Input service credit on deposit insurance premiums for banks upheld, with consequent allowance of credit and penalty set aside

Claimed input service credit on deposit insurance premium charged by the deposit insurance corporation was examined as a taxable service under banking and other financial services and whether banks are eligible to avail credit. The tribunal held that banks must be registered with the deposit insurer and pay premiums under the statutory scheme, and that the issue is governed by an earlier Larger Bench precedent which resolves the question in favour of the taxpayer. Consequentially the appeals allowing credit were allowed and the penalty imposed was set aside as it did not survive the main finding.

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Issues: Whether the insurance service provided by the Deposit Insurance and Credit Guarantee Corporation to banks is an "input service" permitting banks to avail CENVAT (service tax) credit, and whether penalties imposed on the banks survive if this finding is in favour of the banks.

Analysis: The question was examined in light of precedent by the Larger Bench in South Indian Bank v. CC Kozhikode, which addressed whether the Deposit Insurance Corporation's insurance service to banks qualifies as an input service and whether service tax paid on that service can be credited against output services rendered by banks. The Larger Bench answered this question after detailed consideration and concluded that the insurance service provided by the Deposit Insurance Corporation is an input service and that CENVAT credit of service tax paid for this service can be availed by banks for rendering output services. The present appeals involve identical factual and legal issues and therefore follow the Larger Bench ruling.

Conclusion: The insurance service provided by the Deposit Insurance and Credit Guarantee Corporation to banks is an input service; banks are entitled to avail CENVAT (service tax) credit of the service tax paid on that service. Consequently, penalties linked to the denial of such credit do not survive. The appeals are allowed in favour of the assessee.

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