The Karnataka High Court has held that the maintenance of Minimum Average Balance (MAB) by a bank customer is only a contractual condition governing the banker-customer relationship and cannot be treated as “consideration” for banking services under Sections 65B(44), 66B, 66E(e) and 67 of the Finance Act, 1994.
The single-judge Bengaluru Bench of Justice SR Krishna Kumar ruled that in the absence of consideration, no taxable service arises, and the tax department cannot assign a notional or deemed value to MAB for the purpose of levying service tax.
The Court observed that the concepts of “service,” “taxable service,” “declared service,” and “valuation” under the Finance Act all necessarily require the existence of consideration. The impugned notices, however, wrongly equated a contractual stipulation requiring maintenance of MAB with consideration for services rendered by banks
The Court further held that Section 66E(e), which dealt with declared services involving an agreement to refrain from an act, tolerate an act or do an act, would apply only where there exists an independent contractual arrangement supported by consideration flowing from the other party. Since no such arrangement existed in the present case, the show cause notices were found to be based on a fundamentally erroneous premise and contrary to binding circulars issued by the Board. The notices, along with all consequential proceedings, were therefore quashed.
The Court noted that the maintenance of MAB was merely one of the terms governing the operation of a bank account. If a customer failed to maintain the stipulated balance, the bank would impose a penalty, and service tax on such penalties had already been paid by the banks.
Importantly, banking services continued even if the customer defaulted in maintaining MAB, and there was no covenant enabling the bank to recover the cost of services through retention of the balance amount. Consequently, MAB could not be characterised as actual, deemed or notional consideration.
The Bench also observed that accepting the department’s interpretation would effectively result in double taxation, since the service tax had already been paid on penalties collected for non-maintenance of MAB.
Relying on Circular No. 178/10/2022-GST dated August 3, 2022, and Circular No. 214/1/2023-Service Tax dated February 28, 2023, the Court held that a taxable service of agreeing to tolerate an act or do an act must arise from a separate contractual arrangement supported by identifiable consideration having a direct nexus with the activity.
The Court emphasised that no such independent arrangement existed in the present case and that penal charges for breach of contractual terms cannot be treated as consideration for tolerating an act.
It also pointed out that customers remained free to withdraw their deposits, banks did not appropriate the MAB as consideration, and the deposits continued to earn interest for customers. Therefore, the MAB did not confer any benefit upon banks so as to qualify as consideration.
The Bench further noted that in proceedings involving South Indian Bank, the department itself had accepted similar contentions and dropped identical GST proceedings on merits. The Court, therefore, held that the impugned notices were also liable to be quashed on grounds of inconsistency. It additionally rejected the department’s objection regarding the availability of an alternative remedy, observing that the dispute involved a pure question of law and that the notices lacked jurisdictional foundation.
The petitions was filed by Canara Bank, Bank of Baroda and Karnataka Bank challenging show cause notices issued by Service Tax/GST authorities for the pre-GST period ending June 30, 2017. The department alleged that when customers maintained the stipulated MAB and banks did not separately charge for certain facilities, such maintenance of balance constituted non-monetary consideration for banking services.
Proceeding on that basis, the authorities invoked Sections 65B(44), 65B(51), 66B, 66E(e) and 67 of the Finance Act, 1994, along with Section 2(d) of the Indian Contract Act, 1872, to levy service tax, interest and penalties by categorising the arrangement as a “declared service,” particularly as an agreement to do an act.
The banks, however, argued that MAB was merely a contractual requirement, that no consideration was charged where MAB was maintained, and that only penalties were imposed for non-maintenance, on which service tax had already been discharged.
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