South Indian Bank Vs Commissioner of Customs (CESTAT Bangalore)
Conclusion: Insurance service provided by Deposit Insurance Corporation to banks was an “input service” and CENVAT credit of service tax paid for this service received by the banks from the Deposit Insurance Corporation could be availed by the banks for rendering output services.
Held: The service provided by the Deposit Insurance and Credit Guarantee Corporation to the banks for insuring the deposits of public with the banks had been considered by the banks to be an “input service” and CENVAT credit of service tax paid by the banks for this service had been availed by the banks for rendering “output services”. The issue involved in all these appeals was whether the banks could avail credit of this service tax paid by the banks for the service provided by the Deposit Insurance Corporation. It was held that in order to render any output service under the category of “banking and other financial services”, it was 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 outstanding, could not render any “output service” of “banking and other financial service”. It, therefore, held that banks could avail CENVAT credit of the service tax paid by the banks on the premium amount paid to Deposit Insurance Corporation for the insurance service rendered by the Deposit Insurance Corporation to the banks.
FULL TEXT OF THE CESTAT JUDGEMENT
The service provided by the Deposit Insurance and Credit Guarantee Corporation1 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 banks from the Deposit Insurance Corporation, a Division Bench of the Tribunal at Delhi in State Bank of Bikaner and Jaipur vs. Commissioner of Central Excise and Service Tax, Jaipur-I2 held on 11 January, 2019 that the banks can avail such credit of service tax in view of the decisions earlier rendered by the Tribunal in DCB Bank Limited Commissioner of Service Tax, Mumbai3 and Punjab National Bank vs. Commissioner of Central Excise and Service Tax, Bhopal4 that held that the banks can avail credit of service tax.
3. However, a Division Bench of the Tribunal at Mumbai in ICICI Bank Limited vs. Commissioner of Service Tax5, on an identical issue, disallowed the aforesaid credit by order dated 12 February, 2019. It appears that the decision of the Division Bench of the Tribunal at Delhi rendered on 11 January, 2019 in State Bank of Bikaner was not brought to the notice of the Division Bench of the Tribunal at Mumbai.
4. An application containing a prayer that the appeals may be re-listed for hearing in view of the conflicting decisions of the Tribunal at Delhi and Mumbai was, therefore, filed in the present appeals in which the order was reserved on 08 October, 2018.
5. In the meantime, a Division Bench of the Tribunal at Chandigarh in State Bank of Patiala vs. Commissioner of Central Excise and Service Tax, Chandigarh-II6 noticed the contrary views taken by the Division Benches of the Tribunal at Delhi and Mumbai and by order dated 23 May, 2019 considered it appropriate to place the matter before a Larger Bench of the Tribunal to decide the issue.
6. The present appeals were thereafter listed before the Division Bench of the Tribunal on 26 July, 2019. In view of the conflicting decisions of the Division Benches of the Tribunal at Delhi and Mumbai, the Bench ordered that the issue as to whether the Appellants would be entitled to avail CENVAT credit of service tax should be decided by a Larger Bench of the Tribunal.
7. To appreciate the issue involved in the Appeals and the contentions that have been advanced by the learned Counsel for the Appellants and the learned Authorised Representative of the Department, it would be necessary to state the relevant facts.
8. The Appellants herein are banking companies as defined under section 5(c) of the Banking Regulation Act, 19497. 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, 19618 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, 19949 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, 200410, 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 loans, locker rent and similar services, which are in relation to “banking and other financial services” and are chargeable to service tax as consideration for providing such services are not received in the form of interest. The list of services on which the banks have to pay service tax under “banking and other financial services”, can be bifurcated into two categories. The first category consists of services which have a direct nexus with the activity of “accepting” deposits, while the second category consists of those services which have a direct nexus with the “lending” activity of the banks. The services under the aforesaid two categories have been stated by the banks to be as follows:
(i) Direct nexus with the activity of accepting deposits.
