No Service Tax on Surrender Charges on ULIP since these are in the nature of ‘Penalty’ or Liquidated Damages: CESTAT [Read Order]

The Mumbai Bench of Customs, Excise and Service Tax Appellate Tribunal ( CESTAT ) in the case of Reliance Life Insurance Co. Ltd. v. Commissioner of Service Tax allowing the appeal by the assessee held that surrender charges are either in the nature of ‘penalty’ or liquidated damages or a combination of both and hence not taxable as provision of a service of management of investment under Unit Linked Insurance Plan (ULIP).

The appellant-assessee M/s Reliance Life Insurance Co. Ltd. is engaged in Life Insurance Business and is registered under the category of “Life Insurance Service”, “Insurance Auxiliary Service” and “Management of Investment” under the ULIP. The assessee company was held liable to pay service tax on surrender/ partial withdrawal charges after an investigation and thereafter on the ground that surrender charges recovered to cover past expenses are liable to tax.

It was contended on behalf of the assessee that the surrender and partial withdrawal charges are in the nature of penalty as it is imposed to encourage the policy to continue with the contract for the full terms of the policy. And hence the charges not being consideration for the performance of a specific activity but as consideration for discontinuation (being in the nature of liquidated damages under Section 74 of the Indian Contract Act) thereto cannot be liable for service tax.

The Revenue relying upon a number of decisions of the Higher Courts, Board Circular No. 334/1/2010 dated 26.02.2010 submitted that surrender charges are liable to service tax.

The Tribunal after considering the submissions made by both the parties found that the taxable service in case of ULIP as enlisted under Section 65(105)(zzzzf) defining taxable service to include only that portion which involves management of segregated fund in relation to management of investment under ULIP. The Bench held that such charges cannot be categorized as charges towards fund management and hence are not taxable.

The Tribunal went on to analyze the nature of ‘surrender charges’ to be the charges by the assessee when the person dilutes the policy completely or partially. Where Premium Allocation Charges, Fund Management Charges and Policy Management Charges, which are levied towards Management and administration of fund, are capped on the basis of duration, Surrender Charges on the other hand are charged for surrender of contract and are not imposed after 5 years of the policy.