2020 (6) TMI 278 - AT - Service Tax

Tribunal Allows Banks to Claim CENVAT Credit for Insurance Services, Overturns Previous ICICI Bank Case Decision.

M/s. South Indian Bank Versus The Commissioner of Customs, Central Excise and Service Tax-Calicut

M/s. South Indian Bank Versus The Commissioner of Customs, Central Excise and Service Tax-Calicut - 2020 (41) G. S. T. L. 609 (Tri. - LB) Issues Involved:1. Whether the banks can avail CENVAT credit of service tax paid on the insurance service provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC).Detailed Analysis:Background and Conflicting JudgmentsThe core issue in these appeals is whether banks can avail CENVAT credit of service tax paid on the insurance service provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC). This issue arose due to conflicting decisions by different benches of the Tribunal. A Division Bench at Delhi allowed such credit in 'State Bank of Bikaner and Jaipur vs. Commissioner of Central Excise and Service Tax, Jaipur-I,' while a Division Bench at Mumbai disallowed it in 'ICICI Bank Limited vs. Commissioner of Service Tax.'Statutory Framework and DefinitionsThe Appellants are banking companies under section 5(c) of the Banking Regulation Act, 1949. The DICGC, a subsidiary of the Reserve Bank of India, insures deposits accepted by banks. The banks pay a premium to DICGC and avail CENVAT credit of the service tax paid on this premium for their output services under 'banking and other financial services' as defined in section 65 of the Finance Act, 1994. Rule 6(3B) of the CENVAT Credit Rules, 2004, requires banks to reverse 50% of the total CENVAT credit availed on inputs and input services.Arguments by the BanksThe banks argue that:1. They are engaged in accepting deposits, which are used for lending or investment.2. They provide various services related to banking and financial services, which are chargeable to service tax.3. The insurance service provided by DICGC is an 'input service' as it is integrally connected to the output services provided by the banks.4. The insurance premium is a statutory obligation and commercially expedient for the banks to function.5. Section 66D(n) of the Finance Act covers 'extending deposits' and not 'accepting deposits.'Department's StandThe Department contends that:1. Accepting deposits is a transaction in money and outside the purview of service tax under section 66D(n) of the Finance Act.2. The insurance service provided by DICGC is aimed at protecting depositors, not the banks.3. The insurance premium paid by banks does not qualify as an 'input service' under rule 2(l) of the 2004 Rules.Tribunal's AnalysisThe Tribunal analyzed the statutory provisions, including definitions of 'service,' 'input service,' and 'output service' under the Finance Act and the CENVAT Credit Rules. It noted that:1. The primary activity of banks is to accept deposits, which are used for lending or investment.2. The insurance service provided by DICGC is mandatory and integrally connected to the banks' output services.3. The insurance premium paid by banks qualifies as an 'input service' under the main part of the definition in rule 2(l).4. Section 66D(n) of the Finance Act covers 'extending deposits' and not 'accepting deposits.'ConclusionThe Tribunal concluded that:1. The insurance service provided by DICGC to the banks is an 'input service.'2. Banks can avail CENVAT credit of the service tax paid on the insurance service received from DICGC for rendering output services.3. The view taken by the Division Bench in 'ICICI Bank' was not accepted.Final OrderThe reference was answered in favor of the banks, allowing them to avail CENVAT credit of the service tax paid on the insurance service provided by DICGC. The appeals were directed to be placed before the respective Division Benches of the Tribunal for final hearing.