By TIOL News Service

MUMBAI, SEPT 02, 2013: THE appellant is registered under ‘Insurance Auxiliary Service', ‘Life Insurance Service', ‘Renting of Immovable Property' and ‘Business Support Services'. Audit of the records of the appellant company revealed that during the financial year 2004-05 to 2008-09, the appellant had not included income earned in the nature of – (a) Recovery of Agency Processing Fees, (b) Lapse Charges, (c) Back Dating Alteration Charges, (d) recoveries on Look in and (e) Policy Reinstatement Fees, in the gross taxable value.

The department opined that these additional charges are includible in the Taxable value of the services rendered and, therefore, issued a Service Tax demand of Rs.18,70,50,875/-. Two more SCNs were also issued for the period 2009-10 and 2010-11 on similar grounds demanding Service Tax of Rs.54,53,842/- and Rs.23,85,10,180/-. The appellant contested the levy of Service Tax on the ground that during the impugned period, the levy was only on the risk premium in respect of the insurance policies and not on other charges.

The Commissioner of Service Tax, Mumbai-I confirmed the service tax demand along with interest and penalties and the amount of Rs. 7,05,83,534/- paid by the appellant on ‘Lapse charges' and ‘Reinstatement fees' for the period from 16.5.2008 to 31.3.2009 and Rs. 5,34,25,651/-, for the period 2010-2011 were appropriated.

Before the CESTAT, the appellant submitted that –

+ as per Section 65(105)(zx)of the Finance Act, 1994, the taxable service means ‘a service rendered to a policy holder or any person, by an insurer, including re-insurer carrying on life insurance business in relation to the risk cover in life insurance'. Only in Finance Act, 2011, the taxable service was redefined as the “service rendered to a policy holder or any person, by an insurer, including re-insurer carrying on life insurance business” and this amendment came to force w.e.f. 1.5.2011. Therefore, since the taxable service covered only risk cover, Service Tax is liable to be paid only on risk premium and not on other charges collected.

+ reliance is also placed on paragraph 49 of Finance Minister's speech made on 1 st July, 2004 when Service Tax was levied on life insurance business and where it was clearly stated that Service Tax is being imposed on life insurance service to the extent of risk premium.

+ The Circular No. B2/8/2004-TRU dated 10.9.2004& 334/1/2008-TRU dated 29.2.2008 are adverted to emphasize that service tax is leviable on that portion of the service which pertains to the risk element.

+ The Board vide Circular No. 334/3/2011-TRU dated 28.2.2011 had also clarified :-

“3.2 Life Insurance Service [section 65 (105) (zx)]. The scope of this service is proposed to be expanded to cover all services, including relation to management of investments.”

From these clarifications, it is evident that the levy of Service Tax on life insurance prior to 1.5.2011 covered only the risk cover provided and, therefore, the Service Tax was payable only on the risk premium.

+ As regards the various charges collected by them, the agency processing fees related to amount collected towards stamping charges i.e. for the agency agreement entered into with the agent and this has no relationship with the risk premium received by the appellant.

+ As regards lapse charges, when for a unit linked policy, premiums are not paid for the first three years, then such a policy is treated as a lapsed policy and charges are levied to the policy holder, and they are termed as lapse charges. It is evident from the description that it is in the nature of penalty for the default made by the policy holder in payment of premium. In order to revive the policy, extra charges are required to be paid in addition to the premium. Therefore, the said charges also do not form part of the taxable value.

+ As regards backdating alteration charges, it is submitted that when a conventional policy is required to be backdated, extra charges are collected for backdating, which are called back dating charges and this amount is paid for giving retrospective effect to the policy and such grant of retrospective effect had no nexus with the risk premium on which Service Tax in many cases is paid.

+ With regard to look-in charges, this pertains to ULIP, which is looked in and the appellant recovered charges like stamp duty, medical fees, unit price adjustment etc. and the same also has no nexus with the risk element of the premium. Similarly, policy reinstatement charges are collected when the policy holder is given an option to reinstate/revive the policy. It is also submitted that these charges are collected as per the guidelines given by the Insurance Regulation and Development Authority (IRDA).

The Revenue representative submitted that since the amount involved is huge, the appellant should be put to terms.

The Bench observed –

“5.2 When the scope of the levy of Service Tax was extended in the Budget, 2011, it was further clarified that the scope of the levy is being extended to cover all services including in relation to management of investment. Thus, from the budget-speech of the Hon'ble Finance Minister and the circulars issued by the Board at various points of time, what emerges so far as the life insurance is concerned is that prior to 1.5.2011 the Service Tax was leviable on the risk premium and nothing else. If that be so, we do not understand how the various charges collected by the insurer in addition to the risk premium can be taxed under ‘life Insurance Service'.

5.3 The various contentions raised by the appellant have not been examined in detail by the adjudicating authority, who has simply made a sweeping observation that the agency processing fees, lapse charges, backdating alteration charges and policy reinstatement charges were recovered in relation to the life insurance service provided by the noticee and these charges are linked to the risk cover of the policy. This sweeping observation of the adjudicating authority is without examining the matter in detail and without taking into account the IRDA guidelines on the subject and hence cannot be sustained. It is a well settled position that due weightage should be given to the clarifications given by the administrative department, when a new levy was imposed as observed by the Hon'ble Apex Court in the case of K.P. Verghese Vs. Income Tax Officer – 1982 SCR 629 and Commissioner of Central Excise, Guntur Vs. Andhra Sugar – 1988 (38) ELT 564 (SC) = (2002-TIOL-513-SC-CX).”

Holding that the adjudicating authority had not examined the matter in proper perspective, the Bench remanded the matter.

(See 2013-TIOL-1296-CESTAT-MUM)