By TIOL News Service

MUMBAI, NOV 22, 2018: THE appellant is HDFC Bank.

They are providing "Banking and Financial Services" (BOFS) and Credit Card Services. Appellants are also providing Cash Credit, Over Draft and Bill Discounting Services to its Customers and charge interest along with administrative expenses in respect of these services.

Vide Notification No 29/2004-ST exemption is granted in respect of the interest charged on Cash Credit, Over Draft and Bill Discounting Services, while the administrative charges in respect of these services are chargeable to service tax.

Alleging that in view of the exemption granted and the applicability of rule 2(e) of the CCR, 2004 (defining 'exempted services'), rule 6 of the CCR, 2004 comes into play, a demand notice seeking payment/reversal of CENVAT credit of Rs.193,82,99,055/- for the period from 2008-09, 2009-10 & 2010-11 was issued.

The CCE, Thane-II upheld the demand and imposed penalty and interest.

Before the CESTAT, the appellant submits that the services of Cash Credit/Over Draft (CC/OD) are per se not exempt as defined in Rule 2(e) of the CCR, 2004 and the notification No 29/2004-ST only grants a partial exemption of the 'interest' component. Inasmuch as since factually CC/OD is only partially exempt,application of rule 6 is not warranted, it is averred. Moreover, the demand is time barred since the ST-3 returns disclosed all the transactions in question, the appellant submitted.

The appellant also relies on the following cases in support -

+ Gautam Sahakari Bank Limited - 2018 TIOL 1377 CESTAT Mumbai

+ Vaidyanath Urban Co-operative Bank Limited - 2014 TIOL 3299 CESTAT MUM

+ Ambejogai Peoples Co operative Bank Ltd - 2015 TIOL 2471 CESTAT MUM

The AR relied upon the decision in UCO Bank - 2014-TIOL-1902-CESTAT-KOL wherein it is inter alia held - Commissioner is right in its approach to include the value of exempted services namely, overdraft facility and cash credit facility in computing the CENVAT Credit attributable to input services used in providing exempted services, as laid down under Rule 6(3A)(c) of the CENVT Credit Rules, 2004.

The Bench considered the submissions and after extracting the definition of BOFS and the impugned notification 29/2004-ST coupled with the RBI Master Circular dated 1 st July 2009 in the matter of 'Management of Advances' and Reserve Bank of India Report dated 28 September, 2000 of the Working Group on Discounting of Bills by Banks, observed thus -

++ It is quite evident that Banking and Financial Services, as defined comprises of a basket of various services provided by the Banking or Financial Company to its customers. Thus from the very definition it is very clear that the intention of the legislature is not to treat the entire gamut of services provided by a banking/ financial Company en-bloc as a whole, or else the definition would have been simply "all the services provided by a banking/ financial company to its customer." By listing the various aspects and services provided by such banking/ financial company separately the intention of legislature is quite clear that each and every activity has to be treated separately for the purpose of levy of Service Tax and also for the purpose of exemption.

++ From the text of the definition (of BOFS) specifically at clause (ix), it is clear that the Cash Credit/ Overdraft facilities provided by the bank/ financial company to its customers is taxable service.

++ From plain reading of the exemption notification it is quite evident that the said exemption notification do not exempt the Banking and Financial Services as such but only is in respect of one limb of the said service i.e. overdraft facility, cash credit facility and discounting of bills, bills of exchange or cheques. Further what has been exempted is equivalent to the amount of interest on such overdraft, cash credit or, as the case may be, discount.

++ From the Master Circular issued by RBI, it is quite evident that banks are free to determine their own interest rate after taking into account all the administrative expenses and the cost of advancing the loans, cash credit or overdraft facility... Thus the claim of the Appellant in respect of administrative fees etc., charged by them separately in respect of the CC/ OD services appear to be contrary to the said Master Circular.

++ From the RBI report (dated 28 September, 2000), it is quite evident that the actual consideration for the CC/ OD services is only higher interest rate and nothing else.

++ Since the entire consideration received against the CC/OD services is in nature of interest, the said services provided by them to their customer are exempt from payment of service tax under Notification No 29/2004-ST …

++ Since in respect of these services the entire consideration received from the customer is exempt from payment of service tax, these services would definitely be covered by the definition of exempt service as provided by this rule.

++ Applying the same doctrine (of pith and substance) for ascertaining the true nature of exemption provided by the said notification, we are of the view that interest is not only the major component but is the ONLY component for providing the said CC/ OD services.

++ Thus by exempting the value equivalent to interest recovered for providing these services, in fact, in pith and substance, exemption has been granted to the services of CC/OD provided by Banking and Financial Companies.

++ Since we have held that the CC/OD services provided by the appellant are exempt from payment of service tax to the extent of interest recovered, the view of Commissioner in including the quantum of interest recovered against the provision of said services for determination of the amount to be reversed in term of Rule 6(3A)(c) of the CENVAT Credit Rules, 2004 cannot be faulted with.

Terming the decisions cited by the appellant as being sub silentio and which cannot be followed, the same were distinguished and reliance was placed on the decision in UCO Bank (supra).

Insofar as the claim of the appellant that the demand is hit by limitation since the ST-3 returns had disclosed all the transactions in question, the Bench observed that the adjudicating authority had not recorded a specific finding in this regard and, therefore, the matter needs to be remanded. The penalty and interest were also held to be imposable but required re-quantification since the matter was remanded on limitation, the Bench added.

The appeal was disposed of.

In passing - Judicial discipline:

It is cardinal principal that co-ordinate Bench of CESTAT could not have taken a contrary view to the settled judicial precedents and in case of any difference of opinion the matter should have been referred to Larger Bench. - 2018-TIOL-3504-CESTAT-DEL

(See 2018-TIOL-3516-CESTAT-MUM)