2023 (4) TMI 609 - AT - Service Tax

Levy of Service tax - re-instatement interest collected by the appellant on delayed payment of premium by the policy holder to reinstate a lapsed policy (interest on delayed payment of premium by the policy holder) - applicability of rule 6(2)(iv) of the Service Tax (Determination of Value) Rules, 2006 - department believes that the appellant camouflaged the amount received towards processing/administrative charges as reinstatement interest collected on delayed payment of premium. HELD THAT - It is more than apparent that it is only in a case where the policy has lapsed that it can be revived and a policy which stands terminated cannot be revived. The rights and obligation of the parties under the contract do not come to an end on lapse of the policy as the policy holder has an option to revive the policy on payment of premium with interest. This requirement of payment of interest for revival of a lapsed policy flows from the policy contract. A policy holder is under an obligation to make timely payments of the premium and if such payments are not made in time, the policy may lapse and to revive this policy interest has to be paid under the terms of the contract. The overdue premium interest is, therefore, linked to the obligation of timely payment of premium. The Commissioner committed an error in concluding that the relationship stands terminated upon lapse of a policy and, therefore, no interest can be charged for reviving it. The Commissioner also committed an error in concluding that since the rate of interest is not uniform, it cannot be considered as interest . Section 65B(30) of the Finance Act 1994, which defines interest, does not impose any condition that the interest that has to be charged has to be at a uniform rate. The manner in which interest has to be paid is governed by the terms of contract agreed between the parties. The department cannot, therefore, urge that since uniform rate of interest has not been levied, the amount collected would not partake the character of interest but would be in the nature of administrative/processing fee. In this view of the matter it would not be necessary to examine the contention advanced by the learned counsel for the appellant that the extended period of limitation could not have been invoked in the facts and circumstances of the case. Appeal allowed.

Summary

Issues Involved:
1. Leviability of service tax on re-instatement interest collected on delayed payment of premium.
2. Whether the extended period of limitation could be invoked.
3. Legitimacy of interest and penalty levied.

Summary:

1. Leviability of Service Tax on Re-instatement Interest:
The primary issue was whether service tax is leviable on re-instatement interest collected by the appellant on delayed payment of premium by policyholders to reinstate a lapsed policy. The appellant argued that this amount is interest on delayed payment of premium and hence not exigible to service tax under rule 6(2)(iv) of the Service Tax (Determination of Value) Rules, 2006. The department contended that the appellant camouflaged the amount received towards processing/administrative charges as re-instatement interest.

The Commissioner confirmed the demand of service tax, reasoning that:
- Re-instatement interest is charged for reviving lapsed policies, and no interest can be charged since the policies are terminated.
- Interest must be charged at a uniform rate and recovered periodically, which was not the case here.
- Re-instatement interest is in the nature of administrative/processing fees.

The Tribunal found that the policy does not terminate on non-payment of premium but only on the occurrence of specific events. The rights and obligations under the contract do not end on the lapse of the policy, and the policyholder has the option to revive the policy by paying overdue premiums with interest. The Tribunal concluded that the Commissioner erred in stating that the relationship terminates upon lapse of a policy and that non-uniform interest cannot be considered as "interest." The Tribunal emphasized that the manner of interest payment is governed by the contract terms, and the department cannot claim that non-uniform interest is administrative/processing fees.

2. Extended Period of Limitation:
The appellant argued against the invocation of the extended period of limitation. However, given the Tribunal's decision on the primary issue, it was deemed unnecessary to examine this contention.

3. Legitimacy of Interest and Penalty Levied:
The appellant contended that neither interest nor penalty could be levied. Since the Tribunal found that the re-instatement interest is not exigible to service tax, the interest and penalty levied by the Commissioner were also set aside.

Conclusion:
The Tribunal set aside the order dated 28.02.2017 passed by the Commissioner, confirming the demand of service tax with interest and penalty. The appeal was allowed, and the order was pronounced on 12.04.2023.