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

The Tribunal ruled in favor of the banks, allowing them to avail CENVAT credit for the service tax paid on insurance services provided by the Deposit ... CENVAT Credit - Input Services - Nexus with output service - service provided by the Deposit Insurance Corporation to Banks - Whether the insurance service received by the banks from the Deposit Insurance Corporation can be considered to be an “input service”? - Larger Bench has been constituted as divergent views have been expressed by Division Benches of the Tribunal on this issue. HELD THAT:- The basic activity of a banking company, as contemplated under the definition of “banking”, either under the Deposit Insurance Act or the Banking Regulation Act, is to accept deposits from the public, which deposits are used for the purpose of lending or investment by the banks. Thus, the main activity of a banking company is to mobilise the resources received by the banks in the form of deposits from the public for the purpose of lending or investment. These deposits, thus generate returns for the banks. A part of the returns is given by the banks to the depositors as a consideration, which consideration is normally in the form of interest - What also needs to be noticed is that the lending and investment portfolio of banks are required to be funded by deposits and the funds of the shareholders. The Credit Deposit ratio is the percentage of how much the banks lend out of the deposits they have mobilised and also indicates how much of the core funds of the banks are being utilised for lending. A higher ratio indicates more reliance on deposits for lending. In such circumstances, the raising of deposits is an important function of the banks. In other words, the acceptance of deposits is not only a pre-requisite for lending but is also necessary for the banks since the entire activity undertaken by the bank begins with the acceptance of deposits, without which the subsequent activities of lending or investment cannot be undertaken by the banks. The insurance service received by the banks from the Deposit Insurance Corporation is not only mandatory but is also commercially expedient. In fact, without this service the banks may not be able to function at all. The service rendered by the Deposit Insurance Corporation to the banks would fall in the main part of the definition of “input service”, which is any service used by a provider of output service for providing an output service. Once this service falls in the main part of the definition of “input service”, it would not be necessary to examine whether the service would be covered by the inclusive part of the definition. It has also been noted that the service is not excluded from the definition of “input service” - The Assessable deposits, on which the premium is calculated, not only includes deposits such as savings, fixed, current, recurring, etc., but also certain balances appearing in the account of the banks such as credit balances in cash credit accounts, margin held against letters of credit, guarantees, bills purchased, etc., unpresented drafts and payment orders, provident fund balances relating to staff held by bank before they are transferred to Provident Fund Commissioner, amount representing pay orders/ bankers cheques/ demand drafts issued by closing deposit accounts with or without reference to depositors, but remaining unpaid etc. Thus, the contention of the Department that insurance premium is paid only on the deposits of the customers cannot also be accepted. Sub-rule (3B) has, therefore, been introduced with a view to disallow the credit of input and input services attributable to interest/investment income earned by banking companies. Having regard to the fact that it is difficult to ascertain the actual amount of input and input services used in earning interest income, sub-rule (3B) provides for reversal of 50% of input and input services - Thus, the reversal has been made, banks are entitled for credit of the entire amount of service tax paid on input service having nexus with the provisions of output service and it is irrelevant as to which part of the input service is used for provision of taxable output service and which part has been used for provisions of exempted service. Having made reversal under rule 6(3B), the banks have duly complied with the 2004 Rules and hence they are entitled to avail CENVAT credit on the insurance service received from the Deposit Insurance Corporation. In the present appeals also, in order to render any output service under the category of “banking and other financial services”, it is necessary for a bank to register itself with the Deposit Insurance Corporation and pay premium after registration. A bank, without obtaining registration and without payment of insurance premium on the deposits outstanding, cannot render any “output service” of “banking and other financial service”. Thus, the insurance service provided by the Deposit Insurance Corporation to the banks is an “input service” and CENVAT credit of service tax paid for this service received by the banks from the Deposit Insurance Corporation can be availed by the banks for rendering ‘output services’. The appeals may now be placed for hearing before the respective Division Benches of the Tribunal. 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.