TMI Blog2019 (8) TMI 967X X X X Extracts X X X X X X X X Extracts X X X X ..... hever is higher by substituting the explanation w.e.f. 01.07.2010. An Explanation is meant for clarifying the provision of the main section and accordingly has retrospective effect and is normally effective from the date of the statute, unless otherwise provided in the amending Act or notification - the clarification by way of substitution of Explanation-II, service tax is not leviable on surrender charges by any stretch of imagination. It has also been clarified by the CBEC vide TRU No. 334/1/2010, that the charge pertaining to asset management alone should form the value for taxation in case of ULIP policy. Accordingly, we hold that no service can be leviable for the period 2011-12 also as surrender charges towards renting of service being penalty. Appeal allowed on merits itself. - Service Tax Appeal No. 54356 of 2015-CU(DB) - FINAL ORDER NO. 51097/2019 - Dated:- 21-8-2019 - MR. ANIL CHOUDHARY, MEMBER (JUDICIAL) And MR. BIJAY KUMAR, MEMBER (TECHNICAL) Shri Sanjeev Sachdeva and Ms. Neha Gulati, Advocates for the appellant Shri Amresh Jain, Authorised Representative for the respondent ORDER ANIL CHOUDHARY: The issue in the present case is whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment. Illustration: Total premium paid for the Unit Linked Insurance Plan policy = ₹ 100 Risk premium = ₹ 10 Amount actually invested = ₹ 85 Gross amount charged for the service provided = ₹ 5 [100-(10+85)]; (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; 5. Explanation (ii) above was substituted vide Notification No. 24/2010-ST dated 22.06.2010 w.e.f. 01.07.2010, as under: (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, 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 . The aforementioned substituted Explanation (ii) makes it clear tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show cause notice it is observed, that surrender charges as per IRDA guidelines, are the recoveries made to recoup expenses incurred towards procurement, administration of the policy and incidental charges thereto. It appeared to Revenue that surrender charges have a nexus with the service provided to the policy holder. It further appeared that surrender charges are similar to pre-closure/ fore-closure charges, which are levied by a banker, at the time of fore-closure of loan. 10. As regards invocation of extended period of limitation, it is alleged that the appellant had intentionally and wilfully suppressed the facts of the recovery of surrender charges (from the policy holder). Further, they failed to assess and pay service tax due on the said charges for the period under dispute. As appellant did not pay the service tax as applicable on such charges and did not file the prescribed ST-3 returns correctly, thus, the case of non-disclosure of the true facts to the Department is made out, with intention to evade payment of service tax. Accordingly, service tax of ₹ 62,82,94,708/- was proposed to be demanded alongwith interest with further proposal to impose penalty. The sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (emphasis supplied) 13. At the time of entering into a contract of ULIP services with the policyholder, the Appellant does not charge / recover any surrender charges from the policy holder. It is, therefore, apparent that surrender charges are not meant for management of investment under ULIP and there is no question of ULIP service being provided to the policyholder in lieu of the surrender charges. Thus, surrender charges, which are merely a charge for pre-mature termination of the policy, cannot be treated as a consideration for provision of the service. 14. It is further submitted that Service Tax has been paid by the Appellant on charges recovered from a policy, under the heads of premium allocation charges, policy administration charges, fund management charges, etc. under the taxable service category of management of investment under ULIP . Surrender charges, however, are deducted by the Appellant from the fund value of prematurely terminated policy at the time of surrender. Therefore, surrender charges are an outcome of surrender of policy by policyholder and hence cannot be deemed to have a nexus with the provision of life insurance services or management of inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be held as charges towards fund management and hence are not taxable. 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. Similar view has been taken by this Tribunal, that surrender charges are outside the purview of service tax in Sriram Life Insurance Company vide Final order No. A/30187-30189/2019 (Hyderabad) dated 08.02.2019 wherein this Tribunal held as under: In the said decision at Para 12, the Tribunal, held that since the surrender charges were collected by the insurer, in exercise of its right to receive insurance money from insurer-the same is an actionable claim and therefore outside the purview of service tax. The relevant extract of the said decision is reproduced below: 12.While, it is true that the expression of Service under Section 65B(44) only w.e.f. 01.07.2012, however, even for the period prior thereto the transaction in question is a actionable clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not become redundant due to action of another. 20. It is well accepted principle that there has to be a nexus, a link, between consideration and taxable event. Reference in this regard is made to the decision of Bombay High Court in the case of C.K. P. Mandal Vs, CCE, Mumbai-IV reported in 2006 (4) STR 183 (Bom.). 21. It is further urged that IRDA vide Circular No. 055/IRDA/Actl/ULIP/2009-10 dated 24.09.2009, the terminology used by the IRDA is surrender penalty . The relevant extract of the circular is produced herein below: 2. Surrender penalty should be zero after completion of five policy years and thereafter, irrespective of the number of premiums paid (e.g. if DOC is 01.01.2003 then no surrender penalty w.e.f. 01.01.2008) . 22. The CBEC has clarified that no service tax can be levied on charges of penal nature. Reliance is placed on:- (i) CBEC vide Circular No. 96/7/2007-ST dated 23.08.2007 (ii) CBEC vide Circular No. 121/02/2010-ST dated 26.4.2010; (iii) CBEC vide its letter F. No. 137/25/2011-ST dated 3.08.2011. 23. Learned Counsel also urges that the show cause notice is bad for invocation of extended period of limitation. He further urges that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the 5th Policy year 10% In the 6th Policy year and onwards Nil * Annual Target Premium As evident from above, if the ULIP policy is surrendered in the 6th policy year or thereafter, there is no loss either to the insurer. But if the ULIP policy is surrendered in the second, third, fourth or fifth year, the fund value would be reduced by percentage point shown against the column. This reduced amount is an income of the insurer, charged from the ULIP policy holder in the form of surrender charges, to cover the expenses, which the company, though incurred at the time of beginning of the ULIP policy, could not recover because of IRDA capping in the initial years and later due to pre mature closure of the policy by the policy holder. 27. The surrender charges have a nexus with the management of investment under ULIP and other policies. The surrender charges are nothing but unrecovered expenses as on the date of surrender, which the insurance companies (i.e. M/s Max) had already incurred towards procurement, administration of the policy and incidental thereto. The reason because of which such ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of initial expenses incurred by the insurer in marketing and distribution of the policy. As IRDA has fixed limits as to recovery, which can be made from time to time from the initial cost, accordingly, IRDA have permitted to recover surrender charges in case of pre-mature policy, as per the table given hereinabove, so as to enable the insurer to recoup the cost incurred by them. Further, we find that legislature have clarified by substituting clause (ii) in Explanation to Section 65(105)(zzzzf), clarified that service tax is leviable only on the management fee or charges which are either fixed by IRDA or actually levied by the insurer, whichever is higher by substituting the explanation w.e.f. 01.07.2010. An Explanation is meant for clarifying the provision of the main section and accordingly has retrospective effect and is normally effective from the date of the statute, unless otherwise provided in the amending Act or notification. Thus, we hold that in view of the clarification by way of substitution of Explanation-II, service tax is not leviable on surrender charges by any stretch of imagination. 32. We further hold that there being no substantial change in the legislation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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