LIC Not Liable To Pay Service Tax On Premiums Retained After Policy Lapse: CESTAT Mumbai

The Mumbai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has ruled that the Life Insurance Corporation of India (LIC) is not liable to pay service tax on premiums retained after insurance policies lapse or are repudiated.

It held that retaining such amounts does not amount to a taxable service of "agreeing to tolerate an act" under Section 66E(e) of the Finance Act, 1994.

A coram of Judicial Member S.K. Mohanty and Technical Member M.M. Parthiban observed that there was no independent agreement under which LIC agreed, for consideration, to tolerate any act by a policyholder.

The bench observed, "in the absence of any contractual obligation or flow of consideration for the specific act of tolerating an act etc., it cannot be said that such amount of premium on account of forfeiture due to non-payment of further premiums by the policy holder or for the mis-declaration by policy holder occurring in a 'life insurance service' could be said to be another taxable service, under the category of 'declared service' for the purpose of levy of service tax under 66E(e) of the Act of 1994. ."

It added that treating the retained premiums as consideration for a separate service would lead to double taxation because service tax had already been paid on the insurance premiums received.

The dispute stemmed from a service tax demand raised against LIC for the period between July 1, 2012 and June 30, 2017. The Department claimed that premiums retained when policies lapsed due to non-payment of premiums or were repudiated because of mis-declaration by policyholders, amounted to consideration for agreeing to tolerate an act. It therefore sought to levy service tax under Section 66E(e) of the Finance Act, along with interest and penalties.

LIC argued that it had already discharged service tax on the insurance premiums received. It contended that the insurance policy was the only contract between it and the policyholder. The retention of premiums following a policy lapse or repudiation was simply a consequence of the policy terms and the Insurance Act, 1938, and not consideration for any independent taxable service.

It also relied on a 2023 CBIC circular and earlier decisions interpreting Section 66E(e).

Accepting LIC's submissions, the tribunal noted that insurance policies expressly deal with situations such as non-payment of premiums, revival of lapsed policies, and misrepresentation by policyholders. If a lapsed policy is not revived, it acquires no surrender value.

Likewise, where a policyholder makes incorrect declarations, the insurer may repudiate the policy without paying any benefit.

The tribunal noted that these were simply contractual consequences that followed when a policy lapsed or was repudiated. They did not amount to a separate arrangement under which LIC agreed to tolerate a policyholder's conduct.

It also relied on a 2023 CBIC circular, which makes it clear that Section 66E(e) applies only where there is a separate agreement backed by consideration. Finding no such arrangement in LIC's insurance contracts, the tribunal set aside the impugned order and allowed the appeal.

For Appellant (LIC): Dinesh Agarwal, Chartered Accountant, along with Advocate Shri Pranay Sahay

For Respondent (Revenue): Shashank Kumar Yadav, Authorized Representative.