TaxTMI 
TaxTMI 
2020 (6) TMI 278
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....2016 (10) STA No. 20151 of 2017 (11) STA No. 20152 of 2017 (12) STA No. 20198 of 2017 (13) STA No. 20252 of 2017 (14) STA No. 20263 of 2017 (15) STA No. 20415 of 2017 (16) STA No. 20423 of 2017 (17) STA No. 20635 of 2017 (18) STA No. 21030 of 2019 (19) STA No. 21031 of 2019 ORDER 1. The service provided by the Deposit Insurance and Credit Guarantee Corporation[the Deposit Insurance Corporation] to the banks for insuring the deposits of public with the banks has been considered by the banks to be an "input service" and CENVAT credit of service tax paid by the banks for this service has been availed by the banks for rendering "output services". The issue involved in all these appeals is whether the banks can avail credit of this service tax paid by the banks for the service provided by the Deposit Insurance Corporation. This Larger Bench has been constituted as divergent views have been expressed by Division Benches of the Tribunal on this issue. 2. The appeals were listed for final hearing before a Division Bench on 8 October, 2018 and order was reserved. On an identical issue of eligibility of credit of service tax availed ....
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....he Appellants herein are banking companies as defined under section 5(c) of the Banking Regulation Act, 1949 [the Banking Act]. The Deposit Insurance Corporation is a subsidiary of the Reserve Bank of India and has been established under the Deposit Insurance and Credit Guarantee Corporation Act, 1961 [the Deposit Insurance Act.] for the purpose of insuring deposits and guarantee credit facilities. The Deposit Insurance Corporation transacts business of insuring the "deposits" accepted by the banks. It has to register every existing "banking company" as also a "new banking company" as an insured bank and the insured bank has to pay a premium to the Deposit Insurance Corporation at the rate notified by the Deposit Insurance Corporation. In the event of banking failure/winding up/ liquidation of a bank, the Deposit Insurance Corporation protects the deposits of the customers up to a maximum of Rs. 1 lakh per depositor. The banks pay service tax on this premium paid to the Deposit Insurance Corporation and avail CENVAT credit of such service tax for the "output services", which the banks provide in relation to "banking and other financial services" as defined under section 65 of....
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....equired post appropriate sanctions/ approvals being taken. • Inspection charges towards compensation for the time spent in visiting and inspecting the factory/godown/other assets of the borrowers. 10. The banks claim that they have availed credit of service tax paid on "input services" such as core banking software, renting of premises of the bank, maintenance of ATMs by agencies, on which credits no dispute has been raised by the Revenue. The dispute that has been raised by the Revenue is with regard to the service provided by Deposit Insurance Corporation to the banks for insuring the deposits, which service is not considered by the Revenue as an "input service" for the reason that the activity of "accepting deposits" is not a service defined under the Finance Act and so the deposit insurance service received in relation to "accepting" of deposits would not be an "input service" under rule 2(l) of the 2004 Rules. It is for this reason that show cause notices were issued to the banks for recovery of the CENVAT credit availed by the banks on the service tax paid on insurance service received by the banks by invoking the provisions of rule 14 of the 2004 Rules. 11....
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....ivity relating to the business of the banks, but the "activities relating to business" of the banks have been deleted by Notification dated 1 March, 2011. 13. It would also be pertinent to refer to the reasons given in the orders passed by the Adjudicating Authority while confirming the demands made in the show cause notices. One such order was passed on 31 December, 2014 by the Commissioner of Central Excise, Customs and Service Tax, Calicut Commissionerate [the Commissioner] in Service Tax Appeal No. 20747 of 2015 filed by South Indian Bank. The relevant portion of the order is as follows: "41.1............... Hence the contention of M/s South Indian Bank that taking deposits is not a transaction in money would not stand scrutiny. Similarly their other contention that the scope of clause (1) of Section 66D(n) of FA 1994 is limited to the activity of extending deposits is not legally tenable as a plain reading of the entire section makes it evident that services involving receiving deposits in return of consideration of providing interest would fall within the purview of the said Section, thus excluding the said activity from levy of service tax. Based on the above, I ....
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....uld not cover other services offered by the bank and thus would fall outside the ambit of the main portion of the definition. The definition for input services as given in Rule 2(1)(l) of CENVAT Credit Rules, 2004 carry a main clause, the inclusive portion and certain exclusions. The claim of M/s South Indian Bank that services received from DICGC does not figure in the list of exclusion given to the definition of input services is correct and as stated earlier it does not merit classification in the main clause of the said definition as well. The contention of the M/s South Indian Bank is that it would figure in the inclusive portion of the definition is examined now:- ............... The services received by M/s South Indian Bank from DICGC would not fall within the category of any other services listed in the inclusive portion of definition of input services. Further, after removal of clause "activities relating to business" from inclusive portion, the scope of this portion has narrowed considerably. One can accept the contention of the bank that registration with DICGC and payment of premium on deposit upto Rs. 100,000/- is an activity that is linked to the se....
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....of input service for the output service being rendered by them." (emphasis supplied) 16. The aforesaid Division Bench placed reliance on the decision of the Tribunal at Mumbai in DCB Bank. The relevant observations of the Tribunal in DCB Bank are as follows: "Appellant says that the deposits of the banks are insured. Its activity is to borrow money to lend. It protects interest insuring the deposits to be returned to be depositors. Therefore, such insurance being integrally connected with the business, CENVAT credit of the service tax paid in respect of the insurance premium paid should be allowed. xxxxx xxxxxx xxxxxx 4. The contention of the appellant has force since no banker will prefer to take risks against financial services provided. There is certain amount of risk against lending which is made out of deposits received from depositors. Therefore, taking insurance to protect interest of the bank being integrally connected with the business of banking, CENVAT credit of service tax paid claimed is allowable. Accordingly, appeal is allowed." (emphasis supplied) 17. The Division Bench at Delhi in State Bank of Bikaner also placed rel....
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....sitors, in the event the banks undergoing liquidation, the customers will be directly paid the insured amount." (emphasis supplied) 19. The contention of the banks that they can also avail CENVAT credit of the service tax paid on insurance premium under sub-rule (3B) of rule 6 of the 2004 Rules was not accepted for the following reason: "40............The said sub-rule directs payment of 50% credit on the input or input services availed. In the aforesaid analysis, we come to the conclusion that the insurance premium paid on deposits to DICGC is not an input service, consequently, the service tax paid on such insurance premiums, cannot be available as credit to the appellant during a particular month. The payment of 50% credit means that it is from the admissible amount of credit on inputs or input services as defined under the cenvat credit rules, 2004." 20. The decisions of the Tribunal in DCB Bank and Punjab National Bank were held to be per incuriam as they were found to have been rendered without consideration of the relevant statutory provisions. The observation of the Division Bench on this aspect in ICICI Bank is as follows: "42. On going through t....
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....s services by way of "extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount". The term "accepting deposits" is not included under clause (n). The activity of "accepting deposits" is different from the activity of "extending deposits" as in the case of "accepting deposits", the banks have to pay interest to the customers, while in the case of "extending deposits", the banks receive interest from other banks for extending deposits to other banks; (vi) The conclusion arrived at in the impugned order that insurance premium is payable only in relation to the deposits accepted by the bank is not correct. The assessable deposits on which the premium is calculated, not only includes deposits such as savings, fixed, current or recurring, but also certain balances appearing in the account of the bank such as credit balances in cash credit account, margin held against letters of credit, guarantees, bills purchased, drafts and payment orders not presented, provident fund balances relating to the staff of the bank held by the bank before they are transferred to the Provident Fund Commissioner, amount representing pay orders/b....
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....ks; (iv) The amount deposited with the banks form a base for arriving at the premium amount. The entire premium paid is to be borne by the banks and is not passed on to the customers; (v) For a service to be considered as an "input service" under the main clause of the definition of "input service", it is necessary that the service should have a direct nexus with the output service; and (vi) The services specified in the exclusive portion of the definition are not illustrative but exhaustive. 24. To appreciate the contentions advanced by the learned Counsel appearing for the Appellants as also the learned Special Counsel of the Department, it would be necessary to reproduce the relevant statutory provisions involved in the Appeals. 25. Section 65B of the Finance Act was inserted with effect from 1 June 2012. Sub-section (44) of section 65B defines 'service' and is as follows: "Section 65B(44) "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include- (a) an activity which constitutes merely,- (i) a transfer of title in goods or immovable prope....
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....s of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business such as accounting, auditing, financing, recruitment and quality control, coaching and trading, computer networking, credit rating, share registry, and security, inward transport of inputs or capital goods and outward transportation upto the place of removal;" 28. With effect from 1 April, 2011, the definition of "input service' is as follows: "2(l) input service" means any service.- (i) used by a provider of output service for providing an output service; or (ii) used by a manufacturer, whether directly of indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal, and includes services used in relation to modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotions, market research, storage upto the place of removal, procurement of inputs, accou....
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....service provided by a provider of service located in the taxable territory but shall not include a service, (1) specified in section 66D of the Finance Act; or (2) where the whole of service tax is liable to be paid by the recipient of service." 31. Rule 3 deals with CENVAT credit. It interalia provides that a provider of "output service" shall be allowed to take CENVAT credit of the service tax leviable under sections 66, 66A and 66B of the Finance Act and CENVAT credit may be utilised for payment of service tax on any output service. 32. Rule 6 of the 2004 Rules deals with the obligation of a provider of output service. Rule 6(1) provides that CENVAT credit shall not be allowed on such quantity of input used for provisions of exempted services or input services used for provisions of exempted services, except in the circumstances mentioned in sub-rule (2). Sub-rule (2) provides that where a provider of output services avails CENVAT credit in respect of any input or input services and provides such output service which are chargeable to duty or tax as well as exempted services, then, the provider of output service shall maintain separate accounts enumerated....
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....counts by whatever name called, with a corresponding new bank or with a Regional Rural Bank or with a banking company or a co-operative bank and includes credit balances in any cash credit account but does not include, xxxxx xxxx xxxx (h) "existing banking company" means a banking company carrying on the business of banking at the commencement of this Act which either holds a licence at such commencement under section 22 of the Banking Regulation Act, 1949, or having applied for such licence has not been informed by notice in writing by the Reserve Bank that a licence cannot be granted to it and includes the State Bank and a subsidiary bank, but does not include a defunct banking company; (k) "new banking company" means a banking company which begins to transact the business of banking after the commencement of this Act under a licence granted to it under section 22 of the Banking Regulation Act, 1949, (l) "premium" means the sum payable by an insured bank under section 15 of this Act; 34. Sections 10, 11, 13, 15, 15A and 16 of the Deposit Insurance Act are also relevant and they are as follows: "10. The Corporation shall register every existi....
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....tion has been cancelled under sub-section (1), if the concerned bank requests the Corporation to restore the registration and pays all the amounts due by way of premia from the date of default till the date of payment together with interest due thereon, on the date of payment. Provided that the Corporation shall not restore the registration unless it is satisfied, on an inspection of the concerned bank or otherwise that it is eligible to be registered as an insure bank. 16 (1) Where an order for the winding up or liquidation of an insured bank is made, the Corporation shall, subject to the other provisions of this Act, be liable to pay to every depositor of that bank in accordance with the provisions of section 17 an amount equal to the amount due to him in respect of his deposit in that bank at the time when such order is made: Provided that the liability of the Corporation in respect of an insured bank referred to in clause (a) or clause(b) of sub-section (1) of section (13) or clause (a) or clause (b) of section 13 C shall be limited to the deposits as on the date of the cancellation of the registration. Provided further that the total a....
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....xxxx xxxxx xxxxx (4) The Reserve Bank may cancel a licence granted to a banking company under this section- (i) if the company ceases to carry on banking business in India; or (ii) if the company at any time fails to comply with any of the conditions imposed upon it under sub-section (1); or (iii) if at any time, any of the conditions referred to in sub-section (3) and sub-section (3A) is not fulfilled: Provided that before cancelling a licence under clause (ii) or clause (iii) of this sub-section on the ground that the banking company has failed to comply with or has failed to fulfil any of the conditions referred to therein, the Reserve Bank, unless it is of opinion that the delay will be prejudicial to the interests of the company's depositors or the public, shall grant to the company on such terms as it may specify, an opportunity of taking the necessary steps for complying with or fulfilling such condition." 38. It would thus be seen that the Deposit Insurance Corporation has been established under section 3 of the Deposit Insurance Corporation Act for the purpose of insuring deposits and other matters connected therewith or inci....
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....ere an order for winding up or liquidation of an insured bank is made, the Deposit Insurance Corporation shall be liable to pay to every depositor of that bank an amount equal to the amount due to him in respect of his deposits in that bank at that time when such an order is made but the total amount payable by the Corporation to any one depositor in respect of his deposit in that bank shall not exceed Rs. 1 lakh. 39. It is in the light of the aforesaid provisions that it has to be examined whether the insurance service received by the banks from the Deposit Insurance Corporation can be considered to be an "input service". 40. Sub-rule (1) of rule 3 of the 2004 Rules provides that a provider of output service shall be allowed to take CENVAT credit of the service tax leviable under sections 66, 66A and 66B of the Finance Act. Sub-rule(4) of rule 3 provides that the CENVAT credit may be utilised for the payment of service tax on any output service. 41. "Input service", prior to 1 April, 2011, meant any service used by provider of taxable service for providing an output service, including amongst others, activities relating to business such as financing. However, with effect ....
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....s 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. 46. All banks have also to obtain a licence from the Reserve Bank of India under section 22 of the Banking Regulation Act. It also needs to be noticed that it is a compulsory for all banks who have obtained a licence from the Reserve Bank of India under section 22 of the Banking Regulation Act to register themselves with the Deposit Insurance Corporation. The registration of the banks with the Deposit Insurance Corporation is not optional for the banks. The p....
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....company. The interest of depositors is protected by the Deposit Insurance Corporation and in case premium is not paid by the banks for insuring the deposits, the registration with the Deposit Insurance Corporation can be cancelled and so would the interest of the depositors as their deposits will not have the cover of insurance. Thus, if the interest of the depositors is not sufficiently protected then under the third requirement the licence of the bank can also be cancelled by the Reserve Bank of India. 50. It cannot, therefore, be doubted that 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. 51. Premium is paid by the banks to the Deposit Insurance Corporation for providing the insurance service for which the banks pay service tax. It is this service tax paid by the banks on the insurance service received by the banks from the Deposit Insurance Corporation that is the bone of contention between the parties. 52. It is not in dispute that after accepting the deposits there are number of services on which the....
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....banks receive interest from other banks. It is for this reason that inter-bank deposits are not included in the returns filed by the banks with the Deposit Insurance Corporation for calculating the premium payable. The banks cannot avail credit of service tax on any amount of interest earned on extending of deposits. It is, therefore, not possible to accept the contention of the Department that "accepting" of deposits is covered under section 66D(n) of the Finance Act. 55. 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 ....
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....would now be useful to examine decisions on this issue. 59. In Commissioner of Central Excise, Bangalore vs. PNB Metlife India Insurance Co. Ltd [2015 (39) STR 561 (Kar.)], the issue that came up for consideration before the Karnataka High Court was whether an assessee can avail CENVAT credit of service tax paid on reinsurance services by treating the said service as an "input service". PNB Metlife India Insurance Company was carrying on life insurance business and on the insurance policy issued by it, service tax was charged from the customers. It also procured re-insurance service from overseas insurance companies and availed CENVAT credit of service tax paid on such services received by it. This CENVAT credit was denied by the Department for the reason that re-insurance service cannot be considered as an "input service" since it takes place after the insurance policy is issued. The Karnataka High Court examined whether CENVAT credit availed and utilized by the insurance company on service tax paid for re-insurance service is an "input service" for the output service of insurance that the company was providing and held that the process of issuance of the policy by the insurer ....
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....ance by it, is a continuous process, and in the facts of the present case, it cannot be said that the same would not be an 'input service' eligible for Cenvat credit within the meaning of Rule 2(l) of the Cenvat Credit Rules, 2004. 7. We may further add that the Service Tax is levied for certain service rendered and the provision of giving the Cenvat credit is so that there may not be double taxation. If a person has collected service tax, no doubt the same has to be deposited, but if in the process of the same transaction he has paid some service tax, which is necessary for its business, then he is entitled to the Cenvat credit to the extent of service tax which has been paid by it. In the present case, if the entire Service Tax which is collected by the Insurer, while selling its insurance policies, has to be deposited without being given the credit of the tax which is paid by it while procuring a policy of reinsurance as (mandatorily required in law), the same would be against the ethos of Cenvat credit policy, as the same would amount to double taxation, which is not permissible in law." 60. It needs to be noted that the aforesaid decision of the Karnataka High Cour....