Karnataka HC Allows CENVAT Credit on Deposit Insurance Premium Paid to DICGC
Overview of the Decision
The Karnataka High Court in Commissioner of Central Excise And Service Tax Vs Corporation Bank has dismissed a batch of Revenue appeals on the question whether banks can lawfully avail CENVAT credit of service tax paid on deposit insurance premium remitted to the Deposit Insurance and Credit Guarantee Corporation (DICGC).
The Court concluded that:
- The legal issue is already settled by binding precedents of the Kerala High Court and Bombay High Court.
- The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) correctly followed the Larger Bench ruling in South Indian Bank vs. Commissioner of Customs, Central Excise & Service Tax, Calicut.
- All substantial questions of law framed at the time of admission stand answered in favour of the assessee banks and against the Revenue.
Accordingly, all connected appeals filed by the Department were rejected.
Key Impact: Commercial banks can treat DICGC deposit insurance services as “input services” and claim CENVAT credit of the service tax paid thereon, for the period in dispute, in line with the judicial view taken so far.
Background of the Appeals
Parties and Proceedings
- Appellant: Commissioner of Central Excise and Service Tax (Revenue)
- Respondent: Corporation Bank (and other banks in connected appeals)
Multiple Central Excise Appeals were filed by the Revenue raising identical questions concerning:
- The tax treatment of deposit insurance premium paid by banks to DICGC; and
- The availability of CENVAT credit on the service tax element of such payments.
All appeals involved common legal issues, and the Karnataka High Court disposed them of through a consolidated order.
Substantial Questions of Law Considered
When the appeals were admitted on 03.08.2022, the Court framed a series of substantial questions of law. These can be grouped into two broad clusters based on the appeal numbers.
Questions in C.E.A Nos. 02 and 03/2022
Whether CESTAT was justified in setting aside the Orders-in-Original and allowing the appeals of the assessee banks by holding that banks are entitled to CENVAT credit of service tax paid on insurance premium for services received from Deposit Insurance and Credit Guarantee Corporation.
Whether CESTAT rightly relied upon the Larger Bench decision of the Tribunal, Bangalore in the assessee banks’ own case, vide interim order 13-31/2020 dated 20.03.2020, which had held that commercial banks are entitled to treat insurance services provided by DICGC as input services and avail CENVAT credit of service tax paid thereon.
Questions in C.E.A Nos. 07, 08, 09, 10, 11 and 12/2022
The other batch of questions went deeper into the nature of banking and deposit insurance, notably:
Whether, under the Finance Act, 1994, the “business of banking”, characterised as “transactions in money only”, can at all be treated as services.
Whether such banking activities, where no separate service charges are collected for “transactions in money only”, can qualify as output services.
Whether deposit insurance provided by DICGC can be treated as an input service when, according to Revenue, there is no underlying output service by banks in respect of transactions in money.
Whether mere mandatory nature of deposit insurance (without which banks cannot function) is sufficient to treat such insurance as an input service.
Whether it is correct to equate mandatory reinsurance (linked to insurance services) with mandatory deposit insurance (which, as argued, is not linked to any taxable output service in banking).
Whether CENVAT credit on deposit insurance services can still be allowed after the omission of the expression “activities relating to business” from the definition of input service through Notification No. 3/2011 dated 01.04.2011.