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2019 (8) TMI 967 - AT - Service TaxLevy of service tax - Management of Investment under ULIP service - Surrender Charges which are deducted from fund value as per policy provisions for pre-mature withdrawal from the scheme - Link between consideration and taxable event - extended period of limitation - HELD THAT -The surrender charges are permitted to be levied by IRDA by way of penal charges towards recovery 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 the 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 - 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.
Issues Involved:
1. Levy of Service Tax on Surrender Charges under "Management of Investment under ULIP service." 2. Applicability of amendments and explanations under Section 65(105) of the Finance Act, 1994. 3. Nexus between surrender charges and provision of service. 4. Invocation of extended period of limitation. 5. Comparison with similar cases and principles. Detailed Analysis: 1. Levy of Service Tax on Surrender Charges under "Management of Investment under ULIP service": The primary issue was whether service tax is leviable on surrender charges deducted from the fund value upon pre-mature withdrawal from ULIP policies. The Tribunal noted that surrender charges are calculated as a percentage of the fund value and are levied at a predetermined rate during the initial years of the policy. The appellant argued that these charges do not have any nexus with the provision of service as they are levied for the termination of the contract, not for the management of investment. 2. Applicability of Amendments and Explanations under Section 65(105) of the Finance Act, 1994: The Tribunal examined the amendments and explanations under Section 65(105)(zzzzf) and Section 65(105)(zx). The explanation substituted via Notification No. 24/2010-ST dated 22.06.2010 clarified that the taxable value of service is the difference between the premium paid by the policyholder for the ULIP policy and the sum of the premium paid for risk cover and the amount segregated for actual investment. The Tribunal held that the legislature clarified that service tax is only leviable on management fees or charges fixed by IRDA or actually levied by the insurer, whichever is higher, effective from 01.07.2010. 3. Nexus between Surrender Charges and Provision of Service: The Tribunal emphasized that surrender charges are levied for the cessation or discontinuance of service, not for the management of investment under ULIP. The charges are imposed to recoup expenses incurred towards procurement and administration of the policy. The Tribunal referenced similar cases, including Reliance Life Insurance Company Ltd. vs. CST, Mumbai-II, where it was held that surrender charges are not charges towards fund management and thus not taxable. 4. Invocation of Extended Period of Limitation: The appellant argued that the invocation of the extended period of limitation was unjustified as there was no suppression of facts. The Tribunal noted that the practice of imposing surrender charges had been in existence prior to 2008, and the department was aware of this through audits and financial documents. Therefore, the extended period of limitation could not be invoked. 5. Comparison with Similar Cases and Principles: The Tribunal referenced several cases, including the decision in Sriram Life Insurance Company and the principles laid out in the CBEC circulars, which clarified that penal charges are not subject to service tax. The Tribunal also compared surrender charges to pre-closure charges levied by banks, reiterating that such charges are not for the provision of service but are in the nature of penalties or liquidated damages. Conclusion: The Tribunal concluded that surrender charges are not subject to service tax as they are levied for the discontinuance of service, not for the management of investment under ULIP. The appeal was allowed, and the impugned order was set aside, granting the appellant consequential benefits in accordance with the law. The question of limitation was left open.
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