By TIOL News Service

KOLKATA, OCT 01, 2014: THE Appellant is UCO Bank.

A Service Tax demand of Rs.10.92 Crores was confirmed against the appellant under the category of Banking & Other financial services in respect of Bill discounting service rendered during the period 01.10.2004 to 31.03.2009.

Another service tax demand of Rs.9.19 lakhs was confirmed under the category of Renting of Immovable property service for the period 2007-2008 to 2008-2009.

There is a third demand of Rs.5.99 Crores being the amount not paid in accordance with Rule 6(3A)(c) of CCR,2004 even though CENVAT credit was availed on common input services used in providing both taxable and exempted services for the period April 2008 to March 2009.

Before the CESTAT, the appellant submitted that they haveaccepted the liability of service tax under the category of renting of immovable property and do not dispute the same in the present appeal.

However, as regards the liability of service tax on collection of interest against bill discounting facility, extended by the appellant to its customers, it is submitted that the fund advanced under bill discounting is nothing but advance given by the bank and interest earned for such bill-discounting is also nothing but interest on loan; that in terms of Explanation-I to Section 67 of the Finance Act, 1994 interest on loan for the purpose of determination of value of the taxable service is specifically excluded; that CBEC in its Circular No.80/10/2004-ST dated 17.09.2004, clarified that the interest amount would remain excluded from the purview of service tax; that even Rule 6(2)(iv) of the Service Tax (Determination of Value) Rules, 2006 specifically excludes interest on loan for the purpose of determination of value of taxable service; that Notification No.29/2004-ST dated 22.09.2004 exempts interest on overdraft, cash credit and bill discounting from the service tax leviable under Section 66 of the Finance Act, 1994.

On the demand made under rule 6(3A) of CCR, 2004, it is submitted that during the relevant periodthe appellant provided taxable services under the category of Banking and Other Financial Services, which included services provided to Government of India or State Governments in relation to the collection of duties or taxes, which services had been exempted vide Notification No.13/04-ST dated 10.09.2004 and the appellant had reversed the CENVAT Credit attributable to such exempted services. The ground of the demand being time barred was also put forth.

The Special counsel for the Revenue justified the departmental action.

The Bench observed that the following issues needed to be decided -

(i) Whether service tax is payable on the value of interest received on bill discounting facility extended by the Appellant to its Customers; and

(ii) Whether the amount of CENVAT credit reversed being attributable to the input service used in or in relation to the provision of exempted service, under Rule 6(3A) of the CCR,2004, is correct or otherwise?

The Bench extracted clause (ix) of the definition of Banking and Financial Services which reads -

(ix) other financial services, namely, lending, issue of pay order, demand draft, cheque, letter of credit and bill of exchange, transfer of money including telegraphic transfer, mail transfer and electronic transfer, providing bank guarantee, overdraft facility, bill discounting facility, safe deposit locker, safe vaults, operation of bank accounts;

Adverting to the meaning of the term ‘lend’, ‘loan’ as appearing in the Concise Oxford English Dictionary, Blacks’ Law Dictionary and the meaning and scope of the term ‘bill discounting’ as explained in Banking Law and Practice by P.N.Varshney, the Bench observed -

Analysing the meaning of lending, loan, bill discounting, as cited above, and taking into consideration the arguments advanced by both sides, we are of the opinion that even though under the bankers domain and practice, discounting of bills might be a form of advancing money to the customers and akin to some or most of the characteristics of a loan, but under the Finance Act, the service of lending & bill discounting have been considered as separate services, placed under the umbrella of taxable service of banking and financial services; accordingly, these service for the purpose of service tax should be treated differently. This could be supported by the reasoning that in the event all forms of advancing of money to the customers be intended to be covered under the broad category of lending or loan, then other services like, overdraft facility, cash credit facility, bill discounting facility etc. would not have been mentioned separately under the said clause(ix) of the definition of banking and financial services. Thus, it leads to the inescapable inference that the interest received in providing the bill discounting facility cannot be excluded in computing the value of taxable service treating it as loan under Section 67 of the Finance Act, 1994 for the period prior to 18.04.2006 and under Rule 6(2) of the Service Tax (Determination of Value) Rules, 2006, as the relevant exclusion clause is applicable to interest on loans.

In the matter of exemption claimed on ‘interest received on rendering of Bill discounting facility service’in terms of Notification No.29/2004-ST dated 22.09.2004 and which the Revenue seeks to deny on the ground that since discounting of bills is not specifically mentioned in the later part of the notification, therefore, the exemption to interest is restricted only to overdraft facility and cash credit facility, the Bench after referring to the meaning of the term ‘as the case may be’ appearing in the Oxford shorter dictionary and the Collins dictionary & a couple of apex court case laws observed -

24. The crucial issue needs to be addressed is: under the said Notification, whether the exemption to the value equivalent to interest, is limited only in relation to the services of overdraft facility & cash credit facility and not applicable to discounting of bills; and the value equivalent to discounts only is exempted for rendering the service of bill discounting facility. At the first blush, the said interpretation may sound plausible, however, on a deeper analysis and on applying the meaning of the expression as the case may be, culled out as above, in the present context, the argument that interest earned on over draft facility and cash credit facility only be exempted, and not on bill discounting facility would lead to an incorrect result of the interpretation of the said notification; on the contrary, as per the first part of the said Notification the subjects for exemption from service tax are overdraft facility, cash credit facility, or bill discounting facility etc., and the objects are value equivalent to interest or discount, as the case may be, that is, as per the circumstances. Thus, it is the value of interest or discount, in connection with providing the services overdraft facility, cash credit facility, or bill discounting facility etc. would be exempted from service tax under Sec.66 of the Finance Act,1994. Support to the aforesaid interpretation could be appreciated on reading para 19.1 of the Circular No.80/10/2004-ST dt. 17.09.2004…"

The Bench further noted -

Besides, on an enquiry from the Bench about the practice of assessment in case of other banks, it has been informed that no demand has been issued to other banks for rendering similar services. We also find that in the new negative list regime introduced w.e.f 01.07.2012, there is no scope for any ambiguity and call for interpretation as the position has been made clear in the respective provision 66D of the Finance Act,1994; the relevant provision reads as follows:

SECTION [66D. Negative list of services. The negative list shall comprise of the following services, namely :

(n) services by way of

(i) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount;

Inasmuch as the CESTAT held that the confirmation of service tax demand on the value of interest received in rendering bill discounting facility and imposition of penalty by theAdjudicating authority deserves to be set aside.

In the matter of the demand made in terms of Rule 6(3A)(c) of CCR,2004 for not maintaining separate accounts relating to rendering exempted and taxable services, the Bench observed that the appellant had made the following submission -

The Appellant while computing the amount of CENVAT Credit attributable to the exempted services under Rule 6(3A) of CCR, the value of exempted services i.e. interest on cash credit and interest on overdraft facilities, were not considered. It is the contention of the ld. CA for the Appellant that in view of definition, exempted serviceas prescribed at Rule 2(e) of the CCR,2004, they are not be required to reverse the credit attributable to the services viz. overdraft facility and cash credit facility as the banking and financial services, under which it fall are not exempted from service tax levy. In other words, the sub-categories of banking and financial services, if exempted, the CENVAT Credit availed on the input services, used in rendering such exempted sub-service, would not be required to be reversed under Rule 6(3) of CCR, 2004.

After referring to the relevant provisions of the CCR, 2004, the Bench concluded -

"30. A simple reading of the definition of exempted service reveals that it also includes services that are exempt under Section 66 of the Finance Act, 1994. In the present case, interest on overdraft facility and cash credit facility are exempted from service tax under Section 66 of the Finance Act,1944 by virtue of Notification No.29/2004 ST dt.22.09.2004. Therefore, these services would definitely come under the scope of the definition of exempted service, hence, the argument of the ld. CA that to attract Rule 6(3) of the CENVAT Credit Rules, 2004, the entire taxable service i.e. banking and financial services should be exempted and not few services mentioned under the categories of clause (ix) of the said Banking and Financial Services, is untenable. Thus, the ld. Commissioner is right in its approach to include the value of exempted services namely, overdraft facility and cash credit facility in computing the CENVAT Credit attributable to input services used in providing exempted services, as laid down under Rule 6(3A)(c) of the CENVT Credit Rules, 2004."

On the question of limitation, the Bench observed that it is difficult to ascertain whether additional notes to the statutory ST-3 returns had been enclosed with the respective Returns and whether in the said notes the Appellant had disclosed all facts including availment of CENVAT Credit and its reversal as per Rule 6(3A)(c) of the CENVAT Credit Rules,2004, since it had been fairly admitted that these documents were not specifically submitted before the Commissioner during adjudication and no finding had been recorded in this regard.

Inasmuch as taking a view that in the interest of justice, the Appellant should be allowed a fair chance to present these evidences and be subjected to scrutiny/verification by the department, the Bench set aside the confirmation of demand of CENVAT Credit (of Rs.5.99 crores) and imposition of penalty and remanded the case for redetermination of the liability, if any, only on the issue of limitation.
The Appeal was disposed in above terms.

(See 2014-TIOL-1902-CESTAT-KOL)