TaxTMI 
TaxTMI 
2020 (6) TMI 278
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.... (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 on the insurance service received by the b....
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....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 the Finance Act, 1994 [the Finance Act.] by treating ....
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....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. A reply was submitted by the banks to the show cause notices. It was pointed out that the banks are engaged in "accepting" deposits and not "extending" the deposits and so section 66D(n) of the ....
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.... 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 conclude that the activity of receiving/collecting deposits, for which consideration is paid to depositor by way of interest, is covered under Sec. 66D(n) of the FA 1994. 41.2 It is not in dispute that a s....
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....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 services provided using deposits collected but in the absence of any provisions allowing such services to the considered as input services in the inclusive portion of the definition, it would not be possible to accept the contentions of South Indian B....
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....ys 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 reliance on the decision of the Tribunal in Punjab National Bank, which decision had followed the earlier decision of the Tribunal in DBC Bank. 18. However, in ICICI Bank, a Division Bench of the Tribunal at Mumbai took a contrary view on 12 February, 2019. There is no reference to the decision of the Division Be....
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.... "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 the case laws cited by the appellants and the revenue, we find that the same are pertaining to the definitions as was in existence period prior to 1.4. 2011, hence could not be of much assistance and accordingly not applicable to the facts of the present case. The finding by SMC of this Tribunal in DSC Bank Ltd.'s case which was followed subsequently in Punjab....
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....ase 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/bankers cheques/ demand drafts issued on closing deposit account with or without reference to depositors but remaining unpaid; and (vii) Even if it is assumed that some part of the insurance service is not used for provision of "output services", the banks are still entitled for the credit availed on insurance services as 50% of the total CENVAT credit taken is reversed in terms of rule 6(3B) of the 2....
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....ive 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 property, by way of sale, gift or in any other manner; or (ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or (iii) a transfer in money or actionable claim; (b) a provision of service by an employee to the employer in the course of or in relation to his employment; (c) fees taken in any Court or tribunal established under any law for the time being in force. Explanation 1.....
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.... 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, accounting, auditing, financing, recruitment and quality control, coaching and training, computer network, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal; but excludes (A) service portion in the execution of a works contract and construction services including service listed under clause (b) of section 66E of the Finance Act(hereinafter referred as specified services) in so far as they are used for- (a) Construction or execution of work contract of a building or a civil structure or a part thereof; or (b) Laying of foundation or making of structures for support of capital goods, except for t....
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....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 therein. Sub-rule (3B) of rule 6 of the 2004 Rules, that was inserted with effect from 1 April, 2011, is as follows: "Rule 6(3B) Notwithstanding anything contained in sub-rules (1), (2) and (3), a banking company and a financial institution including a non-banking financial company, engaged in providing services by way of extending deposits, loans or advances shall pay for every month an amount equal to fifty per cent of the CENVAT credit availed on inputs and input services in that month." 33. The relevant provisions of the Deposit Insurance Act can now be examined; Statement of Objects and Reasons. "The question of establishing statutory Corporation for insuring deposits in commercial banks has been under consideration for some time............. 2. The Deposit Insurance Corporation will be established as a whol....
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.... (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 existing banking company as an insured bank before the expiry of thirty days from the date of commencement of this Act. 11. The Corporation shall register every new banking company as an insured bank as soon as may be after it is granted a licence under section 22 of the Banking Regulation Act, 1949. 13. The registration of a banking company as an insured bank shall stand cancelled on the occurrence of any of the following events, namely: (a) if it has been prohibited from receiving fresh deposits; or (b) if it has been informed by notice in writing by the Reserve Bank that its licence has been cancelled under section 22 of the Banking Regulation Act, 1949 or that a licence under that section cannot be granted to it; or (c) if it has been ordered to be wound up; or (d) if it has transferred all its deposit liabilities in India to any other institution; or (e) if it has ceased to be a banking company within the meaning, of sub s....
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.... be limited to the deposits as on the date of the cancellation of the registration. Provided further that the total amount payable by the Corporation to any one depositor in respect of his deposit in that bank in the same capacity and in the same right shall not exceed Rs. 1,00,000/-." 35. It would also be appropriate to refer to the relevant provisions of the Deposit Insurance and Credit Guarantee Corporation General Regulations, 1961 [the Deposit Insurance Regulations] and they are as follows: "19.(1) An insured bank shall pay to the Corporation premium at the rate notified by the Corporation from time to time for each of the half-yearly periods ending on the last day of March and September in every year. xxxxxx xxxxx xxxxxxx (2) The actual premium payable by an insured bank in respect of a half-year shall be determined on the basis of its total deposits as on the last day of the proceeding half-year. xxxxxx xxxxxx xxxxxxxx (3) Every insured bank shall, as soon as possible after the commencement of each calender half-year but in any even not later than the last day of the second month of that half-year, furnish to the Corporation a statement in duplicate, dul....
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....ntal thereto. Both, the "existing banking companies" and "new banking companies" have to be registered by the Deposit Insurance Corporation as insured banks. "Banking" has been defined under section 2(a) of the Deposit Insurance Act to mean accepting for the purpose of lending or investments, of deposits of money from the public and repayable on demand. A "banking company" has been defined under section 2 (b) of the Deposit Insurance Act to mean any company which transacts the business of banking in India. Section 65 (10) of the Finance Act provides that "banking" would have the same meaning assigned to it under the said Act as is defined in clause (b) of section 5 of the Banking Regulation Act. The definition of "banking" under section 5(b) of the Banking Regulation Act is identical to the definition of banking under section 2(a) of the Deposit Insurance Act. "Deposit" has been defined under section 2(g) of the Deposit Insurance Act to mean the aggregate of the unpaid balances due to a depositor in respect of all his accounts. "Insured bank" has been defined under section 2(i) of the Deposit Insurance Act to mean a bank registered under the provisions of the Deposit Insurance Act.....
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....pril, 2011, the definition was amended and the definition can conveniently be divided into three parts namely; (i) main part which means any service used by a provider of output service for providing an output service; (ii) inclusive part which means services used in relation to various activities including financing; and (iii) services which are excluded from the definition of input service. 42. "Output service", prior to 1 July, 2012, meant any taxable service [excluding the taxable service referred to under section 65 (105) (zzp)] provided by the provider of taxable service. After 1 July, 2012, it has been defined to mean any service provided by a provider of service located in the taxable territory but shall not include a service that is either specified under section 66D of the Finance Act or where the whole of service tax is liable to be paid by the recipient of service. 43. The contention advanced on behalf of the banks is that the insurance service rendered by the Deposit Insurance Corporation to the banks is covered under the main part of the definition of "input service" and, therefore, the banks are justified in availing CENVAT credit on this "input service" for ....
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....posit Insurance Corporation is a statutory obligation of the banks. The banks this way, protect the interest of the depositors because non payment of premium and subsequent withdrawal of the protection provided by the Deposit Insurance Corporation may lead to loss of confidence of the public in the banks and ultimately loss of deposits. 47. A licence is issued to the banks by the Reserve Bank of India under section 22 of the Banking Regulation Act subject to such conditions as the Reserve Bank of India may think fit to impose. Sub-section (3) of section 22 provides that before granting any licence, the Reserve Bank of India may require certain conditions to be fulfilled to ensure that the carrying of banking business by such banks will not be prejudicial to the public interest or the interest of the depositors. Section 22 (4) enumerates the circumstances under which the licence granted to a banking company can be cancelled by the Reserve Bank of India and they are as follows: (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 t....
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....es". These services are in connection with both the "accepting" of deposits and "lending" activity of the banks. Banks would be able to lend only if they accept deposits. It has been seen that without payment of insurance premium on the outstanding deposits, banks will not be able to function or render any output service of "banking and other financial services" and the licence granted to the banks by the Reserve Bank of India can be cancelled. 53. Thus, 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". 54. The contention of the Department is that "accepting" of deposits is covered under section 66 D(n) of the Finance Act which contains the negative list. As noticed above, the negative list comprises, under sub-clause (n....
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....n submitted by learned Counsel appearing for the banks that even if it is assumed that some part of the deposit is not used for providing "output service", then too the banks are still entitled for the credit availed on the insurance service provided by the Deposit Insurance Corporation as the banks have reversed 50% of the total CENVAT credit taken in terms of rule 6(3B) of the 2004 Rules. This rule 6(3B) provides that notwithstanding anything contained in sub-rules (1), (2) and (3), a banking company and a financial institution including a non-banking financial company, engaged in providing services by way of extending deposits, loans or advances shall pay for every month an amount equal to 50% of the CENVAT credit availed on inputs and input services in that month. The Circular dated 28 February, 2011 issued by the Central Board of Excise and Customs explains the reason behind the abovementioned amendment. It has been stated that since substantial part of the income of a bank is from investments or by way of interest in which a number of inputs and input services are used and as there have been difficulties in ascertaining the amount of credit flowing into earning these amount, ....
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....tutory requirement, is an integral part of the entire process and the insurance process does not come to end merely on the issuance of the insurance policy since it continues till the existence of the term of the policy. The High Court noted that since re-insurance has to be taken under section 101 A of the Insurance Act, it is a statutory obligation and, therefore, has to be considered as having nexus with the "output service" and, therefore, would be an "input service", for which CENVAT credit can be availed. The portion of the judgment of the High Court pertaining to this aspect is reproduced below: "6. Having heard the learned counsel for the parties and in the fact of this case, we are of the opinion that the order of the Tribunal does not require any interference. Rule 2(l) of the Cenvat Credit Rules 2004 provides that 'Input Service' means service used by a provider of taxable service for providing an 'Output Service'. The submission of the learned counsel for the appellant that once the Insurance Policy is issued by the Insurer, the transaction comes to an end (and would not depend on the reinsurance policy) and as such the service provided would not come within the ambit....
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....ted 16 February, 2018. The relevant paragraphs 8 and 8.1 are reproduced below: "8. Decision of the Hon'ble High Court of Karnataka at Bangalore dated 09.04.2015 in the case of M/s PNB Metlife India Insurance Company Ltd. Bangalore [2015 (39) STR 561 (Kar.)] 8.1. Department has accepted the aforementioned order of the Hon'ble High Court of Karnataka. The issue examined in the order was, whether Reinsurance is an input service which is used for providing output service, namely, insurance and whether CENVAT Credit taken on re-insurance service is admissible. Hon'ble High Court held that reinsurance is a statutory obligation and the same is co-terminus with the insurance policy. Issuance of insurance policy by insurer, and then taking of reinsurance by it, is a continuous process. Reinsurance is, therefore, an input service." 61. 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 outsta....