Providing loans to borrowers by the bank does not amount to service

In State Bank of Patiala v. Commissioner, Central Excise & Central Goods & Services Tax [Service Tax Appeal No. 52160 of 2019-SM dated August 9, 2021], the current appeal has been filed against the Order-In-Appeal No. 392 (CRM) ST/JDR/2019 dated April 24, 2019('OIA') which upheld the Order-In-Original ('OIO') stating the Central Value Added Tax ('CENVAT') Credit on Input Service was wrongly availed by State Bank of Patiala ('the Appellant').

The Revenue observed that the Appellants had availed CENVAT Credit on Input Services of 'Collateral Management charges' which provides services in relation to processing of loans and advances. Noted that, such input service is exclusively used for providing exempt services, in other words, service tax is not chargeable on the interest earned by the bank on loans/ advances. Therefore, the credit not being available on this service under Rule 6(1) read with Rule 6(5) and 6(3) of the CENVAT Credit Rules, 2004.

The Hon’ble CESTAT, Delhi observed that giving loans is not a service, but an activity of the Bank in which money, which is akin to goods, is given to the borrower. For the reason that interest earned by the Bank on loans is not liable to tax, the Show Cause Notice ('SCN') also alleged that giving of loan is an exempt service.

Further noted, that the SCN was issued after 32 months from the date of return was due, therefore the decision of the SCN for invoking the extended period of Limitation was bad in the eyes of law. No suppression of facts or contumacious conduct was observed from the side of Appellants.

Our Comments:

In GST regime Entry No. 27 of Notification 12/2017- Central Tax (Rate) dated June 28, 2017 ('Services Exemption Notification') provides exemption to the following services-

 'Services by way of-

(a) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services);'

This implies that services by way of loan do come within the purview of supply, however, that has been considered as an 'exempted supply' in the Service Exemption Notification.