2024 (6) TMI 1420 - AT - Service Tax

Levy of service tax - insurance premium paid by the Banking Institutions to DICGC to secure deposits of the customer - Service Tax paid on insurance premium to DICGC for insuring deposits is eligible input credit for the Banking Institutions or not - HELD THAT - This issue was examined at length by a Larger Bench of the Tribunal in South Indian Bank vs. Commission of Customs, C. Ex. ST., Calicut 2020 (11) TMI 120 - CESTAT BANGALORE and after a consideration of the provisions of the Finance Act, the CENVAT Rules, the Deposit Insurance Act and the Regulations it was held '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' - it was further held that 'Having made reversal under Rule 6(3B), the banks have duly complied with the 2004 Rules and hence they are entitled to avail Cenvat credit on the insurance service received from the Deposit Insurance Corporation.' Thus, the insurance service provided by the Deposit Insurance Corporation to the appellant is an input service and CENVAT credit of the service tax paid by the appellant for this service received by the appellant from the Deposit Insurance Corporation can be availed by the appellant for rendering output services . The two appeals may now be placed for hearing before the Division Bench of the Tribunal.

Summary

Issues Involved:
1. Whether the insurance premium paid by banks to the Deposit Insurance and Credit Guarantee Corporation (DICGC) for insuring customer deposits is considered a service for which the bank must pay service tax.
2. Whether the service tax paid on the insurance premium to DICGC is eligible for input credit for the banking institutions.

Issue-wise Detailed Analysis:

1. Insurance Premium as a Taxable Service:

The primary issue was whether the insurance premium paid by banks to DICGC for insuring customer deposits constitutes a service requiring service tax payment by the banks. The judgment clarified that the insurance service provided by DICGC is mandatory and commercially expedient for banks. Without this service, banks would be unable to function effectively, as it is essential for securing customer deposits against banking failures. The service is deemed integral to the banks' operations, thereby falling within the definition of "input service" as per the CENVAT Credit Rules, which allows banks to treat the service tax paid on this insurance premium as an input service.

2. Eligibility of Service Tax for Input Credit:

The second issue addressed was whether banks could avail input credit for the service tax paid on the insurance premium to DICGC. The judgment referenced a previous decision by a Larger Bench in the South Indian Bank case, which held that the insurance service provided by DICGC is an "input service." The service tax paid on this insurance premium can be availed as CENVAT credit by banks for rendering "output services" in the category of "banking and other financial services." The decision emphasized that banks' operations, including accepting deposits and lending, are interlinked, and the insurance service is crucial for these activities. Therefore, the service tax on insurance premiums is eligible for input credit.

The judgment also discussed the implications of the negative list in Section 66D(n) of the Finance Act, which exempts certain banking activities from service tax. However, it clarified that the activity of accepting deposits, which requires paying interest to customers, is distinct from extending deposits, which involves banks earning interest. The insurance service by DICGC is related to the former and does not fall under the negative list, affirming the eligibility for input credit.

The judgment further supported its conclusions by referencing the Karnataka High Court's decision in the PNB Metlife case, which recognized re-insurance as an input service due to its statutory obligation and continuous process nature. This analogy reinforced the view that the insurance service provided by DICGC has a nexus with the output services rendered by banks.

Conclusion:

The Tribunal concluded that the insurance service provided by DICGC to banks is an "input service," and banks are entitled to avail CENVAT credit of the service tax paid on this service for rendering output services. This conclusion was supported by various high court decisions, including those from the Kerala and Bombay High Courts, which upheld the Tribunal's view and dismissed the department's appeals challenging this interpretation. The judgment emphasized the integral role of the insurance service in banking operations and the statutory and commercial necessity of availing such services, thereby justifying the input credit entitlement.