Banks are registered under service tax in the category of ‘Banking and Financial Services’. They collect and pay service tax on its various incomes such as commissions, bank charges, documentation charges, processing fees etc. levied on its customers. However, one of the major revenues earned by the banks is in the form of interest which is outside the purview of service tax as the same is covered in the negative list. Now as per Rule 6(3B) of the CENVAT Credit Rules, 2004, the banking companies have an option to reverse the CENVAT credit proportionately @ 50% instead of reversing the same based on actuals. Many banks prefer this option as it is easy and leaves less scope for errors and interpretational issues. Since, individually identifying the eligible and ineligible input services based on nexus is practically difficult and could see legal challenge.
One of the areas of dispute by the revenue is the availment of CENVAT credit by the bankers on the insurance premium paid for insuring the deposits accepted by them from various deposit holders. It is pertinent to note that insurance of these deposits is needed, as any slip up on its investment directly effects banks exposure. Since the quantums are huge and the risk is high, it is mandatory as per RBI guidelines that all banks must mandatorily take the insurance of all their deposits from Deposit Insurance and Credit Guarantee Corporation (a wholly owned subsidiary of RBI) (hereinafter referred to as ‘DICGC’).
This has led to departmental notices being issued by the service tax department denying the CENVAT credit on the grounds that, such insurance premium paid on the deposits does not qualify as ‘input service’ in terms of Rule 2(I) of CENVAT Credit Rules, 2004 on a one to one nexus basis since ‘deposits’ fall under negative list of services and since no output service tax is paid by banks on such deposits therefore, insurance premium paid on insuring of such deposits shall be directly ineligible to be availed as CENVAT credit.
Now, this brings us to a very important question as to whether the 50% reversal of Cenvat credit is to be applied on the entire Cenvat credit or whether the Cenvat credit directly attributable to the exempt supply is to be anyway treated as ineligible, since it is not an input service in the first place and then the 50?p is to be applied only on the balance Cenvat credit.
Eligibility of CENVAT credit - Legislative view
The rule of allowing standard 50?nvat credit was initially introduced in the Budget 2011 and while explaining the budget changes in the year 2011, Tax Research Unit of the CBEC vide para 1.15 of TRU D.O.F.No.334/3/2011- TRU dated 28th February, 2011 stated that there have been difficulties in ascertaining the amount of credit flowing into earning of the revenue by the banks and financial institutions. Thus a banking company or a financial institution, including NBFC, providing banking and financial services are being obligated to pay an amount equal to 50% of the credit availed.
Similar view is also clarified in point 11 of Circular No.943/04/2011-CX, wherein it is states that Rule 6(3B) is an obligation on the entities providing Banking & Financial Services.
Therefore, till 31.03.2016, it was obligation cast on banking companies to follow the reversal of CENVAT credit @ 50% on all input services without making any bifurcation as to actual. However, from 01.04.2016, Banks have been given option to choose as to whether reversal of CENVAT credit is preferred at standard rate of 50% under Rule 6(3B) or to opt for reversal on actual basis as per rule 6(1), (2) and (3) of the CENVAT credit rules.
While explaining the budget changes in the year 2016-17, Tax Research Unit of the CBEC vide Annexure II of TRU D.O.F.No.334/8/2016-TRU dated 29th February, 2016 stated that Sub-rule (3B) of rule 6 is being amended so as to allow banks and other financial institutions to reverse credit in respect of exempted services on actual basis in addition to the option of 50% reversal.
Now, in the case of DCB Bank Ltd. Vs. Commissioner of Service Tax I, Mumbai [2017 (6) GSTL 479 (Tri-Mum) = 2017-TIOL-2849-CESTAT-MUM, it was held that taking DICGC insurance to protect interest of the bank being integrally connected with the business of banking, Cenvat credit of service tax paid on the same is allowable.
Above judgement has been referred while deciding the case of M/s Punjab National Bank Vs. Commissioner of Central Excise and Service Tax Bhopal 2018-TIOL-1395-CESTAT-DELHI, wherein appellant stated that insurance of deposits was essential for them to secure the money retained by them and there is a statutory provision for the same under DICGC, wherein they have to mandatory insure the deposits lying with them. Thus, insurance is essential and they have paid service tax, therefore entitled to avail CENVAT credit on the said service. The Tribunal held that the Appellant was entitled to avail CENVAT credit on insurance of deposits stating that:
“The contention of the appellant has force since no banker will prefer to take risks against financial services provided. There is certain amount of risk against lending which is made out of deposits received from depositors. Therefore, taking insurance to protect interest of the bank being integrally connected with the business of banking, Cenvat credit of service tax paid claimed is allowable. Accordingly, appeal is allowed."
Similarly, in the case of State Bank of Bikaner & Jaipur Narayan Swamy Vs. Commissioner of Central Excise and Service Tax Act, Jaipur-I 2019-TIOL-558-CESTAT-DEL it was held that the assessee is eligible to avail CENVAT credit on insurance of deposits.
However, in the case of ICICI Bank Ltd. v. Commissioner - 2019 (31) G.S.T.L. J78 (Tri. - Mumbai)], the Hon’ble CESTAT held that the Deposit insurance services on which Service Tax was paid, is for the benefit of the depositors and not for the benefit of the bank for providing Banking services. Further the consideration received in extending deposits, loan or advances being out of purview of Service Tax, the activity for providing Deposit insurance services cannot be termed as an input service. Also, the fact that it is not the business of the bankers which has been insured but the deposit of the customers to protect the interest of the small depositors, in the event the banks undergoing liquidation, the customers will be paid the insured amount.
Further the decision rendered in DCB Bank Ltd. (supra) which was subsequently followed in Punjab National Bank (supra) have been held per incuriam in the aforesaid judgement of ICICI, as the same have been passed without considering the relevant statutory provisions and hence cannot be considered as binding precedent.
In this regard, reference needs to be given to a judgement on the matter in case of M/s. South Indian Bank Vs The Commissioner of Customs, Central excise and Service tax- Calicut 2020(6) TMI 278- CESTAT Bangalore, wherein initially the appeals in that case were listed before the division bench of the Tribunal, however 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.
Hon’ble larger bench of the Tribunal observed that 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 to function at all. After accepting the deposits there are number of services on which the banks have to pay service tax under “banking and other financial services”. These services are in connection with both the “accepting” of deposits and “lending” activity of the banks. Banks would be able to lend only if they accept deposits. It has been seen that without payment of insurance premium on the outstanding deposits, banks will not be able to function or render any output service of “banking and other financial services” and the license granted to the banks by the Reserve Bank of India can be cancelled.
Further in respect of eligibility of credit on input service in respect of exempt output service, the Hon’ble Tribunal held that the “accepting” of deposits would not be covered under section 66D(n) of the Finance Act. In the para 54 Hon’ble Tribunal observed that:
‘the negative list comprises, under sub-clause (n) of section 66D, services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount. The issue is whether extending deposits would mean the activity of accepting deposits. The activity of accepting deposits would be an activity where the banks receive deposits from the customers in the form of savings account, recurring deposits, for which the banks pay interest to the customers. On the other hand, the extending 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.
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.’
Considering both the aforesaid issues, Hon’ble Tribunal allowed the credit of service tax paid for this service received by the banks from the Deposit Insurance Corporation for rendering output services.
Conclusion:
The issue is no more res integra after the judgement of Larger Bench of Hon’ble Bangalore Tribunal, in case of M/s South India Bank (supra) wherein after considering the conflicting divisional bench judgements, Hon’ble Larger bench held that credit in respect of the insurance services received by the banks from the Deposit Insurance Corporation for rendering output services is rightly available to the banks.
Output services of the Banks are in the nature of lending, advancing, providing overdrafts etc. on which banks are paying service tax. Such output services of lending, advancing etc. cannot be provided by banks if they do not create ‘financing’ in the form of accepting deposits. Therefore, insurance premium is paid on deposits only to safeguard its finances and therefore there is a complete nexus and insurance premium paid for insuring of deposits qualify as an eligible input service for availing CENVAT credit. Also, the intent of legislature is clear that once 50% of CENVAT credit is reversed by the banking companies then again CENVAT credit need not be reversed on actual one-to-one nexus basis.
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