By TIOL News Service

MUMBAI, FEB 25, 2019: THE appellants are engaged in providing taxable services of Banking and Other financial services.

During the relevant period [April 2012 to September 2016] they had availed CENVAT credit in respect of service tax paid on various input services including deposit insurance service provided by Deposit Insurance and Credit Guarantee Corporation (DICGC).

Alleging that the premium paid on deposit insurance to DICGC is not an 'input service' as defined under Rule 2(l) of CCR, 2004, SCNs were issued to various appellants of the banking sector and the demands were confirmed along with imposition of interest.

Eight banks are in appeal against these orders and there are two appeals filed by the Revenue.

The charge of Revenue:

++ DICGC provides insurance only to the depositor of the Bank and this was not for the benefit of the Bank or for protecting the interest of the Bank. It was meant for the benefit of small depositors[M/s DICGC's case (2015-TIOL-629-CESTAT-MUM) referred]. There is no contractual relationship between the appellant and the Bankers. The Corporation does not execute any contract with the Bank as the activity is statutory in nature. The Bank cannot be treated as an 'insured person' and hence not the recipient of insurance service from DICGC. This is the reason the Bank has no freedom but to insure all their deposits which is limited to the extent of Rs.1.00 lakh. In the event of liquidation, the Bank is not paid by DICGC any amount to offset its liabilities. The recipient of the benefit is the depositor hence Bank cannot claim the receipt of the service. Merely because the Bank pays the premium will not make the Bank as recipient of service.

The grounds for entitlement made by the banks in their appeal/submissions –

++ As per RBI norms, the appellant is required to have a capital adequacy ratio of 9% and should be registered with the Deposit Insurance and Credit Guarantee Corporation(DICGC), a subsidiary of Reserve Bank of India. The DICGC protects small depositors, in the event of failure of bank, by way of ensuring return of the deposits up to Rs. 1,00,000/- per depositor. Every bank in India is mandatorily required to insure its deposits through DICGC.

++ Tribunal in the case of Deposit Insurance and credit Guarantee Corporation Vs. Commissioner of Central Excise & Service Tax, Mumbai 2015-TIOL-629-CESTAT-MUM, while examining the issue of leviability of Service Tax on Insurance premium collected by DICGC from the Banks observed that the Corporation is assessed to Income Tax as a company and it functions as an Insurer, the insured are the various banks who pay the insurance premium and the beneficiaries are the depositors of the insured banks. Therefore, the service is provided by DICGC to Banks who pay the premium and beneficiaries are the depositors of the Bank. Therefore, the observation of the Commissioner that Banks are not recipients of service is incorrect.

++ As per Section 10 of the DICGC Act, 1961, every Bank is required to register with DICGC. It is a compulsory registration. Further, Section 15A of the said Act provides that the Corporation may cancel the registration of an insured bank, if it fails to pay the premium for three consecutive periods. This default will ultimately lead to cancellation of License granted under section 22 of the Banking Regulation Act, 1949.

++ Therefore, no output services can be provided unless the statutory requirement of insuring the deposit has been complied with. Hence, obtaining insurance deposit is having direct nexus with the provision of output service, therefore, such payment of insurance premium should be considered as 'input service'.

++ In compliance with the Rule 6(3B) of CCR, they have already reversed 50% of the total CENVAT Credit availed on various input and input services. This is a statutory obligation to reverse the credit. Therefore, the Commissioner has erred in demanding the reversal of the entire amount when the appellant had already reversed 50% of the credit. Further, the issue relating to admissibility of credit on deposit insurance premium is settled in their favour by two judgments of the Tribunal reported as DCB Bank Ltd . – 2017-TIOL-2849-CESTAT-MUM and M/s Punjab National Bank – 2018-TIOL-1395-CESTAT-DEL. Furthermore, no penalty is imposable as the issue relates to interpretation of statute.

The Member (Judicial) writing for the Bench considered the elaborate submissions made by both sides and after highlighting the genesis of the MODVAT/CENVAT scheme extracted the definition of “Input service” as existing prior to 01.04.2012 and later, section 65B(44), section 66D of the Finance Act, 1994 and inter alia observed -

++ It can safely be concluded that all or any of services that suffers service tax in the hands of the service providers or the manufacturer, as the case may be, cannot said to be an 'input service' as defined under Sec. 2(l) of CCR,2004 and eligible to credit.

++ Revenue's arguments is that the deposit received from the customers has been insured by the banks and the activity of accepting 'deposits' being not a service, inasmuch as the consideration on deposits, in the form of interest flows from the Banks to the customers, hence, the Banks are receivers of service of deposit against consideration of the interest paid by them to depositors; when the Banks deposit their money in another Banks/institutions, such deposits are not insured, and the interest paid/received on such deposits falls under the negative list of service.

++ Similarly, the activity of loans or advances provided by the Banks as service providers to the customers out of the deposits received from the public, the consideration thereof received by the Banks as 'interest' from the borrower is placed in the negative list defined under Section 66D of the Finance Act, 1994, accordingly, falls outside the scope of 'output service'; and consequently also falls outside the scope of 'input service'.

++ Considering the arguments vis-à-vis the statutory provisions and keeping in mind the concept of credit facility of the tax paid on services usedfor discharging Service Tax, it cannot be denied that all services/activities which are required for promoting or running the business cannot be considered as 'input service'; the CENVAT Credit facility of the tax paid on such services, could be allowed only when it falls within the scope of the present definition of 'input service'.

++ While placing the extent to which the banking activities/operations be subjected to Service Tax levy, it has been made clear under Section 66D of the Finance Act,1994, that is, the negative list; which prescribes that services rendered by way of extending deposit, loans or advances, to the extent the consideration is represented by interest is not leviable to service tax.

++ In other words, the consideration received in extending deposit, loan or advance being out of the service tax net cannot come under the scope of taxable services, defined at Section 66B of the said Act. Hence, the activity for providing the said service cannot also be an input service.

++ The deposits kept in the Bank are in different forms like, saving bank deposit, current deposit, fixed deposit etc. The consideration is received by the customers in the form of interest and such deposit per se is not a taxable service, since the consideration, in the form of interest, does not come under the Service Tax net.

++ Thus, the inference that could safely be drawn from the above analysis is that even though deposit is an activity relating to banking business but not a taxable service under the Finance Act, 1994, as the consideration for such service is exempted.

++ The deletion of the expression 'activities relating to business' post 01.4.2012 is with some significance and in that sense the new amended provision has to be read and understood. Hence, the argument that to commence and continue the banking business, insuring the deposits of customers is mandatory, accordingly, the service tax paid on such insurance premium, become an input service, in our opinion could not be sustained under the amended definition of 'input service' brought into effect from 01.4.2012.

++ Besides, it is not the business of the bankers which has been insured but the deposit of the customers with the social objective of the Government/RBI to protect the interest of small depositors, in the event the banks undergoing liquidation, the customers will be directly paid the insured amount.

Insofar as the argument advanced by the appellants that the Commissioner had erred in demanding the reversal of the entire amount when the appellant had already reversed 50% of the credit, the Bench examined the provisions of rule 6 and concluded that the said argument is fallacious since -

+ The said sub-rule directs payment of 50% credit on the input or input services availed.

+ As it is concluded that the insurance premium paid on deposits to DICGC is not an input service, consequently, the service tax paid on such insurance premiums, cannot be available as credit to the appellant during a particular month.

+ The payment of 50% credit means that it is from the admissible amount of credit on inputs or input services as defined under the CENVAT Credit Rules, 2004.

The Tribunal also held that the findings of the Single Member Bench in the cited cases of DSC Bank Ltd. (supra) which was followed subsequently in Punjab National Bank (supra) is per incuriam inasmuch it had been passed without considering the relevant statutory provisions and hence could not be considered as binding precedent.

On the issue of penalty, the Bench observed that since the issue relates to interpretation of law and the demand notices were issued for normal period, there was no justification in imposing penalty on the appellants.

Conclusion:

++ Amount of service tax paid on the insurance premium relating to the deposits of customer to DICGC by the Appellant Banks cannot be considered as an “input service” accordingly, credit of the said amount is not admissible to the Appellants.

++ The amount of 50% of the available credit in a month, required to be paid under Rule 6(3B) of CCR,2004 by the Appellants, cannot include the inadmissible credit of service tax paid on insurance premium paid to DICGC.

++ Since the issue involved is a pure question of interpretation of law, no penalty is imposable on the appellants.

++ The impugned orders against which the appellants are in appeal are modified by setting aside penalties imposed and appeals are partly allowed to that extent.

The first appeal of the Revenue on the issue of penalty was rejected in view of the findings arrived at above.

So also, as regards the second Revenue appeal No. ST/85915/16 filed assailing the impugned order on merit, the same was allowed by setting aside the impugned order of the Commissioner to the extent it was contrary to the findings recorded above.

The appeals were disposed of.

The above order was concurred by the Member (Technical) in a separate order by highlighting and affirming the conclusions arrived by the Member (J) and also extracting at length the paragraphs 26 to 29 of the apex court decision in Intercontinental Consultants and Technocrats [2018-TIOL-76-SC-ST].

In passing: For the record, the total Service Tax demand confirmed/upheld against the eight banks is around Rs. 340 Crores and the penalty that was imposed (and set aside) is Rs.34 crores.

(See 2019-TIOL-589-CESTAT-MUM)