Unreported Decisions – ST – September 2019

By Vinay Jain & Sachin Mishra, Advocates

1. Whether demand of service tax on ‘surrender charges’, which are deducted from the fund value as per policy provisions for pre-mature withdrawal from the ULIP scheme is taxable under the category of ‘Management of Investment under ULIP Service’?

Facts and Pleading:
Max Life Insurance Co. India Limited (hereinafter referred to as ‘Appellant’) is in the business of life insurance and provides several products which are broadly classifiable into term plan product, Unit Link Insurance Product (ULIP) etc. Sometimes the policy holder or the insurer opts for pre-mature termination of the policy. In such case, the Appellant levies surrender charges, which is deducted from the fund value or the benefit value accrued in the policy.

For the period 01.10.2008 to 30.06.2010, the department has demanded service tax on surrender charges levied on the surrender of ULIP policy on the count that the surrender charges are nothing but unrecovered expenses as on the date of surrender, which the insurance companies (i.e. the Appellant) had already incurred towards procurement, administration of the ULIP policy and incidental thereto. As regard, the period 01.07.2010 to 30.04.2011, there is no demand. For the period 01.05.2011 to 30.06.2012, the department has demanded service tax on surrender charges under ‘Life Insurance Service’. The department further alleged that surrender charges are similar to pre-closure/fore-closure charges levied by a banker, at the time of fore-closure of loan and hence, taxable.

The Appellant argued that surrender charges do not have any nexus with the provision of service as it is levied on the policyholder for surrender of the ULIP policy. Further, the Appellant submitted that event on which this amount is payable is an act of discontinuance of service and not an act of management of investment under ULIP and hence, not taxable. In this regard, the Appellant also relied upon Reliance Life Insurance Company Ltd. vs. CST, Mumbai-II-2018-TIOL- 1308-CESTAT-MUM and Sriram Life Insurance Company vide Final Order No. A/30187-30189/2019 (Hyderabad) dated 08-02-2019. For the demand for period 2011-12, the Appellant submitted that when there was no change in the coverage of ULIP Management, when surrender charges are related only to ULIP and when surrender charges are accepted to be not taxable under 65(105)(zzzzf) of the Finance Act, 1994, service tax cannot be demanded on surrender charges under ‘Life Insurance Service’. The Appellant submitted that doing so would lead to redundancy of Section 65(105) (zzzzf) of the Finance Act, 1994.

Judgment: The Hon’ble Appellate Tribunal after duly considering the submission of both the sides, held that in view of the Clause (ii) in Explanation to Section 65(105)(zzzzf) of the Finance Act, 1994, 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 and hence, service tax is not leviable on surrender charges. The Hon’ble Appellate Tribunal set aside the demand for the period 2011-12 on the count that there was no substantial change in the legislation for the said period and even the department did not demand service tax on surrender charges for the period 2011-12. The Hon’ble Appellate Tribunal further observed that 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, the Hon’ble Appellate Tribunal held that as surrender charges are in the nature of penalty, no service tax can be leviable on the same.

M/s. Max Life Insurance Co. India Limited. Vs. CCE, New Delhi, CESTAT, New Delhi, decided on 21-8-2019 in the Final Order No. 51097/2019.

M/s. Max Life Insurance Co. India Limited.

2. Whether the acquisition of land made by the Appellant for setting up of the Thermal Power Plant by the Joint Venture (JV) Company is to be considered as ‘Renting of Immovable Property Service’ for ‘transfer of surface rights’? Whether the 51% equity stake which has been granted to the Appellant by the Implementation Agreement, in the JV Company, could be treated as “Business Auxiliary Service”? and Whether deployment of officers in the JV Company, would amount to rendition of service under the category of “Business Auxiliary Service”?

Facts and Pleading: Rajasthan State Mines & Minerals Limited (hereinafter referred to as ‘Appellant’) is Government of Rajasthan Undertaking formed under Companies Act, for development and extracting mines and minerals etc. in the State. The Appellant formed a Joint Venture (JV) Company named Barmer Lignite Mining Co. Limited with Raj West Power Limited for carrying out lignite mining in Barmer with 51:49 of equity share respectively. As per the agreement, the Appellant acquired land for setting up of a thermal power plant by the JV Company. The property was initially supposed to be transferred to the JV Company, however, the said transfer was later on withdrawn by the Government. The Appellant also deployed its officers in the JV Company and recovered related expenditure from JV Company on cost to cost basis.

The department alleged that the acquisition of land made by the Appellant for setting up of the Thermal Power Plant by the JV Company is to be considered as ‘Renting of Immovable Property Service’ for ‘transfer of surface rights’. The Department also alleged that the 51% equity stake which has been granted to the Appellant by the Implementation Agreement, in the JV Company, could be treated as “Business Auxiliary Service” (‘BAS’). The Department further alleged that the deployment of officers in the JV Company by the Appellant would amount to rendition of service under the category of BAS on the pretext of giving technical knowledge and other expertise. The Appellant submitted that acquisition of land made by Appellant for setting up of Thermal Power Plant by JV Company is not renting of immovable property rather it is assignment of land. Further, the Appellant submitted that ‘transfer of surface right’ is incidental to the mining activity undertaken by the JV Company and hence not taxable under ‘Renting of Immovable Property Service’. The Appellant also submitted that renting of vacant land for mining activity is specifically excluded from the definition of ‘Renting of Immovable Property Service’. The Appellant submitted that the 51% equity stake of the Appellant in the JV could not be treated as BAS, as the Appellant has not provided any promotion, marketing, sale, etc. to JV Company. Further, Appellant submitted that deployment of officers to JV Company by Appellant would not amount to rendition of service under category of BAS as amount recovered by them are on actual basis.

Judgment: The Hon’ble Appellate Tribunal held that ‘surface right’ emerges out from the mining operations as ‘incidental activity’. The main activity remains ‘mining activity’, which is nothing but ‘benefit arising out of land’. Therefore, same cannot be held to be ‘service’ per se. The Hon’ble Appellate Tribunal set aside the demand of service tax on 51% equity stake granted to Appellant in the JV, under BAS on the count that the department failed to specify the exact entry of BAS under which the same was covered. Hon’ble Appellate Tribunal further held that 51% equity share is like ‘royalty’ which cannot be considered as ‘consideration’ for rendering of any service because it is Appellant’s share of revenue arising out of the JV. Reliance was placed on Mormugao Port Trust vs. Commissioner of Cus., C. Ex. & S.T. Goa -2017 (48) STR 69 (Tri. Mumbai) affirmed by Hon’ble Supreme Court in 2018 (19) GSTL J118 (S.C.). The Hon’ble Appellant Tribunal held that the expenses recovered by the Appellant on actual basis from JV Company, towards deputation of their employee and related expenses, cannot be categorized under the category of BAS. The Hon’ble Appellant Tribunal further held that even otherwise the deputation of employees in the JV company cannot be treated as taxable service under BAS. Reliance was placed on Punj Llyod Ltd. Vs. CST, Delhi-2019 (22) GSTL 85 (Tri. Del.).

M/s. Rajasthan State Mines & Minerals Limited v. CCE, CESTAT, New Delhi, decided on 21-8-2019 in the Final Order No. 51098/2019.

M/s. Rajasthan State Mines & Minerals Limited