2018 (4) TMI 1407 - AT - Service Tax

Management of Investment under Unit Linked Insurance Plan (ULIP) - surrender/ partial withdrawal charges - case of Revenue is that these charges are recovered to cover the past expenses incurred towards provision of services and hence liable to tax - Held 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. Reference made to 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. 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. 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 - demand cannot sustain. Time limitation - Held 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 - 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 - extended period not invoked. Appeal allowed - decided in favor of appellant.

Issues Involved:

1. Taxability of surrender/partial withdrawal charges under ULIP services.
2. Nature of surrender charges – penalty or liquidated damages.
3. Inclusion of surrender charges in the gross amount charged under ULIP services.
4. Applicability of the extended period of limitation for demand.
5. Relevance of precedents and circulars in determining the taxability of surrender charges.

Issue-wise Detailed Analysis:

1. Taxability of Surrender/Partial Withdrawal Charges under ULIP Services:
The core issue was whether surrender/partial withdrawal charges under ULIP services are liable for service tax. The revenue argued that these charges are part of the consideration for providing services related to investment management. However, the tribunal found that surrender charges are not related to the management of investment under ULIP but are imposed when a policy is surrendered or partially withdrawn. These charges are either in the nature of penalty or liquidated damages, which do not constitute a taxable service.

2. Nature of Surrender Charges – Penalty or Liquidated Damages:
The appellant contended that surrender charges are penalties to encourage policyholders to maintain the policy for its full term or liquidated damages for losses due to premature termination. The tribunal agreed, noting that these charges are compensation for ending the contract and not for any specific service provided. This view was supported by the IRDA guidelines, which classify these charges as either penalties or liquidated damages.

3. Inclusion of Surrender Charges in the Gross Amount Charged under ULIP Services:
The tribunal examined the definitions under Section 65 (105) (zzzzf) and found that the taxable service in ULIP is limited to the management of the segregated fund and does not include surrender charges. Surrender charges are not part of the gross amount charged for ULIP services as they do not relate to the management of investment but are penalties for contract termination.

4. Applicability of the Extended Period of Limitation for Demand:
The appellant argued that the demand was time-barred as there was no suppression, fraud, or willful misstatement. The tribunal agreed, noting that the surrender charges were disclosed in the appellant’s books of accounts and balance sheets as per IRDA guidelines. The tribunal cited precedents where mere inaction or failure to pay duty was not considered suppression. Thus, the demand invoking the extended period was not sustainable.

5. Relevance of Precedents and Circulars in Determining the Taxability of Surrender Charges:
The tribunal referred to various precedents and circulars, including the Board Circular No. 334/1/2010, which emphasized that charges like entry and exit loads in mutual funds and container detention charges are not taxable as they are not towards fund management services. Similarly, the surrender charges in ULIP were found to be penalties or liquidated damages and not charges for fund management services. The tribunal also noted that a similar issue regarding foreclosure charges on loans was referred to a larger bench but found the present case distinct as surrender charges have no relation to service provision.

Conclusion:
The tribunal concluded that surrender charges under ULIP are not part of taxable services for management of investment and are either penalties or liquidated damages, which are not liable for service tax. The demand was also found to be time-barred. Consequently, the impugned order was set aside, and the appeal was allowed with consequential reliefs.

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