2024 (11) TMI 471 - AT - Service Tax

Cenvat Credit of Service Tax on the insurance premium paid to Deposit Insurance Credit Guarantee Corporation DICGC - commission paid to the brokers for underwriting the government security etc. and for making investments in securities to maintain mandatory Statutory Liquid Ratio in accordance with Banking Regulation Act, 1949 - HELD THAT - The referral Bench has referred the issue to the Larger Bench because according to them the decision in South Indian Bank 2020 (6) TMI 278 - CESTAT BANGALORE - LB has been passed without considering the decision of the Hon ble Constitution Bench of the Supreme Court in the matter of Commissioner of Customs (Import), Mumbai v. Dilip Kumar Company 2018 (7) TMI 1826 - SUPREME COURT . It also observed that the decision of the Hon ble Karnataka High Court in the matter of Commissioner vs. PNB Metlife Insurance Co. Ltd. 2015 (5) TMI 68 - KARNATAKA HIGH COURT relied upon by the Larger Bench in the matter of South Indian Bank 2020 (6) TMI 278 - CESTAT BANGALORE - LB , has been rendered much prior to the decision of Dilip Kumar 2018 (7) TMI 1826 - SUPREME COURT therefore the said referral Bench was not in agreement with the interpretation of the provisions given by the Larger Bench in the matter of South Indian Bank 2020 (6) TMI 278 - CESTAT BANGALORE - LB Since now the Larger Bench vide its interim order in the matter of Bank of America v. Principal Commr., Mumbai 2024 (4) TMI 1149 - CESTAT MUMBAI has confirmed the decision of the Larger Bench in the matter of South Indian Bank 2020 (6) TMI 278 - CESTAT BANGALORE - LB and held that the earlier decision of Larger Bench needs no reconsideration, therefore we have no hesitation in holding that the issues involved herein are no longer res integra and is covered by the decision of Larger Bench in South Indian Bank (supra). There is no information about any further appeal filed by revenue against the aforesaid decision of the Hon ble Kerala High Court therefore it attained finality. Since the decision of the Larger Bench of the Tribunal in South Indian Bank 2020 (6) TMI 278 - CESTAT BANGALORE - LB has been upheld by two Hon ble High Courts coupled with the fact that the another Larger Bench of the Tribunal in the instant Appeals vide Interim order 2024 (4) TMI 1149 - CESTAT MUMBAI has once again upheld the decision in the matter of South Indian Bank 2020 (6) TMI 278 - CESTAT BANGALORE - LB , therefore it can safely be concluded that the insurance service received by the appellants from the DICGC which covers a substantial portion of Cenvat Credit in issue herein, qualifies as an input service under the provisions of Rule 2(l) of the Cenvat Credit Rules, 2004. Commission/brokerage paid to brokers for underwriting government securities or for making investments in securities to maintain mandatory statutory liquid ratio and all other remaining issues - There is no dispute that as per Reserve Bank of India s regulations, the banks are required to comply with the cash reserve ratio (CRR) and Statutory Liquid Ratio (SLR) and in order to maintain money supply according to the monetary policy of India from time to time. This activity cannot be separated from the banking and financial service by bank to its customers since it is a statutory requirement. Tribunal in the matter of South Indian Bank (supra) has held that any activity, without which the existence of the assessee as provider of taxable service is jeopardized, cannot but be an essential input service and is eligible for credit. The same view is also followed by this Tribunal in the matter of Bank of Baroda Ltd. 2021 (9) TMI 536 - CESTAT MUMBAI . In our opinion such services, which are necessary to fulfill statutory obligation, would certainly be qualified as input services and in the light of the settled legal position, we are of the view that the appellant is entitled for the Cenvat credit of the service tax paid by them for such services including the payment made to the brokers. Appellant-Bank of America, National Association has also made a submission that they have paid the service tax amount alongwith applicable interest even before the issuance of show cause notice in relation to the inadvertent availment of Cenvat Credit for a brief period but still the penalty has been imposed on them. This fact has not been denied anywhere by revenue, therefore we are of the view that in terms of Section 73(3) of the Finance Act, 1994 no penalty is to be imposed when short paid Service Tax is deposited alongwith interest prior to the issuance of show-cause notice. Therefore as the payment of service tax along with applicable interest has already been deposited before the issuance of show cause notice the penalty of Rs.25.53 lakhs is not liable to be imposed on the appellant and is accordingly set aside.

Summary

Issues Involved:

1. Admissibility of Cenvat Credit on Service Tax for insurance premium paid to Deposit Insurance Credit Guarantee Corporation (DICGC).
2. Admissibility of Cenvat Credit on Service Tax for brokerage commissions related to underwriting government securities and maintaining Statutory Liquid Ratio (SLR).
3. Interpretation of legal provisions under Sections 65 and 66 of the Finance Act, 1994, and their alignment with the Supreme Court's decision in Dilip Kumar and Co.
4. Application of Rule 6(3B) of the Cenvat Credit Rules, 2004, regarding credit eligibility for services used in providing both exempted and taxable services.
5. Penalty imposition under Section 73(3) of the Finance Act, 1994, when service tax is paid with interest before the issuance of a show-cause notice.

Detailed Analysis:

1. Admissibility of Cenvat Credit on Insurance Premium:
The judgment extensively discusses whether the insurance services provided by the DICGC qualify as 'input services' for banks. The Larger Bench of the Tribunal in South Indian Bank held that these services are mandatory and commercially expedient, allowing banks to function effectively. The service tax paid on these services by banks can be availed as Cenvat Credit for providing output services. This decision was upheld by the Kerala and Bombay High Courts, confirming that the insurance service provided by DICGC is indeed an 'input service,' allowing banks to claim Cenvat Credit.

2. Admissibility of Cenvat Credit on Brokerage Commissions:
The Tribunal examined the necessity of brokerage services for banks to comply with statutory requirements like maintaining the SLR. The judgment referenced the South Indian Bank case, which concluded that services essential for fulfilling statutory obligations are eligible for Cenvat Credit. The Tribunal agreed that brokerage services used for underwriting government securities and maintaining SLR are integral to banking operations, thereby qualifying as input services.

3. Interpretation of Legal Provisions:
The Tribunal addressed whether the interpretation of Sections 65 and 66 of the Finance Act, 1994, in the South Indian Bank case aligns with the Supreme Court's decision in Dilip Kumar and Co. The Tribunal found no ambiguity in the provisions and concluded that the decision in South Indian Bank did not require reconsideration. The Tribunal emphasized that the decision of the Larger Bench was upheld by higher courts, reinforcing its correctness.

4. Application of Rule 6(3B) of the Cenvat Credit Rules, 2004:
The Tribunal discussed the applicability of Rule 6(3B), which mandates banks to reverse 50% of the total Cenvat Credit availed on input services. The judgment clarified that once the reversal is made, banks are entitled to the full credit of service tax paid on input services related to providing taxable output services. This interpretation was supported by the Larger Bench's decision, which the Kerala and Bombay High Courts upheld.

5. Penalty Imposition:
The Tribunal considered the appellant's argument that penalties should not be imposed when service tax and interest are paid before the issuance of a show-cause notice. The Tribunal agreed, citing Section 73(3) of the Finance Act, 1994, which precludes penalty imposition under such circumstances. Consequently, the penalties imposed on the appellant were set aside.

In conclusion, the Tribunal set aside the impugned orders and allowed the appeals, affirming the eligibility of Cenvat Credit on both insurance services provided by DICGC and brokerage services related to statutory obligations. The judgment reinforced the interpretation of legal provisions and rules concerning Cenvat Credit, aligning with precedents set by higher courts.