Menu

By Vinay Jain, Chartered Accountant, & Sachin Mishra, Advocate

1. Whether 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 1-4-2009 to 30-6-2012?

Facts & Pleadings: Pleadings: M/s. Reliance Life Insurance Company Ltd. (hereinafter referred to as ‘Appellant’) is engaged in Life Insurance Business. Out of several policies offered by the Appellant, it also offers a Unit Linked Insurance Plans generally called as ‘ULIP Plans’ that are investment cum protection plans that offers customers dual benefits of availing market linked returns on their investments along with life insurance cover. In case, the customers wish to terminate the policy within 5 years of the plan, the Appellant charges an amount in the form of ‘surrender charges’ from its customers for the losses or damages caused to the Appellant.

According to the department, the said surrender charges are liable for service tax on the ground that the surrender charges are recoveries made to recover the expenses incurred towards procurement, administration of policy and incidentals thereto and thus has nexus with the service provided by the insurer to policy holder.

The Appellant argued that the surrender charges are in the nature of penalty as it is imposed to encourage the policy holder to continue with the contract for the full term of the policy. Further, the Appellant submitted that the sad activity of premature termination cannot be considered as ‘provision of service’ rather it is discontinuation of already existing service of risk cover and investment. The Appellant has further submitted that the said surrender charges fall under the scope of section 74 of the Contract Act, 1874 i.e., it is liquidated damages for breach of the contract. The Appellant further stated that the recovery of surrender charges is not the main source of revenue i.e., for provision of ULIP Service but merely compensation against premature termination of a contract. Thus, the same cannot form part of gross amount charged for ULIP Services.

Judgment: The Hon’ble CESTAT inter alia held that the surrender charges collected by the Appellant 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 ULIP. The Hon’ble CESTAT further held that the ULIP is primarily a contract between the insurer and insured and the charges collected for surrender of policy i.e., ending of contract is nothing but a compensation in the form of damages which cannot be termed as charges towards management.In this regard, the Hon’ble CESTAT drew a corollary to Circular No. 94/5/2007-ST dated 15-5-2006, wherein the entry and exit load charges of the Mutual Funds were held not chargeable to service tax as they were not towards Fund Management Service. The Hon’ble CESTAT also relied upon the decision of Hon’ble High Court of Delhi in Intercontinental Consultants & Technocrats Pvt. Ltd. vs. UOI 2013(29) STR 9 whereinit was held that it is only the value of the service rendered which is chargeable to tax. Thus, Hon’ble CESTAT held that the surrender/partial withdrawal charges are not liable for service tax under the taxable service category of ‘Management of Investment under ULIP Services’ for the period 1-4-2009 to 30-6-2012.

M/s. Reliance Life Insurance Company Ltd. vs. CST, Mumbai-II, CESTAT Mumbai, decided on 10-4-2018 vide Final ORDER NO. A/85966/2018

M/s. Reliance Life Insurance Company Ltd.

2. Whether time limit prescribed under Section 35 of the Central Excise Act, 1944 for filing of an appeal is also applicable on the mandatory pre-deposit under Section 35F of the Central Excise Act, 1944?

Facts & pleadings: M/s. Nyati Hotels & Resorts Pvt. Ltd. (hereinafter referred to as “Appellant”) had filed an appeal against the order-in-original before Commissioner (Appeals) within the stipulated time limit of 2 months from the receipt of the order-in-original. However, the Appellant paid the pre-deposit after three months of the passing of the order-in-original. Commissioner (Appeals) dismissed the appeal on the ground that the compliance of Section 35F of the Central Excise Act, 1944 is to be done within the time limits specified in Section 35(1) of the Central Excise Act, 1944 i.e., the Appellant should not only file the appeal within the time period stipulated under Section 35(1) of the Central Excise Act, 1944 but also is required to make pre-deposit of 7.5% of the duty within the said time period.

The Appellant submitted that the reference of Section 35(1) is given only for specifying the kind of appeals the Section 35 would be applicable. Under Section 35F there is no time limit to make pre-deposit. Section 35(1) only provides for filing of appeal within stipulated time before Commissioner (Appeals).The Appeal was correctly filed within 60 days and thus there is no default under Section 35(1) of the Central Excise Act, 1944.

Judgment:  The Hon’ble CESTAT agreeing with the submissions of the Appellant held that both Section 35 and Section 35F of the Central Excise Act, 1944 are independent provisions and have no overriding effect over each other. The statutory time limit provided under Section 35(1) of Central Excise Act, 1944 for filing of an appeal cannot be made applicable on the mandatory pre-deposit as well. As Section 35F of the Central Excise Act, 1944 does not prescribe any statutory time limit, provisions of Section 35 of the Central Excise Act, 1944 has got no application on it. The Hon’ble CESTAT while setting aside the order of Commissioner (Appeals) held that delay in payment of pre-deposit cannot be a ground to dismiss an appeal if the same has been filed within the statutory time limit as prescribed under Section 35 of the Central Excise Act, 1944.

Nyati Hotels & Resorts Pvt. Ltd. vs. CCE, Pune-III, CESTAT Mumbai, decided on 13-4-2018 vide Final Order No. A/86003/2018

Nyati Hotels & Resorts Pvt. Ltd.

Note: The Whole decisions can be downloaded from the CTC website www.ctconline.org under Knowledge Centre.

Go to top