JUNE 15, 2020

By Jay Chheda, Principal Associate and Vinay Jain, Joint Partner - Lakshmikumaran & Sridharan, Attorneys

RECENTLY, the Hon'ble Larger Bench of CESTAT in the case of South Indian Bank and Others ¹ has answered the question referred to it in positive holding that insurance services received by the banks from Deposit Insurance and Credit Guarantee Corporation (DICGC) qualify as 'input service' and, accordingly, cenvat credit of service tax paid on such services can be availed by the Banks.

All banks in India are mandatorily required to insure their deposits with DICGC, a subsidiary of Reserve Bank of India. DICGC protects small depositors in the event of bank failure by insuring the deposits up to Rs.1,00,000/- per depositor (now amended to 5 lakhs). The banks avail Cenvat credit of the service tax charged by DICGC on the insurance premium.

According to the Department, the banks were not eligible to avail cenvat credit of service tax paid on such insurance premium paid to DICGC on the ground that deposit insurance premium was linked only to deposits accepted by banks which is nothing but a transaction in money. The said receipt of service had no nexus with any output services provided by the bank, so such service cannot be said to be an input service used for providing output service. Further the department had contended that insurance service is for the benefit of the depositors and not for the bank, therefore, bank is not the 'service recipient' of the insurance service.

The Single Member bench of CESTAT Mumbai in the case of DCB Bank Ltd. ² and Single Member bench of CESTAT Delhi in the case of Punjab National Bank ³ had held that banks are entitled to avail Cenvat credit on insurance of deposits. Later, the Division bench of CESTAT Mumbai in the case of ICICI Bank Ltd ⁴ held that cenvat credit of DICGC services was not an eligible 'input service'. The order in the case of ICICI Bank Ltd was reserved on 8.10.2018 and the decision was rendered on 12.2.2019. However, in the meanwhile, the Division bench of CESTAT Delhi in the case of State Bank of Bikaner & Jaipur ⁵ vide judgment dated 11.1.2019 held that Cenvat credit of DICGC insurance services was eligible as 'input service'.

The decision of CESTAT Delhi was not brought to the notice of Division Bench at Mumbai before the order dated 12.2.2019 was passed.

Subsequently in the case of State Bank of Patiala ⁶, the Chandigarh CESTAT observed that contrary views have been taken by CESTAT Mumbai and CESTAT Delhi and, therefore, referred the issue to Larger Bench.

Proceedings before Larger Bench

The question to be decided by the Larger Bench was – Whether cenvat credit of DICGC insurance services qualify as 'input service' or not? The Larger Bench held as under:

- The basic activity of a banking company, as contemplated under DICGC Act or Banking Regulation Act, is to accept deposits from the public for the purpose of lending or investment by the banks. 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.

- It is mandatory for all banks who have obtained a licence from Reserve Bank of India under section 22 of the Banking Regulation Act to register themselves with DICGC. If banking company fails to pay the premium amount to DICGC, it would not be able to retain its registration, which may ultimately also lead to the cancellation of the licence granted to the banking company by the Reserve Bank of India. The Karnataka High Court decision in the case of PNB Metlife India Insurance Co. Ltd., where the High Court had held that re-insurance service received by the company was statutory requirement as per Insurance Act 1938 and therefore it has to be considered as having nexus with output service and therefore would qualify as 'input service', was relied upon. Further, decision of CESTAT Hyderabad in the case of Shriram Life Insurance Company Ltd. where the CESTAT had held that investment activity undertaken by the company was statutory obligation to carry out life insurance business and therefore the activity was an integral part of life insurance service and Cenvat credit was eligible, was also noted.

- As per Section 66D(n), the activity of services by way of extending deposits, loans or advances is under negative list. 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. Therefore, accepting deposits doesn't come within Section 66D(n).

- As per Rule 6(3B) of Cenvat Credit Rules, banks are required to reverse 50% of the cenvat credit availed. This rule has been introduced with the view to disallow the credit of input services attributable to interest income earned by banking companies. Therefore, when such reversal is done by the banks, banks are entitled for credit of the entire amount of service tax paid on input service having nexus with the provision of output service.

- Based on the above, the insurance service received by the banks from the DICGC is not only mandatory but is also commercially expedient. Therefore, the service rendered by the DICGC to the banks would fall in the main part of the definition of 'input service' and such Cenvat credit would be eligible.

The Larger bench has not considered the transaction of receiving deposits in isolation. The activity of receiving deposits and granting loans is an integral part of banking business and without the activity of receiving deposits, the banks won't be able to grant loans.

Further, the decision has also clarified that once Rule 6(3B) of Cenvat Credit Rules has been followed, then all such services having some nexus with output service would qualify as 'input service' and it is irrelevant for the banks to identify as to which part of the input service has been used for providing taxable service and which part has been used for exempt service.

In our view, the ratio laid down by the Larger bench is correct and in line with the Income Tax judgment of Supreme Court in the case of Indian Bank ⁷. In the said case, the Bank received deposits from various constituents and paid interest on the same. Such deposits were used in advancing loans and towards investment in tax-free bonds. The entire interest paid on deposits was claimed as expenditure by the bank. Further the profit and loss accruing on sale of tax-free bonds forms part of total income of the bank. The Revenue disallowed proportionate interest pertaining to investments in tax-free bonds on the ground that assessee cannot be entitled to a double benefit viz. (i) exemption from tax in respect of tax-free bonds and (ii) an allowance of interest on the money utilised to purchase those bonds.

The Supreme Court held that to decide the admissibility of such deduction the aspect to be ascertained is whether the expenditure incurred is expended wholly and exclusively for the business or not. If the answer is affirmative, then the question that such expenditure has produced any taxable income or not is irrelevant. The Apex Court observed that it is not worth the administrative effort to go further and trace the expenditure to some taxable income only.

In the said case, the Supreme Court has treated the activity of investments in question as integral part of the banking business. The expenditure incurred in the course of banking operations though unremunerative is also a deductible expenditure, if wholly and exclusively made for the purposes of banking operations.

CONCLUSION

The aforesaid decision has affirmed the proposition that services which are statutorily required to be availed without which operations could not be carried out would form essential part of the output service and thus would qualify as 'input service'.

Considering the twist and turns in this issue before the Single Member Bench and Division Bench of Tribunal since 2017, the Larger bench settling the issue in favour of the banks is a welcome one.

This decision has provided great relief to the banking sector and would certainly have a precedential value in GST regime as well.

[The views expressed are strictly personal.]

¹2020-TIOL-861-CESTAT-BANG-LB

²2017-TIOL-2849-CESTAT-MUM

³ 2018-TIOL-1395-CESTAT-DEL

⁴2019-TIOL-589-CESTAT-MUM

⁵ 2019-TIOL-558-CESTAT-DEL

⁶ 2019 (29) G.S.T.L. 496 (Tri. - Chan.)

⁷ AIR 1965 SC 1473