ST - Surrender charges under ULIP cannot be held as charges towards fund management and hence are not taxable: CESTAT
By TIOL News Service
MUMBAI, APRIL 23, 2018: THE appellant is registered as a service provider.
They were issued a SCN demanding service tax on ground that the surrender/partial withdrawal charges are liable for service tax under the taxable service category of 'Management of Investment under ULIP Services' for the period 01.04.2009 to 30.06.2012. Inasmuch as surrender charges are similar to pre-closure/ foreclosure charges and are neither in the nature of interest nor collected for delayed payment, the notice alleged.
The demand was confirmed by the CST, Mumbai, and, therefore the appeal before CESTAT.
In a detailed submission, it was concluded that the surrender and partial withdrawal charges are in the nature of penalty as it is imposed to encourage the policyholder to continue with the contract for the full terms of the policy; that the surrender charges are neither allocated towards the risk cover, investment or management of funds/ investment and, therefore, cannot form part of gross amount charged towards ULIP Service. The appellant also contended that the demand is time - barred as there is no suppression of facts.
The AR, while reiterating the findings of the original authority inter alia placed reliance on the decision in HDFC Standard Life Insurance Co. Ltd. - 2013-TIOL-1296-CESTAT-MUM (remanding the matter) and the decision in SMALL INDUSTRIES DEV. BANK OF INDIA Vs. CST, AHMEDABAD - 2014-TIOL-2463-CESTAT-AHM wherein the issue whether charges collected for foreclosure of loans is liable to service tax has been referred to the Larger Bench. It is pleaded by the AR that in view of the cited decisions, the issue involved in present appeal may also be referred.
The Bench extracted the definition of the taxable service of 'Management of Investment under ULIP Service' and observed -
Merits:
+ In nutshell, whatever amount is charged for the management of investment portion in ULIP policy is a taxable service and thus liable for service tax. On the contrary, the surrender charges are charged by the assessee when the person dilutes the policy completely or partially.
+ Notification F. No. IRDA/Reg/2/52/2010 dt. 01.07.2010 issued by the Insurance Regulatory and Development Authority (Treatment of Discontinued Linked Insurance Policy) Regulations, 2010 specifies that the major objective of discontinuance charges are either to recoup expenses incurred towards procurement, administration of the policy and incidental thereto and design the discontinuance charges to encourage the policyholder to continue with the contract for full term.
+ The fact which emerges from the above shows that the charges are either in the nature of 'penalty' or liquidated damages or a combination of both. Thus in no way it can be considered as charges towards providing of any services of management of investment under Unit Linked Insurance Plan. The clause 2 of Letter Ref : 055/IRDA/Act/ULIP/2009 - 10 DT. 24.09.2009 define it as surrender penalty.
+ 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.
+ Parallel can be drawn from 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.
+ Similarly, in case of Container Detention charges the Board vide Circular No. 121/2/2010-ST dt. 26.04.2010 held that the detention charges is not a service but can be called penal rent and hence not chargeable to tax.
+ Drawing the above same analogy the surrender charges under ULIP cannot be held as charges towards fund management and hence are not taxable.
Limitation:
+ 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.
The impugned order was set aside and the appeal was allowed with consequential relief.
(See 2018-TIOL-1308-CESTAT-MUM)
