Delhi HC To Decide Whether Service Tax Can Be Imposed On Banks By Treating 'Minimum Balance' As Consideration [Read Petition]

Thirteen banks have joined together to file a petition in the Delhi High Court challenging the demand of Rs.38,000 crores as service tax from them.

The service tax claim is based on the premise that the commitment of customers to maintain minimum average balance (MAB) in bank accounts is a "consideration" for banking facilities provided free.

The petition jointly filed by Punjab National Bank, State Bank of India, HDFC, HSBC, Kotak Mahindra Bank, ICICI, Deutsche Bank, Yes Bank, Citi Bank, Standard Chartered Bank, Axis Bank etc., contend that the demand is based on a totally misconceived notion that bank facilities are conditional on maintenance of minimum account balance by the customers.

The show-cause notices issued by the Tax Authorities relied on Section 66E(e) of the Finance Act 1994 which classifies "agreeing to the obligation to do an act" as "service" which is taxable.

The petitioners have challenged the constitutionality of Section 66E(e) by terming it "vague and arbitrary". The corresponding provision in Section 7(1A) read with Clause 5(e) of Schedule II of the CGST Act is also challenged in the petition.

It is contended that these provisions enable the Government to impose tax on a non-taxable transaction without any taxable event by arbitrarily terming it 'service'. 'Service' is even otherwise comprehensively defined under Section 65B(44). Despite that, with the aid of Section 66E(e), transactions without any service element are treated as 'service', contend the banks.

The petition highlights that the Central Board of Indirect Taxes and Customs(CBIC) have clarified that free services are not amenable to service tax as there is no consideration involved. The show-cause notices are against the instructions of the CBIC, the banks complain.

"The proceedings are ex-facie violative of Article 19(1)(g) of the Constitution of India as it interferes with the right of the Petitioner Banks to carry on trade and business besides being violative of Article 265 of the Constitution of India and in plain contravention of the Finance Act, 1994 (hereinafter referred to as "Finance Act")", the petition states. 

The High Court Division Bench of Justices S Muralidhar and Talwant Singh has restrained the authorities from passing final adjudication orders pursuant to the show cause notices until the next hearing date, which is fixed as November 14.

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