Facts of the Case

The petitioners were banks engaged in providing banking and financial services, including savings accounts, current accounts and various facilities and privileges forming part of the banking relationship with customers.

Customers were permitted to choose different types of accounts carrying different facilities and conditions. In certain account categories, customers maintaining the stipulated Minimum Average Balance (MAB) were provided various banking facilities without payment of a separate charge or penalty.

The Revenue authorities issued show cause notices proposing recovery of service tax, interest and penalty for periods up to 30 June 2017, contending that the customers’ commitment to maintain MAB represented non-monetary consideration for the services supplied by the banks.

The Department sought to attribute a notional or deemed monetary value to such consideration by reference to the penalty or fee charged where customers failed to maintain the stipulated MAB. The SCNs invoked, inter alia, Sections 65B(44), 65B(51), 66B, 66E(e) and 67, together with the concept of “consideration” under Section 2(d) of the Indian Contract Act, 1872.

The Department further alleged that the banks had undertaken an obligation to render services and that the customers’ maintenance of MAB constituted consideration for such obligation, thereby attracting the concept of a “declared service” under Section 66E(e).

The banks challenged the SCNs under Article 226 of the Constitution of India, asserting that the jurisdictional foundation for imposing service tax was absent.

Issues Involved

The principal issues before the High Court were:

  1. Whether maintenance of the stipulated Minimum Average Balance by customers constitutes “consideration” or “non-monetary consideration” for banking services.
  2. Whether facilities provided by banks to customers maintaining MAB qualify as a taxable “service” under Section 65B(44).
  3. Whether such banking arrangements fall within Section 66E(e) as a declared service involving an agreement or obligation “to do an act.”
  4. Whether the Department could determine a notional or deemed value of MAB-linked services under Section 67 by adopting the penalty charged for non-maintenance of MAB as a valuation benchmark.
  5. Whether the impugned SCNs were contrary to the statutory scheme and the relevant CBIC/CBEC circulars.
  6. Whether the writ petitions were maintainable despite the Revenue’s objection that the banks could reply to the SCNs and pursue alternative statutory remedies.

Petitioners’ Arguments

The petitioner banks contended that maintenance of MAB was merely a contractual condition governing the account relationship and did not amount to consideration for any taxable service.

They argued that no consideration was charged from customers who maintained MAB. Only where a customer failed to comply with the stipulated MAB condition was a fee or penalty charged, and service tax was being discharged on the relevant amounts collected as applicable.

The banks submitted that the Department could not artificially transform a contractual condition into non-monetary consideration and thereafter assign a notional value to it by reference to the penalty payable upon breach or default.

It was further argued that Section 66E(e) requires the existence of a genuine contractual arrangement involving an obligation to refrain from an act, tolerate an act or situation, or do an act, supported by consideration. The maintenance of MAB did not satisfy those requirements.

The petitioners relied upon:

  • Circular No. 178/10/2022-GST dated 03.08.2022
  • Circular No. 214/1/2023-Service Tax dated 28.02.2023
  • CBEC Circular No. 62/11/2003-ST dated 21.08.2003

They also contended that the controversy involved a pure question of law, without disputed questions of fact, and that the SCNs were without jurisdiction; therefore, the existence of an alternative remedy did not bar writ jurisdiction.

Respondents’ Arguments

The Revenue contended that the writ petitions were premature because the banks could submit replies to the show cause notices and raise all available contentions before the adjudicating authorities.

The Department argued that the very fact that penal charges were imposed when customers failed to maintain MAB demonstrated that customers maintaining MAB were receiving additional or continued banking facilities.

According to the Revenue, the customer’s maintenance of MAB therefore constituted non-monetary consideration, capable of valuation under Section 67 of the Finance Act and the applicable valuation rules.

The Revenue further maintained that the banks’ obligation to provide facilities could fall within Section 66E(e), particularly the limb concerning an agreement “to do an act,” and therefore the proposed service-tax demands were legally sustainable.

Court Order / Findings

The Karnataka High Court rejected the Revenue’s theory and held that the impugned SCNs were legally unsustainable.

1. Maintenance of MAB Is Merely a Contractual Condition

The Court found that the requirement to maintain MAB was one of the conditions of the contract between the bank and its customer.

Where the stipulated MAB was maintained, the customer continued to receive banking facilities without payment of a penalty or fee. Where MAB was not maintained, a fee or penalty could be charged.

Accordingly, maintenance of MAB was a condition of contract simpliciter and could not be treated as consideration for banking services. The judgment specifically records that services provided to customers maintaining MAB were not supplied against any deemed or notional non-monetary consideration.

2. MAB Cannot Be Converted into Non-Monetary Consideration

The Court rejected the Department’s attempt to characterise the customer’s act of maintaining MAB as non-monetary consideration.

The fact that a fee or penalty became payable upon non-maintenance did not mean that compliance with the MAB condition itself represented consideration.

3. Penalty for Non-Maintenance Cannot Become a Notional Value for MAB Compliance

The Court rejected the theory that the penalty payable upon failure to maintain MAB could be used to determine a notional or deemed value for services provided to customers who actually maintained MAB.

The contractual arrangement contemplated a consequence for default; it did not establish that compliant customers paid consideration equivalent to the default charge.

4. Essential Element of Consideration Was Absent

The Court emphasised the statutory requirement of consideration in determining whether a taxable service existed. A contractual condition could not automatically be elevated into taxable consideration merely because breach of that condition attracted a monetary consequence.

5. Section 66E(e) Could Not Be Invoked on Presumption

The Court rejected the Department’s attempt to apply the declared-service provision relating to “agreeing to the obligation to do an act.”

For such a taxable arrangement, the necessary statutory and contractual elements must exist. They cannot be imagined, presumed or constructed by treating MAB maintenance as consideration.

6. SCNs Contrary to Binding Departmental Circulars and Statutory Scheme

The Court found the impugned notices contrary to the relevant circulars and to the scheme and mandate of the Finance Act.

The Court ultimately characterised the SCNs as:

  • manifestly unsustainable in law;
  • arbitrary;
  • without jurisdiction;
  • bereft of statutory sanction; and
  • ex facie contrary to the relevant circulars and statutory framework.

7. Alternative Remedy Did Not Bar Writ Jurisdiction

The High Court rejected the Revenue’s preliminary objection regarding alternative remedy.

It held that the controversy raised a pure question of law, without disputed factual issues, and that the necessary jurisdictional foundations for issuing the SCNs were conspicuously absent.

The Court also took note of the wider ramifications of the impugned demands upon the banking industry.

Final Order

The High Court allowed all four writ petitions and quashed the respective show cause notices together with all further, consequential and connected proceedings:

  • W.P. No. 10234/2020 – SCN dated 08.01.2020 quashed.
  • W.P. No. 10363/2020 – SCN dated 20.01.2020 quashed.
  • W.P. No. 11574/2020 – SCN dated 13.01.2020 quashed.
  • W.P. No. 2173/2021 – SCN dated 11.06.2020 quashed.

The operative order confirms that the SCNs and all proceedings emanating therefrom stood quashed.

Important Clarification

The judgment draws an important distinction between:

(a) a contractual condition, such as maintaining a stipulated Minimum Average Balance; and

(b) taxable consideration, whether monetary or non-monetary, flowing in return for a service.

A customer’s compliance with an MAB requirement does not automatically become non-monetary consideration merely because non-compliance attracts a fee or penalty.

Further, a charge arising upon breach or default cannot automatically be used as a deemed valuation benchmark for customers who comply with the contractual condition.

The ruling therefore clarifies that taxability cannot rest upon a hypothetical, notional or presumed consideration; the statutory ingredients creating the levy must actually exist.

Sections / Legal Provisions Involved

  • Article 226 of the Constitution of India – Writ jurisdiction of the High Court
  • Section 65B(44) – Definition of “service”
  • Section 65B(51) – Definition of “taxable service”
  • Section 66B – Charge of service tax
  • Section 66E(e) – Declared service: agreeing to refrain from an act, tolerate an act or situation, or do an act
  • Section 67 – Valuation of taxable services
  • Section 2(d) of the Indian Contract Act, 1872 – Definition of “consideration”
  • Circular No. 178/10/2022-GST dated 03.08.2022
  • Circular No. 214/1/2023-Service Tax dated 28.02.2023
  • CBEC Circular No. 62/11/2003-ST dated 21.08.2003

Link to download the order -

https://www.mytaxexpert.co.in/uploads/1783070263_440compressed.pdf

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