THE FACT OF THE MATTER.
The tax authorities during mid-2018 issued a notice to several banks demanding service tax on the free services provided by banks. They contend that services provided by banks come at a cost as they force the account holder to maintain a Minimum Account Balance (hereinafter, “MAB”). Further, banks also levy a uniform penalty if a MAB is not maintained. The State Bank of India has fixed the MAB at INR 3000.[1] Moreover, for a shortfall of less than or equal to 50 % INR 10 with GST is charged. Similarly, for a shortfall 50-75 % will be INR 12 with GST and more than 75 % would be INR 15 plus GST.[2]
Hence, the tax authorities contend that the cost of services required by the bank is equivalent to the penalty charged by the bank. Further, when the customer does maintain MAB the bank gets remuneration by extracting monetary value out of the minimum balance.[3] The banks contend that the service provided by them is free as long as the MAB is maintained. It is liable to provide service tax only if the account holder doesn’t maintain MAB and in turn is penalised.[4] They argue that service tax banks can be charged only if consideration is involved under a contractual obligation. Hence, as charging provisions are strictly interpreted the unwritten spirit of the law should not be considered.[5
THE LEGALITY INVOLVED.
The taxable event under the CGST Act, 2017 (hereinafter, “Act”) is the supply of goods or services or both. The section 7 (1)(a) of the Act defines the term supply to include all forms of supply of goods or services or both, made for a consideration by a person in the course or furtherance of business.[6] Moreover, Section 7 (1A) provides that where certain activities or transactions constitute a supply in accordance with the provisions of 7 (1), they have to be treated either as the supply of goods or supply of services as mentioned under Schedule II.[7]
The presence of consideration is sine qua non to constitute an act as supply. Moreover, the point of dispute in the present case is regarding the presence of consideration and whether the activity of the bank could be termed as service.
A. Whether valid consideration exist or not?
Section 2(31) of the Act defines “consideration” in relation to the supply of goods or services or both to include–
- Any payment made in money or otherwise (or)
- Monetary value of any act or forbearance.
- In response to, in respect of, or for the inducement of, the supply of goods or services or both.[8]
However, the foreign jurisprudence have provided that for a valid consideration to exist between two parties. It has to be (i) Direct linkage between the supply and consideration[9] (ii) Supply has to be voluntary passed[10] (iii) the consumer should be identifiable[11] (iv) Intention to create a contract.[12] In the present case point (i) & (iv) are disputed and hence would be discussed.
i. Consideration has to be direct.
The definition of Consideration uses terms like “in respect of, in response to, for the inducement of supply of goods or services or both suggesting a direct link between service and consideration. Moreover, in the case of Naturally Yours Cosmetics limited v. HMRC[13] where the cosmetics company sold its products via beauty consultants at price lower than the normal price with an undertaking that they would arrange for hostesses and gift it to them to organize parties where the product could be sold. Also, if the said condition was not fulfilled the beauty consultant have to either return the product or pay the whole price. The Court held that there has to be a direct link between the service provided and the consideration charged which in the above case was present between the beauty consultant and cosmetics company. However, the services considered as consideration for supply should not be a condition of contract. Hence, the service should not be peripheral but valuable.
In the present case a direct linkage can be inferred between the amount deposited and the service provided by the banks.
ii. Intention to create contract.
The activity carried out by an individual should be an activity carried out for consideration.[14] This signifies that the individual doing an activity does so at the request of the person providing the consideration. The concept was clarified in the case of R. J. Tolsma v. Inspecteur der Omzetbelasting Leeuwarden[15] where the Court held that where a musician performs on the public highway receives donations from the passers-by, those receipts cannot be regarded as consideration supplied to him. This is because (i) Absence of any agreement between the parties as the parties make only voluntary donation (ii) No necessary link between the musical service and payment received as the passers-by cannot wish for any particular song (iii) The amount paid arise out of sympathy which is non-quantifiable. In the same example if a musician performs at a particular show after selling of tickets that would be a case of consideration and would be charged with service tax banks. This argument is adopted in the Indian system through an Education Guide issued by the Central Board of Excise and Customs.[16]
In the present case, there does not exist any explicit contractual agreement per-se for the customers to provide any consideration for the services availed. However, the customer is under a contractual obligation to maintain a MAB which banks use to extract monetary value and can be considered as consideration under section 2(31) (b).
B. Whether the activity can be considered under Service or not?
Section 2 (31) of the Act, defines “services” to mean anything other than goods, money, and securities but includes activities relating to the use of money or its conversion by cash or by any other mode. The implicit activity of bank availing consideration by extracting the monetary value out of MAB is recognized under Schedule-II clause 5(e) of the Act which provides that an activity of agreeing to the obligation to refrain from an act, or to tolerate an act or situation, or to do an act would be considered as supply.[17] Further, Section 27 of the Rules provide that where the supply of goods or services is for a consideration not wholly in money, the value of the supply can be determined by the value of supply of goods or services or both of like kind and quality.[18]
There have been no cases dealing with clause 5(e) of Schedule II. However, the erstwhile 66E(e) of Finance Act, 1994 had a similar provision.[19] In the case of AKQA Media India Private Ltd. vs. Commissioner of Service Tax-VI[20] the question arose whether discount given to Advertising Agency by the media owner based on the volume of product availed would be charged under service tax?
The court held that there is no agreement or contractual obligation between the advertising agency and the media owner to give a volume discount. Hence, the media owner was not in any way mandated and any discount provided was only in the form of a gratuitous act. Moreover, the quantum of discount was also not fixed and varied according to the discretion of the Media Owner. Hence, an advertising agency cannot claim it as a matter of right. Therefore, the applicant is not providing declared services to the media owner.[21]
It can be inferred from the above case that for application of 5(e) of Schedule II the pre-requisite of a valid contractual obligation with a fixed consideration have to be satisfied.
In the present case, generally, all the banks enter into a contractual obligation with the customers for providing free services. The consideration amount is not fixed via a contractual obligation. However, the contract does mandate the customers to maintain a MAB at all time and any deviation from it is penalised. The penalty amount is fixed for non-maintenance of MAB.[22]
The section 27 of the Rules provides that, where the supply of goods or services is for a consideration not wholly in money, the value of the supply can be determined by the value of supply of goods or services or both of like kind and quality.[23] Hence, the value of the services is equivalent to the penal charges levied when the balance is not maintained or the amount that the bank monetizes out of the minimum balance maintained in the account. Moreover, the banks have themselves revealed the value that they extract out of the minimum balance by charging an equal amount in the name of penal charges when the account holder does not maintain a minimum balance.
GENERAL INTERPRETATION OF TAX LAWS.
In the present case, it cannot be disputed that the point of law is not clear. The question that whether an implicit consideration is charged as service tax banks has not been settled yet. However, applying general interpretation principles a few observations can be made. The word “includes” is mentioned under 7(1)a and 2(31) to define supply and consideration respectively.[24] The courts have held that term “includes” is used in interpretation clauses to enlarge the meaning of the words or phrases occurring in the body of the statute.[25] Hence, an observation can be made that implicit consideration made as in the present case may be included. However, the courts have also held that charging provisions are always strictly interpreted and the unwritten spirit of law should not be considered.[26] Therefore, the question arises how far could the meaning of the term supply and consideration be expanded without damaging the literal spirit of the law.
An analysis of English case law based on similar facts could settle the dilemma. In the case of ING Intermediate Holdings Ltd v. HM Revenue and Customs[27] a deposit-taking business was carried on by the Appellant. Moreover, in return of the deposits, the appellant also provided certain services like debit cards, cheque books, ATMs etc. The question arose whether the services provided by appellant is a VATable supply or not? The Court held that there was an implicit consideration given by the depositors by accepting the Appellant’s terms and conditions and by providing the interest arising out of the money deposited in exchange for the banking services. The Court considered it as a case of barter where the appellant provided the banking facilities and interest payments in exchange for the making of the loan.
CONCLUSION
Hence, referring the above case law it may be accepted that the service provided by banks in exchange of maintaining MAB can be considered as Service and be charged as Service Tax. Also, a practical application of mind would reveal that the bank which provides free services for months charge for the same set of transactions when the MAB is not maintained. Hence, they do extract monetary value out of the MAB. A normal rational person would deploy the funds or invest it to gain profit and bank is no different.
[1] Editor, SBI, Bank of Baroda savings account: Minimum balance rules penalty explained, 13th April, 2019.
[2] Id.
[3] Tamal Bandopadhay, The Untold story of the Rs. 45,000 crore service tax claim on banks, 6th May 2018.
[4] Id.
[5] A. V Fernandez v. State of Kerala, (1957) SCR.
[6] Central Goods and Services Tax Act, 2017, Section 7(1)(a).
[7] Id., Section 7(1A).
[8] The Central Goods and Services Tax Act, 2017, Section 2(31).
[9] [1988] STC 879.
[10] Databank Systems Ltd v Commissioner of Inland Revenue, (1987) 9 NZTC 6213.
[11] Jurgen Mohr v. Finanzamt Bad Segeberg C-215/94.
[12] Infra 14.
[13] [1988] STC 879
[14] Taxation of Services: An Education guide, Central Board of Excise and Customs, para 2.3
[15] ECR 1994 C-16/93.
[16] Supra 12.
[17] Central Goods and Service Tax Act, 2017, Schedule-II, 5(e).
[18] Central Goods and Services Tax Rules, 2017, Section 27.
[19] The Finance Act, 66E(e).
[20] AAR/ST/11/2016.
[21] Id.
[22] Supra 2.
[23] Supra 16.
[24] Supra 7; Supra 5.
[25] C.I.T. Andhra Pradesh vs M/S Taj Mahal Hotel 1972 AIR 168
[26] Supra 4.
[27] [2017]EWCA Civ 2111.
This article is authored by Arpit Sarangi, Student of B.A. LL.B at Hidayatullah National Law University, Raipur.
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