2021 (7) TMI 735 - AT - Service Tax

Valuation - life insurance business - treatment of surrender value exacted, on premature exit, from holders of unit linked insurance policy (ULIP) as consideration for provision of service - whether the surrender charge is consideration for a service that comes within the ambit of the levies pertaining to the insurance sector during the period of dispute? HELD THAT - It is common ground that upon an insured ceasing to comply with the obligation to pay the premium at stipulated intervals, the policy is deemed to be surrendered and the holder entitled to surrender value representing the portion of the receipts that had been invested in the appropriate funds. There is also no dispute that the amount disbursed is lesser than the value of the funds on the date of surrender. The proposition of Learned Authorized Representative is that the amount so withheld is consideration for services rendered in connection with the fund during the period of investment. The recall order was actuated by the merit of the plea in rectification proceedings that taxability under one of the enumerations in section 65(105) of Finance Act, 1944 appeared to have been considered in the decision of the Tribunal that ruled in favour of the assessee. Rectification that calls for recall remains as under disposal and attains consummation with substitution of the recalled order. It would be presumption for Learned Authorised Representative to conceive that such recall must, inevitably, lead to a contrary opinion on the part of the Tribunal - Mere reference to the recalled decision does not, ipso facto, render the finding to be bereft of value as precedent. Reliance placed in the case of SHRIRAM LIFE INSURANCE COMPANY VERSUS CC, CE ST, HYDERABAD IV AND CC, CE ST, RANGAREDDY GST (VICE-VERSA) 2019 (2) TMI 868 - CESTAT HYDERABAD where it was held that the transaction in question is not a service at all but the transaction in a actionable claim hence could not have been by any stretch of imagination covered under any of the specified taxable heads of service even for the period prior to 01.07.2012 - the demand of service tax on the surrender charges for the period in question is unsustainable. Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Taxability of 'surrender value' under 'unit linked insurance policy (ULIP)'.
2. Applicability of service tax on 'life insurance business' under various amendments and notifications.
3. Classification of 'surrender charges' as consideration for services rendered.
4. Precedential value of earlier Tribunal decisions in similar disputes.

Detailed Analysis:

Taxability of 'Surrender Value' under ULIP:
The primary issue revolves around the taxability of the 'surrender value' exacted from policyholders upon premature exit from ULIP. The appellant contested the demand of ?5,50,03,318 under section 73 of the Finance Act, 1994, along with applicable interest and penalties under sections 77 and 78 of the Finance Act, 1994. The Tribunal noted that the 'on-off' nature of the levy had been recognized in several decisions concerning insurance services.

Applicability of Service Tax on 'Life Insurance Business':
The Tribunal traced the legislative history, noting that tax liability on 'life insurance business' was introduced by section 149 of the Finance Act, 2002. Initially, services provided to 'policyholders' were excluded from tax by notification no. 9/2002-ST but were later included by notification no. 23/2004-ST. The inclusion of (zzzzf) in section 65(105) of the Finance Act, 1994, from 16th May 2008, taxed the consideration received from policyholders for 'management of investment' under ULIP. The Tribunal emphasized that the coverage of risk to life was taxable from 10th September 2004, and the notice dated 2nd October 2014 was restricted to the 'surrender value' retained between April 2009 and June 2012.

Classification of 'Surrender Charges' as Consideration for Services Rendered:
The appellant argued that 'surrender' is a unilateral act by the policyholder and that 'surrender charges' are akin to 'foreclosure charges,' which were held non-taxable by a Larger Bench of the Tribunal in Commissioner of Service Tax, Chennai v. REPCO Home Finance Ltd. The Tribunal examined the nature of 'surrender charges' and concluded that these charges are not consideration for services rendered but represent amounts retained by the insurer upon policy termination. The Tribunal cited decisions in Shriram Life Insurance Company and MAX Life Insurance Co Limited, which held that 'surrender charges' are not taxable as they represent a transaction in actionable claims, not services.

Precedential Value of Earlier Tribunal Decisions:
The Tribunal discussed the precedential value of earlier decisions, particularly Shriram Life Insurance Company and MAX Life Insurance Co Limited, which had similar disputes. The Tribunal noted that the recall of the decision in Reliance Life Insurance Company Ltd did not undermine the precedents set by other decisions. The Tribunal emphasized judicial consistency and followed the precedents, finding no compelling reason to deviate.

Conclusion:
The Tribunal set aside the impugned order and allowed the appeal, following the precedents in Shriram Life Insurance Company and MAX Life Insurance Co Limited, concluding that 'surrender charges' are not taxable as they do not constitute consideration for services rendered. The decision was pronounced in open court on 16/07/2021.