Page 112 - GSTL_7th May 2020_Vol 36_Part 1

70 GST LAW TIMES [ Vol. 36
ruling of this Tribunal in Housing and Development Corporation Ltd. v. CST, Ah-
medabad - 2012 (26) S.T.R. 531 (Tri. - Ahmd.) wherein this Tribunal held that there
is definitely an element of service involved in considering the request of the bor-
rower for prepayment of loan, fixing of prepayment charges, collection of the
same and closure of loan. These activities can be definitely in relation to Banking
and other Financial Services, which includes lending after 1-9-2004. Further,
when loans are foreclosed, the situation gives rise to the issue of asset liability
mismatch for the lender since lender, has to find alternative source for deploy-
ment of such funds. Prepayment charges are the charges leviable by a
bank/lender to offset the cost of finding such alternative source for deployment
of fund and also intended to make exit difficult for the borrower. This shows that
prepayment charges can never be considered to be in the nature of interest.
1 30. Learned Authorised Representative further urges that as the issue
of taxability of foreclosure charges has been referred to Larger Bench in the case
of Small Industries Dev. Bank of India v. CST, Ahmedabad - 2015 (38) S.T.R. 666 (Tri.
- Ahmd.), this matter may be kept pending till decision by the Larger Bench in
the case of SIDBI. He further urges for dismissal of the appeal.
31. Having considered the rival contentions, we are satisfied that sur-
render charges are permitted to be levied by IRDA, by way of penal charges to-
wards recovery of initial expenses incurred by the insurer in marketing and dis-
tribution of the policy. As IRDA has fixed limits as to recovery, which can be
made from time to time from the initial cost, accordingly, IRDA have permitted
to recover surrender charges in case of premature policy, as per the table given
hereinabove, so as to enable the insurer to recoup the cost incurred by them. Fur-
ther, we find that Legislature have clarified by substituting clause (ii) in Explana-
tion to Section 65(105)(zzzzf), clarified that 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 by substituting the Explanation w.e.f. 1-7-2010.
An Explanation is meant for clarifying the provision of the main section and ac-
cordingly has retrospective effect and is normally effective from the date of the
statute, unless otherwise provided in the amending Act or notification. Thus, we
hold that in view of the clarification by way of substitution of Explanation II, ser-
vice tax is not leviable on surrender charges by any stretch of imagination.
32. We further hold that there being no substantial change in the legis-
lation for the period 2011-12 also, and as appreciated by Revenue, that no service
tax is demandable on surrender charges for the period 2011-12 also. It has also
been clarified by the C.B.E. & C. vide TRU No. 334/1/2010, that the charge per-
taining to asset management alone should form the value for taxation in case of
ULIP policy. Accordingly, we hold that no service tax can be leviable for the pe-
riod 2011-12 also as surrender charges towards renting of service tax being penal-
ty. Accordingly, we allow the appeal and set aside the impugned order. The ap-
pellant shall be entitled to consequential benefit in accordance with law. As we
have allowed the appeal on merit, we have left the question of limitation open.
(Order pronounced on 21-8-2019)

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1 Paragraph number as per official text.
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