CESTAT Delhi: Interest earned by the Bank on the loans is not chargeable to service tax & cannot be said as exempt service

State Bank of Patiala v. Commissioner, Central Excise & Central Goods & Services Tax; ST APPEAL NO. 52160 OF 2019; FINAL ORDER NO. 51739 OF 2021; AUGUST 9, 2021

Brief Facts: Appellant being Banking Company provides service under the category of ‘Banking and other Financial Service among others.

In the course of audit for the period April, 2008 to September, 2011 it was observed that appellant had taken cenvat credit wrongly, relating to the period April, 2008 to March, 2010 being on input service – ‘Collateral Management charges’ as per the invoices raised by the ‘National Bulk Handling Corporation’ which provides services in relation to processing of loans/advances, as is evident from the invoices. It appeared to Revenue that such input service is exclusively used for providing exempt services i.e. service tax is not chargeable on the interest earned by the bank on loans/advances.

Hence, cenvat credit is not available on this service, as per the provision of Rule 6(1) read with Rule 6(5) and 6(3) of the Cenvat Credit Rules. It is further alleged that these facts came to the knowledge of the Department in the course of audit or else, the same would have gone un-noticed. Further alleged, there have been suppression of facts on the part of the appellant and accordingly the show cause notice dated 23-10-2013 was issued, invoking the extended period of limitation under the proviso to Section 73(1) of the Finance Act.

The show cause notice was adjudicated on contest. The proposed demand was confirmed alongwith equal amount of penalty with interest.

Bank’s Contention:

The show cause notice is misconceived, as prima facie giving of loans is not an output service, rather money in real terms somewhat akin to goods, goes out of the bank when the loan is advanced. Secondly, only for the reason that interest earned by the Bank on the loans is not chargeable to service tax, it cannot be said that giving of loan is exempt service.

Admittedly appellant have maintained proper books of accounts and statutory registers, and further they have filed their returns with the Department regularly. Further, there is no allegation in the show cause notice that the appellant have not filed the return properly and/or there is any suppression of facts or mis-statement in the returns

Held: Giving of loans is not a service, rather it is an activity of the Bank in which money in real terms which is akin to goods, is given to borrower. Further, for the reason that interest earned by the Bank on loans is not liable to tax, the show cause notice alleged that giving of loan is an exempt service. The show cause notice has been issued after more than 32 months from the last date when the return was due from the financial year ending 31-3-2010. Accordingly, the show cause notice is bad for invoking the extended period of limitation. There is no suppression of facts or contumacious conduct on the part of the appellant.