Banks' Eligible for CENVAT Credit on Service Tax Paid for Deposit Insurance Premium: Karnataka HC [Read Order]

In a recent ruling, the Karnataka High Court dismissed appeals filed by the Revenue and affirmed that banks are eligible to avail CENVAT credit on the Service Tax paid on premiums to the Deposit Insurance and Credit Guarantee Corporation (DICGC).

The case involved multiple appeals filed by the Commissioner of Central Excise and Service Tax against various banks, including Corporation Bank, State Bank of Mysore, Bank of Baroda, Canara Bank, Syndicate Bank, and Karnataka Bank. The Revenue had challenged the orders of the CESTAT, which had allowed the banks' claim for CENVAT credit.

The core legal question was whether the service tax paid on deposit insurance premiums could be considered an 'input service' for the banking business, allowing the banks to claim credit. The Revenue argued that the business of banking largely involved "transactions in money only" (which are not services) and that deposit insurance, though mandatory, was not linked to any output service.

The Respondent banks, represented by Senior Counsel, argued that the issue was already settled by the Larger Bench of the CESTAT in the case of South Indian Bank vs. Commissioner of Customs, Central Excise & Service Tax, Calicut. They pointed out that the Kerala High Court, in The Principal Commissioner of Central Tax and Central Excise vs. M/s South Indian Bank, had subsequently affirmed the Larger Bench decision on December 5, 2022. They further noted that the Bombay High Court had followed the Kerala High Court's ruling in Commissioner of CGST and Central Excise vs. Yes Bank Ltd.

The Revenue attempted to distinguish the matter by arguing that a previous Karnataka High Court judgment in PNB MetLife India Insurance Co. Ltd. was being misapplied. They also submitted that appeals regarding similar issues were pending before the Supreme Court.

The bench of Justice S.G. Pandit and Justice K. V. Aravind observed that the Kerala High Court had extensively analyzed the issue, taking into account the regulatory framework of the Banking Regulation Act, 1949, and answered the substantial questions of law in favour of the assessee.

The Court observed:

“On a perusal of the impugned order and upon considering the judgment of the High Court of Kerala, we are of the view that the questions raised in these appeals are no longer res integra and stand answered by the judgment of the High Court of Kerala. We find no grounds and reasons to take a different view from the view taken by the High Court of Kerala.”

Accordingly, the Court followed the judgment of the Kerala High Court and dismissed the Revenue's appeals, answering the substantial questions of law in favour of the banks.

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