2026 (2) TMI 434 - HC - Service Tax

Deposit insurance service and CENVAT credit: service tax on DICGC premium held eligible as input service, credits allowed.

Whether service tax paid on deposit insurance premiums qualifies as an 'input service' under the CENVAT Credit Rules was considered; deposit insurance is ... Input service - CENVAT credit - nexus with taxable output service - deposit insurance as mandatory statutory requirement for banking - banking as a single and integrated activity - Whether the service tax paid by the respondent–banks on the deposit insurance premium remitted to the Deposit Insurance and Credit Guarantee Corporation qualifies as an “input service” under Rule 2(l) of the CENVAT Credit Rules, 2004. - HELD THAT:- The very same question was examined in detail by the Larger Bench of the CESTAT in South Indian Bank Ltd. v. Commissioner of Customs, Central Excise and Service Tax [2020 (6) TMI 278 - CESTAT BANGALORE - LB], wherein, after an exhaustive analysis of the provisions of the DICGC Act, the nature of banking business, and the scope of the definition of “input service”, it was held that deposit insurance is a statutory and mandatory requirement for banks and that the service tax paid on such insurance premium is eligible for CENVAT credit. The Larger Bench categorically held that without such insurance, a bank cannot lawfully carry on banking operations and render taxable banking and financial services. The said Larger Bench decision has been affirmed by the Kerala High Court in Principal Commissioner of Central Tax & Central Excise, Cochin v. South Indian Bank Ltd. and Catholic Syrian Bank Ltd. [2022 (12) TMI 1479 - KERALA HIGH COURT]. The High Court agreed in full with the findings of the Larger Bench and rejected the Revenue’s attempt to isolate the activity of acceptance of deposits from other allied banking services. It was held that while acceptance of deposits is a money transaction, the statutory obligation to insure such deposits forms part of the banking business and does not fall within the negative list. The Court further held that the insurance service provided for insuring deposits is an “input service” and that CENVAT credit of service tax paid thereon is admissible. In view of the settled legal position, we hold that the Tribunal applied the law and followed authoritative precedents in allowing CENVAT credit on the service tax paid on the DICGC insurance premium. The substantial questions of law framed by the Revenue are answered against it. Consequently, the impugned common Final Order of the Tribunal requires no interference, and all appeals filed by the Revenue are dismissed. No costs. Issues: Whether the service tax paid by banks on deposit insurance premium remitted to the Deposit Insurance and Credit Guarantee Corporation (DICGC) qualifies as an 'input service' under Rule 2(l) of the CENVAT Credit Rules, 2004 and whether CENVAT credit of such service tax is admissible to the banks.Analysis: The question was examined in light of Rule 2(l) of the CENVAT Credit Rules, 2004, the definition of 'service' in Section 65B(44) of the Finance Act, 1994, and the statutory obligations under the Deposit Insurance and Credit Guarantee Corporation Act, 1961. Authoritative decisions addressing identical questions include the Larger Bench decision of the CESTAT in South Indian Bank Ltd. and the subsequent affirmation by the Kerala High Court; the Bombay High Court has followed the same view. The statutory mandate requiring banks to obtain deposit insurance and pay the prescribed premium was treated as integral to the business of banking, such that the insurance service is used in providing the banks' taxable banking and financial services. The availability of CENVAT credit was assessed by reference to the requirement of a nexus between the service availed and the taxable output services of the banks and the settled precedents holding that deposit insurance satisfies that requirement.Conclusion: The service tax paid on DICGC deposit insurance premium constitutes an 'input service' under Rule 2(l) of the CENVAT Credit Rules, 2004 and CENVAT credit of such service tax is admissible to the banks. The substantial questions of law raised by the Revenue are answered against the Revenue and in favour of the assessee; the appeals are dismissed.