Page 107 - GSTL_7th May 2020_Vol 36_Part 1

2020 ]MAX LIFE INSURANCE CO. INDIA LTD. v. COMMR. OF C.E. & S.T., LTU, NEW DELHI 65
“On gross premium charged from a policyholder reduced by the amount
allocated for investment or saving on behalf of the policyholder, if such
amount is intimated to the policyholder at the time of providing of ser-
vices.”
Further, in para 11 of the show cause notice it is observed, that surrender charges
as per IRDA guidelines, are the recoveries made to recoup expenses incurred
towards procurement, administration of the policy and incidental charges there-
to. It appeared to Revenue that surrender charges have a nexus with the service
provided to the policyholder. It further appeared that surrender charges are
similar to pre-closure/foreclosure charges, which are levied by a banker, at the
time of foreclosure of loan.
10. As regards invocation of extended period of limitation, it is alleged
that the appellant had intentionally and wilfully suppressed the facts of the re-
covery of surrender charges (from the policyholder). Further, they failed to as-
sess and pay service tax due on the said charges for the period under dispute. As
appellant did not pay the service tax as applicable on such charges and did not
file the prescribed ST-3 returns correctly, thus, the case of non-disclosure of the
true facts to the Department is made out, with intention to evade payment of
service tax. Accordingly, service tax of Rs. 62,82,94,708/- was proposed to be
demanded along with interest with further proposal to impose penalty. The
show cause notice was adjudicated vide impugned order-in-original, and the
proposed demand confirmed on contest along with interest and further equal
amount of penalty imposed under Section 78 along with penalty of Rs. 10,000/-
under Section 77 for not filing the proper ST-3 returns. Being aggrieved, the ap-
pellant is before this Tribunal.
11. Learned Counsel submits that surrender charges are calculated as a
percentage of fund value and are levied at a pre-determined rate (for a policy
year) on the fund value at the time of effecting premature surrender of the poli-
cy, during the initial years. Therefore, 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.
12. The appellant submits that the jurisdictional authority, that directs
or permits all insurance companies, to demand and collect the surrender charge,
is IRDA. That IRDA has clearly provided in its Circular No. 032/IRDA/Act-
1/Dec-2005, dated 21 December, 2005, that surrender means ‘terminating the
contract once and for all’. Further the same circular also states that surrender
charges are charges levied on the ULIP fund at the time of surrender of the con-
tract. Since, these charges are levied on termination of the contract, it clearly
shows that no service will be rendered by the insurer on payment of surrender
charges. Further, the Notification F. No. IRDA/Reg./2/52/2010, dated 1 July,
2010, also provides that the surrender charges are imposed only to recoup ex-
penses incurred towards procurement, administration of the policy and inci-
dental thereto. The test to determine whether or not the charges are for manage-
ment is to examine the precise nature of the surrender charges, IRDA in its circu-
lar has clearly stated that charges are levied for terminating the contract. The pur-
pose of the charge may be recoupment of expenses incurred earlier, but the fact remains
that the nature of the charge is for cessation/discontinuance of service and not manage-
ment of investment under ULIP. Further, the event on which this amount is payable
is an act of discontinuance of service and not an act of management of invest-
ment under ULIP. The activity, for which surrender charges is recovered, is an
GST LAW TIMES  7th May 2020  107