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TMI Blog2019 (8) TMI 967X X X X Extracts X X X X X X X X Extracts X X X X ..... nder charges, which is deducted from the fund value or the benefit value accrued in the policy. The appellant in the business of life insurance and provides several products which are broadly classifiable into term plant product, Unit Link Insurance Product (ULIP) etc. vide show cause notice dated 16.04.2014, invoking the extended period of limitation, service tax was demanded on surrender charges for the following period: 01.10.2008 to 30.06.2010 Demand under ULIP Management service 01.07.2010 to 30.04.2011 No demand (dropped in Adju.) 01.05.2011 to 30.06.2012 Demand under Life Insurance service 4. Section 65(105)(zzzzf) of the Finance Act, 1994 defines taxable service, provided or to be provided to a policy holder, by an insurer carrying on life insurance business, in relation to management of investment under Unit Link Insurance business, commonly known as Unit Link Insurance Plan (ULIP) scheme. Explanation for the purpose 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 insur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od 01.10.2008 to 30.06.2010 service tax have been demanded vide impugned order on surrender charges levied on the surrender of ULIP policy. As regards the period 01.07.2010 to 30.04.2011, as per para 6 of the show cause notice taking notice, of the amendment by way of substitution of Explanation (ii) as referred hereinabove in Section 65(105) (zzzzf), read with CBEC letter F. No.334/1/2010-TRU dated 26.02.2010, which stipulated that fund management charges alone should form the value for taxable service for purpose for ULIP. Since this amount was capped for ULIP by IRDA, it was the value of taxable service for any year for the operation of the policy, shall be the actual amount charged for the said purpose or the maximum amount of fund management charges fixed by IRDA, whichever is higher. Accordingly, Revenue in its wisdom has not raised any demand for this period (01.07.10 to 30.04.2011). 9. For the period 01.05.2011 to 30.06.2012, the definition of insurance service under Section 65(105)(zx) of the Finance Act was amended w.e.f. 01.05.2011. The amended definition provided - taxable service means any service provided to a policy holder or any person by an insurer, including rein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urisdictional authority, that directs or permits all insurance companies, to demand and collect the surrender charge, is IRDA. That IRDA has clearly provided in its circular no. 032/IRDA/Act-1/Dec-2005, dated 21 December 2005, that surrender means 'terminating the contract once and for all'. Further the same Circular also states that surrender charges are charges levied on the ULIP fund at the time of surrender of the contract. Since, these charges are levied on termination of the contract, it clearly shows that no service will be rendered by the insurer on payment of surrender charges. Further, the Notification F.No. IRDA/Reg/2/52/2010 dated 1 July 2010, also provides that the surrender charges are imposed only to recoup expenses incurred towards procurement, administration of the policy and incidental thereto. The test to determine whether or not the charges are for management is to examine the precise nature of the surrender charges, IRDA in its circular has clearly stated that charges are levied for terminating the contract. The purpose of the charge may be recoupment of expenses incurred earlier, but the fact remains that the nature of the charge is for cessation/ discontinuan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity (Treatment of Discontinued Linked Insurance Policy) Regulations, 2010 specifies 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. * 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. The clause 2 of Letter Ref: 055/IRDA/Act/ULIP/2009 - 10 DT. 24.09.2009 defined it as surrender penalty. * 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. * Parallel can be drawn from Circular No. 94/5/2007-ST dt. 15.05.2007 wherein the entry and exit load charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 65(105)(zzzzf) read with Section 65(105)(zx). 17. The SCN as well as the impugned order rely on amendment in definition and coverage of life insurance services in Section 65(105) (zx), to demand service tax on surrender charges, during 2011-12. This is illegal and improper. When there was no change in the coverage / definition of ULIP Management, when surrender charges are related only to ULIP and when surrender charges are accepted to be not taxable under 65(105)(zzzzf), service tax cannot be demanded on surrender charges under life insurance service. 18. Board circular TRU No - DOF No 334/3/2011, dated 28.02.2011, wherein Para 2.1 seeks to explain the amendment in the coverage of life insurance services and states as follows : "2.1 Life insurance companies provide services relating to risk cover and managing investment for the policy holders. The former is already subjected to service tax. The latter is now being brought into the tax net. Similar services rendered by way of ULIP are already subject to service tax since 2008." It is evident that the amendment in life insurance service was not intended to make any difference in the coverage of investment under ULIP Man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant has suppressed facts. 25. Learned Authorised Representative for Revenue states that surrender charges defined by IRDA's Notification dated 01.07.2010 which are as under: The charges under dispute i.e. "surrender charges" are defined in IRDA's Notification No. F. No. IRDA/Reg/2/52/2010 dated 1.7.2010 as follows: "The surrender charges are imposed only to recoup expenses incurred towards procurement, administration of the policy and incidental thereto. The meaning of the term 'surrender' has been given in IRDA's Circular No. 032/IRDA/Act-1/Dec-2005 dated 21.12.2005, which states that surrender means 'terminating the contact once and for all' and that "surrender charges are charges levied on the ULIP fund at the time of surrender of the contract". 26. The "Surrender Charges" are based on and are calculated as a percentage of annual target premium; and gets reduced with every passing year. Surrender Charge: This charge is calculated as a percentage of first year ATP and shall be levied at the following rates on the Fund Value at the time of effecting surrender of the Policy: If the Policy is surrendered Surrender Charge (as % of first year ATP*) In the 1st P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment charges, collection of the same and closure of loan. These activities can be definitely in relation to Banking & other Financial Services, which includes lending after 1.9.04. Further, when loans are fore closed, the situation gives rise to the issue of asset liability mis-match for the lender since lender, has to find alternative source for deployment of such funds. Prepayment charges are the charges leviable by a bank/ lender to offset the cost of finding such alternative source for deployment of fund and also intended to make exist difficult for the borrower. This shows that prepayment charges can never be considered to be in the nature of interest. 30. Learned Authorised Representative further urges that as the issue of taxability of fore-closure charges has been referred to Larger Bench in the case of Small Industries Dev. Bank of India vs. CST, Ahmedabad -2015 (38) STR 666 (Tri. Ahmd.) -2015 (38) STR 666 (Tri. Ahmd.), this matter may be kept pending till decision by the larger bench in the case of SIDBI. He further urges for dismissal of the appeal. 31. Having considered the rival contentions, we are satisfied that surrender charges are permitted to be levied by IRD ..... X X X X Extracts X X X X X X X X Extracts X X X X
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