C.E.Appeal Nos. 1/2021, 2/2021, 3/2021, 4/2021 and 5/2021 v M/s South Indian Bank; High Court of Kerala (Ernakulam)

## **`IN THE HIGH COURT OF KERALA`** # **`PRESENT`** ``` THE HONOURABLE MR.JUSTICE S.V.BHATTI ``` ``` & ``` ``` THE HONOURABLE MR.JUSTICE BASANT BALAJI ``` ``` MONDAY, THE 5[TH] DAY OF DECEMBER 2022 / 14TH AGRAHAYANA, 1944 ``` ``` C.E.APPEAL NO. 1 OF 2021 ``` ``` AGAINST THE ORDER IN TA(STA) 20747/2015 OF ``` ``` CUSTOMS,EXCISE&SERVICE TAX APP.TRIBUNAL,BANGALORE APPELLANT: ``` ``` THE PRICIPAL COMMISSIONER OF CENTRAL TAX & CENTRAL EXCISE, KOCHI COMMISSIONERATE, C.R.BUILDING I.S PRESS ROAD, COCHIN-682 018. BY ADV SRI.SREELAL N.WARRIER ``` ## **`RESPONDENT:`** ``` M/S SOUTH INDIAN BANK SOUTH INDIAN BANK HOUSE, T.B ROAD, MISSION QUARTERS, THRISSUR, KERALA-680 001. BY ADVS. SRI.SHAJI THOMAS SRI.JEN JAISON ``` ## **`OTHER PRESENT:`** ``` SR. ADV. G. SHIVADASS., ``` ``` ADV.SHAJI THOMAS ``` ``` THIS CENTRAL EXICISE APPEAL HAVING COME UP FOR ADMISSION ON 05.12.2022, ALONG WITH C.E.Appeal.2/2021, 4/2021 AND CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ``` C.E.Appeal No.1 of 2021 & conn.cases -2- # **`IN THE HIGH COURT OF KERALA AT ERNAKULAM`** ``` PRESENT ``` ``` THE HONOURABLE MR.JUSTICE S.V.BHATTI ``` ``` & ``` ``` THE HONOURABLE MR.JUSTICE BASANT BALAJI ``` ``` MONDAY, THE 5[TH] DAY OF DECEMBER 2022 / 14TH AGRAHAYANA, 1944 C.E.APPEAL NO. 2 OF 2021 ``` ``` AGAINST THE ORDER IN TA 21027/2015 OF CUSTOMS,EXCISE&SERVICE TAX APP.TRIBUNAL,BANGALORE ``` ## **`APPELLANT:`** ``` THE PRINCIPAL COMMISSIONER OF CENTRAL TAX / CENTRAL EXCISE, KOCHI COMMISSIONERATE, C.R. BUILDING, IS. PRESS ROAD, COCHIN 682 018. BY ADV SRI.SREELAL N.WARRIER ``` ## **`RESPONDENT:`** ``` M/S. SOUTH INDIAN BANK, SOUTH INDIAN BANK HOUSE, T.B. ROAD, MISSION QUARTERS, THRISSUR, KERALA 680 001. BY ADVS. SRI.G.SHIVADASS (SR.) SRI.SHAJI THOMAS SRI.JEN JAISON ``` ``` THIS CENTRAL EXICISE APPEAL HAVING COME UP FOR ADMISSION ON 05.12.2022, ALONG WITH C.E.Appeal.1/2021 AND CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ``` C.E.Appeal No.1 of 2021 & conn.cases -3- ## **`IN THE HIGH COURT OF KERALA AT ERNAKULAM`** ## **`PRESENT`** ``` THE HONOURABLE MR.JUSTICE S.V.BHATTI ``` ``` & ``` ``` THE HONOURABLE MR.JUSTICE BASANT BALAJI ``` ``` MONDAY, THE 5[TH] DAY OF DECEMBER 2022 / 14TH AGRAHAYANA, 1944 C.E.APPEAL NO. 4 OF 2021 ``` ``` AGAINST THE ORDER IN TA 20548/2017 OF CUSTOMS,EXCISE&SERVICE TAX APP.TRIBUNAL,BANGALORE ``` ## **`APPELLANT/Appellant:`** ``` THE PRINCIPAL COMMISSIONER OF CENTRAL TAX & CENTRAL EXCISE KOCHI COMMISSIONERATE, C.R.BUILDING, I.S PRESS ROAD, COCHIN - 682 018. BY ADV SRI.SREELAL WARRIAR, C.G.C ``` ## **`RESPONDENT/Respondent:`** ``` M/S SOUTH INDIAN BANK SOUTH INDIAN BANK HOUSE, T.B. ROAD, MISSION QUARTERS, THRISSUR, KERALA - 680 001. ``` ``` BY ADVS. ``` ``` SRI.G.SHIVADASS (SR.) SRI.JEN JAISON SRI.SHAJI THOMAS ``` ``` THIS CENTRAL EXICISE APPEAL HAVING COME UP FOR ADMISSION ON 05.12.2022, ALONG WITH C.E.Appeal.1/2021 AND CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ``` C.E.Appeal No.1 of 2021 & conn.cases -4- ``` IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT ``` ``` THE HONOURABLE MR.JUSTICE S.V.BHATTI ``` ``` & ``` ``` THE HONOURABLE MR.JUSTICE BASANT BALAJI ``` ``` MONDAY, THE 5[TH] DAY OF DECEMBER 2022 / 14TH AGRAHAYANA, 1944 C.E.APPEAL NO. 3 OF 2021 ``` ``` AGAINST THE ORDER IN TA 20635/2017 OF CUSTOMS,EXCISE&SERVICE TAX APP.TRIBUNAL,BANGALORE ``` ``` APPELLANT: ``` ``` THE PRINCIPAL COMMISSIONER OF CENTRAL TAX AND CENTRAL EXCISE, KOCHI COMMISSIONERATE, C.R. BUILDING, I.S. PRESS ROAD, COCHIN 682 018. BY ADV SRI.SREELAL N. WARRIER, SC, CENTRAL BOARD OF EXCISE & CUSTOMS ``` ## **`RESPONDENT:`** ``` M/S SOUTH INDIAN BANK, SOUTH INDIAN BANK HOUSE, T.B. ROAD, MISSION QUARTERS, THRISSUR, KERALA-680 001 BY ADVS. SRI.G.SIVADASS (SR.) SRI.SHAJI THOMAS SRI.JEN JAISON ``` ``` THIS CENTRAL EXICISE APPEAL HAVING COME UP FOR ADMISSION ON 05.12.2022, ALONG WITH C.E.Appeal.1/2021 AND CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ``` C.E.Appeal No.1 of 2021 & conn.cases -5- ``` IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT ``` ``` THE HONOURABLE MR.JUSTICE S.V.BHATTI & ``` ``` THE HONOURABLE MR.JUSTICE BASANT BALAJI MONDAY, THE 5[TH] DAY OF DECEMBER 2022 / 14TH AGRAHAYANA, 1944 C.E.APPEAL NO. 5 OF 2021 ``` ``` AGAINST THE ORDER IN TA 20417/2016 OF CUSTOMS,EXCISE&SERVICE TAX APP.TRIBUNAL,BANGALORE ``` ## **`APPELLANT:`** ``` THE PRINCIPAL COMMISSIONER OF CENTRAL TAX & CENTRAL EXCISE,KOCHI COMMISSIONERATE, C.R. BUILDINGS, I.S PRESS ROAD, COCHIN - 682 018. BY ADV SRI SREELAL N.WARRIER ``` ## **`RESPONDENT:`** ``` M/S CATHOLIC SYRIAN BANK LTD CSB BHAVAN, ST. MARY & COLLEGE ROAD, THRISSUR, KERALA - 680 020. BY ADVS. JOSEPH KODIANTHARA (SR.) V.ABRAHAM MARKOS ABRAHAM JOSEPH MARKOS ISAAC THOMAS P.G.CHANDAPILLAI ABRAHAM ALEXANDER JOSEPH MARKOS SHARAD JOSEPH KODANTHARA ``` ``` THIS CENTRAL EXICISE APPEAL HAVING COME UP FOR ADMISSION ON 05.12.2022, ALONG WITH C.E.Appeal.1/2021 AND CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ``` C.E.Appeal No.1 of 2021 & conn.cases -6- ## **JUDGMENT** ``` [C.E.Appeal Nos.1/2021, 2/2021, 4/2021, 3/2021, 5/2021] ``` ## _S.V.Bhatti, J._ We have heard Mr.Sreelal Warrier, learned standing counsel for Central Tax & Central Excise Department and Mr.G.Sivadas, learned standing counsel for the respondent. 2. The Principal Commissioner of Central Tax & Central Excise, Kochi Commissionerate, Kochi/Revenue is the appellant in the batch of appeals. M/s South Indian Bank/assessee is the respondent. 3. The appellant challenges the common order dated 23.09.2020 of Customs, Excise & Service Tax Tribunal, South Zonal Bench, Bangalore (for short ‘the Tribunal‘). The appeals are filed under Section 35G of the Central Excise Act, 1944 read with Section 83 of the Finance Act, 1994. The circumstances and the issues for consideration in the appeals are identical. For a reason thereof, the Tribunal disposed of the appeals filed by the C.E.Appeal No.1 of 2021 & conn.cases respondents herein by the common order impugned before us. Hence, by the common judgment, we dispose of the appeals. There is no controversy on the circumstances leading to a controversy on the claim of the assessee for availing input tax credit under CENVAT Credit Rules, 2004 on the service availed by the assessee from Deposit Insurance & Credit Guarantee Corporation (for short ‚‘DICGC‘) and payment of service tax while paying a premium for insuring the deposits accepted and retained by the assessee. Thereafter availed CENVAT credit against the input tax credit received from DICGC. **C.E.Appeal No.1 of 2021** 4. The instant appeal has been treated as the lead case for disposing of the batch of appeals. The limited circumstances surrounding the controversy are, fairly and in detail, narrated in the orders of the Tribunal and the primary authority. 5. We have taken note of the circumstances set out therein and, in a very brief way, state that the assessee, as per the statutory obligation primarily fastened by the conditions C.E.Appeal No.1 of 2021 & conn.cases -8- incorporated in the license granted to the assessee for doing business in banking and provided insurance coverage to the deposits accepted by the assessee; paid the insurance premium to DICGC for providing insurance coverage. The effect of such transaction is the assessee availed service from DICGC and paid service tax. The next limb of the controversy is whether assessee can avail CENVAT the service tax credit paid by it to DICGC. On 20.09.2011, the Central Board of Excise and Customs, Department of Revenue, Ministry of Finance issued Circular F.No.187/135/2008-CX.4 clarifying the applicability of service tax to DICGC. The circular clarifies that the insurance activity of DICGC was within the ambit of Section 65(105)(d) of the Finance Act, 1994 and such service is chargeable to service tax. The appeals do not present a point for consideration on the nature of service availed by the assessee from DICGC and payment of service tax while paying the premium for the insurance coverage the assessee takes from DICGC. But the controversy centres round on whether the assessee can take C.E.Appeal No.1 of 2021 & conn.cases -9- credit for the service tax paid while purchasing a premium for the service tax payable by the assessee for rendering services to its customers. The primary authority rejected the reply of the assessee and held that the service tax paid on the premium and CENVAT credit cannot be claimed for the service tax paid by the assessee. The assessee challenging the said view filed appeals before the Tribunal. Through the common order impugned before this Court, the appeals were allowed. Hence the second v appeal. It is a matter of record that in _**State Bank of Patiala Commissioner of Central Excise & Service Tax, Chandigarh-II[1]**_ the Tribunal noticed the divergent opinion taken by the Division Bench of Tribunal at Delhi in v _**State Bank of Bikaner ad Jaipur Commissioner of Central Excise and Service Tax, Jaipur-I[2]**_ and the Division Bench of the Tribunal at _**Mumbai in ICICI Bank Limited**_ v _**Commissioner of Service Tax[3]**_ . The Delhi Bench of the Tribunal held that the assessee can avail credit of service tax paid on the > 1 2019-VIL-426-CESTAT-CHD-ST > 2 2019-TIOL-558-CESTAT-DEL - 3 2019-VIL-108-CESTAT-MUM-ST C.E.Appeal No.1 of 2021 & conn.cases -10- insurance premium to cover the deposits accepted by the assessee. Per contra, the Division Bench of the Tribunal at Mumbai had taken a different view. The said difference of opinion was referred to a larger bench and the larger bench in _**South Indian Bank**_ v _**Commissioner of Customs, Central Excise &**_ _**Service Tax, Calicut[4]**_ answered the reference as follows: “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“. 6. The common order impugned in the appeals is rendered by the Tribunal by following larger bench in the _South_ _Indian Bank_ case. Hence the appeals at the instance of the Revenue. 7. The following substantial questions of law are raised: 1. Whether the insurance service provided by the Deposit Insurance & Credit Guarantee Corporation to the banks is an `input service‘ specifically for the purpose of CENVAT Credit Rules, 2004? 2. Was CESTAT right in concluding that the service rendered by the Deposit Insurance Corporation to the banks would > 4 2020 (41) GSTL 609 C.E.Appeal No.1 of 2021 & conn.cases -11- fall in the main part of the definition of “input service“, on the reasoning that it is mandatory, when statutory requirements such as accounting and auditing, without which banks/companies would not be able to function, are included in the inclusive part of the definition of “input service“ in Rule 2(1) of the CENVAT Credit Rules, 2004? 3. Was CESTAT right in allowing CENVAT credit on deposit insurance, even after omission of the general entry ‘activities relating to business such as from the inclusive part of the definition of input services, vide Notification No.3/2011-CE(NT) dated 01.03.2011, w.e.f.01.04.2011, merely because it is mandatory for the banking business? 8. Sri.Sreelal Warrier has argued that Section 66D deals with a negative list of services. Clause (n) of Section 66D deals with services by way of extending deposits, loans or advances insofar as the consideration is represented by way of interest or discount is excluded. Since extending deposits, loans etc. falls within the negative list, the activity _per se_ carried on by the assessee is out of the purview of output services. Therefore, the service tax paid for insurance premiums cannot be claimed as a credit while paying the service tax payable by the assessee. The next argument is that the omission of the words ‘activities relating to business‘ such as from the scope C.E.Appeal No.1 of 2021 & conn.cases -12- of the definition of input services, it is clear that on the service tax payable by the bank for the umbrella of services being rendered by it, the assessee cannot claim the credit of service tax paid by the assessee. 9. Mr.Sivadas, per contra, argues that the substantial question, particularly, in the batch of appeals on hand, would arise from the conclusions on the interpretation of various provisions considered by the Larger Bench in the _South Indian Bank_ case. The view of the Larger Bench is a complete answer to all the primary and ancillary grounds now raised by the revenue. The merit in the argument arises only by challenging the interpretation applied by the larger bench of the Tribunal in _South Indian Bank_ case. 10. A few submissions are made in the alternative, by inviting the attention of the Court to the definitions of input services, negative list etc., learned counsel appearing for the Bank substantially banks on the consideration and conclusions recorded by the Tribunal. He has invited our attention to each C.E.Appeal No.1 of 2021 & conn.cases -13- one of the paragraphs of the order of the Tribunal as a complete answer to the questions now canvassed in the appeal. 11. We have taken note of the argument of revenue, and we will, first, refer to whether these aspects have fallen for consideration before the Larger Bench or not. The verification is taken up by excerpting the following paragraphs from the order dated 20.03.2020 of the Larger Bench. 39. It is in the light of the aforesaid provisions that it has to be examined whether the insurance service received by the banks from the Deposit Insurance Corporation can be considered to be an “input service”. 40. Sub-rule (1) of rule 3 of the 2004 Rules provides that a provider of output service shall be allowed to take CENVAT credit of the service tax leviable under sections 66, 66A and 66B of the Finance Act. Sub-rule(4) of rule 3 provides that the CENVAT credit may be utilised for the payment of service tax on any output service. 41. “Input service”, prior to 1 April, 2011, meant any service used by provider of taxable service for providing an output service, including amongst others, activities relating to business such as financing. However, with effect from 1 April, 2011, the definition was amended and the definition can conveniently be divided into three parts namely; (i) main part which means any service used by a provider of output service for providing an output service; (ii) inclusive part which means services used in relation to various activities including financing; and (iii) services which are excluded from the definition of C.E.Appeal No.1 of 2021 & conn.cases -14- ## input service. 42. “Output service”, prior to 1 July, 2012, meant any taxable service [excluding the taxable service referred to under section 65 (105) (zzp)] provided by the provider of taxable service. After 1 July, 2012, it has been defined to mean any service provided by a provider of service located in the taxable territory but shall not include a service that is either specified under section 66D of the Finance Act or where the whole of service tax is liable to be paid by the recipient of service. 43. The contention advanced on behalf of the banks is that the insurance service rendered by the Deposit Insurance Corporation to the banks is covered under the main part of the definition of “input service” and, therefore, the banks are justified in availing CENVAT credit on this “input service” for the “output service” rendered by the banks in relation to “banking and other financial services”. The contention of the Department is that since insurance is paid on the deposits and the activity of acceptance of deposits is a transaction in money which would be outside the purview of service tax, the insurance service rendered by the Insurance Corporation to the banks cannot be considered as an “input service”. 44. The basic activity of a banking company, as contemplated under the definition of “banking”, 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 C.E.Appeal No.1 of 2021 & conn.cases -15- 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 prerequisite 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. 46. All banks have also to obtain a licence from the Reserve Bank of India under section 22 of the Banking Regulation Act. It also needs to be noticed that it is a compulsory for all banks who have obtained a licence from the Reserve Bank of India under section 22 of the Banking Regulation Act to register themselves with the Deposit Insurance Corporation. The registration of the banks with the Deposit Insurance Corporation is not optional for the banks. The payment of premium, therefore, to the Deposit Insurance Corporation is a statutory obligation of the banks. The banks this way, protect the interest of the depositors because non payment of premium and subsequent withdrawal of the protection provided by the Deposit Insurance Corporation may lead to loss of confidence of the public in the banks and ultimately loss of deposits. 47. A licence is issued to the banks by the Reserve Bank of India under section 22 of the Banking Regulation Act subject to such conditions as the Reserve Bank of India may think fit to impose. Sub-section (3) of section 22 provides that before granting any licence, the Reserve Bank of India may require certain conditions to be fulfilled to ensure that the carrying of banking business by such banks will not be prejudicial to the public interest or the interest of the depositors. Section 22 (4) enumerates the circumstances under which the licence granted to a banking company can be cancelled by the Reserve Bank of India and they are as follows: (i) if the company ceases to carry on banking business in India; or (ii) if the company at any time fails to comply with C.E.Appeal No.1 of 2021 & conn.cases -16- any of the conditions imposed upon it under sub-section (1); or (iii) if at any time, any of the conditions referred to in subsection (3) and sub-section (3A) is not fulfilled: 48. Thus, the first condition under which the Reserve Bank of India can cancel the licence granted to a banking company is when the bank ceases to carry on banking business in India. This implies that banks must accept deposits for the purpose of lending and for the purpose of accepting deposits, the banks have to obtain registration with the Deposit Insurance Corporation and, therefore, pay premium for 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 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. 51. Premium is paid by the banks to the Deposit Insurance Corporation for providing the insurance service C.E.Appeal No.1 of 2021 & conn.cases -17- for which the banks pay service tax. It is this service tax paid by the banks on the insurance service received by the banks from the Deposit Insurance Corporation that is the bone of contention between the parties. 52. It is not in dispute that 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 licence granted to the banks by the Reserve Bank of India can be cancelled. 53. Thus, the service rendered by the Deposit Insurance Corporation to the banks would fall in the main part of the definition of “input service”, which is any service used by a provider of output service for providing an output service. Once this service falls in the main part of the definition of “input service”, it would not be necessary to examine whether the service would be covered by the inclusive part of the definition. It has also been noted that the service is not excluded from the definition of “input service”. 54. The contention of the Department is that “accepting” of deposits is covered under section 66D(n) of the Finance Act which contains the negative list. As noticed above, 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. This would be a case where in the course C.E.Appeal No.1 of 2021 & conn.cases -18- 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 37 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 only includes deposits such as savings, fixed, current, recurring, etc., but also certain balances appearing in the account of the banks such as credit balances in cash credit accounts, margin held against letters of credit, guarantees, bills purchased, etc., unpresented drafts and payment orders, provident fund balances relating to staff held by bank before they are transferred to Provident Fund Commissioner, amount representing pay orders/ bankers cheques/ demand drafts issued by closing deposit accounts with or without reference to depositors, but remaining unpaid etc. Thus, the contention of the Department that insurance premium is paid only on the deposits of the customers cannot also be accepted. 56. It has also been submitted by learned Counsel appearing for the banks that even if it is assumed that some part of the deposit is not used for providing “output service”, then too the banks are still entitled for the credit availed on the insurance service provided by the Deposit Insurance Corporation as the banks have reversed 50% of the total CENVAT credit taken in terms of rule 6(3B) of the 2004 Rules. This rule 6(3B) provides that notwithstanding anything contained in sub-rules (1), (2) and (3), a banking company and a financial institution including a non- C.E.Appeal No.1 of 2021 & conn.cases -19- banking financial company, engaged in providing services by way of extending deposits, loans or advances shall pay for every month an amount equal to 50% of the CENVAT credit availed on inputs and input services in that month. The Circular dated 28 February, 2011 issued by the Central Board of Excise and Customs explains the reason behind the abovementioned amendment. It has been stated that since substantial part of the income of a bank is from investments or by way of interest in which a number of inputs and input services are used and as there have been difficulties in ascertaining the amount of credit flowing into earning these amount, a banking company providing banking and financial services is obligated to pay an amount equal to 50% of the credit availed in terms of rule 6(3B). This sub-rule (3B) has, therefore, been introduced with a view to disallow the credit of input and input services attributable to interest/investment income earned by banking companies. Having regard to the fact that it is difficult to ascertain the actual amount of input and input services used in earning interest income, subrule (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 39 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 C.E.Appeal No.1 of 2021 & conn.cases -20- Metlife India Insurance Company was carrying on life insurance business and on the insurance policy issued by it, service tax was charged from the customers. It also procured re-insurance service from overseas insurance companies and availed CENVAT credit of service tax paid on such services received by it. This CENVAT credit was denied by the Department for the reason that re-insurance service cannot be considered as an “input service” since it takes place after the insurance policy is issued. The Karnataka High Court examined whether CENVAT credit availed and utilized by the insurance company on service tax paid for re-insurance service is an “input service” for the output service of insurance that the company was providing and held that the process of issuance of the policy by the insurer and subsequent procurement of reinsurance policy from another company, which is a statutory requirement, is an integral part of the entire process and the insurance process does not come to end merely on the issuance of the insurance policy since it continues till the existence of the term of the policy. The High Court noted that since re-insurance has to be taken under section 101 A of the Insurance Act, it is a statutory obligation and, therefore, has to be considered as having nexus with the “output service” and, therefore, would be an “input service”, for which CENVAT credit can be availed. The portion of the judgment of the High Court pertaining to this aspect is reproduced below: “6. Having heard the learned counsel for the parties and in the fact of this case, we are of the opinion that the order of the Tribunal does not require any interference. Rule 2(l) of the Cenvat Credit Rules 2004 provides that ‘‘Input Service‟ means service used by a provider of taxable service for providing an ‘‘Output Service‟. The submission of the learned counsel for the appellant that once the Insurance Policy is issued by the Insurer, the transaction comes to an end (and would not depend on the reinsurance policy) and as such the service provided would not come within the ambit of input service, is not worthy of acceptance. The process of issuance of an Insurance Policy by the Insurer and subsequent procurement of C.E.Appeal No.1 of 2021 & conn.cases -21- reinsurance policy from another company (which is a statutory requirement) is an integral part of the total process. The process of insurance does not come to an end merely on the issuance of the Insurance Policy by the Insurer. In fact, it continues till the existence of the term of the policy. The re-insurance 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 of 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 some service tax, which is necessary for its business, then he is entitled to the Cenvat credit to the extent of service tax which has been paid by it. In the present case, if the entire Service Tax which is collected by the Insurer, while selling its insurance policies, has to be deposited without being given the credit of the tax which is paid by it while procuring a policy of reinsurance as (mandatorily required in law), the same would be against the ethos of Cenvat credit policy, as the same would amount to double taxation, which is not permissible in law.” 60. It needs to be noted that the aforesaid decision of the Karnataka High Court in PNB Metlife India has been accepted by the Central Board of Excise and Customs in the Circular dated 16 February, 2018. The relevant paragraphs C.E.Appeal No.1 of 2021 & conn.cases -22- 8 and 8.1 are reproduced below: “8. Decision of the Hon‟ble High Court of Karnataka at Bangalore dated 09.04.2015 in the case of M/s PNB Metlife India Insurance Company Ltd. Bangalore [2015 (39) STR 561 (Kar.)] 8.1. Department has accepted the aforementioned order of the Hon‟ble High Court of Karnataka. The issue examined in the order was, whether Reinsurance is an input service which is used for providing output service, namely, insurance and whether CENVAT Credit taken on re-insurance service is admissible. Hon‟ble High Court held that reinsurance is a statutory obligation and the same is co-terminus with the insurance policy. Issuance of insurance policy by insurer, and then taking of reinsurance by it, is a continuous process. Reinsurance is, therefore, an input service.” 61. In the present appeals also, in order to render any output service under the category of “banking and other financial services”, 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”. 62. The decision of the Tribunal in Shriram Life Insurance Company Ltd. vs. Commissioner of Customs, Central Excise and Service Tax, Hyderabad [2019-TIOL1087-CESTAT-HYD] also needs to be referred to. The appellant provided life insurance services for which it had to statutorily invest the premiums collected in approved securities. The issue that arose 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 C.E.Appeal No.1 of 2021 & conn.cases -23- 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 Insurance Corporation to the banks. 64. This view has been taken by the Tribunal in State Bank of Bikaner. However, in ICICI Bank a contrary view was taken. For all the reasons stated above, it is not possible to accept the view taken by the Division Bench of the Tribunal in ICICI Bank.‘ 12. We have examined the view from the perspective of questions raised before us. To conclude precisely, the larger bench has taken each one of the circumstances at both the ends i.e. while availing the services and providing services, the practice/procedure and the provisions of law had rendered the view on the entitlement of assessee for availing the credit. We are in full agreement with the view of the larger bench in all fours. 13. The argument of Mr.Sreelal Warrier disjuncts allied services provided by the assessee under one umbrella and C.E.Appeal No.1 of 2021 & conn.cases -24- expands the meaning of ‘extending‘ as including activities related to acceptance of deposits and consequential assurance or services provided by the bank. Such construction not only cause violence to the clear expression but would act contrary to the intended expressions in Section 66D. 14. It can be construed from a plain reading of section 66D that the negative list is compiled of the services stated therein and is relied on to bring the assessee within the negative list is clause-(n) i.e. services by way of extending deposits, loans, advances etc. in so far as the consideration is represented by way of interest or discount. The expression used in clause-(n) begins with the words ‘extending deposits, loans or advances‘, and such activity is represented by way of interest or deposit of money. The determining word in the clause is ‘ **extending** deposits, loans or advances etc.‘ `Extending deposits‘ literally understood is the deposits, loans etc. extended by the assessee. The acceptance of deposits is a pure and simple money transaction. But the realm in which the controversy operates is after receiving the deposits C.E.Appeal No.1 of 2021 & conn.cases -25- from public, the assessee is under statutory obligation to insure the deposits received for conducting the bank business and extends under law services on which service tax is paid. The services provided by the assessee are not falling within the negative list. Therefore, there is relatability on a hostile consideration of business in banking between the services availed and services rendered. The suggestion of revenue would compartmentalise the activities in an odd way only to deny the claim of CENVAT credit and we are not persuaded, firstly, by the argument now canvassed before us and secondly, upon taking note of are the applicable sections in this behalf. The payment of premium on insurance together with service tax for valid and correct reasons has been held by the larger bench as follows: “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“. 15. The substantial questions raised are not tenable, and the findings recorded by the larger bench have already C.E.Appeal No.1 of 2021 & conn.cases -26- considered these issues. Two questions argued before this Court are answered against the Revenue and in favour of the assessee. Hence C.E.Appeal No.1 of 2021 is dismissed. For the view taken in the preceding paras, the questions raised in the appeals are answered against the revenue and in favour of the assessee. Hence the appeals stand dismissed. Sd/- **S.V.BHATTI, JUDGE** Sd/- **BASANT BALAJI, JUDGE** css/ C.E.Appeal No.1 of 2021 & conn.cases -27- ## **C.E.APPEAL NO.1 OF 2021** ## PETITIONER’S EXHIBITS: ANNEXURE A1 : TRUE COPY OF THE ORDER IN ORIGINAL NUMBERED CALEXCUSE-000-COM-0022-14-15 PASSED BY THE COMMISSIONER OF CENTRAL EXCISE, CUSTOMS & SERVICE TAX, CALICUT DTD.31.12.2014. ANNEXURE A2 : TUR ECOPY OF INTERIM ORDER NUMBERED 13/2020 OF THE HON’BLE CESTAT (LARGER BENCH, SOUTH ZONAL BENCH, BANGALORE IN SERVICE TAX APPEAL 20747/2015 FILED BY THE RESPONDENT DTD.20.03.2020. ANNEXURE A3: TRUE COPY OF FINAL RODER NUMBERED 20691/2020 OF THE HON’BLE CESTAT (DIVISION BENCH), SOUTH ZONAL BENCH, BANGALORE IN SERVICE TAX APPEAL 20747/2015 FILED BY THE RESPONDENT DTD.23.09.2020. C.E.Appeal No.1 of 2021 & conn.cases -28- ## **C.E.APPEAL NO.2 OF 2021** ## APPELLANT’S EXHIBTS: ANN.A1 TRUE COPY OF THE ORDER-IN-ORIGINAL NUMBERED CAL-EXCUS000-COM-0022-14-15 PASSED BY THE COMMISSIONER OF CENTRAL EXCISE, SERVICE TAX & CUSTOMS, CALICUT DTD.31.12.2014. ANN.A2 TRUE COPY OF INTERIM ORDER NUMBERED 14/2020 OF THE HON’BLE CESTAT (LARGER BENCH), SOUTH ZONAL BENCH, BANGALORE IN SERVICE TAX APPEAL 21027 OF 2015 FILED BY THE COMMISSIONER OF CUSTOMS CENTRAL EXCISE & SERVICE TAX, CALICUT DTD.20.3.2020. ANNX.A3 TRUE COPY OF FINAL ORDER NUMBERED 20693/2020 OF THE HON’BLE CESTAT (DIVISION BENCH), SOUTH ZONAL BENCH, BANGALORE INS ERVICE TAX APPEAL 21027/2015 FILED BY THE COMMISSIONER OF CUSTOMS, CENTRAL EXCISE & SERVICE TAX, CALICUT DT.23.09.2020 C.E.Appeal No.1 of 2021 & conn.cases -29- ## **C.E.APPEAL NO.3 OF 2021** ## **PETITIONER’S EXHIBITS:** ANN.A1 TRUE COPY OF THE ORDER-IN-ORIGINAL NUMBERED CALEXCUS-000-COM-018-16-17 PASSED BY THE COMMISSIONER OF CENTRAL EXCISE & CUSTOMS, CALICUT DTD.30.01.2017. ANN.A2 TRUE COPY OF INTERIM ORDER NUMBERED 29.2020 OF THE HON’BLE CESTAT (LARGER BENCH, SOUTH ZONAL BENCH, BANGALORE IN SERVICE TAX APPEAL 20635/2017 FILED BY THE RESPONDENT DTD.20.3.2020. ANN.A3 TRUE COPY OF FINAL AORDER NUMBERED 20695/2020 OF THE HON’BLE CESTAT (DIVISION BENCH), SOUTH ZONAL BENCH, BANGALORE IN SERVICE TAX APPEAL 20635/2017 FILED BY THE RESPONDENT DTD.23.09.2020. C.E.Appeal No.1 of 2021 & conn.cases -30- ## **C.E.APPEAL NO.4 OF 2021** ## **PETITIONER’S EXHIBITS:** ANN.A1 TRUE COPY OF THE ORDER-IN-ORIGINAL NUMBERED CALEXCUS-000-COM-018-16-17 PASSED BY THE COMMISSIONER OF CENTRAL EXCISE & CUSTOMS, CALICUT DTD.30.07.2017. ANN.A2 TRUE COPY OF INTERIM ORDER NUMBERED 16/2020 OF THE HON’BLE CESTAT (LARGER BENCH, REGIONAL BENCH, BANGALORE IN SERVICE TAX APPEAL 20548/2017 FILED BY THE RESPONDENT DTD.20.3.2020. ANN.A3 TRUE COPY OF FINAL AORDER NUMBERED 20694/2020 OF THE HON’BLE CESTAT (DIVISION BENCH), SOUTH ZONAL BENCH, BANGALORE IN SERVICE TAX APPEAL 20548/2017 FILED BY THE COMMISSIONER OF CUSTOMS, CENTRAL EXCISE & SERVICE TAX, CALICUT DTD.23.09.2020. C.E.Appeal No.1 of 2021 & conn.cases -31- ## **C.E.APPEAL NO.5 OF 2021** ## **PETITIONER’S EXHIBITS:** ANN.A1 TRUE COPY OF THE ORDER-IN-ORIGINAL NUMBERED CALEXCUS-000-COM-057-15-16 PASSED BY THE COMMISSIONER OF CENTRAL EXCISE & CUSTOMS, CALICUT DTD.29.12.2015. ANN.A2 TRUE COPY OF INTERIM ORDER NUMBERED 19/2020 OF THE HON’BLE CESTAT (LARGER BENCH, SOUTH ZONAL BENCH, BANGALORE IN SERVICE TAX APPEAL 20417/2016 FILED BY THE RESPONDENT DTD.20.3.2020. ANN.A3 TRUE COPY OF FINAL ORDER NUMBERED 20707/2020 OF THE HON’BLE CESTAT (DIVISION BENCH), SOUTH ZONAL BENCH, BANGALORE IN SERVICE TAX APPEAL 20417/2016 FILED BY THE RESPONDENT DTD.23.09.2020.