mumbai – I 2015 (38) STR 124 (TRI) wherein the matter was remanded. He also relies upon the orders in case of CCE, Guntur Vs. Andhar Sugars Ltd. 1988 (38) ELT 564 (SC) and Hitachi Home & Life Solution Ltd Vs. C.C (Import), Nhava Sheva 2012 (285) ELT 504 (TRI) wherein it was held that the Circular issued by the Board has great weightage. He also submits that in case of SMALL INDUSTRIES DEV. BANK OF INDIA Vs. CST, AHMEDABAD 2015 (38) S.T.R. 666 (Tri. – Ahmd.) the issue involves of charges on fore closure of loan has been referred to the Larger Bench and hence the issue involved in present appeal may also be referred.
5. We have carefully considered the submissions made by both the sides. The revenue has made demand from the Appellant on the ground that the surrender charges of the ULIP policy is considered as part of unrecovered expenses on overheads and is part of consideration for providing services relating to investment management. The Management of Investment under ULIP Service was made taxable w.e.f 16.05.2008 under Section 65 (105) (zzzzf) which defines taxable service as :
“to a policy holder, by an insurer carrying on life insurance business, in relation to management of investment, under unit linked insurance business, commonly known as Unit Linked Insurance Plan (ULIP) scheme.
Explanation. – For the purposes of this sub-clause, –
(i) management of segregated fund of unit linked insurance business by the insurer shall be deemed to be the service provided by the insurer to the policy holder in relation to management of investment under unit linked insurance business;
[(ii) the gross amount charged by the insurer from the policy holder for the said service provided or to be provided shall be equal to the difference between, –
(a) Premium paid by the policy holder for the Unit Linked Insurance Plant policy; and
(b) The sum of premium paid for or attributable to risk cover, whether for life, health or other specified purposes, and the amount segregated for actual investment.
(iii) in addition to the amount referred to in clause (ii), the gross amount charged shall include any amount charged subsequently, whether or not periodically, by the insurer from the policy holder in relation to management of investment under unit linked insurance business;
For the period w.e.f 01.07.2010 the taxable service was defined as under :
“to a policy holder, by an insurer carrying on life insurance business, in relation to management of investment, under unit linked insurance business, commonly known as Unit Linked Insurance Plan (ULIP) scheme.
Explanation. – For the purposes of this sub-clause, –
(i) management of segregated fund of unit linked insurance business by the insurer shall be deemed to be the service provided by the insurer to the policy holder in relation to management of investment under unit linked insurance business;
[(ii) the gross amount charged by the insurer from the policy holder for the said service provided or to be provided shall be equal to the maximum amount fixed by the Insurance Regulatory and Development Authority established under section 3 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999), as fund management charges for unit linked insurance plan or the actual amount charged for the said purpose by the insurer from the policy holder, whichever is higher;]
We find from the above that the taxable service in case of Unit linked insurance plan is considered only that portion which involves management of segregated fund in relation to management of investment under ULIP, difference between premium paid by the policy holder and the sum of premium paid for or attributable to risk cover and any amount charged for management of investment under the ULIP. In nut shell whatever amount is charged for the management of investment portion in ULIP policy is a taxable service and thus liable for service tax. On the contrary the surrender charges are charged by the assessee when the person dilutes the policy completely or partially. We find from the Notification F. No. IRDA/Reg/2/52/2010 dt. 01.07.2010 issued by the Insurance Regulatory and Development Authority (Treatment of Discontinued Linked Insurance Policy) Regulations, 2010 that the major objective of discontinuance charges are either to recoup expenses incurred towards procurement, administration of the policy and incidental thereto and design the discontinuance charges to encourage the policyholder to continue with the contract for full term. Such charges even are to be shown under separate head under balance sheet. The fact which emerges from the above shows that the charges are either in the nature of ‘penalty’ or liquidated damages or a combination of both. Thus in no way it can be considered as charges towards providing of any services of management of investment under Unit Linked Insurance Plan. Further the surrender value of the policy is always calculated as per the formula which shows as to how the same shall be calculated. In the Guidelines on ULIP we find that Premium Allocation charges, Fund Management charges and policy management charges which are levied towards Management and administration of fund and are capped on the basis of duration whereas the surrender charges are charged for surrender of contract i.e surrender of ULIP and are not imposed after 5 years of policy. The clause 2 of Letter Ref : 055/IRDA/Act/ULIP/2009 – 10 DT. 24.09.2009 define it as surrender penalty. We find that the ULIP is primarily a contract between the insurer and insured and thus when seen in the context of Section 73 and 74 of the Contract Act, 1872 what transpires is that surrender of policy is nothing but ending of contract for which compensation in the form of damages which cannot be termed as charges towards management. We find that the parallel can be drawn from Circular No. 94/5/2007 – ST dt. 15.05.2007 wherein the entry and exit load charges of the Mutual fund were held not to chargeable to tax as they are not towards fund management service. Para 4 of the said Circular is as under :
In terms of the Tenth Schedule to the SEBI (Mutual Fund) Regulation, 1996, the initial issue expenses are amortized over a period of the scheme, and the entry and exit load charges are paid by the investors to the fund to meet these expenses. Any unamortized portion of expenses is included in calculation of NAV. Hence, entry and exit load charges are not towards fund management service provided by the AMC but to meet the initial issue expense and other specified expenses, incurred by the mutual fund. It is accordingly clarified that “entry and exit load” charged by mutual fund would not attract service tax levy under the category of fund management service.
Similarly in case of Container Detention charges the Board vide Circular No. 121/2/201 – ST dt. 26.04.2010 held that the detention charges is not a service but can be called penal rent and hence not chargeable to tax. The relevant portion is as under :
4. The issue has been examined. To retain the container beyond the pre-holding period is neither a service provided on behalf of the client (Business Auxiliary Service) nor is it an infrastructural support in the business of either the shipping lines or the customer (Business Support Service). Such charges can at best be called as ‘penal rent’ for retaining the containers beyond the pre-determined period. Therefore, the amount collected as ‘detention charges’ is not chargeable to service tax. Drawing the above same analogy the surrender charges under ULIP cannot be held as charges towards fund management and hence are not taxable. The service tax is chargeable only on taxable service value and the surrender charges cannot be thus taxed as it is not towards providing taxable service of fund management. In case of Intercontinental Consultants & Technocrats Pvt. Ltd Vs. UOI 2013 (29) STR 9 the Hon’ble High Court of Delhi while dwelling upon the issue of taxable service held that it is only the value of the service rendered which is chargeable to tax. The relevant para of same is as under :
10. The contention of the petitioner that Rule 5(1) of the Rules, in as much as it provides that all expenditure or costs incurred by the service provider in the course of providing the taxable service shall be treated as consideration for the taxable service and shall be included in the value for the purpose of charging service tax goes beyond the mandate of Section 67 merits acceptance. Section 67 as it stood both before 1-5- 2006 and after has been set out hereinabove. This section quantifies the charge of service tax provided in Section 66, which is the charging section. Section 67, both before and after 1 -5-2006 authorises the determination of the value of the taxable service for the purpose of charging service tax under Section 66 as the gross amount charged by the service provider for such service provided or to be provided by him, in a case where the consideration for the service is money. The underlined words i.e. ~for such service” are important in the setting of Sections 66 and 67. The charge of service tax under Section 66 is on the value of taxable services. The taxable services are listed in Section 65(105). The service provided by the petitioner falls under clause (g). It is only the value of such service that is to say, the value of the service rendered by the petitioner to NHAI, which is that of a consulting engineer, that can be brought to charge and nothing more. The quantification of the value of the service can therefore never exceed the gross amount charged by the service provider for the service provided by him. Even if the rule has been made under Section 94 of the Act which provides for delegated legislation and authorises the Central Government to make rules by notification in the official gazette, such rules can only be made ~for carrying out the provisions of this Chapter” i. e. Chapter V of the Act which provides for the levy, quantification and collection of the service tax. The power to make rules can never exceed or go beyond the section which provides for the charge or collection of the service tax.
Further in case of Jaipur Jewellery Show Vs. CCE & ST, JAPUR – I 2017 (49) STR 313 (TRI) it was held that the cancellation charges are not liable for service tax. The relevant findings of the Tribunal are as under :
6. that the same are being retained As regards the cancellation charges, we note by the appellant from the initial amounts given to them for booking a booth, when the same is subsequently cancelled by the customer and the amount is refunded to them. Admitted position, which emerges is, that no booths are ultimately rented out by the appellant to their customers. As explained, such cancellation charges are for putting the appellant into inconvenience by initially booking the booths and subsequently cancelled. Inasmuch as no service stand provided by the appellant to their customers and for which purpose no consideration was ever received by them, we are of the view that the cancellation charges recovered by the appellant cannot be held to be the consideration for providing business exhibition services. The same are thus not liable to service tax.
In view of our above discussion and on perusal of the facts of the case we are of the view that the surrender charges are not part of taxable service of management of funds. Rather it is in the nature of penalty or liquidated damages which is not a service and hence cannot be made liable for tax during the period involved . We thus do not find any reason to uphold the demand.
6. The Ld. AR has argued that the similar issue i.e service tax on Fore – closure of loan i.e pre payment charges on settlement of loan has been referred to the Larger Bench in case of SMALL INDUSTRIES BANK OF INDIA Vs. COMMR. OF S.T., AHMEDABAD 2015 (38) S.T.R. 666 (Tri. – Ahmd.) and hence present case may also be referred. We are of the view that the issue involved in above case is pre-payment of charges to Bank whereas in the present case the issue is absolutely different as the surrender charges of ULIP has got no relation with the service. Thus we are not inclined to accept the suggestion put forth by the Revenue.
7. We also find that the demand is also time barred as the issue involved is of interpretation and therefore no element of suppression, fraud or intention to evade taxes can be made against Appellant. The information of surrender charges stands disclosed in books of accounts and also in Balance Sheet as per the directions of IRDA. Hence it is not a case of suppression. Our views are also based upon the judgment of Hon’ble Supreme Court in case of PAHWA CHEMICALS PRIVATE LIMITED Vs. CCE, DELHI 2005 (189) E.L.T. 257 (S.C.) and COLLECTOR OF CENTRAL EXCISE Vs. CHEMPHAR DRUGS & LINIMENTS 1989 (40) E.L.T. 276 (S.C.) wherein the Hon’ble Court has held that mere inaction or failure on the part of the assessee cannot be construed as an act to evade payment of duty. We thus find that the demand made by invoking extended period is hit by limitation of time and is not sustainable on ground of time bar also.
8. As per the above discussion and relevant judgments we are thus of the view that no service tax demand can be made on surrender charges as it is not towards management of ULIP service and hence we set aside the impugned order. The appeal is allowed with consequential reliefs, if any.
(Pronounced in court on 12/04/2018)
