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TMI Blog2020 (6) TMI 278X X X X Extracts X X X X X X X X Extracts X X X X ..... posits, thus generate returns for the banks. A part of the returns is given by the banks to the depositors as a consideration, which consideration is normally in the form of interest - What also needs to be noticed is that the lending and investment portfolio of banks are required to be funded by deposits and the funds of the shareholders. The Credit Deposit ratio is the percentage of how much the banks lend out of the deposits they have mobilised and also indicates how much of the core funds of the banks are being utilised for lending. A higher ratio indicates more reliance on deposits for lending. In such circumstances, the raising of deposits is an important function of the banks. In other words, the acceptance of deposits is not only a pre-requisite for lending but is also necessary for the banks since the entire activity undertaken by the bank begins with the acceptance of deposits, without which the subsequent activities of lending or investment cannot be undertaken by the banks. The insurance service received by the banks from the Deposit Insurance Corporation is not only mandatory but is also commercially expedient. In fact, without this service the banks may not be able ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices , 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 outstanding, cannot render any output service of banking and other financial service . Thus, the insurance service provided by the Deposit Insurance Corporation to the banks is an input service and CENVAT credit of service tax paid for this service received by the banks from the Deposit Insurance Corporation can be availed by the banks for rendering output services . The appeals may now be placed for hearing before the respective Division Benches of the Tribunal. - MR. JUSTICE DILIP GUPTA, PRESIDENT, MR. S. S. GARG, MEMBER (JUDICIAL) AND MR. C J MATHEW, MEMBER (TECHNICAL) Present for the Appellant : Shri G. Shivadass, Sr. Advocate, Ms. Sandhya Sarvode and Ms. M V Rohan Karia, Advocates, Mr. S. Ananthan Mrs. R Lalitha, Mr. G Thangaraj CA, Mr. Kuriyan Thomas, Mr. Sanjay Khemani CA Present for the Respondent: Shri P R V Ramanan, Special Counsel (AR) Service Tax Appeal No. 20747 of 2015 with (2) STA No. 21027 of 2015 with ST Cross ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal 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-II [ 2019-VIL-426-CESTAT-CHD-ST ] 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Charges towards issuance of Cheque book; Charges to maintain minimum balance; Debit Card charges; Duplicate Pass Book/ Bank Statement charges. Stop payment charges Cheque return charges Demand Draft charges Charges for providing bank guarantee Safe deposit locker facilities; etc (ii) Direct nexus with the lending activity. Processing fee towards obtaining necessary sanctions/approvals for lending money to customers; Documen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the banks in reply to the show cause notices was not accepted by the Adjudicating Officers and the demands have been confirmed. It has been found that accepting of deposits by the banks is not a service defined under the Finance Act and in fact is covered under the negative list of services under section 66 D(n) of the Finance Act. Thus, the banking and other financial services provided by the banks could not be considered as output service and in turn the insurance services received by the banks in relation to accepting of deposits would not be input service . Insurance on deposits, it has been noted, is taken by the banks for the purpose of securing the deposits of the public and the insurance premium does not protect the actions taken consequent to the deployment of the funds mobilised by the banks through deposits. Thus, the insurance premium is linked only to the deposits accepted by the banks and has no nexus with any output service. Therefore, even if the said service is received by the banks from the Deposit Insurance Corporation to fulfil a statutory requirement, such service would not qualify as an input service , unless the service rendered utilising such input ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insure deposits upto ₹ 100,000/- with DICGC. This has been done to secure the deposits of the small depositors and to protect them from any financial loss on account of any damage to the health of the financial institutions. Thus, the insurance is taken specifically for the purpose of securing the deposits. The insurance premium does not seek to protect, in any manner, the actions taken consequent to the deployment of funds mobilized through deposits . M/s South Indian Bank themselves admit that incomes are generated by deploying of deposits, and it is evident that insurance cover does not extend to the said deployment of deposits. Thus the service provided by DICGC would not qualify as a direct input service for the output services performed by a bank on which service tax is paid. Hence the contention in the show cause notice that this falls outside the ambit of the main part of the definition of input services is valid and tenable. 41.4 The argument of M/s South Indian Bank that without receiving deposits, banks cannot function and that collection of deposits is a necessary precursor for the main activities of the bank is certainly valid. However, as stated abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat insurance of deposits is essential for them to secure the money retain by them and also there is a statutory provisions for the same under DICGC, wherein they have to mandatorily ensure the deposits lying with them. Therefore, insurance is essential and they have paid the service tax on that insurance premium. In the circumstances, they are liable to availed Cenvat Credit on such services. In support of their claim reliance was placed on the decision of DGB Bank Ltd. vs. CCE, Commissioner of Service Tax-I, Mumbai [2017 (6) GSTL 479(TriMum)] and Final Order No. 52877/2018 dated 9/3/18, in case of M/s Punjab National Bank vs. Commissioner of Central Excise Service Tax, Bhopal, wherein the Hon ble Tribunal has held that such, activity credit of service available to the appellant. 6. We find that the issue is no more res integra, in view of the judgments of coordinate bench of this Hon ble Tribunal on the same issue which were relied upon by the Ld. Advocate . We also find that the Revenue has no force in their argument since no banker will prefer to take risk against the financial services provided by not taking insurance. Moreover same is mandatory in terms of DICGE. And ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hold good, firstly, in view of the above analysis that deposit by customers does not involve any service by the bank to the customer, and interest against loans or advances covered under the provisions of Section 66D of the Finance Act, 1994; secondly, this plea would have some basis under the definition of input service as was in force prior to 01.4.2012, which, interalia in the inclusive portion contained the expression the activities relating to business . With the deletion of the said expression, all the activities which contribute to the commencement and continuation of the banking business may not be relevant for bringing the same within the fold of definition of input service post amendment era. xxxx xxxx xxxx Hence, the argument that to commence and continue the banking business, insuring the deposits of customers is mandatory, accordingly, the service tax paid on such insurance premium, become an input service, in our opinion could not be sustained under the amended definition of input service brought into effect from 01.4.2012. Besides, it is not the business of the bankers which has been insured, but the deposit of the customers, with the social obj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporation is not only covered under the main part of the definition of input service , but is also covered under the inclusive part of the definition and has also not been specifically excluded from the definition; (iii) The said insurance service is covered under the main part of the definition for the reason that acceptance of deposits is integrally connected to the output services provided by the bank for which service tax is paid under the category of banking and other financial services ; (iv) The payment of insurance premium to secure the deposits is a statutory obligation and the registration of the banks with the Deposit Insurance Corporation for non-compliance of this obligation can be cancelled. The Reserve Bank of India can also cancel the licence of the banks because if the registration of the banks is cancelled the banks will not be able to conduct any banking business. Thus, the availment of service from the Deposit Insurance Corporation is not only mandatory in nature but also commercially expedient, without which service the banks cannot function at all; (v) Section 66D (n) of the Finance Act specifies the negative list of services on which no se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary for the banks to carry on their business and that banking and other financial services rendered by the banks are integrally connected to accepting of deposits . Reliance has also been placed on the decisions of the Supreme Court in Grasim Industries Ltd. vs. Collector of Customs, Bombay [ 2002 (141) ELT 593 (SC) ] and Thakkar Shipping P Ltd. vs. Commissioner of Customs (General) [ 2012 (285) ELT 321 (SC) ] . 23. Shri P R V Ramanan, learned Special Counsel for the Department has, however, made the following submissions: (i) Since no consideration is charged by the bank in relation to acceptance of deposits, it is a transaction only in money and, therefore, outside the purview of service tax under section 66D(n) of the Finance Act; (ii) The scope of the 2004 Rules is limited to the services consumed for providing taxable services. Thus, for any service to be covered within the scope of input service , it should be consumed or at least used for providing taxable services; (iii) Insurance by the Deposit Insurance Corporation is aimed at protecting the interest of the depositors against the failure of the banks leading to its liquidation and does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xxx (f) xxxxxxx (g) xxxxxxx (h) xxxxxxx (i) xxxxxxx (j) xxxxxxx (k) xxxxxxx (l) xxxxxxx (m) xxxxxxx (n) services by way of (i) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount; (ii) inter se sale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange or amongst banks and such dealers; (o) xxxxxx (p) xxxxxx (q) xxxxxx 27. The 2004 Rules deal with CENVAT credit. Rule 2(l) defines input service . The said sub rule (l), as it existed prior to 1 April, 2011, is as follows: 2(l) input service means any service,- (i) used by a provider of taxable service for providing an output service; or (ii) used by the manufacture, whether directly or 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 setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee; 29. Output service is defined under rule 2(p) of the 2004 Rules. Prior to 1 July 2012, output service was defined as follows: 2(p) output service means any taxable service, excluding the taxable service referred to in subclause (zzp) of clause (105) of section 65 of the Finance Act, provided by the provider of taxable service, to a customer, client, subscriber, policy holder or any other person, as the case may be, and the expressions provider and provided shall be construed accordingly; 30. After 1 July, 2012, output service is defined as follows: 2(p) output service means any service provided by a provider of service located in the taxable territory but shall not include a service, (1) specified in section 66D of the Finance Act; or (2) where the whole of service tax is liable to be paid by the recipient of service. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. (b) banking company means any company which transacts the business of Banking in India and includes the State Bank, and a Subsidiary bank but does not include the Tamilnadu Industrial Investment Corporation Ltd. (g) deposit means the aggregate of the unpaid balances due to a depositor (other than a foreign Government, the Central Government, a State Government, a corresponding new bank, Regional Rural Bank or a banking company or a cooperative bank) in respect of all his accounts by whatever name called, with a corresponding new bank or with a Regional Rural Bank or with a banking company or a co-operative bank and includes credit balances in any cash credit account but does not include, xxxxx xxxx xxxx (h) existing banking company means a banking company carrying on the business of ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inues 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 Corporation, from time to time, to the insured bank and different rates may be notified for different categories of insured banks. 15 A. Cancellation of registration of an insured bank for non-payment of premium (1) The Corporation may cancel the registration of an insured bank if it fails to pay the premium for three consecutive periods: Provided that no such registration shall be cancelled except after giving to the concerned bank one month s notice in writing calling upon that bank to pay the amount in default. (2) The Corporation may restore the registration of a bank whose registration has been cancelled under sub-section (1), if the concerned bank requests the Corporation to restore the registration and pays all the amounts due by way of premia from the date of default till the date of payment together with interest due thereon, on the date of payment. Provided that the Corporation shall not restore the registration unless it is satisfied, on an inspection of the concerned bank or otherw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise; 5(c) banking company means any company which transacts the business of banking in India. 37. Section 22(1) of the Banking Regulation Act deals with licencing of banking companies and it is reproduced below: 22 (1) Save as hereinafter provided, no company shall carry on banking business in India unless it holds a licence issued in that behalf by the Reserve Bank and any such licence may be issued subject of such conditions as the Reserve Bank may think fit to impose. (2) xxxxx xxxxx xxxxx (3) xxxxx xxxxx xxxxx (4) The Reserve Bank may cancel a licence granted to a banking company under this section- (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 time, any of the conditions referred to in sub-section (3) and sub-section (3A) is not fulfilled: Provided that before cancelling a licence under clause (ii) or clause (iii) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall stand cancelled. Section 15(1) of the Deposit Insurance Act requires every insured bank, so long as it continues to be registered, to pay a premium to the Deposit Insurance Corporation on its deposits at rates to be notified. Sub-section (3) of section 15 provides that if an insured bank makes any default in payment of any amount of premium, it shall, for the period of such default, be liable to pay interest to the Corporation. Section 15A(1) provides that the Deposit Insurance Corporation may cancel the registration of an insured bank if it fails to pay the premium for three consecutive periods. Section 16 (1) of the Deposit Insurance Act provides that where an order for winding up or liquidation of an insured bank is made, the Deposit Insurance Corporation shall be liable to pay to every depositor of that bank an amount equal to the amount due to him in respect of his deposits in that bank at that time when such an order is made but the total amount payable by the Corporation to any one depositor in respect of his deposit in that bank shall not exceed ₹ 1 lakh. 39. It is in the light of the aforesaid provisions that it has to be examined whether the insurance servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g , either under the Deposit Insurance Act or the Banking Regulation Act, is to accept deposits from the public, which deposits are used for the purpose of lending or investment by the banks. Thus, the main activity of a banking company is to mobilise the resources received by the banks in the form of deposits from the public for the purpose of lending or investment. These deposits, thus generate returns for the banks. A part of the returns is given by the banks to the depositors as a consideration, which consideration is normally in the form of interest. 45. What also needs to be noticed is that the lending and investment portfolio of banks are required to be funded by deposits and the funds of the shareholders. The Credit Deposit ratio is the percentage of how much the banks lend out of the deposits they have mobilised and also indicates how much of the core funds of the banks are being utilised for lending. A higher ratio indicates more reliance on deposits for lending. In such circumstances, the raising of deposits is an important function of the banks. In other words, the acceptance of deposits is not only a pre-requisite for lending but is also necessary for the banks sinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the insurance. It, therefore, follows that if a banking company fails to pay the premium amount to the Deposit Insurance Corporation, it would not be able to retain its registration with the Deposit Insurance Corporation, which may ultimately also lead to the cancellation of the licence granted to the banking company by the Reserve Bank of India under section 22 of the Banking Regulation Act. 49. The third condition under which the Reserve Bank of India can cancel the licence of the banking company is when the Reserve Bank of India comes to a conclusion that the interest of the depositors is being prejudiced by a banking company. The interest of depositors is protected by the Deposit Insurance Corporation and in case premium is not paid by the banks for insuring the deposits, the registration with the Deposit Insurance Corporation can be cancelled and so would the interest of the depositors as their deposits will not have the cover of insurance. Thus, if the interest of the depositors is not sufficiently protected then under the third requirement the licence of the bank can also be cancelled by the Reserve Bank of India. 50. It cannot, therefore, be doubted that the insuranc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding of deposits would be an activity of a bank giving its surplus money in the form of deposit to another person, where the consideration received would be in the form of interest. This would be a case where in the course of banking activities, one bank makes a deposit with another bank for which it receives consideration in the form of interest. It is this consideration received by the banks in the form of interest which has been specified under section 66D (n) of the Finance Act in the negative list of services. Thus, in case of accepting deposits, the banks have to pay interest to the customers, whereas while extending deposits, the banks receive interest from other banks. It is for this reason that inter-bank deposits are not included in the returns filed by the banks with the Deposit Insurance Corporation for calculating the premium payable. The banks cannot avail credit of service tax on any amount of interest earned on extending of deposits. It is, therefore, not possible to accept the contention of the Department that accepting of deposits is covered under section 66D(n) of the Finance Act. 55. The Assessable deposits, on which the premium is calculated, not o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come, sub-rule (3B) provides for reversal of 50% of input and input services. 57. Thus, the reversal has been made, banks are entitled for credit of the entire amount of service tax paid on input service having nexus with the provisions of output service and it is irrelevant as to which part of the input service is used for provision of taxable output service and which part has been used for provisions of exempted service. 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. 58. It would now be useful to examine decisions on this issue. 59. In Commissioner of Central Excise, Bangalore vs. PNB Metlife India Insurance Co. Ltd [ 2015 (39) STR 561 (Kar.) ] , the issue that came up for consideration before the Karnataka High Court was whether an assessee can avail CENVAT credit of service tax paid on reinsurance services by treating the said service as an input service . PNB Metlife India Insurance Company was carrying on life insurance business and on the insurance policy issued by it, service tax was charged from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is taken by the Insurer immediately after the insurance policy is issued, as is required under Section 101A of the Insurance Act, 1938. Since re-insurance 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 ox the re-insurance has to be considered as having nexus with the output service, since the re-insurance is a statutory obligation and the same is coterminus with the Insurance Policy. We only reiterate that the issuance of insurance policy by insurer, and then taking of reinsurance by it, is a continuous process, and in the facts of the present case, it cannot be said that the same would not be an input service eligible for Cenvat credit within the meaning of Rule 2(l) of the Cenvat Credit Rules, 2004. 7. We may further add that the Service Tax is levied for certain service rendered and the provision of giving the Cenvat credit is so that there may not be double taxation. If a person has collected service tax, no doubt the same has to be deposited, but if in the process of the same transaction he has paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e before the Tribunal was whether such investments in securities can be considered as an exempted service as a result of which CENVAT credit was required to be reversed under rule 6 of the 2004 Rules. The Tribunal found that the activity undertaken by the Appellant of issuing unit linked policy or any instrument was covered under life insurance business and the Insurance Act made it obligatory for an insurance company to make investments. Any insurance company which did not comply with this requirement could be disqualified from undertaking insurance business. Thus, the investment activity undertaken by the Appellant was held to be an integral part of life insurance service. The Tribunal also found that since the service rendered by the Appellant was a taxable service, it could not be said that the Appellant was rendering an exempted service. The Appellant was, therefore, held entitled to avail CENVAT credit. 63. It, therefore, follows from the discussion made above and the aforesaid decisions that banks can 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 Insura ..... X X X X Extracts X X X X X X X X Extracts X X X X
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