TaxTMI 
TaxTMI 
2020 (11) TMI 582
X X X X Extracts X X X X
X X X X Extracts X X X X
....e issues involved in both the appeals are identical both the appeal were heard and taken up for consideration together. The issues involved in the two appeals are summarized in the table below: Appeal No ST/87659/2016 Issue Credit Denied Penalty Service Tax Paid on premium paid to DICGC 10563561 10563561 Service Tax Paid on Brokerage 1409650 1409650 Irregular credits already reversed prior to SCN 0 2573795 Total 11973211 14547006 Appeal No ST/88202/2019 Issue Credit Denied Penalty Service Tax Paid on premium paid to DICGC 23939687 2393969 Service Tax Paid on Brokerage 2124235 212423 Total 26063922 2606392 2.1 Appellant is a scheduled commercial bank and is providing various banking and Financial Services. For undertaking the various operations in relation to conduct of their business as a bank they are required to undertake certain activities which are statutorily prescribed. 2.2 They are required to deposit certain amount as premium for insuring the depositors account to the Deposit Insurance Credit Guarantee Corporation (DICGC). On the premium paid by them to the DICGC, they pay ser....
X X X X Extracts X X X X
X X X X Extracts X X X X
....owed to them. • They receive the services of the stock brokers for the purchase on sale of government securities in the open market for the following reasons,- • They underwrite government securities and to ensure sufficient liquidity to make market for each subsequent mandatory auction, they are required to trade in the government securities including those underwritten. • To maintain capital adequacy standards prescribed by RBI. • To maintain the SLR as per the Banking Regulation Act, 1949. • To comply with the Section 11 (2) (b)(ii) of The Banking Regulation Act, 1949, 20 to 25% of its profits is mandatorily deployed in cash or government securities. • They are required to comply with these statutorily prescribed requirements, and for these they engage the services of the stock brokers. Since the services of stock brokers are required to comply with the statutorily prescribed requirements, the CENVAT Credit in respect of these services should be admissible to them as has been held by the Hon'ble Karnataka High Court in case of PNB Metlife India Insurance Co Ltd [2015-TIOL-1097-HC-Kar- ST]. â€....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ne Workforce Solutions Ltd [2011 (9) TMI 114 (Kar)] • C Ahead Info Technologies India P Ltd [2010 (19) STR 276 (T-Ahd)] • Nischint Engineering Consultants Pvt Ltd [2010 (19) STR 276 (T-Ahd)] • Gupta Coal Fields & Washeries Ltd {2013 (29) STR 166 (T-Mum)] 3.3 Arguing for the revenue learned Authorized Representative while reiterating the findings recorded in the order submits that: • in relation to the admissibility of the CENVAT Credit of the Service Tax p66id on the premium paid to Deposit Insurance Credit Guarantee Corporation to the Bank, the Larger Bench of Hon'ble Tribunal has in its recent judgment in the case of South Indian Bank VS The Commissioner of customs, Central Excise and Service Tax, Calicut (2020 - TIOL - 861 CESTAT - BANG - LB) has held that the CENVAT credit service tax paid on insurance premium paid to DIGCC can be availed by the bank. A letter has been written to the concerned Commissionerate enquiring whether any appeal has been filed against the said judgment. Reply is still awaited. • In respect of the second issue i.e. wrong availment of CENVAT credit of service tax paid on brokerage on the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... We have considered the impugned order along with the submissions made in appeal made during the course of arguments. We have also considered the submissions made by the appellants in their written submissions dated 9th October 2020 and 14th October 2020, and by the revenue in the written submissions dated 19th October 2020. 4.2 There are three issues before us for consideration in this appeal, namely,- i. Admissibility of the CENVAT credit of the service tax paid on the insurance premium paid to DICGC. ii. Admissibility of the CENVAT credit of the service tax paid on the commission paid to the brokers for underwriting the government securities etc and for making investments in securities to maintain mandatory SLR as per the Banking Regulation Act, 1949 iii. Penalties imposed 4.3 There is no dispute about the fact that the issue in respect of the admissibility of CENVAT Credit of the Service Tax paid on the premium paid by the bank to the DICGC, has been decided by the three member bench of this tribunal in case of South Indian Bank, referred to by the learned Counsel and Authorized Representative. Learned Authorized Representative submits that they....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ation 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 by treating the service rendered by the Deposit Insurance Corporation as "input service". These services provided by the banks in relation to "banking and other financial services‟ are leviable to service tax as the banks do not receive consideration for the same in the form of interest. In terms of rule 6(3B) of the CENVAT Credit Rules, 2004, the banks also reverse 50% of the total CENVAT credit availed on input and input services during a particular month. 9. The banks claim that they are engaged in "accepting" deposits from the public, which deposits are used for the purpose of lending or investment and though no consideration is charged for making the deposits, but the banks thereafter provide number of services like discounting of cheques, minimum balance charges, handling charges for gold loa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 Finance Act would not be applicable. It was also pointed out that though no consideration was charged by the banks for "accepting" the deposits, but thereafter charges for various services rendered by the banks are recovered from the depositors, for which service tax is paid by the banks. The banks also highlighted that the payment of insurance premium would fall under the main part of the definition of "input service" since any default in making payment of this insurance premium may result in cancellation of the registration of the banks with the Deposit Insurance Corporation which could also ultimately lead to the cancellation of the licence of the banks by the Reserve Bank of India. The banks, t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 wholly-owned subsidiary of the Reserve Bank with a paid-up capital of a crore of rupees. It will insure all deposits in commercial banks including the State Bank and its subsidiaries,........... The premium rate will be determined by the Corporation from time to time with the previous approval of the Central Government. ....... 3. The Corporation's liability will arise and be discharged in the event of the liquidation of a bank or the enforcement in relation to it for a scheme of compromise or arrangement or reconstruction or amalgamation. The payment due to the depositors up to the limit of the insurance cover offered by the Corporation will be made in the most convenient and expeditious manner which may be possible. 2. In this Act, unless the context otherwise requires: (a) "banking" means the accepting, for the purpose of lending or investments, of deposits of money from th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 section (2) of section 36A of the "Banking Regulation Act, 1949, or has converted itself into a nonbanking company; or (f) if a liquidator has been appointed in pursuance of a resolution for the voluntary winding up of its affairs; or (g) if in respect of it any scheme of compromise or arrangement or of reconstruction has been sanctioned by any competent authority and the said scheme does not permit the acceptance of fresh deposits; or (h) if it has been amalgamated with any other banking institution. 15. (1) Premium- Every insured bank shall, so long as it continues to be registered, be liable to pay a premium to the Corporation on its deposits at such or rates as may, with the previous approval of the Reserve Bank, be notified by the Corpor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rn profits by way of lending the money at much higher interest rates. The actual risk which banking business faces is vis a vis the lendings and not the deposits. We would find the case for non performing assets, (NPA), and when such NPA increase a bank starts going bust. So the actual risk to banking business lies in the lendings and not in the deposits. However no such statutory scheme has been envisage for insuring the bank against the lending's. However the banks are always free to mitigate the risk involved, by asking the borrower to insure the loans advanced through a separate insurance scheme. All these facts point that what has been insured is not the bank or the banking business, but the deposits made in the bank, by the depositors, and against that the reason why section 16(1) of the Deposit Insurance Act, provides that the corporation will be liable to pay to every depositor of that bank. Thus the manner in which the scheme operates is to mitigate the risk faced by the depositor while making the deposits with the bank and not the risk which bank or banking business incurs. 4.6 The larger bench has while deciding the case of South India Bank relied heavily on the decis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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 of input service, is not worthy of acceptance. The process of issuance of an Insurance Policy by the Insurer and subsequent procurement of reinsurance policy from another company (which is a statutory requirement) is an integral part of the total process. The process of insurance does not come to an end merely on the issuance of the Insurance Policy by the Insurer. In fact, it continues till the existence of the term of the policy. The re-insurance is taken by the Insurer immediately after the insurance policy is issued, as is required under Section 101A of the Insurance Act, 1938. Since reinsurance is a statutory obligation, and the same is coterminus with the Insurance policy issued by the respondent, we are of the opinion that the stand taken by the Tribunal is correct that the transfer of a portion of the risk of the re-insurance has to be considered as having nexus with the output service, since the reinsurance is a statutory obligation and the same is coterminus with the Insurance Pol....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the said decision are reproduced below: "25. We are not suggesting that literal rule de hors the strict interpretation nor one should ignore to ascertain the interplay between 'strict interpretation' and 'literal interpretation'. We may reiterate at the cost of repetition that strict interpretation of a statute certainly involves literal or plain meaning test. The other tools of interpretation, namely contextual or purposive interpretation cannot be applied nor any resort be made to look to other supporting material, especially in taxation statutes. Indeed, it is well settled that in a taxation statute, there is no room for any intendment; that regard must be had to the clear meaning of the words and that the matter should be governed wholly by the language of the notification. Equity has no place in interpretation of a tax statute. Strictly one has to look to the language used; there is no room for searching intendment nor drawing any presumption. Furthermore, nothing has to be read into nor should anything be implied other than essential inferences while considering a taxation statute. 26. Justice G.P. Singh, in his treatise 'Principles of Statutory Interpretati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l v. Scott, (1948) 2 All ER 1]. The proper course in construing revenue Acts is to give a fair and reasonable construction to their language without leaning to one side or the other but keeping in mind that no tax can be imposed without words clearly showing an intention to lay the burden and that equitable construction of the words is not permissible [Ormond Investment Co. v. Betts, (1928) AC 143]. Considerations of hardship, injustice or anomalies do not play any useful role in construing taxing statutes unless there be some real ambiguity [Mapp v. Oram, (1969) 3 All ER 215]. It has also been said that if taxing provision is "so wanting in clarity that no meaning is reasonably clear, the courts will be unable to regard it as of any effect [IRC v. Ross and Coutler, (1948) 1 All ER 616]." Further elaborating on this aspect, the learned author stated as follows: "Therefore, if the words used are ambiguous and reasonable open to two interpretations benefit of interpretation is given to the subject [Express Mill v. Municipal Committee, Wardha, AIR 1958 SC 341]. If the Legislature fails to express itself clearly and the taxpayer escapes by not being brought within the letter o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e other aspect, as we presently discuss, even with regard to exemption clauses or exemption notifications issued under a taxing statute, this Court in some cases has taken the view that the ambiguity in an exemption notification should be construed in favour of the subject. In subsequent cases, this Court diluted the principle saying that mandatory requirements of exemption clause should be interpreted strictly and the directory conditions of such exemption notification can be condoned if there is sufficient compliance with the main requirements. This, however, did not in any manner tinker with the view that an ambiguous exemption clause should be interpreted favouring the revenue. Here again this Court applied different tests when considering the ambiguity of the exemption notification which requires strict construction and after doing so at the stage of applying the notification, it came to the conclusion that one has to consider liberally. 28. With the above understanding the stage is now set to consider the core issue. In the event of ambiguity in an exemption notification, should the benefit of such ambiguity go to the subject/assessee or should such ambiguity should ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on'. The Court was to interpret the aforesaid provision in order to ascertain whether the sale to the Government of India, Ministry of Industries and Supplies would be covered under the Section. 30. The majority was of the view that the Government of India, Ministry of Industries and Supplies was not similar to those mentioned in the exemption notification. The majority extensively relied on the history and origin of Ministry of Industries and Supplies and concluded that the functions of the aforesaid Ministry were different from the erstwhile departments mentioned under the exemption provision. The majority reasoned that the exemption being the creation of the statute itself, it should have to be construed strictly and the interpretation cannot be extended to sales to other departments. We might find some clue as to the content of a strict construction also. It was canvassed before the Court that the object of Section 5(2)(a)(iii) of the relevant statute, was to give exemption not to the particular departments but to the sale of such goods to those departments and, therefore, sale of those goods made to any Departments of the Government of India, which came to be charged ....
X X X X Extracts X X X X
X X X X Extracts X X X X
...." 33. The minority construed 'strict interpretation' to be an interpretation wherein least number of "determinates in terms of quantity" would fall under the exemption. The minority referred to an old English case of Commissioner of Inland Revenue v. James Forrest, (1890) 15 AC 334. It may be relevant to note that the minority could not find the justification to apply strict interpretation as the exemption notification was broad enough to include exemptions for commodities purchased by the Government of India. The Court was of the opinion that the strict interpretation provided by the majority was uncalled for as there was no additional burden on others by giving such exemptions. The relevant observations are as follows" The High Court referred to the observations of Lord Halsbury in the case of Commissioner of Inland Revenue v. James Forrest (1890) 15 AC 334, to the effect that exemptions from taxation should be strictly construed because otherwise the burden of taxation will fall on other members of the community. Those observations, in my opinion, have no relevance to the facts and circumstances of the present controversy, because we know that the exemption was....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... society would have to incur in transporting the aforesaid cotton fabric. In the years 1959 and 1960, the Government issued an exemption notification which exempted cotton fabrics produced by any cooperative society formed of owners of cotton power looms, registered on or before 31st March, 1961. The question before the Court was whether the appellant who got the cotton fabric produced from one of the registered cooperative society was also covered under the aforesaid notification. It may be of some significance that the revenue tried to interpret the aforesaid exemption by relying on the purposive interpretation by contending that the object of granting the above exemption was to encourage the formation of cooperative societies which not only produced cotton fabrics but also consisted of members, not only owning but having actually operated not more than four power looms during the three years immediately preceding their having joined the society. The policy was that instead of each such member operating his looms on his own, he should combine with others by forming a society to produce clothes. It was argued that the goods produced for which exemption could be claimed must be goo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r referred as 'Wood Papers Ltd. Case' for brevity], a distinction between stage of finding out the eligibility to seek exemption and stage of applying the nature of exemption was made. Relying on the decision in Collector of Central Excise vs. Parle Exports (P) Ltd., (1989) 1 SCC 345, it was held "Do not extend or widen the ambit at the stage of applicability. But once that hurdle is crossed, construe it liberally". The reasoning for arriving at such conclusion is found in para 4 of Wood Papers Ltd. Case (supra), which reads"... Literally exemption is freedom from liability, tax or duty. Fiscally, it may assume varying shapes, specially, in a growing economy. For instance tax holiday to new units, concessional rate of tax to goods or persons for limited period or with the specific objective etc. That is why its construction, unlike charging provision, has to be tested on different touchstone. In fact, an exemption provision is like an exception and on normal principle of construction or interpretation of statutes it is construed strictly either because of legislative intention or on economic justification of inequitable burden or progressive approach of fiscal provisions intended t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... "... There is support of judicial opinion to the view that exemptions from taxation have a tendency to increase the burden on the other unexempted class of tax payers and should be construed against the subject in case of ambiguity. It is an equally well known principle that a person who claims an exemption has to establish his case. ... The choice between a strict and a liberal construction arises only in case of doubt in regard to the intention of the legislature manifest on the statutory language. Indeed, the need to resort to any interpretative process arises only where the meaning is not manifest on the plain words of the statute. If the words are plain and clear and directly convey the meaning, there is no need for any interpretation. It appears to us the true rule of construction of a provision as to exemption is the one stated by this Court in Union of India v. Wood Papers Ltd. [(1990) 4 SCC 256 = 1990 SCC (Tax) 422 = JT (1991) SC 151]" Three important aspects which comes out of the discussion are the recognition of horizontal equity by this court as a consideration for application of strict interpretation, subjugation of strict interpretation to the plain meani....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... complied with. The mandatory requirements of those conditions must be obeyed or fulfilled exactly, thought at times, some latitude can be shown, if there is failure to comply with some requirements which are directory in nature, the noncompliance of which would not affect the essence or substance of the notification granting exemption." 39. The Constitution Bench then considered the doctrine of substantial compliance and "intended use". The relevant portions of the observations in paras 31 to 34 are in the following terms - "31. Of course, some of the provisions of an exemption notification may be directory in nature and some are mandatory in nature. A distinction between the provisions of a statute which are of substantive character and were built in with certain specific objectives of policy, on the one hand, and those which are merely procedural and technical in there nature, on the other, must be kept clearly distinguished... Doctrine of substantial compliance and "intended use" 32. The doctrine of substantial compliance is a judicial invention, equitable in nature, designed to avoid hardship in cases where a party does all that can reasonably be exp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....examined is whether the requirements relate to the "substance" or "essence" of the statute, if so, strict adherence to those requirements is a precondition to give effect to that doctrine. On the other hand, if the requirements are procedural or directory in that they are not of the "essence" of the thing to be done but are given with a view to the orderly conduct of business, they may be fulfilled by substantial, if not strict compliance. In other words, a mere attempted compliance may not be sufficient, but actual compliance with those factors which are considered as essential." 40. After considering the various authorities, some of which are adverted to above, we are compelled to observe how true it is to say that there exists unsatisfactory state of law in relation to interpretation of exemption clauses. Various Benches which decided the question of interpretation of taxing statute on one hand and exemption notification on the other, have broadly assumed (we are justified to say this) that the position is well settled in the interpretation of a taxing statute: It is the law that any ambiguity in a taxing statute should endure to the benefit of the subject/assessee, but....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t not lightly disregard the decision of another Bench of the same Tribunal on an identical question. This is particularly true when the earlier decision is rendered by a larger Bench. The rationale of this rule is the need for continuity, certainty and predictability in the administration of justice. Persons affected by decisions of Tribunals or Courts have a right to expect that those exercising judicial functions will follow the reason or ground of the judicial decision in the earlier cases on identical matters. Classification of particular goods adopted in earlier decisions must not be lightly disregarded in subsequent decisions, lest such judicial inconsistency should shake public confidence in the administration of justice. It is, however, equally true that it is vital to the administration of justice that those exercising judicial power must have the necessary freedom to doubt the correctness of an earlier decision if and when subsequent proceedings being to light what is perceived by them as an erroneous decision in the earlier case. In such circum stances, it is but natural and reasonable and indeed efficacious that the case is referred to a larger Bench. This is what was d....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., the same was binding on the other Benches of the Tribunal and to the extent the referral order had recommended to the Hon'ble President the constitution of a Larger Bench to resolve a divergence of opinion between a three Member Bench and a Single Member Bench was not a proper and legal order and the order of the Hon'ble President constituting a five Member Bench to determine the difference of opinion between a three Member Bench and a Single Member Bench was beyond the competence of the Hon'ble President. In response to queries from the Bench ld. JDR, Shri S. Srivastava submitted that there was no bar to a Single Member Bench doubting the correctness of an earlier decision of the Tribunal even if that decision was rendered by a Bench consisting of a larger number of Members than the Bench doubting the correctness of the earlier decision. In this connection, he relied on the observations of the Apex Court in Union of India v. Paras Laminates (P) Ltd. reported in 1990 (49) E.L.T. 322 at Paras 9 to 12 thereof. He submitted that in terms of Section 129C(5) of the Customs Act, 1962, where the Members of a Bench of the Tribunal differed in opinion on a point the point, it ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... note that the Apex Court judgment in Paras Laminates case has examined both the aspects, viz., (a) the competence of one Bench of the Tribunal to differ from the view taken by another Bench of the Tribunal and (b) the power of the Hon'ble President to constitute and refer a case to a Larger Bench a matter where Members of the Bench differ in opinion on any point and to refer such a case to one or more Members of the Tribunal. It has been observed in Paragraph 11 of the said judgment that Section 129C confers the power of reference upon the Hon'ble President and the power should be construed to be wide enough to enable the Hon'ble President to make a reference where Members of a Bench find themselves unable to decide a case according to what they perceive to be the correct law and fact because of the impediment of an earlier decision with which they cannot honestly agree. The Apex Court had stated: "In such cases, it is necessary for the healthy functioning of the Tribunal that the President should have the requisite authority to refer the case to a Larger Bench. That is the power which is implied in the express grant authorizing the President to constitute Benches of t....