Appellant wins service tax case on bill discounting interest exemption, CENVAT credit reversal issue remanded

M/s. UCO BANK, KOLKATA Versus COMMISSIONER OF SERVICE TAX, KOLKATA

M/s. UCO BANK, KOLKATA Versus COMMISSIONER OF SERVICE TAX, KOLKATA - 2014 (36) S.T.R. 1169 (Tri. - Kolkata), [2015] 78 VST 317 (CESTAT) Issues Involved:
1. Liability of service tax on interest received from bill discounting facility.
2. Correctness of CENVAT credit reversal under Rule 6(3A) of the CENVAT Credit Rules, 2004.

Detailed Analysis:

1. Liability of Service Tax on Interest from Bill Discounting Facility:

The appellant, a Public Sector Bank, contested the liability of service tax on interest collected from bill discounting services. The central argument was that bill discounting should be treated as a loan, and thus, interest on it should be excluded from the taxable value as per Section 67 of the Finance Act, 1994, and Rule 6(2) of the Service Tax (Determination of Value) Rules, 2006. The appellant referenced their balance sheet and profit & loss account, which treat bill discounting similarly to loans, and cited various legal provisions and judgments to support their stance.

However, the tribunal noted that the Finance Act, 1994, distinctly categorizes 'lending' and 'bill discounting facility' under 'Banking and Financial Services,' implying separate treatment for tax purposes. The tribunal concluded that interest from bill discounting cannot be excluded from the taxable value as it is not considered a loan under the relevant tax provisions.

2. Exemption under Notification No. 29/2004-ST:

The appellant argued that interest received from bill discounting is exempt from service tax under Notification No. 29/2004-ST dated 22.09.2004, which exempts the value equivalent to interest on overdraft, cash credit, or discounting of bills from service tax. The tribunal analyzed the notification and judicial interpretations of the phrase 'as the case may be.' It concluded that the exemption applies to interest or discount related to overdraft, cash credit, and bill discounting facilities. Therefore, the interest received from bill discounting is exempt from service tax under the said notification.

3. Correctness of CENVAT Credit Reversal:

The appellant disputed the reversal of CENVAT credit under Rule 6(3A) of the CENVAT Credit Rules, 2004, arguing that interest on overdraft and cash credit facilities should not be considered exempt services for the purpose of credit reversal. The tribunal reviewed the definition of 'exempted service' under Rule 2(e) of the CENVAT Credit Rules, 2004, which includes services exempt from the whole of service tax. Since interest on overdraft and cash credit facilities is exempt under Notification No. 29/2004-ST, these are considered exempted services.

The tribunal upheld the commissioner's approach to include the value of exempted services in computing the CENVAT credit attributable to input services used in providing exempted services. However, the tribunal allowed the appellant an opportunity to present additional evidence regarding the disclosure of facts in their ST-3 returns, remanding the case for redetermination of liability on the issue of limitation.

Conclusion:

The tribunal set aside the demand and penalty related to the interest received from bill discounting facility, recognizing it as exempt under Notification No. 29/2004-ST. The issue of CENVAT credit reversal was remanded for further determination based on additional evidence regarding the disclosure of facts in the appellant's returns.