The Karnataka High Court (Bengaluru Bench) has held that maintenance of Minimum Average Balance (MAM) by a bank customer is merely a contractual stipulation governing the account relationship and cannot be construed, treated, categorised or described as “consideration” for the services rendered by the bank within the meaning of Sections 65B(44), 66B, 66E(e) and 67 of the Finance Act, 1994. Thus, in the absence of any consideration, no taxable service arises, and the department cannot impute a notional or deemed value to MAB for the purpose of levying service tax.
The Court further held that Section 66E(e) applies only where there is an independent arrangement to refrain from an act, tolerate an act or do an act for consideration flowing from the other party, and such arrangement was absent in the present case. Since the show cause notices proceeded on a fundamentally erroneous premise, were contrary to binding Board circulars, and lacked jurisdictional foundation, they were manifestly unsustainable in law. The Court therefore quashed the impugned show cause notices along with all further proceedings pursuant thereto.
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A Single Judge Bench of Justice S.R. Krishna Kumar observed that under the Finance Act, “service” under Section 65B(44), “taxable service” under Section 65B(51), the charging provision under Section 66B, declared service under Section 66E(e), and valuation under Section 67 all require the existence of “consideration”, and the impugned notices wrongly conflated a contractual condition with such consideration.
The Bench also observed that maintenance of MAB is merely one of the terms of the contract between the bank and the customer; if the customer defaults, the bank levies a penalty, and service tax on that penalty was undisputedly being paid. The services continue notwithstanding such default, there is no covenant to recover the cost of services from the customer upon failure to maintain MAB, and therefore MAB cannot be construed as consideration, whether actual, deemed or notional.
The Bench further held that accepting the department’s theory would amount to double taxation, because tax had already been paid on the penalty collected for non-maintenance of MAB.
The Bench also relied on Circular No. 178/10/2022-GST dated August 03, 2022 and Circular No. 214/1/2023-Service Tax dated February 28, 2023 to hold that a service of agreeing to refrain from an act, tolerate an act or do an act must arise from an independent contractual arrangement and must be supported by consideration having a necessary and sufficient nexus with such activity.
The Bench emphasised that there was no such independent arrangement here, and that penal charges for breach cannot be characterised as consideration for tolerating an act or for doing an act. It also emphasised that customers remained free to withdraw the deposits, the banks did not appropriate the MAB as consideration, and the deposits continued to earn interest. In that view, the MAB did not accrue as a benefit vesting in the banks so as to qualify as consideration.
The Bench also noted that the department itself had, in the case of South Indian Bank, accepted identical contentions and dropped similar GST proceedings on merits, and therefore the impugned notices were also liable to be quashed on that ground. The Bench further rejected the objection on alternative remedy, holding that the issue was a pure question of law and the notices were without jurisdiction.
Briefly, the petitions were filed by Canara Bank, Bank of Baroda and Karnataka Bank challenging show cause notices issued by the Service Tax/GST authorities for the pre-GST period up to June 30, 2017. The notices alleged that where customers maintained the stipulated Minimum Average Balance (MAB) and the banks did not separately charge for various facilities, the maintenance of such MAB constituted non-monetary consideration for services rendered by the banks.
Proceeding on that premise, the department invoked Sections 65B(44), 65B(51), 66B, 66E(e) and 67 of the Finance Act, 1994, read with Section 2(d) of the Indian Contract Act, 1872, and sought to levy service tax, interest and penalty by treating the services as “declared services”, particularly as “agreeing to the obligation to do an act”. The banks contended that MAB was merely a condition of the account contract, that no consideration was charged when MAB was maintained, and that only penalty was levied when MAB was not maintained, on which service tax had already been discharged.
