CANARA BANK vs THE UNION OF INDIA
- Court
- Karnataka High Court
- 1 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
ST
DATED THIS THE 1 DAY OF JUNE, 2026
R
BEFORE
THE HON'BLE MR. JUSTICE S.R.KRISHNA KUMAR
WRIT PETITION NO. 10234 OF 2020 (T-RES)
C/W
WRIT PETITION NO. 10363 OF 2020 (T-RES)
C/W
WRIT PETITION NO. 11574 OF 2020 (T-RES)
C/W
WRIT PETITION NO. 2173 OF 2021 (T-RES)
IN WP No. 10234/2020
BETWEEN:
CANARA BANK
(FORMERLY SYNDICATE BANK)
J.C. ROAD BENGALURU-560002
REPRESENTED HEREIN BY ITS
CHIEF GENERAL MANAGER
MR V. RAMACHANDRA.
…PETITIONER
(BY SRI. G.SHIVADASS, SENIOR COUNSE APPEARING FOR
SMT. MANASA ANANTHAN AND
SMT. TANMAYEE RAJKUMAR ADVOCATES)
AND:
1. THE UNION OF INDIA
REPRESENTED HEREIN BY THE SECRETARY
DEPARTMENT OF REVENUE,
MINISTRY OF FINANCE
GOVERNMENT OF INDIA
NORTH BLOCK
NEW DELHI-110 001.
2. THE CENTRAL BOARD OF
INDIRECT TAXES AND CUSTOMS
NORTH BLOCK,
Digitally
signed by
LEELAVATHI
S R
Location: High
Court of
Karnataka
- 2 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
DEPARTMENT OF REVENUE
MINISTRY OF REVENUE
MINISTRY OF FINANCE
GOVERNMENT OF INDIA
NEW DELHI-110 001.
3. THE PRINCIPAL ADDITIONAL DIRECTOR GENERAL
DIRECTORATE GENERAL OF
GOODS AND SERVICE TAX INTELLIGENCE
BELAGAVI ZONAL UNIT
SHREE LAKSHMI COMPLEX. NO.4855/83
ND RD TH ST
2 , 3 AND 5 FLOOR, 1 CROSS
SADASHIV NAGAR, APMC YARD
BELAGAVI-590 001.
4. THE COMMISSIONER OF
CENTRAL GST AND CENTRAL TAX
MANGALURU GST COMMISSIONERATE
TH
7 FLOOR, TRADE CENTER,
BUNTS HOSTEL ROAD,
MANGALURU-575 003.
…RESPONDENTS
(BY SRI. ARAVIND KAMATH, ASGI ALONG WITH
SRI. JEEVAN.J, NEERALGI, ADVOCATE)
THIS W.P. FILED UNDER ARTICLE 226 OF THE CONSTITUTION OF
INDIA PRAYING TO DECLARE THAT THE VARIOUS FACILITIES PROVIDED
BY THE PETITIONER TO CUSTOMERS, WHO MAINTAINED MAB AND
FROM WHOM NO CONSIDERATION WAS RECEIVED BY THE PETITIONER,
ARE NOT LIABLE TO SERVICE TAX AND ETC.
IN WP NO. 10363/2020
BETWEEN:
BANK OF BARODA
(FORMERLY VIJAYA BANK)
41/2 M G ROAD
BANGALORE
REPRESENTED HEREIN BY ITS
GENERAL MANAGER
MR G RAMESH.
...PETITIONER
(BY SRI. G. SHIVADASS, SENIOR COUNSEL APPEARING FOR
SMT. TANJMAYEE RAJKUMAR, AND
SMT. MANASA ANANTHAN, ADVOCATES)
- 3 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
AND:
1. THE UNION OF INDIA
REPRESENTED HEREIN BY THE SECRETARY
DEPARTMENT OF REVENUE
MINISTRY OF FINANCE
GOVERNMENT OF INDIA
NORTH BLOCK
NEW DELHI-110 001.
2. THE CENTRAL BOARD OF
INDIRECT TAXES AND CUSTOMS
NORTH BLOCK
DEPARTMENT OF FINANCE
GOVERNMENT OF INDIA
NEW DELHI-110 001.
3. THE PRINCIPAL ADDITIONAL DIRECTOR GENERAL
DIRECTORATE GENERAL OF
GOODS AND SERVICE TAX INTELLIGENCE
BANGALORE ZONAL UNIT
NO.112 SP ENCLAVE ADJACENT
TO KARNATAKA BANK, KH ROAD
BANGALORE-560 027.
4. THE PRINICPAL COMMISSIONER OF CENTRAL TAX
BENGALURU NORTH GST COMMISSIONERATE
C R BUILDING, QUEENS ROAD
BENGALURU - 560 001.
...RESPONDENTS
(BY SRI. ARAVIND KAMATH, ASGI ALONG WITH
SRI. JEEVAN.J.NEERALGI, ADVOCATE)
THIS W.P IS FILED UNDER ARTICLE 226 OF THE CONSTITUTION OF
INDIA PRAYING TO-DECLARE THAT THE VARIOUS FACILITIES PROVIDED
BY THE PETITIONER TO CUSTOMERS, WHO MAINTAINED MAB AND
FROM WHOM NO CONSIDERATION WAS RECEIVED BY THE PETITIONER,
ARE NOT LIABLE TO SERVICE TAX AND ETC.
IN WP NO. 11574/2020
BETWEEN:
CANARA BANK
NO. 51, BGSE TOWERS,
ST CROSS, J C ROAD,
WILSON GARDEN
- 4 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
BANGALORE 560027
REPRESENTED HEREIN BY ITS
CHIEF GENERAL MANAGER
MR. V. RAMACHANDRA
...PETITIONER
(BY SRI. G. SHIVADASS, SENIOR COUNSEL APPEARING FOR
SMT. TANMAYEE RAJKUMAR, AND
SMT. MANASA ANANTHAN, ADVOCATES)
AND:
1. THE UNION OF INDIA
REPRESENTED HEREIN BY THE SECRETARY
DEPARTMENT OF REVENUE
MINISTRY OF FINANCE
GOVERNMENT OF INDIA
NORTH BLOCK
NEW DELHI 110 001.
2. THE CENTRAL BOARD OF
INDIRECT TAXES AND CUSTOMS
NORTH BLOCK,
DEPARTMENT OF REVENUE
MINISTRY OF FINANCE
GOVERNMENT OF FINANCE
GOVERNMENT OF INDIA,
NEW DELHI 110 001.
3. THE PRINCIPAL ADDITIONAL DIRECTOR GENERAL
DIRECTORATE GENERAL OF
GOODS AND SERVICE TAX INTELLIGENCE
BANGALORE ZONE UNIT,
NO.112, SP ENCLAVE,
ADJACENT TO KARNATAKA BANK,
K.H. ROAD,
BENGALURU 560 027.
4. THE COMMISSIONER OF CENTRAL TAX
BENGALURU SOUTH GST COMMISSIONERATE
C R BUILDING, QUEENS ROAD,
BENGALURU 560 001.
...RESPONDENTS
(BY SRI. ARAVIND KAMATH, ASGI ALONG WITH
SRI. JEEVAN.J.NEERALGI, ADVOCATE)
- 5 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
THIS W.P. IS FILED UNDER ARTICLE 226 OF THE CONSTITUTION OF
INDIA PRAYING TO DECLARE THAT THE VARIOUS FACILITIES PROVIDED
BY THE PETITIONER TO CUSTOMERS, WHO MAINTAINED MAB AND
FROM WHOM NO CONSIDERATION WAS RECEIVED BY THE PETITIONER
ARE NOT LIABLE TO SERVICE TAX AND ETC.
IN WP NO. 2173/2021
BETWEEN:
THE KARNATAKA BANK LTD
NO.599, MAHAVEERA CIRCLE
KANKANADY, MANGALURU-575002
REPRESENTED HEREIN BY ITS
GENERAL MANAGER AND
CHIEF FINANCIAL OFFICER
MR. MURALIDHAR KRISHNA RAO
...PETITIONER
(BY SRI. G.SHIVADASS, SENIOR COUNSEL APPEARING FOR
SMT. TANMAYEE RAJKUMAR, AND
SMT. MANASA ANANTHAN, ADVOCATE)
AND:
1. THE UNION OF INDIA
REPRESENTED HEREIN BY THE SECRETARY,
DEPARTMENT OF REVENUE
MINISTRY OF FINANCE
GOVERNMENT OF INDIA
NORTH BLOCK, NEW DELHI-110 001.
2. THE CENTRAL BOARD OF
INDIRECT TAXES AND CUSTOMS
NORTH BLOCK
DEPARTMENT OF REVENUE
MINISTRY OF FINANCE
GOVERNMENT OF INDIA
NEW DELHI-110 001.
3. THE PRINCIPAL ADDITIONAL DIRECTOR GENERAL
DIRECTORATE GENERAL OF GOODS AND SERVICE
TAX INTELLIGENCE, BELAGAVI ZONAL UNIT
SHREE LAXMI COMPLEX
ND RD TH
NO.4855/83, 2 & 3 AND 5 FLOOR,
ST
1 CROSS, SADASHIV NAGAR, APMC YARD
BELAGAV I- 590 001.
- 6 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
4. THE ADDITIONAL DIRECTORGENERAL (ADJ)
DIRECTORATE GENERAL OF GST INTELLIGENCE
RD
3 FLOOR, NTC HOUSE
15, N M ROAD,
BALLARD ESTATE
MUMBAI-400 001.
...RESPONDENTS
(BY SRI. ARAVIND KAMATH, ASGI ALONG WITH
SRI. JEEVAN.J. NEERALGI, ADVOCATE)
THIS W.P IS FILED UNDER ARTICLE 226 OF THE CONSTITUTION OF
INDIA PRAYING TO-DECLARE THAT THE VARIOUS FACILITIES PROVIDED
BY THE PETITIONER TO CUSTOMERS, WHO MAINTAINED MAB AND
FROM WHOM NO CONSIDERATION WAS RECEIVED BY THE PETITIONER,
ARE NOT LIABLE TO SERVICE TAX AND ETC.
THESE PETITIONS ARE BEING HEARD AND RESERVED ON
05.03.2026 COMING ON FOR PRONOUNCEMENT OF ORDERS THIS DAY,
THE COURT MADE THE FOLLOWING:-
CORAM: HON'BLE MR. JUSTICE S.R.KRISHNA KUMAR
CAV ORDER
This batch of writ petitions take exception to the impugned
show cause notices (SCNs) issued by the respondents to the
petitioners – Banks calling upon them to show cause as to why
service tax not paid by the Banks for various periods upto
30.06.2017 (pre-GST regime) should not be demanded and
recovered from the petitioners – Banks together with interest and
- 7 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
penalty as demanded in the impugned SCNs issued by the
respondents.
2. Briefly stated, the factual conspectus giving rise to the
present batch of writ petitions may be adverted to thus:-
The petitioners in these writ petitions are Public Sector
Banks engaged in the rendition of banking and financial services,
encompassing savings bank accounts, current accounts and a
bouquet of other facilities and privileges made available to
customers in the course of their banking relationship. It is
contended by the petitioners that the customers are given a choice
to open and operate different types of accounts, in relation to which
different services comprising of a bouquet / basket of services are
provided by the Banks to its customers. The respondents issued
the impugned show cause notices interalia contending that by
virtue of the provisions contained in Sections 66B, 65B(44) and
(51), 66E(e) and Section 67 of the Finance Act, 2012 and the
definition of “consideration” under Section 2(d) of the Indian
Contract Act, 1872, the petitioners – Banks are the petitioner Banks
had incurred liability towards service tax in respect of the services
rendered by them to their customers and such services being
- 8 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
undergirded non-monetary consideration in the nature of the
customer’s commitment to the petitioners – Banks to maintain the
stipulated Minimum Average Balance (MAB), by ascribing a
notional / deemed value equivalent and in terms of the penalty
charged by the Banks to the customers, in the event they do not
maintain MAB in their chosen accounts and that accordingly, the
petitioners – Banks are liable to pay service tax. The impugned
SCNs further alleged that the nature and extent of services
extended by the petitioner Banks to their customers were
contingent upon the MAB undertaken to be maintained by them
and that, upon failure to maintain the stipulated MAB, the rendition
of such services was not curtailed but continued, albeit subject to
the levy of the prescribed penalty. It is further contended in the
impugned SCNs that the services provided by the petitioners –
Banks are nothing but “declared services” within the meaning of
Section 66E(e) of the Finance Act, whereby the petitioners - Banks
had “agreed to an obligation to do an act” of rendering services and
in return, the act of the customers in keeping the MAB in their
accounts, constitutes the “consideration” for the said obligation
undertaken by the Banks and as such, the respondents have
- 9 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
issued the impugned SCNs invoking the aforesaid provisions of the
Finance Act demanding service tax, interest and penalty from the
petitioners – Banks who are before this Court by way of the present
petitions.
3. Heard learned Senior counsel for the petitioners and
learned ASG for the respondents and perused the material on
record.
4. In addition to reiterating the various contentions urged in
the petition and referring to the material on record, learned Senior
counsel for the petitioners submitted that the petitioners – Banks
had not charged any consideration for the services provided by
them to the customers, who maintained MAB which was merely
one of the conditions of the contract entered into between the
Banks and the customers and only in the event, the customers
committed breach / default in complying with the said condition of
maintaining MAB, the services would still be provided subject to
payment of penalty and in the absence of any consideration being
charged by the Banks to the customers for providing the said
services without charging penalty and upon maintaining MAB, the
- 10 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
respondents did not have any jurisdiction or authority of law to
demand service tax from the petitioners who are not liable to pay
service tax as demanded by the respondents in the impugned
SCNs, which deserve to be quashed. It is submitted that since the
impugned SCNs are contrary to the Circular No.178/10/2022- GST
dated 03.08.2022, Circular No.214/1/2023 – Service Tax dated
28.02.2023 and CBEC Circular No.62/11/2003-ST dated
21.08.2003 as well as the provisions contained in Sections 66B,
65B(44) and (51), 66E(e) and Section 67 of the Finance Act,
thereby rendering the impugned SCNs arbitrary, illegal and without
jurisdiction or authority of law and since there are no questions /
disputed questions of fact involved in the present petitions, which
relate to pure questions of law, mere existence of an alternative
remedy in favour of the petitioners would not come in the way of
this Court entertaining and adjudicating upon the present petitions,
which deserve to be allowed by quashing the impugned SCNs
issued by the respondents. In support of his submissions, learned
Senior counsel for the petitioners placed reliance upon the
following judgments:-
(i) Commissioner vs. Larsen and Toubro Limited –
2016 (44) STR 391 (Guj);
- 11 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
(ii) Commissioner of Service Tax vs. Bhayana
Builders (P) Ltd., - 2018 (10) GSTL 118 (SC);
(iii) Commissioner of Service Tax, Chennai vs.
REPCO Home Finance Limited – 2020 (42) GSTL 104
(TRI-LB);
(iv) Magadh Sugar and Energy vs. State of Bihar –
2021 SCC OnLine SC 801;
(v)Engineers India Limited vs. State of A.P. &
others – W.P.No.32971/2016 Dated 31.12.2018;
(vi) Philips India Limited vs. Collector of Central
Excise – 1997(91) ELT 540 (SC);
(vii) Commissioner of Customs (Import), Mumbai
vs. Dilip Kumar and Company – 2018 (361) ELT 577 (SC);
(viii) Commissioner of Central Excise, Pondicherry
vs. Acer India Limited – 2004 (172) ELT 289(SC);
(ix) The South Gujarath Roofing Tiles
Manufacturers Association vs. State of Gujarath – AIR
1977 SC 90;
(x) The Commissioner of Customs, New Delhi vs.
Caryaire Equipment India Private Limited – 2012 (278)
ELT 30 (SC);
(xi) Balarampur Chini Mills Limited vs. Union of
India & others - 2019 (368) ELT 279 (All.);
(xii) Hitachi Home and Life Solutions Limited vs.
State – 2018 (8) GSTL 370 (J & K);
(xiii) Commissioner of CGST & Central Excise vs.
Edelweiss Financial Services Limited – (2023) 5 CENTAX
58 (SC);
- 12 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
(xiv) Asha R. vs. ACCT – (2025) 29 CENTAX 391
(KAR);
(xv) Commissioner of Central Excise & Service
Tax, Rohtak vs. Merino Panel Product Limited – 2022
SCC Online SC 1677;
(xvi) Union of India vs. Intercontinental
Consultants & Techno Crafts – (2018) 4 SCC 669.
5. Per contra, learned ASG would reiterate the various
contentions urged in the statement of objections and submits that
the petitions are premature, since it is always open for the
petitioners to submit their replies to the impugned SCNs which
would be considered by the respondents in accordance with law. It
was submitted that the very fact that penal charges are collected
when MAB is not maintained indicates that petitioners – Banks are
providing additional services for the customers who maintain MAB
and therefore, this very maintenance of MAB by the customers
constitutes non-monetary consideration which is valued and
quantified in terms of Section 67 of the Finance Act and the Rules
made thereunder, thereby making the petitioners liable to pay
service tax towards the said services rendered by the petitioners-
Banks, whose contentions and claims in the present petitions are
devoid of merit and the same are liable to be dismissed.
- 13 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
6. I have accorded my anxious consideration to the rival
submissions and perused the material on record.
7. Before proceeding to consider the rival contentions on
merits, it is apposite and germane to extract the relevant provisions
of the Finance Act, 2012 which are as under:-
“ 65B. Interpretations :
In this Chapter, unless the context otherwise requires,–
(1) "actionable claim" shall have the meaning assigned
to it in section 3 of the Transfer of Property Act, 1882;
(2) "advertisement" means any form of presentation for
promotion of, or bringing awareness about, any event, idea,
immovable property, person, service, goods or actionable
claim through newspaper, television, radio or any other means
but does not include any presentation made in person;
(3) "agriculture" means the cultivation of plants and
rearing of all life-forms of animals, except the rearing of horses,
for food, fibre, fuel, raw material or other similar products;
(4) "agricultural extension" means application of
scientific research and knowledge to agricultural practices
through farmer education or training;
(5) "agricultural produce" means any produce of
agriculture on which either no further processing is done or
such processing is done as is usually done by a cultivator or
producer which does not alter its essential characteristics but
makes it marketable for primary market;
(6) "Agricultural Produce Marketing Committee or
Board" means any committee or board constituted under a
- 14 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
State law for the time being in force for the purpose of
regulating the marketing of agricultural produce;
(7) "aircraft" has the meaning assigned to it in clause
(1) of section 2 of the Aircraft Act, 1934;
(8) "airport" has the meaning assigned to it in clause (b)
of section 2 of the Airports Authority of India Act, 1994;
3 [xxx]
(10) "Appellate Tribunal" means the Customs, Excise
and Service Tax Appellate Tribunal constituted under section
129 of the Customs Act, 1962;
(37) "person" includes,––
(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a society,
(v) a limited liability partnership,
(vi) a firm,
(vii) an association of persons or body of individuals, whether
incorporated or not,
(viii) Government,
(ix) a local authority, or
(x) every artificial juridical person, not falling within any of the
preceding sub-clauses;
(38) "port" has the meaning assigned to it in clause (q)
of section 2 of the Major Port Trusts Act, 1963 or in clause (4)
of section 3 of the Indian Ports Act,
1908;
(39) "prescribed" means prescribed by rules made
under this Chapter;
[(39a) “ Print media” means
(i) “ book” as defined in sub-section (1) of section 1
of the Press and Registration of Books Act, 1867(25 to 1867),
- 15 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
but does not include business directories, yellow pages and
trade catalogues which are primarily meant for commercial
purposes;
(ii) “ newspaper” as defined in sub-section (1) of
section 1 of the Press and Registration of Books Act, 1867(25
of 1867);]
(40) " process amounting to manufacture or production
of goods" means a process on which duties of excise are
leviable under section 3 of the Central Excise Act, 1944 or 1[ or
the Medicinal and Toilet preparation (Excise Duties) Act , 1955
(16 of 1955)] any process amounting to manufacture of
alcoholic liquors for human consumption, opium, Indian hemp
and other narcotic drugs and narcotics on which duties of
excise are leviable under any State Act for the time being in
force;
(41) "renting" means allowing, permitting or granting
access, entry, occupation, use or any such facility, wholly or
partly, in an immovable property, with or without the transfer of
possession or control of the said immovable property and
includes letting, leasing, licensing or other similar
arrangements in respect of immovable property;
(42) "Reserve Bank of India" means the bank
established under section 3 of the Reserve Bank of India Act,
1934;
(43) "securities" has the meaning assigned to it in
clause (h) of section 2 of the Securities Contract (Regulation)
Act, 1956;
(44) "service" means any activity carried out by a
person for another for consideration, and includes a
declared service , but shall not include—
(a) an activity which constitutes merely,––
- 16 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
(i) a transfer of title in goods or immovable property, by
way of sale, gift or in any other manner; or
(ii) a transaction in money or actionable claim;
(b) a provision of service by an employee to the
employer in the course of or in relation to his employment;
(c) fees taken in any Court or tribunal established under
any law for the time being in force.
Explanation 1. — For the removal of doubts, it is hereby
declared that nothing contained in this clause shall apply to,––
(A) the functions performed by the Members of
Parliament, Members of State Legislative, Members of
Panchayats, Members of Municipalities and Members of other
local authorities who receive any consideration in performing
the functions of that office as such member; or
(B) the duties performed by any person who holds any
post in pursuance of the provisions of the Constitution in that
capacity; or
(C) the duties performed by any person as a
Chairperson or a Member or a Director in a body established
by the Central Government or State Governments or local
authority and who is not deemed as an employee before the
commencement of this section.
Explanation 2.– For the purposes of this clause, the
expression “ transaction in money or actionable claim” shall not
include
(i) any activity relating to use of money or its
conversion by cash or by any other mode, from one form,
- 17 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
currency or denomination, to another form, currency or
denomination for which a separate consideration is charged;
(ii) any activity carried out, for a consideration, in
relation to, or for facilitation of, a transaction in money or
actionable claim, including the activity carried out
(a) by a lottery distributor or selling agent on behalf
of the State Government, in relation to promotion, marketing,
organising, selling of lottery or facilitating in organising lottery
of any kind, in any other manner, in accordance with the
predictions of the Lottories (Regulation) Act, 1998]
(b) by a foreman of chit fund for conducting or
organising a chit in any manner]
Explanation 3: For the purpose of this chapter-
(a) an unincorporated association or a body of persons,
as the case may be, and a member thereof shall be treated as
distinct persons;
(b) an establishment of a person in the taxable territory
and any of his other establishment in a non-taxable territory
shall be treated as establishments of distinct persons.
Explanation 4.— A person carrying on a business
through a branch or agency or representational office in any
territory shall be treated as having an establishment in that
territory;
(45) "Special Economic Zone" has the meaning
assigned to it in clause (za) of section 2 of the Special
Economic Zones Act, 2005;
- 18 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
(46) "stage carriage" shall have the meaning assigned
to it in clause (40) of section 2 of the Motor Vehicles Act, 1988;
(47) "State Electricity Board" means the Board
constituted under section 5 of the Electricity (Supply) Act,
1948;
(48) "State Transmission Utility" shall have the meaning
assigned to it in clause (67) of section 2 of the Electricity Act,
2003;
(49) "support services" means infrastructural,
operational, administrative, logistic, marketing or any other
support of any kind comprising functions that entities carry out
in ordinary course of operations themselves but may obtain as
services by outsourcing from others for any reason whatsoever
and shall include advertisement and promotion, construction or
works contract, renting of immovable property, security, testing
and analysis;
(50) "tax" means service tax leviable under the
provisions of this Chapter;
(51) "taxable service" means any service on which
service tax is leviable under section 66B;
(52) "taxable territory" means the territory to which the
provisions of this Chapter apply;
53) "vessel" has the meaning assigned to it in clause
(z) of section 2 of the Major Port Trusts Act, 1963;
(54) "works contract" means a contract wherein transfer
of property in goods involved in the execution of such contract
is leviable to tax as sale of goods and such contract is for the
- 19 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
purpose of carrying out construction, erection, commissioning,
installation, completion, fitting out, improvement, repair,
renovation, alteration of any building or structure on land or for
carrying out any other similar activity or a part thereof in
relation to any building or structure on land;
(55) words and expressions used but not defined in this
Chapter and defined in the Central Excise Act, 1944 or the
rules made thereunder, shall apply, so far as may be, in
relation to service tax as they apply in relation to a duty of
excise.”
66B. Charge of Service Tax on and after Finance
Act, 2012.
There shall be levied a tax (hereinafter referred to as
the service tax) at the rate of twelve per cent. on the value of
all services, other than those services specified in the negative
list, provided or agreed to be provided in the taxable territory
by one person to another and collected in such manner as may
be prescribed.”
66E. Declared Services .-
The following shall constitute declared services,
namely:––
(a) renting of immovable property;
(b) construction of a complex, building, civil structure or
a part thereof, including a complex or building intended for sale
to a buyer, wholly or partly, except where the entire
consideration is received after issuance of completion-
certificate by the competent authority.
- 20 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
Explanation. — For the purposes of this clause,—
(I) the expression "competent authority" means the
Government or any authority authorized to issue completion
certificate under any law for the time being in force and in case
of non-requirement of such certificate from such authority, from
any of the following, namely:––
(A) architect registered with the Council of Architecture
constituted under the Architects Act, 1972; or
(B) chartered engineer registered with the Institution of
Engineers (India); or
(C) licensed surveyor of the respective local body of the
city or town or village or development or planning authority;
(II) the expression "construction" includes additions,
alterations, replacements or remodeling of any existing civil
structure;
(c) temporary transfer or permitting the use or
enjoyment of any intellectual property right;
(d) development, design, programming, customisation,
adaptation, upgradation, enhancement, implementation of
information technology software;
(e) agreeing to the obligation to refrain from an act,
or to tolerate an act or a situation, or to do an act;
67. Valuation of taxable services for charging
Service tax –
(1) Subject to the provisions of this Chapter,
service tax chargeable on any taxable service with
reference to its value shall,—
(i) in a case where the provision of service is for a
consideration in money, be the gross amount charged by
the service provider for such service provided or to be
provided by him;
- 21 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
(ii) in a case where the provision of service is for a
consideration not wholly or partly consisting of money, be
such amount in money, with the addition of service tax
charged, is equivalent to the consideration;
(iii) in a case where the provision of service is for a
consideration which is not ascertainable, be the amount
as may be determined in the prescribed manner.
(2) Where the gross amount charged by a service
provider, for the service provided or to be provided is inclusive
of service tax payable, the value of such taxable service shall
be such amount as, with the addition of tax payable, is equal to
the gross amount charged.
(3) The gross amount charged for the taxable service
shall include any amount received towards the taxable service
before, during or after provision of such service.
(4) Subject to the provisions of sub-sections (1), (2) and
(3), the value shall be determined in such manner as may be
prescribed.
Explanation.—For the purposes of this section,—
(a) “consideration” includes
(i) any amount that is payable for the taxable
services provided or to be provided;
(ii) any reimbursable expenditure or cost incurred
by the service provider and charged in the course of providing
or agreeing to provide a taxable service, except in such
circumstances, and subject to such conditions, as may be
prescribed;
- 22 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
(iii) any amount retained by the lottery distributor or
selling agent from gross sale amount of lottery ticket in addition
to the fee or commission, if any or, as the case may be the
discount received, that is to say, the difference in the face
value of lottery ticket and the price at which the distributor or
selling agent gets such ticket.]
(b) “ money includes any currency cheque,
promissory note, letter of credit, drat, pay order, travellers
cheque, money order, postal remittance and other similar
instrument but does not include currency that is held for its
numismatic value]
(c) “gross amount charged” includes payment by
cheque, credit card, deduction from account and any form of
payment by issue of credit notes or debit notes and 2 [book
adjustment, and any amount credited or debited, as the case
may be, to any account, whether called “Suspense account” or
by any other name, in the books of account of a person liable
to pay service tax, where the transaction of taxable service is
with any associated enterprise.”
Circular No.178/10/2022- GST dated 03.08.2022, reads as
under:-
Circular No. 178/10/2022-GST
F. No. 190354/176/2022-TRU
Government of India
Ministry of Finance
Department of Revenue (Tax Research Unit)
*
Room No. 146G, North Block,
New Delhi, the 3rd August, 2022.
- 23 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
To,
The Principal Chief Commissioners/
Chief Commissioners/ Principal Commissioners/
Commissioner of Central Tax (All) / The Principal
Director Generals/ Director Generals (All)
Madam/Sir,
Subject: GST applicability on liquidated
damages, compensation and penalty arising out of
breach of contract or other provisions of law – reg.
In certain cases/instances, questions have been
raised regarding taxability of an activity or transaction
as the supply of service of agreeing to the obligation to
refrain from an act or to tolerate an act or a situation, or
to do an act. Applicability of GST on payments in the
nature of liquidated damage, compensation, penalty,
cancellation charges, late payment surcharge etc.
arising out of breach of contract or otherwise and scope
of the entry at para 5 (e) of Schedule II of Central
Goods and Services Tax Act, 2017 (hereinafter referred
to as, “CGST Act”) in this context has been examined in
the following paragraphs.
2. “Agreeing to the obligation to refrain
from an act or to tolerate an act or a situation, or to
do an act” has been specifically declared to be a
supply of service in para 5 (e) of Schedule II of
CGST Act if the same constitutes a “supply” within
the meaning of the Act. The said expression has
following three limbs: -
- 24 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
a. Agreeing to the obligation to refrain from
an act-
Example of activities that would be covered by
this part of the expression would include non-compete
agreements, where one party agrees not to compete
with the other party in a product, service or
geographical area against a consideration paid by the
other party.
Another example of such activities would be a
builder refraining from constructing more than a certain
number of floors, even though permitted to do so by the
municipal authorities, against a compensation paid by
the neighbouring housing project, which wants to
protect its sunlight, or an industrial unit refraining from
manufacturing activity during certain hours against an
agreed compensation paid by a neighbouring school,
which wants to avoid noise during those hours.
b. Agreeing to the obligation to tolerate an act or
a situation- This would include activities such a
shopkeeper allowing a hawker to operate from the
common pavement in front of his shop against a
monthly payment by the hawker, or an RWA tolerating
the use of loud speakers for early morning prayers by a
school located in the colony subject to the school
paying an agreed sum to the RWA as compensation.
c. Agreeing to the obligation to do an act-
This would include the case where an industrial
unit agrees to install equipment for zero
emission/discharge at the behest of the RWA of a
neighbouring residential complex against a
- 25 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
consideration paid by such RWA, even though the
emission/discharge from the industrial unit was
within permissible limits and there was no legal
obligation upon the individual unit to do so.
3. The description “agreeing to the
obligation to refrain from an act or to tolerate an act
or a situation, or to do an act” was intended to
cover services such as described above. However,
over the years doubts have persisted regarding
various transactions being classified under the said
description.
3.1. Some of the important examples of such
cases are Service Tax/GST demands on –
i. Liquidated damages paid for breach of
contract;
ii. Compensation given to previous allottees
of coal blocks for cancellation of their licenses pursuant
to Supreme Court Order;
iii. Cheque dishonour fine/penalty charged by a
power distribution company from the customers;
iv. Penalty paid by a mining company to
State Government for unaccounted stock of river bed
material;
v. Bond amount recovered from an
employee leaving the employment before the agreed
period;
vi. Late payment charges collected by any
service provider for late payment of bills;
vii. Fixed charges collected by a power
generating company from State Electricity Boards
- 26 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
(SEBs) or by SEBs/DISCOMs from individual customer
for supply of electricity;
viii. Cancellation charges recovered by
railways for cancellation of tickets, etc.
In some of these cases, tax authorities have
initiated investigation and in some advance ruling
authorities have upheld taxability.
4. In Service Tax law, ‘Service’ was defined
as any activity carried out by a person for another
for consideration. As discussed in service tax
education guide, the concept ‘activity for a
consideration’ involves an element of contractual
relationship wherein the person doing an activity
does so at the desire of the person for whom the
activity is done in exchange for a consideration. An
activity done without such a relationship i.e.,
without the express or implied contractual
reciprocity of a consideration would not be an
‘activity for consideration’. The element of
contractual relationship, where one supplies goods
or services at the desire or another, is an essential
element of supply.
5. The description of the declared service in
question, namely, agreeing to the obligation to
refrain from an act or to tolerate an act or a
situation, or to do an act in para 5 (e) of Schedule II
of CGST Act is strikingly similar to the definition of
contract in the Contract Act, 1872. The Contract Act
defines ‘Contract’ as a set of promises, forming
consideration for each other. ‘Promise’ has been
defined as willingness of the ‘promisor’ to do or to
- 27 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
abstain from doing anything. ‘Consideration’ has
been defined in the Contract Act as what the
‘promisee’ does or abstains from doing for the
promises made to him.
6. This goes to show that the service of
agreeing to the obligation to refrain from an act or
to tolerate an act or a situation, or to do an act is
nothing but a contractual agreement. A contract to
do something or to abstain from doing something
cannot be said to have taken place unless there are
two parties, one of which expressly or impliedly
agrees to do or abstain from doing something and
the other agrees to pay consideration to the first
party for doing or abstaining from such an act.
There must be a necessary and sufficient nexus
between the supply (i.e. agreement to do or to
abstain from doing something) and the
consideration.
6.1 A perusal of the entry at serial 5(e) of
Schedule II would reveal that it comprises the
aforementioned three different sets of activities viz.
(a) the obligation to refrain from an act, (b)
obligation to tolerate an act or a situation and (c)
obligation to do an act. All the three activities must
be under an “agreement” or a “contract” (whether
express or implied) to fall within the ambit of the
said entry. In other words, one of the parties to
such agreement/contract (the first party) must be
under a contractual obligation to either (a) refrain
from an act, or (b) to tolerate an act or a situation or
(c) to do an act. Further some “consideration” must
- 28 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
flow in return from the other party to this
contract/agreement (the second party) to the first
party for such (a) refraining or (b) tolerating or (c)
doing. Such contractual arrangement must be an
independent arrangement in its own right. Such
arrangement or agreement can take the form of an
independent stand- alone contract or may form part
of another contract. Thus, a person (the first
person) can be said to be making a supply by way
of refraining from doing something or tolerating
some act or situation to another person (the
second person) if the first person was under an
obligation to do so and then performed
accordingly.
Agreement to do or refrain from an act
should not be presumed to exist
7. There has to be an express or implied
agreement; oral or written, to do or abstain from
doing something against payment of consideration
for doing or abstaining from such act, for a taxable
supply to exist. An agreement to do an act or
abstain from doing an act or to tolerate an act or a
situation cannot be imagined or presumed to exist
just because there is a flow of money from one
party to another. Unless there is an express or
implied promise by the recipient of money to agree
to do or abstain from doing something in return for
the money paid to him, it cannot be assumed that
such payment was for doing an act or for refraining
from an act or for tolerating an act or situation.
Payments such as liquidated damages for breach
- 29 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
of contract, penalties under the mining act for
excess stock found with the mining company,
forfeiture of salary or payment of amount as per the
employment bond for leaving the employment
before the minimum agreed period, penalty for
cheque dishonour etc. are not a consideration for
tolerating an act or situation. They are rather
amounts recovered for not tolerating an act or
situation and to deter such acts; such amounts are
for preventing breach of contract or non-
performance and are thus mere ‘events’ in a
contract. Further, such amounts do not constitute
payment (or consideration) for tolerating an act,
because there cannot be any contract: (a) for
breach thereof, or (b) for holding more stock than
permitted under the mining contract, or (c) for
leaving the employment before the agreed
minimum period or (d) for doing something leading
to the dishonour of a cheque. As has already been
stated, unless payment has been made for an
independent activity of tolerating an act under an
independent arrangement entered into for such
activity of tolerating an act, , such payments will
not constitute ‘consideration’ and hence such
activities will not constitute “supply” within the
meaning of the Act. Taxability of these
transactions is discussed in greater detail in the
following paragraphs.
Liquidated Damages
7.1 Breach or non-performance of contract
by one party results in loss and damages to the other
- 30 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
party. Therefore, the law provides in Section 73 of the
Contract Act, 1972 that when a contract has been
broken, the party which suffers by such breach is
entitled to receive from the other party compensation
for any loss or damage caused to him by such breach.
The compensation is not by way of consideration for
any other independent activity; it is just an event in the
course of performance of that contract.
7.1.1 It is common for the parties entering into
a contract, to specify in the contract itself, the
compensation that would be payable in the event of the
breach of the contract. Such compensation specified in
a written contract for breach of non-performance of the
contract or parties of the contract is referred to as
liquidated damages. Black’s Law Dictionary defines
‘Liquidated Damages’ as cash compensation agreed to
by a signed, written contract for breach of contract,
payable to the aggrieved party.
7.1.2 Section 74 of the Contract Act, 1972
provides that when a contract is broken, if a sum has
been named or a penalty stipulated in the contract as
the amount or penalty to be paid in case of breach, the
aggrieved party shall be entitled to receive reasonable
compensation not exceeding the amount so named or
the penalty so stipulated.
7.1.3 It is argued that performance is the
essence of a contract. Liquidated damages cannot be
said to be a consideration received for tolerating the
breach or non-performance of contract. They are
rather payments for not tolerating the breach of
- 31 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
contract. Payment of liquidated damages is stipulated
in a contract to ensure performance and to deter non-
performance, unsatisfactory performance or delayed
performance. Liquidated damages are a measure of
loss and damage that the parties agree would arise due
to breach of contract. They do not act as a remedy for
the breach of contract. They do not restitute the
aggrieved person. It is further argued that a contract is
entered into for execution and not for its breach. The
liquidated damages or penalty are not the desired
outcome of the contract. By accepting the liquidated
damages, the party aggrieved by breach of contract
cannot be said to have permitted or tolerated the
deviation or non-fulfilment of the promise by the other
party.
7.1.4 In this background a reasonable view
that can be taken with regard to taxability of liquidated
damages is that where the amount paid as ‘liquidated
damages’ is an amount paid only to compensate for
injury, loss or damage suffered by the aggrieved party
due to breach of the contract and there is no
agreement, express or implied, by the aggrieved party
receiving the liquidated damages, to refrain from or
tolerate an act or to do anything for the party paying the
liquidated damages, in such cases liquidated damages
are mere a flow of money from the party who causes
breach of the contract to the party who suffers loss or
damage due to such breach. Such payments do not
constitute consideration for a supply and are not
taxable.
- 32 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
7.1.5 Examples of such cases are damages
resulting from damage to property, negligence, piracy,
unauthorized use of trade name, copyright, etc. Other
examples that may be covered here are the penalty
stipulated in a contract for delayed construction of
houses. It is a penalty paid by the builder to the buyers
to compensate them for the loss that they suffer due to
such delayed construction and not for getting anything
in return from the buyers. Similarly, forfeiture of
earnest money by a seller in case of breach of ‘an
agreement to sell’ an immovable property by the buyer
or by Government or local authority in the event of a
successful bidder failing to act after winning the bid, for
allotment of natural resources, is a mere flow of money,
as the buyer or the successful bidder does not get
anything in return for such forfeiture of earnest money.
Forfeiture of Earnest money is stipulated in such cases
not as a consideration for tolerating the breach of
contract but as a compensation for the losses suffered
and as a penalty for discouraging the non-serious
buyers or bidders. Such payments being merely flow of
money are not a consideration for any supply and are
not taxable. The key in such cases is to consider
whether the impugned payments constitute
consideration for another independent contract
envisaging tolerating an act or situation or refraining
from doing any act or situation or simply doing an act. If
the answer is yes, then it constitutes a ‘supply’ within
the meaning of the Act, otherwise it is not a “supply”.
7.1.6 If a payment constitutes a consideration
for a supply, then it is taxable irrespective of by what
- 33 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
name it is called; it must be remembered that a
“consideration” cannot be considered de hors an
agreement/contract between two persons wherein one
person does something for another and that other pays
the first in return. If the payment is merely an event in
the course of the performance of the agreement and it
does not represent the ‘object’, as such, of the contract
then it cannot be considered ‘consideration’. For
example, a contract may provide that payment by the
recipient of goods or services shall be made before a
certain date and failure to make payment by the due
date shall attract late fee or penalty. A contract for
transport of passengers may stipulate that the ticket
amount shall be partly or wholly forfeited if the
passenger does not show up. A contract for package
tour may stipulate forfeiture of security deposit in the
event of cancellation of tour by the customer. Similarly,
a contract for lease of movable or immovable property
may stipulate that the lessee shall not terminate the
lease before a certain period and if he does so he will
have to pay certain amount as early termination fee or
penalty. Some banks similarly charge pre- payment
penalty if the borrower wishes to repay the loan before
the maturity of the loan period. Such amounts paid for
acceptance of late payment, early termination of lease
or for pre-payment of loan or the amounts forfeited on
cancellation of service by the customer as
contemplated by the contract as part of commercial
terms agreed to by the parties, constitute consideration
for the supply of a facility, namely, of acceptance of late
payment, early termination of a lease agreement, of
prepayment of loan and of making arrangements for the
- 34 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
intended supply by the tour operator respectively.
Therefore, such payments, even though they may be
referred to as fine or penalty, are actually payments
that amount to consideration for supply, and are subject
to GST, in cases where such supply is taxable. Since
these supplies are ancillary to the principal supply for
which the contract is signed, they shall be eligible to be
assessed as the principal supply, as discussed in detail
in the later paragraphs. Naturally, such payments will
not be taxable if the principal supply is exempt.
Compensation for cancellation of coal
blocks
7.2 In the year 2014, coal block/mine
allocations were cancelled by the Hon’ble Supreme
Court vide order dated 24.09.2014. Subsequently, Coal
Mines (Special Provisions) Act, 2015 was enacted to
provide for allocation of coal mines and vesting of
rights, title and interest in and over the land and mines
infrastructure together with mining leases to successful
bidders and allottees. In accordance with section 16 of
the said Act, prior (old) allottee of mines were given
compensation in the year 2016 towards the transfer of
their rights/ titles in the land, mine infrastructure,
geological reports, consents, approvals etc. to the new
entity (successful bidder) as per the directions of
Hon’ble Supreme Court.
7.2.1 There was no agreement between the
prior allottees of coal blocks and the Government that
the previous allottees shall agree to or tolerate
cancellation of the coal blocks allocated to them if the
- 35 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
Government pays compensation to them. No such
promise or offer was made by the prior allottees to the
Government. The allottees had no option but to accept
the cancellation. The compensation was given to them
for such cancellation, not under a contract between the
allottees and the Government, but under the provisions
of the statute and in pursuance of the Supreme Court
Order. Therefore, it would be incorrect to say that the
prior allottees of the coal blocks supplied a service to
the Government by way of agreeing to tolerate the
cancellation of the allocations made to them by the
Government or that the compensation paid by the
Government for such cancellation in pursuance to the
order of the Supreme Court was a consideration for
such service. Therefore, the compensation paid for
cancellation of coal blocks pursuant to the order of the
Supreme Court in the above case was not taxable.
Cheque dishonor fine/ penalty
7.3 No supplier wants a cheque given to him
to be dishonoured. It entails extra administrative cost
to him and disruption of his routine activities and cash
flow. The promise made by any supplier of goods or
services is to make supply against payment within an
agreed time (including the agreed permissible time with
late payment) through a valid instrument. There is
never an implied or express offer or willingness on part
of the supplier that he would tolerate deposit of an
invalid, fake or unworthy instrument of payment against
consideration in the form of cheque dishonour fine or
penalty. The fine or penalty that the supplier or a
banker imposes, for dishonour of a cheque, is a penalty
- 36 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
imposed not for tolerating the act or situation but a fine,
or penalty imposed for not tolerating, penalizing and
thereby deterring and discouraging such an act or
situation. Therefore, cheque dishonor fine or penalty is
not a consideration for any service and not taxable.
Penalty imposed for violation of laws
7.4 Penalty imposed for violation of laws such
as traffic violations, or for violation of pollution norms or
other laws are also not consideration for any supply
received and are not taxable, which are also not
taxable. Same is the case with fines, penalties
imposed by the mining Department of a Central or
State Government or a local authority on discovering
mining of excess mineral beyond the permissible limit
or of mining activities in violation of the mining permit.
Such penalties imposed for violation of laws cannot be
regarded as consideration charged by Government or a
Local Authority for tolerating violation of laws. Laws are
not framed for tolerating their violation. They stipulate
penalty not for tolerating violation but for not tolerating,
penalizing and deterring such violations. There is no
agreement between the Government and the violator
specifying that violation would be allowed or permitted
against payment of fine or penalty. There cannot be
such an agreement as violation of law is never a lawful
object or consideration. The service tax education
guide issued in 2012 on advent of negative list regime
of services explained that fines and penalties paid for
violation of provisions of law are not considerations as
no service is received in lieu of payment of such fines
and penalties.
- 37 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
7.4.1 It was also clarified vide Circular No.
192/02/2016-Service Tax, dated 13.04.2016 that fines
and penalty chargeable by Government or a local
authority imposed for violation of a statute, bye-laws,
rules or regulations are not leviable to Service Tax. The
same holds true for GST also.
Forfeiture of salary or payment of bond
amount in the event of the employee leaving the
employment before the minimum agreed period
7.5 An employer carries out an elaborate
selection process and incurs expenditure in recruiting
an employee, invests in his training and makes him a
part of the organization, privy to its processes and
business secrets in the expectation that the recruited
employee would work for the organization for a certain
minimum period. Premature leaving of the employment
results in disruption of work and an undesirable
situation. The provisions for forfeiture of salary or
recovery of bond amount in the event of the employee
leaving the employment before the minimum agreed
period are incorporated in the employment contract to
discourage non-serious candidates from taking up
employment. The said amounts are recovered by the
employer not as a consideration for tolerating the act of
such premature quitting of employment but as penalties
for dissuading the non-serious employees from taking
up employment and to discourage and deter such a
situation. Further, the employee does not get anything
in return from the employer against payment of such
amounts. Therefore, such amounts recovered by the
- 38 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
employer are not taxable as consideration for the
service of agreeing to tolerate an act or a situation.
Compensation for not collecting toll charges
8. In the wake of demonetization, NHAI
directed the concessionaires (toll operators) to allow
free access of toll roads to the users from 8.11.2016 to
1.12.2016 for which the loss of toll charge was paid as
compensation by NHAI as per the instructions of
Ministry of Road Transportation and Highways. The toll
reimbursements were calculated based on the average
monthly collection of toll. A question arose whether the
compensation paid to the concessionaire by project
authorities (NHAI) in lieu of suspension of toll collection
during the demonetization period (from 8.11.2016 to
1.12.2016) was taxable as a service by way of agreeing
to refrain from collection of toll from users.
8.1 It has been clarified vide Circular No.
212/2/2019-ST dated 21.05.2019 that the service that is
provided by toll operators is that of access to a road or
bridge, toll charges being merely a consideration for
that service. During the period from 8.11.2016 to
1.12.2016, the service of access to a road or bridge
continued to be provided without collection of toll from
users. Consideration came from the project authority.
The fact that for this period, for the same service,
consideration came from a person other than the actual
user of service does not mean that the service has
changed.
- 39 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
Late payment surcharge or fee
9. The facility of accepting late payments with
interest or late payment fee, fine or penalty is a facility
granted by supplier naturally bundled with the main
supply. It is not uncommon or unnatural for customers
to sometimes miss the last date of payment of
electricity, water, telecommunication services etc.
Almost all service providers across the world provide
the facility of accepting late payments with late fine or
penalty. Even if this service is described as a service of
tolerating the act of late payment, it is an ancillary
supply naturally bundled and supplied in conjunction
with the principal supply, and therefore should be
assessed as the principal supply. Since it is ancillary to
and naturally bundled with the principal supply such as
of electricity, water, telecommunication, cooking gas,
insurance etc. it should be assessed at the same rate
as the principal supply. However, the same cannot be
said of cheque dishonor fine or penalty as discussed in
the preceding paragraphs.
Fixed Capacity charges for Power
10. The price charged for electricity by the
power generating companies from the State Electricity
Boards (SEBs)/DISCOMS or by SEBs/DISCOMs from
individual customers has two components, namely, a
minimum fixed charge (or capacity charge) and variable
per unit charge. The minimum fixed charges have to be
paid by the SEBs/DISCOMS/individual customers
irrespective of the quantity of electricity scheduled or
purchased by them during a month. They take care of
- 40 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
the fixed cost of generating/ supplying electricity. The
variable charges are charged per unit of electricity
purchased and increase or decrease every month
depending on the quantity of electricity consumed.
10.1 The fact that the minimum fixed charges
remain the same whether electricity is consumed or not
or it is scheduled/consumed below the contracted or
available capacity or a minimum threshold, does not
mean that minimum fixed charge or part of it is a
charge for tolerating the act of not scheduling or
consuming the minimum the contracted or available
capacity or a minimum threshold.
10.2 Both the components of the price, the
minimum fixed charges/capacity charges and the
variable/energy charges are charged for sale of
electricity and are thus not taxable as electricity is
exempt from GST. Power purchase agreements may
have provisions that the power producer shall not
supply electricity to a third party without approval of
buyer. Such agreements which ensure assured supply
of power to State Electricity Boards/DISCOMS are
ancillary arrangements; the contract is essentially for
supply of electricity.
Cancellation charges
11. A supply contracted for, such as booking
of hotel accommodation, an entertainment event or a
journey, may be cancelled by a customer or may not
proceed as intended due to his failure to show up for
availing the same at the designated place and time.
The supplier may allow cancelation of supply by the
- 41 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
customer within a certain specified time period on
payment of cancellation fee as per commercial terms of
the contract. In case the customer does not show up for
availing the service, the supplier may retain or forfeit
part of the consideration or security deposit or earnest
money paid by the customer for the intended supply.
11.1 It is a common business practice for
suppliers of services such as hotel accommodation,
tour and travel, transportation etc. to provide the facility
of cancellation of the intended supplies within a certain
time period on payment of cancellation fee.
Cancellation fee can be considered as the charges for
the costs involved in making arrangements for the
intended supply and the costs involved in cancellation
of the supply, such as in cancellation of reserved tickets
by the Indian Railways.
11.2 Services such as transportation travel and
tour constitute a bundle of services. The transportation
service, for instance, starts with booking of the ticket for
travel and lasts at least till exit of the passenger from
the destination terminal. All services such as making
available an online portal or convenient booking
counters with basic facilities at the transportation
terminal or in the city, to reserve the seats and issue
tickets for reserved seats much in advance of the
travel, giving preferred seats with or without extra cost,
lounge and waiting room facilities at airports, railway
stations and bus terminals, provision of basic
necessities such as soap and other toiletries in the
wash rooms, clean drinking water in the waiting area
etc. form part and parcel of the transportation service;
- 42 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
they constitute the various elements of passenger
transportation service, a composite supply.. The
facilitation service of allowing cancellation against
payment of cancellation charges is also a natural part
of this bundle. It is invariably supplied by all suppliers of
passenger transportation service as naturally bundled
and in conjunction with the principal supply of
transportation in the ordinary course of business.
11.3 Therefore, facilitation supply of allowing
cancellation of an intended supply against payment of
cancellation fee or retention or forfeiture of a part or
whole of the consideration or security deposit in such
cases should be assessed as the principal supply. For
example, cancellation charges of railway tickets for a
class would attract GST at the same rate as applicable
to the class Circular No. 178/10/2022-GST of travel
(i.e., 5% GST on first class or air-conditioned coach
ticket and nil for other classes such as second sleeper
class). Same is the case for air travel.
11.4 Accordingly, the amount forfeited in the
case of non-refundable ticket for air travel or security
deposit or earnest money forfeited in case of the
customer failing to avail the travel, tour operator or
hotel accommodation service or such other intended
supplies should be assessed at the same rate as
applicable to the service contract, say air transport or
tour operator service, or other such services.
11.5 However, as discussed above, forfeiture
of earnest money by a seller in case of breach of ‘an
agreement to sell’ an immovable property by the buyer
- 43 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
or such forfeiture by Government or local authority in
the event of a successful bidder failing to act after
winning the bid for allotment of natural resources, is a
mere flow of money, as the buyer or the successful
bidder does not get anything in return for such forfeiture
of earnest money. Forfeiture of earnest money is
stipulated in such cases not as a consideration for
tolerating the breach of contract but as a compensation
for the losses suffered and as a penalty for
discouraging the non-serious buyers or bidders. Such
payments being merely flow of money are not a
consideration for any supply and are not taxable.
12. Field formations are advised that while
the taxability in each case shall depend on facts of that
case, the above guidelines may be followed in
determining whether tax on an activity or transaction
needs to be paid treating the same as service by way of
agreeing to the obligation to refrain from an act or to
tolerate an act or a situation, or to do an act.
13. Any difficulty in implementation of the
circular may be brought to the notice of the Board.
Yours faithfully,
(Smita Roy) Technical
Officer, TRU
Circular No.214/1/2023 – Service Tax dated 28.02.2023,
reads as under:
Circular No. 214/1/2023-Service Tax
F.NO. CBIC-110267/14/2023-CX-VIII SECTION-CBEC
- 44 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
Government of India
Ministry of Finance
Department of Revenue Central Board of Indirect Tax &
Customs
(CX & ST Wing)
New Delhi, dated: 28th February, 2023
To,
1. The Principal Chief Commissioner / Chief Commissioner,
CGST & CX (All)
2. The Principal Director General/ Director General (All)
3. The Principal Commissioner / Commissioner, CGST & CX
(All)
4. [email protected] for uploading the Circular
on CBIC’s website Madam/Sir,
Subject: Leviability of Service Tax on the declared
service “Agreeing to the obligation to refrain from an act, or to
tolerate an act or a situation, or to do an act" under clause (e)
of section 66E of the Finance Act, 1994 - reg.
An issue has arisen on the levy of service tax on
liquidated damages arising out of breach of contract,
forfeiture of salary or payment of bond amount in the event of
the employee leaving the employment before the minimum
agreed period and similar other issues arising out of clause
(e) of section 66E of the Finance Act, 1994. Reference has
rd
also been invited to Circular No. 178/10/2022-GST dated 3
August, 2022 regarding applicability of GST on liquidated
damages, compensation and penalty arising out of breach of
contract or other provisions of law, and its applicability to
service tax related issues.
- 45 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
2. It may be seen that "Agreeing to the obligation
to refrain from an a or to tolerate an act or a situation, or
to do an act" is a Declared Service as per clause (e) of
section 66E of the Finance Act, 1994. A service
conceived in an agreement where one person agrees to
an obligation to refrain from an act or to tolerate an act
or to do an act, would be a 'declared service' under
section 66E(e) read with section 65B(44) and would be
leviable to service tax.
3. The description of the declared service in
question, namely, agreeing to the obligation to refrain
from an act or to tolerate an act or a situation, or to do an
act is similar in GST. “Agreeing to the obligation to
refrain from an act or to tolerate an act or a situation, or
to do an act” has been specifically declared to be a
supply of service in para 5 (e) of Schedule II of the CGST
Act, 2017.
4. As can be seen, the said expression has three
limbs: - i) Agreeing to the obligation to refrain from an
act, ii) Agreeing to the obligation to tolerate an act or a
situation, iii) Agreeing to the obligation to do an act.
Service of agreeing to the obligation to refrain from an
act or to tolerate an act or a situation, or to do an act is
nothing but a contractual agreement. A contract to do
something or to abstain from doing something cannot be
said to have taken place unless there are two parties,
one of which expressly or impliedly agrees to do or
abstain from doing something and the other agrees to
- 46 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
pay consideration to the first party for doing or
abstaining from such an act. Such contractual
arrangement must be an independent arrangement in its
own right. There must be a necessary and sufficient
nexus between the supply (i.e. agreement to do or to
abstain from doing something) and the consideration.
5. The issue also came up in the CESTAT in
Appeal No. ST/ 50080 of 2019 in the case of M/s Dy. GM
(Finance) Bharat Heavy Electricals Ltd in which the
hon’ble Tribunal relied on the judgment of divisional
bench in case of M/s South Eastern Coal Fields Ltd Vs.
CCE Raipur {2021(55) G.S.T.L 549(Tri-Del)}. Board has
decided not to file appeal against the CESTAT order
ST/A/50879/2022-CU[DB] dated 20.09.2022 in this case
and also against Order A/85713/2022 dated 12.8.2022 in
case of M/s Western Coalfields Ltd. Further, Board has
decided not to pursue the Civil Appeals filed before the
Apex Court in M/s South Eastern Coalfields Ltd. supra
(CA No. 2372/2021), M/s Paradip Port Trust (Dy. No.
24419/2022 dated 08-08-2022), and M/s Neyveli Lignite
Corporation Ltd (CA No. 0051-0053/2022) on this ground.
6. In view of above, it is clarified that the activities
contemplated under section 66E(e), i.e. when one party
agrees to refrain from an act, or to tolerate an act or a
situation, or to do an act, are the activities where the
agreement specifically refers to such an activity and
there is a flow of consideration for this activity. Field
formations are advised that while taxability in each case
- 47 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
shall depend on facts of the case, the guidelines
discussed above and jurisprudence that has evolved
over time, may be followed in determining whether
service tax on an activity or transaction needs to be
levied treating it as service by way of agreeing to the
obligation to refrain from an act, or to tolerate an act or a
situation, or to do an act. Contents of Circular No.
178/10/2022-GST dated 3rd August, 2022, may also be
referred to in this regard.
7. Difficulty experienced, if any, in implementing the
circular should be brought to the notice of the Board. Hindi
version will follow.
CBEC Circular No.62/11/2003-ST dated 21.08.2003, reads
as under:-
Circular: 62/11/2003-S.T.dated: 21-Aug-2003
Service Tax- Commissioning or installation services, IT
services, maintenance or repair and Foreign exchange
broking services- Clarifications.
Circular No.62/11/2003-S.T, dated: 21-8-2003
F.No.B3/7/2003-TRU
Government of India
Ministry of Finance (Department of Revenue)
Central Board of Excise & Customs, New Delhi
Subject: Miscellaneous issues relating to the service on which
service tax has been imposed with effect from 1-7-2003.
1. Commissioning or installation:
- 48 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
1.1 Commissioning or installation of plant,
equipment or machinery by a commissioning or installation
agency, is chargeable to service tax. A doubt has been raised
as to whether the services like a plumber putting up a water
tank, fitting pipes and tubing, an electrician putting up electric
wire and fittings, installation of booster motors, air conditioners,
water filters, hand-pumps, water heaters etc. will be
chargeable to service tax.
1.2 .2 As commonly understood, the activity of
installation means the act of putting an equipment, machinery
or plant into its place and making it ready for use. The activity
of installation will start after erection which would refer to
putting up civil structures. Commissioning of a plant would
mean operationalising an installed plant/equipment/machinery.
In this backdrop it is clarified that putting up a water tank,
piping, electric wiring, in a residential premises etc. would not
be covered in the definition of taxable service and thus would
not be taxable. However, installing a booster pump, air-
conditioner, water filter, water heater etc. would be covered in
the definition and be taxable, as all these things are machinery
or equipment.
1.3 Notification No.18/2003-Service Tax dated 21-8-03
has been issued which exempts commission or installation
services provided by a commissioning or installation agency
other than a commercial concern. Accordingly the
commissioning or installation services provided by an
individual will be exempt from service tax.
1.4 Notification No. 19/2003-Service Tax dated 21-8-03
has been issued which provides that in case of a contract
which involves the commissioning or installation service along
- 49 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
with supply of plant, machinery or equipment, service tax will
be payable only on 33% of the gross amount charged for
commissioning or installation and supply of plant, machinery or
equipment. It is optional for the assessee to avail of this
notification. It is emphasized under this notification that the
gross amount (33% of which is chargeable to service tax) shall
include the value of the plant, machinery, equipment, parts and
any other material sold by the service provider alongwith the
commission or installation service. The benefit of this
notification can be availed for a contract only if the exemption
under notification 12/2003-Service Tax dated 20-6-2003 is not
availed for that contract.
1.5 Corrigendum to Circular No. 59/8/2003: In Service
Tax Circular No. 59/8/2003, dated 20th June 2003, in
paragraph 2.6,-
(i) in the first sentence the words “commercial coaching
and training” may be read as “commissioning or installation” ;
(ii) in the first bullet the sentence “It is submitted that it
has been provided in law that service tax is leviable on erection
and commissioning charges only and not on the material and
goods supplied.” may be read as “It is clarified that it has been
provided in law that service tax is leviable on commissioning or
installation charges only and not on the material and goods
supplied.”
2. Scope of IT service under Business Auxiliary
Service;
2.1 The definition of Business Auxiliary Service in the
law excludes the Information Technology (IT) services. As per
the definition IT service means any service in relation to
- 50 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
designing, developing or maintaining of computer software or
computerized data processing or system networking or any
other service primarily in relation to operation of computer
systems. It was clarified in Circular No. 59/8/2003, dated 20th
June 2003 that only if the output service provided by a service
provider is in the nature of the above operations, such
exclusion would operate. The mere fact that a personal
computer or a laptop has been used for providing the service
does not, ipso facto, make the service an information
technology service. Similarly, the fact that any of the IT
services has been used by the service provider as an input
service does not automatically make the output service an IT
service.
2.2 A doubt has been raised that the clarification in the
said circular dated 20-6-03, is at odds with the letter
F.No.334/1/2003-TRU dated 28-2-2003 which states,
“However computer enabled services, namely, data
processing, networking, back office processing, computer
facility management shall not be subjected to Service Tax.” It is
claimed that back office processing may include accounts
outsourcing or payroll-processing activities etc. and such
service may not be primarily in relation to computer system.
2.3 It is clarified that there is no contradiction between
the clarifications dt.28-2-03 and dt.20-6-2003. The scope of IT
services is explained in the definition of Business Auxiliary
Service in the Act itself as any service in relation to designing,
developing or maintaining of computer software or
computerized data processing or system networking or any
other service primarily in relation to operation of computer
systems. The last words “primarily in relation to operation of
computer systems” make the intention abundantly clear. The
- 51 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
words “back office processing” used in the clarification dated
28-2-2003 have to be read in conjunction with the other terms
used therein viz. data processing, networking, computer facility
management. Thus any service of back office processing
primarily in relation to operation of computer system will be
covered as IT services and not taxable. Payroll-processing,
accounts management etc. even by using computer programs,
can not be termed as activities primarily in relation to computer
systems. The use of computer in these services is secondary
and the primary activity is that of business-related work. Thus
these services will be taxable as Business Auxiliary Services.
This is exactly the position that has been clarified in the circular
dated 20-6-2003.
3. Maintenance or repair service:
3.1 Maintenance or repair services rendered under
contracts entered into prior to 1-7-2003 are exempted from
service tax if the bills are raised, and payment also made, prior
to 1-7-2003 (notification No.11/2003-ST dated 20-6-03). In this
context a doubt has been raised as to whether service tax
would still be chargeable in cases where though the bills are
raised, or payment made, after 1-7-2003, but the service was
rendered prior to 1-7-2003.
3.2 It is a basic principle that no tax can be charged
except under authority of law. Thus, if the levy of service tax on
a particular service comes into force on a given date, that
service will not be taxable if rendered before that date. The
levy of service tax on “Maintenance or repair service” has
come into force on 1-7-2003. Accordingly any maintenance or
repair service rendered prior to 1-7-2003 will not be taxable,
irrespective of when the bills are raised or payment made. This
- 52 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
will apply to other services as well which were rendered prior to
the imposition of service tax on them.
3.3 Notification No. 20/2003-Service Tax dated 21-8-03
has been issued which exempts services in relation to
maintenance or repair of computers, computer systems and
computer peripherals.
4. Foreign exchange broking:
4.1 With regard to services provided by money
changers, a doubt has been raised whether all trading in
foreign exchange will be chargeable to service tax.
4.2 Prior to 1-7-2003 the service of “securities and
foreign exchange (forex) broking”, when provided by banking
company/financial institution/body corporate was liable to
service tax. Through Finance Act, 2003 “foreign exchange
broking” when provided by foreign exchange brokers, other
than banking company/financial institution/body corporate,
were also brought under the tax net w.e.f 1-7-2003. As per the
definition in law foreign exchange brokers include authorized
dealers of foreign exchange. Authorised dealer of foreign
exchange has been assigned the meaning of “authorized
person” under the FEMA, 1999. Accordingly authorized
dealers/money changer etc. which are authorized to deal in
foreign exchange are covered in the definition of “foreign
exchange brokers” under service tax provisions. However, as
explained above only the service of “foreign exchange broking”
when provided by foreign exchange brokers (other than
banking company/financial institution/body corporate which are
already covered) has been brought under the tax net.
- 53 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
5. Service rendered free of charge:
5.1 In the context of certain services, a doubt has
been raised as to whether service tax will be payable if the
service is provided free of charge. 5.2 As per charging
section viz. section 66 of the Act, service tax is chargeable
at the rate of 8% of the value of taxable service. Thus if the
value is zero the tax will also be zero even though the
service is taxable. Receipt of this letter may please be
acknowledged.”
8. It is not in cavil and stands borne out from the record that,
under the Finance Act, with effect from 01.07.2012 onwards, a
negative list regime was introduced and the term “service” was
specifically defined under Section 65B(44) as being an activity
carried out by one person for another for a consideration; the
expression “taxable service” in Section 65B(51) has been defined
as a service on which service tax is leviable under Section 66B
which is the charging section, where there is a levy of tax on the
value of all services except those in the negative list; Section
65B(22) defines “declared service” as an activity carried for
consideration and declared as such under Section 66E; in this
context, Section 66E (e) of the Finance Act covers the activity of
“agreeing to the obligation to refrain from an Act or to tolerate an
- 54 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
act or situation or to do an act” as a declared service. It is this very
clause which the impugned SCNs seek to press into service for the
purpose of fastening service tax liability upon the petitioners, with
specific reliance being placed upon the latter limb of the expression
“agreeing to the obligation to do an act” as adverted to in the
impugned SCNs issued by the respondents.
9. A perusal of the material on record including the
transactions / contracts / agreements entered into between the
petitioners – Banks and its customers clearly indicate that several
customers may keep differing balances and if the MAB is kept
according to the norms of the Banks, customers would be entitled
to facilities, and in the event there was failure to keep MAB, the
Banks would charge penalty / fee towards the default and service
tax was undisputedly being discharged by the Banks towards the
said amounts collected by them. The requirement of maintaining
MAB by the customers who would be entitled to continue to receive
services from the petitioners – Banks without payment of any
penalty / fee is clearly one of the conditions of the contract entered
into between the petitioners – Banks and its customers and the
services provided to a customer, who maintained MAB and to
- 55 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
customers who do not maintain MAB (subject to payment of
penalty/fee) is merely and essentially a condition of the contract
and the said services are not provided towards non-monetary
consideration of a deemed or notional value as sought to be
contended by the respondents in the impugned SCNs issued by
them; to put it differently, if a customer does not keep his part of the
bargain under the contract, a fee / penalty is charged to him, on
which service tax is paid and therefore, keeping of the MAB is
merely a condition of the contract simpliciter which cannot be
construed / treated / called as “consideration” charged in terms of
the Finance Act and the Rules made thereunder; nor can it be said
that the contract contemplates charging of service cost to the
customers on a post facto basis and the contract only envisages
recovery of penalty post facto which is the consideration for non-
maintenance of such MAB and no other consideration is charged
or is in contemplation of the contract.
10. As stated supra, in the event of a failure to maintain the
stipulated MAB, the contractual framework governing the
relationship between the petitioner Banks and their customers
contains no covenant providing for recovery of the cost of services
- 56 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
from the customers, which unmistakably demonstrates that the
rendition of services continues notwithstanding such default and
that adherence to the MAB stipulation is susceptible of verification
only post facto ; in other words, the Banks does not charge any
consideration nor is there any intention to charge the costs of
services to the customers as can be discerned from the apparent
tenor of the contract and the only charge is for non-maintenance of
MAB which the Banks may impute as a recovery for the costs in
servicing such customers; it follows therefrom that so long as the
petitioners – Banks are paying service tax on such penalty, it would
be incongruous to charge them again on the imputed value of
services being rendered, which would result in double taxation /
double levy of tax which is neither contemplated nor permissible in
law.
11. It is well settled that Circulars issued by the Board are
binding upon the respondents / Department as held in various
judgments including the judgment of the Apex court in the case of
,
Merino Panel Product’s case supra wherein it is held as under:-
“ C. Analysis
C.1. Binding nature of circulars issued by the
Department
- 57 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
17. On first blush, it appears that the arguments from
the appellant Revenue and respondent assessee are on
two separate footings. While the former assails the
specific reasoning given by C ESTAT for setting aside the
show-cause notice in terms of invocation of an incorrect
part of the CEVR, the latter is more concerned with the
binding nature of the CBEC Circular issued by the
Revenue itself.
18. It is clear that the latter question goes to the heart
of the matter, rather than the issue of whether the show-
cause notice becomes legally untenable for failure to
expressly mention that the valuation of the goods is to be
done under Rule 11 read with Rule 9 of the CEVR. On
the legal proposition advanced by learned ASG, we
readily affirm that citation of an incorrect source of power
does not vitiate the exercise of the power itself provided
the power vests in the authority to begin with.
19. However, what needs to be additionally
ascertained is whether the appellant acted in
contravention of its own circular. The reason for this is
that while citation of an incorrect provision may not, by
itself, lead to an invalidation of the show-cause notice,
but contravention of a binding circular that mandates a
particular methodology to be followed might. The power
under the CEA for issuance of such
administrative/executive directions is contained in
Section 37-B. [ “ 37-B. Instructions to Central Excise
Officers .—The Central Board of Excise and Customs
constituted under the Central Boards of Revenue Act,
- 58 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
1963 (54 of 1963), may, if it considers it necessary or
expedient so to do for the purpose of uniformity in the
classification of excisable goods or with respect to levy of
duties of excise on such goods or for the implementation
of any other provision of this Act, issue such orders,
instructions and directions to the Central Excise Officers
as it may deem fit, and such officers and all other
persons employed in the execution of this Act shall
observe and follow such orders, instructions and
directions of the said Board: Provided that no such
orders, instructions or directions shall be issued—(a) so
as to require any Central Excise Officer to make a
particular assessment or to dispose of a particular case
in a particular manner; or(b) so as to interfere with the
discretion of the Commissioner of Central Excise
(Appeals) in the exercise of his appellate functions.”] The
binding nature of such circulars has long been
acknowledged by this Court.
20. In Paper Products Ltd. v. CCE [Paper Products
Ltd. v. CCE, (1999) 7 SCC 84] the settled position on this
point of law was noted in the following passage : (SCC p.
87, para 4)
“4. The question for our consideration in these
appeals is : what is the true nature and effect of the
circulars issued by the Board in exercise of its power
under Section 37-B of the Central Excise Act, 1944?
This question is no more res integra in view of the
various judgments of this Court. This Court in a
catena of decisions has held that the circulars issued
- 59 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
under Section 37-B of the said Act are binding on the
Department and the Department cannot be permitted
to take a stand contrary to the instructions issued by
the Board. These judgments have also held that the
position may be different with regard to an assessee
who can contest the validity or legality of such
instructions but so far as the Department is
concerned, such right is not available.”
21. The rationale behind the requirement for the
Revenue to abide by its own administrative directions
and interpretation of different parts of the CEA and
CEVR, was commented upon in Ranadey
Micronutrients v. CCE [Ranadey Micronutrients v. CCE,
(1996) 10 SCC 387] : (SCC p. 392, paras 15-16)
“15. There can be no doubt whatsoever, in the
circumstances, that the earlier and later circulars
were issued by the Board under the provisions of
Section 37-B, and the fact that they do not so recite
does not mean that they do not bind Central Excise
officers or become advisory in character. There can
be no doubt whatsoever that after 21-11-1994, excise
duty could be levied upon micronutrients only under
the provisions of Heading 31.05 as “other fertilisers”.
If the later circular is contrary to the terms of the
statute, it must be withdrawn. While the later circular
remains in operation the Revenue is bound by it and
cannot be allowed to plead that it is not valid.
16. We reject the submission to the contrary made
by the learned counsel for the Revenue and in the
- 60 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
affidavit by M.K. Gupta, working as Director in the
Department of Revenue, Ministry of Finance. One
should have thought that an officer of the Ministry of
Finance would have greater respect for circulars
such as these issued by the Board, which also
operates under the aegis of the Ministry of Finance,
for it is the Board which is, by statute, entrusted with
the task of classifying excisable goods uniformly.
The whole objective of such circulars is to adopt a
uniform practice and to inform the trade as to how a
particular product will be treated for the purposes of
excise duty. It does not lie in the mouth of the
Revenue to repudiate a circular issued by the Board
on the basis that it is inconsistent with a statutory
provision. Consistency and discipline are of far
greater importance than the winning or losing of
court proceedings.”
22. Thus, the starting point of our analysis on this
question is that the CBEC Circular of 1-7-2002 is binding
on the Revenue. If the show-cause notice issued by the
Revenue is found to be contrary to the Circular, it would
prima facie result in abrogation of the uniformity and
consistency which is strongly emphasised upon
in Ranadey Micronutrients [Ranadey
Micronutrients v. CCE, (1996) 10 SCC 387] . It goes
without saying that the Revenue's stance against its own
circular can potentially lead to a chaotic situation where,
with one hand, the Revenue would lay down instructions
on how to interpret the relevant statutes and rules, and
- 61 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
with the other hand, it would promptly disobey those very
directions. Maintaining predictability in taxation law is of
utmost importance and, for this reason, the Court should
not accept an argument by the Revenue that waters
down its own Circular as this would fall squarely within
the contours of the prohibition outlined in Paper
Products [Paper Products Ltd. v. CCE, (1999) 7 SCC 84].
12. In Asha’s case supra , this Court held as under:-
9. Since both the issues are interlinked, they are taken
up together for consideration. In my considered opinion,
compensation paid in favour of the petitioners by the KIADB
under the Head “Solatium” is not exigible / amenable to levy
of GST under the provisions of CGST / KGST Act and the
impugned notices, orders etc., issued / passed by the
respondents are illegal, arbitrary and without jurisdiction or
authority of law and the same deserve to be quashed for the
following reasons:-
(i) The material on record discloses that the BMRCL
offered package compensation to the petitioners which was
accepted by them, pursuant to which, agreements under
Section 29(2) of the KIAD Act were entered into between the
petitioners and KIADB resulting in disbursement of
compensation in favour of the petitioners. In this context, it is
significant to note that neither the agreements nor other
documents entered into between the petitioners and KIADB
indicate that the petitioners have been paid solatium towards
compensation received by them from the KIADB. In fact, it is
only in the package compensation offered by the BMRCL
- 62 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
that it chose to split up the compensation offered to the
petitioners under various heads by designating solatium
under one head amongst several heads of compensation;
merely because the package compensation offered by the
BMRCL is split into various heads, the compensation offered
by the BMRCL under the designated head “Solatium” cannot
be construed or treated or understood as solatium in the real
sense of the term / expression “solatium” either under the
L.A. Act or under RFCTLARR Act; in other words, the
package compensation offered by the BMRCL by
categorising / describing various amounts out of the total
package offered under various heads including solatium was
for the limited / restricted purpose of offering package
compensation and in reality / substance, the said amount
cannot be treated as solatium in true / strict / real sense as
wrongly contended by the respondents whose contention
cannot be accepted on this ground also.
(ii) It is an undisputed fact borne out from the material
on record that pursuant to the package compensation offered
by the BMRCL which was accepted by the petitioners,
various documents including agreement, affidavit, indemnity
bond, receipt etc., were executed by the petitioners in favour
of the KIADB whereby the petitioners transferred,
relinquished / abandoned and gave up their claim, right, title,
interest, possession etc., in the lands in favour of KIADB for
consideration offered by the BMRCL; it follows there from
that though the BMRCL categorised a particular component
of the consideration offered by them to the petitioners as
solatium, in reality, the transaction essentially entered into
- 63 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
between petitioners and KIADB under Section 29(2) of the
KIAD Act was in the nature of a sale / transfer of all rights in
land of the petitioners which was directly and squarely
exempted from levy of GST under Entry 5 of the Schedule –
III of the CGST / KGST Act, since compulsory acquisitions of
land where the owners lose their entire right on the property
is akin to sale and ought to be treated as such and on this
score also, the impugned orders, notices etc., deserve to be
quashed.
(iii) There is no gainsaying the fact that ordinarily,
when compensation is awarded by the State / acquiring
authority in favour of the land losers under any enactment,
one of the components of compensation would necessarily
be solatium paid by the State / acquiring authority; a land
loser who is not satisfied with any component of
compensation including the quantum of solatium awarded /
granted in his favour would be entitled to challenge the same
in accordance with law; however, in the instant cases,
petitioners having entered into various documents with the
KIADB agreeing to an undertaking that they would not seek
enhancement of compensation under any of the heads
designated / described / categorised in the package
compensation offered by the BMRCL and would not be
entitled to challenge the quantum of solatium which is yet
another circumstance to indicate that though the BMRCL
described / designated / categorised a particular portion of
the amount offered by them as solatium, the said amount
was not solatium in its real / true / strict sense of the term so
as to make it exigible / amenable to levy of GST and as
- 64 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
such, the contentions urged by the respondents cannot be
accepted.
(iv) It is pertinent to note that as stated supra, the
primary / main ground for levying GST on solatium by the
respondents is by contending that the act of the petitioners in
receiving the solatium component tantamounts to agreeing to
an obligation to tolerate the act of acquisition within the
meaning of Entry 5(e) of the CGST / KGST Act; in this
regard, it is relevant to state that the entire compensation
including the solatium component having been received by
the petitioners pursuant to various documents executed by
them in favour of the KIADB would clearly not amount to
agreeing to an obligation to tolerate acquisition; in fact, rather
than tolerating acquisition of their lands, petitioners have
undisputedly executed various documents in favour of
KIADB relinquishing / transferring / selling their right over the
lands after receiving monetary compensation and neither
these transactions nor any act, deed or thing done by the
petitioners in this regard would amount to agreeing to the
obligation to tolerate an act by the petitioners so as to attract
Entry 5(e) of Schedule – II and consequently, on this ground
also, the contention of the respondents cannot be accepted.
(v) Section 11(2) of the L.A.Act contemplated passing
of a consent award pursuant to an agreement entered into
between the land losers and the Government / acquiring
authority; it is well settled that compensation paid under a
consent award in terms of Section 11(2) of the L.A.Act was /
is not amenable to levy of service tax / GST in respect of any
of the various components of compensation including
- 65 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
solatium. Similarly, certain States viz., Gurajat, Andhra
Pradesh, Maharastra etc., amended Section 23 by inserting /
incorporating Section 23-A of the RFCTLARR Act, thereby
providing for passing of consent award pursuant to
agreement entered into between the land losers and the
Government / acquiring authority. In the instant cases, a
perusal of the package compensation offered by the BMRCL
as well as subsequent documents executed between the
petitioners and KIADB will indicate that the compensation is
paid with the consent of the petitioners, thereby indicating
that no portion of the compensation including solatium would
be exigible / amenable as wrongly contented by the
respondents and viewed from this angle also, the contention
of the respondents cannot be accepted.
(vi) Even assuming that the component / head
described / designated / categorised as solatium in the
package compensation offered by the BMRCL is to be
treated or construed or understood as solatium, the said
amount paid to the petitioners towards acquisition of their
lands cannot be said to be exigible/amenable to GST for
more than one reason; in this context, it is relevant to refer to
the relevant statutory provisions of the CGST/KGST Act.
Section 7 of the CGST Act, reads as under:
Scope of supply.
7. (1) For the purposes of this Act, the expression “supply”
includes––
(a) all forms of supply of goods or services or both such as
sale, transfer, barter, exchange, licence, rental, lease or disposal
made or agreed to be made for a consideration by a person in
the course or furtherance of business;
- 66 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
(b) import of services for a consideration whether or not in the
course or furtherance of business;[and]
(c) the activities specified in Schedule I, made or agreed to be
made without a consideration;[]
(d) []. *
[(1A) where certain activities or transactions constitute a
supply in accordance with the provisions of sub-section (1), they
shall be treated either as supply of goods or supply of services
as referred to in Schedule II.]
Entry 5(e) of Schedule II - Activities [or transactions]
to be treated as supply of goods or supply of services, reads
as under;
5. Supply of services.
The following shall be treated as supply of services, namely:-
(a) xxx
(b) xxx
(c) xxx
(d) xxx
(e) agreeing to the obligation to refrain from an act, or to
tolerate an act or a situation, or to do an act; and
Entry 5(b) of the aforesaid Schedule II, reads as under:-
5. Supply of services .
The following shall be treated as supply of services,
namely:—
(a) renting of immovable property;
(b) construction of a complex, building, civil structure
or a part thereof, including a complex or building intended for
sale to a buyer, wholly or partly, except where the entire
consideration has been received after issuance of completion
certificate, where required, by the competent authority or
after its first occupation, whichever is earlier.
Explanation.—For the purposes of this clause—
(1) the expression "competent authority" means the
Government or any authority authorised to issue completion
certificate under any law for the time being in force and in
- 67 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
case of non-requirement of such certificate from such
authority, from any of the following, namely:—
(i) an architect registered with the Council of
Architecture constituted under the Architects Act, 1972;or
(ii) a chartered engineer registered with the Institution
of Engineers (India); or
(iii) a licensed surveyor of the respective local body of
the city or town or village or development or planning
authority;
(2) the expression "construction" includes additions,
alterations, replacements or remodelling of any existing civil
structure;
Entry 5 of Schedule III (Activities or transactions
which shall be treated neither as a supply of goods nor a
supply of services) reads as under:
5. Sale of land and, subject to clause (b) of paragraph 5 of
Schedule II, sale of building.
(vii) Section 7(1) of the CGST/KGST Act provides for
the scope of supply; it includes all forms of supply of goods
and services or both such as sale, transfer, barter, exchange,
licence, rental, lease or disposal made or agreed to be made
for a consideration by a person in the course or furtherance
of business.
(viii) Clause (d) of sub-section (1) of Section 7 states that
the activities referred to in Schedule II shall be treated as
“supply of goods” or “supply of services”. This clause was
omitted vide CGST Amendment Act, 2018 w.e.f. 01.07.2017.
(ix) Simultaneously, Section 7(1A) was inserted vide
CGST Amendment Act, 2018 w.e.f. 1.07.2017. It postulates
that only when activities or transactions constitute a supply in
accordance with Section 7(1), then they shall be treated as
- 68 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
supply of goods or services as referred to in Schedule II.
The effect of this would be that Schedule II will be merely a
classification schedule and will not automatically lead to
being considered a supply of goods or services or both.
(x) Entry No. 5(e) of Schedule II treats agreeing to the
obligation to refrain from an act or to tolerate an act or a
situation or to do an act as supply of service.
(xi) Section 7(2)(a) postulates that notwithstanding
anything contained in Section 7(1), activities or transactions
specified in Schedule III shall neither be treated as supply of
goods nor supply of services.
(xii) Entry 5 of the III Schedule treats sale of land and
subject to clause (b) of paragraph 5 of Schedule II, sale of
building as neither supply of goods nor as supply of services.
(xiii) The nature of GST and its brief history was dealt
with by this Court in the case of Tonbo Imaging India
Pvt.Ltd vs. Union of India - (2023) 4 Centax 443, wherein
it was held as under:
7. Before adverting to the rival contentions and the
relevant statutory provisions, a brief overview of the GST
scheme is required ; in this context, it is relevant to state that
the entire scheme of indirect taxes in India has undergone
transformation upon introduction of GST with effect from July
1, 2017. This tax is being levied with concurrent jurisdiction of
the Centre and the States on the supply of goods or services.
For this purpose, the Constitution of India has been amended
vide Constitution (101st Amendment) Act, 2016 with effect
from September 16, 2016. The Constitutional Amendment
Bill specifically mentions that the objective of introducing
GST is to avoid cascading effect of taxes.
8. The Central Government enacted the CGST Act to
provide for levy and collection of tax on supply of goods or
services or both where the supply is intra-State supply ; so
- 69 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
also, the CGST Rules were also framed including the
impugned rule 89(4)(C).
9. The Central Government enacted the IGST Act for
the purpose of levy and collection of GST on the supply of
goods or services or both where the supply is inter-State
supply.
10. The State of Karnataka enacted the KGST Act to
levy and collect tax on intra-State supply of goods or services
or both within the state of Karnataka.
11. GST is a multi-stage tax, as each point in a supply
chain is taxed (unless specifically exempted by law) till the
goods and services reach the final consumer. This can be
demonstrated by the following :
• A manufacturer procures "input goods" and "input
services" to manufacturer his goods and would make
"outward supply" to a wholesale supplier. Here, the levy of
GST would be on the manufacturer/seller. However, the
incidence of GST would be on the wholesale supplier.
• For the wholesale supplier, the goods procured from
the manufacturer/seller becomes "input goods". The
wholesale supplier would make value additions thereon and
make an "outward supply" of the same to the retailer. In
doing so, GST is levied on the wholesale supplier, but the
incidence of GST, which was earlier on the wholesale
supplier, is further passed on to the retailer.
• The goods procured from the wholesale supplier
becomes "input goods" for the retail seller. The retail seller
would make value additions thereon and make an "outward
supply" of the same to the final consumer. In doing the same,
GST is levied on the retail seller, but the incidence of GST,
which was earlier on the retail seller, is further passed on to
the final consumer.
• The supply chain having been terminated, the final
consumer will not be able to pass the incidence of tax any
further and thus bears the final burden of tax.
• GST is therefore a destination-based tax on
consumption of goods and services. It is levied at all stages
right from manufacture up to final consumption with "credit" of
- 70 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
taxes paid at previous stages of supply chain available as
set-off. In a nutshell, only value addition will be taxed, and
burden of tax is to be borne by the final consumer.
12. In the case of All India Federation of Tax
Practitioners v. Union of India [2007] 9 VST 126 (SC) ; (2007)
7 SCC 527, the apex court held as under (page 153 in 9
VST) :
"6. At this stage, we may refer to the concept of
'Value Added Tax' (VAT), which is a general tax that
applies, in principle, to all commercial activities involving
production of goods and provision of services. VAT is a
consumption tax as it is borne by the consumer.
7. In the light of what is stated above, it is clear that
service tax is a VAT which in turn is destination based
consumption tax in the sense that it is on commercial
activities and is not a charge on the business but on the
consumer and it would, logically, be leviable only on
services provided within the country. The service tax is a
value added tax."
13. In the case of Union of India v. VKC Footsteps
India Pvt. Ltd. [2021] 93GSTR 160 (SC) ; (2022) 2 SCC
603, the apex court held as under (para 23, page 202 in
93 GSTR) :
"44. The idea which permeates GST legislation globally
is to impose a multi-stage tax under which each point in a
supply chain is potentially taxed. Suppliers are entitled to avail
credit of tax paid at an anterior stage. As a result, GST fulfils
the description of a tax which is based on value addition.
Value addition is intended to achieve fiscal neutrality and to
obviate a cascading effect of taxation which traditional tax
regimes were liable to perpetuate. In a sense therefore, the
purpose of a tax on value addition is not dependent on the
distribution or manufacturing model. The tax which is paid at
an anterior stage of the supply chain is adjusted. The
fundamental object is to achieve both neutrality and
equivalence by the grant of seamless credit of the duties paid
at an anterior stage of the supply chain."
Section 16 of the IGST Act, 2017 reads as under :
- 71 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
"Zero rated supply.—(1) 'zero rated supply' means any of
the following supplies of goods or services or both,
namely :
(a) export of goods or services or both ; or
(b) supply of goods or services or both to a special
economic zone developer or a special economic zone
unit.
(2) Subject to the provisions of sub-section (5) of section
17 of the Central Goods and Services tax Act, credit of
input tax may be availed for making zero rated supplies,
notwithstanding that such supply may be an exempt
supply.
(3) A registered person making zero rated supply shall be
eligible to claim refund under either of the following
options, namely :
(a) he may supply goods or services or both under bond
or Letter of Undertaking, subject to such conditions,
safeguards and procedure as may be prescribed, without
payment of integrated tax and claim refund of unutilised
input-tax credit ; or
(b) he may supply goods or services or both, subject to
such conditions, safeguards and procedure as may be
prescribed, on payment of integrated tax and claim
refund of such tax paid on goods or services or both
supplied, in accordance with the provisions of section 54
of the Central Goods and Services tax Act or the rules
made there under."
Section 54(3) of the CGST Act, 2017 reads as under :
- 72 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
54. Refund of tax.—(1) Any person claiming refund of
any tax. ..
(2). ..
(3) Subject to the provisions of sub-section (10), a
registered person may claim refund of any unutilised
input-tax credit at the end of any tax period:
Provided that no refund of unutilised input-tax credit shall
be allowed in cases other than—
(i) zero rated supplies made without payment of tax ;
(ii) where the credit has accumulated on account of rate
of tax on inputs being higher than the rate of tax on
output supplies (other than nil rated or fully exempt
supplies), except supplies of goods or services or both as
may be notified by the Government on the
recommendations of the Council :
Provided further that no refund of unutilised input-tax
credit shall be allowed in cases where the goods
exported out of India are subjected to export duty :
Provided also that no refund of input tax credit shall be
allowed, if the supplier of goods or services or both avails
of drawback in respect of Central tax or claims refund of
the integrated tax paid on such supplies.
(4). ..
Rule 89(4) of the CGST Rules, 2017 reads as under :
"89. Application for refund of tax, interest, penalty, fees or
any other amount.—(1) - (3). ..
(4) In the case of zero-rated supply of goods or services
or both without payment of tax under bond or letter of
undertaking in accordance with the provisions of sub-
- 73 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
section (3) of section 16 of the Integrated Goods and
Services tax Act, 2017 (13 of 2017), refund of input tax
credit shall be granted as per the following formula-
Refund Amount = (Turnover of zero-rated supply of
goods + Turnover of zero-rated supply of services) x Net
ITC ÷· Adjusted Total Turnover Where,—
(A) 'Refund amount' means the maximum refund that is
admissible ;
(B) 'Net ITC' means input tax credit availed on inputs and
input services during the relevant period other than the
input tax credit availed for which refund is claimed under
sub-rules (4A) or (4B) or both ;
(C) 'Turnover of zero-rated supply of goods' means the
value of zero-rated supply of goods made during the
relevant period without payment of tax under bond or
letter of undertaking or the value which is 1.5 times the
value of like goods domestically supplied by the same or,
similarly placed supplier, as declared by the supplier,
whichever is less, other than the turnover of supplies in
respect of which refund is claimed under sub-rules (4A)
or (4B) or both
(D) 'Turnover of zero-rated supply of services' means the
value of zero-rated supply of services made without
payment of tax under bond or letter of undertaking,
calculated in the following manner, namely :
Zero-rated supply of services is the aggregate of the
payments received during the relevant period for zero-
rated supply of services and zero-rated supply of
services where supply has been completed for which
- 74 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
payment had been received in advance in any period
prior to the relevant period reduced by advances
received for zero-rated supply of services for which the
supply of services has not been completed during the
relevant period ;"
(xiv) It would be relevant to note that the levy of
GST is on goods or services or both and the same is
defined in the CGST/KGST Act under Section 2(52)
and Section 2(102) as under:
2. Definitions .- In this Act, unless the context otherwise requires,
(52) “goods’’ means every kind of movable property other than
money and securities but includes actionable claim, growing crops,
grass and things attached to or forming part of the land which are
agreed to be severed before supply or under a contract of supply;
It is quite clear from the above that since goods is defined as
movable property, it obviously does not include immovable
property. It is also seen that though the definition of services is
wide enough to cover anything other than goods, money and
securities, it will have to be read in its context and cannot be given
such a wide meaning as to include immovable property.
(102) “services” means 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, from one form, currency
or denomination, to another form, currency or denomination for
which a separate consideration is charged;
(xv) In VKC Footsteps case supra , the Apex Court
held that stamp duties and taxes on alcohol for human
consumption provide a significant part of revenues of the
states and that hence, the Parliament has consciously
excluded them from the scope of GST so as to protect the
revenues of States i.e., collecting stamp duties on land
acquisition or sale or transfer as under:
- 75 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
“The jurisprudential basis furnishes a depiction of an ideal
State of existence of GST legislation within the purview of a
modern economy, as a destination-based tax. But there can
be no gain saying the fact that fiscal legislation around the
world, India being no exception, makes complex balances
founded upon socio-economic complexities and diversities
which permeate each society. The form which a GST
legislation in a unitary State may take will vary considerably
from its avatar in a nation such as India where a dual
system of GST law operates within the context of a federal
structure. The ideal of a GST framework which Article
279A(6) embodies has to be progressively realized. The
doctrines which have been emphasized by Counsel during
the course of the arguments furnish the underlying rationale
for the enactment of the law but cannot furnish either a valid
basis for judicial review of the legislation or make out a
ground for invalidating a validly enacted law unless it
infringes constitutional parameters. While adopting the
constitutional framework of a GST regime, Parliament in
the exercise of its constituent power has had to make
and draw balances to accommodate the interests of the
States. Taxes on alcohol for human consumption and
stamp duties provide a significant part of the revenues
of the States. Complex balances have had to be drawn so
as to accommodate the concerns of the States before
bringing them within the umbrella of GST. These aspects
must be borne in mind while assessing the jurisprudential
vision and the economic rationale for GST legislation. But
abstract doctrine cannot be a ground for the Court to
undertake the task of redrawing the text or context of a
statutory provision. This is clearly an area of law where
judicial interpretation cannot be ahead of policy making.
Fiscal policy ought not be dictated through the judgments of
the High Courts or this Court. For it is not the function of the
Court in the fiscal arena to compel Parliament to go further
and to do more by, for instance, expanding the coverage of
the legislation (to liquor, stamp duty and petroleum) or to
bring in uniformity of rates. This would constitute an
impermissible judicial encroachment on legislative power.
Likewise, when the first proviso to Section 54(3) has
provided for a restriction on the entitlement to refund it
would be impermissible for the Court to redraw the
boundaries or to expand the provision for refund beyond
- 76 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
what the legislature has provided. If the legislature has
intended that the equivalence between goods and services
should be progressively realized and that for the purpose of
determining whether refund should be provided, a restriction
of the kind which has been imposed in clause (ii) of the
proviso should be enacted, it lies within the realm of policy.”
(xvi) As held by the Apex Court in the aforesaid
judgment, though stamp duty transactions are on the
instrument, given the fact that it is a major source of revenue,
the GST Council deliberated on subsuming the same under
GST so that real estate transactions of sale, acquisition, etc.,
could also be taxed under the GST regime; however, since
the same could not be agreed upon, the GST regime was
introduced without subsuming the said transactions and the
same was left to the domain of the States.
(xvii) The Agenda Item 2A to the GST council minutes
before the legislation was introduced would be of some
relevance to our discussion;
Agenda Item 2A - GST TREATMENT OF LAND &
BUILDING (REAL ESTATE)
1.1 Presently, under service tax law, the following
services relating to real estate (land and building) are
subjected to service tax: -
(1) Any lease, tenancy, easement, license to occupy
land;
(2) Any lease or letting out of the building including a
commercial, industrial, or residential complex for business or
commerce.
Both are covered under renting of immovable
property, which has been declared a service under the
Finance Act, 1994.
1.2 Further, construction of a complex, building, civil
structure or a part thereof, including a complex or building
- 77 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
intended for sale to a buyer, wholly or partly except where
the entire consideration has been received after issuance of
completion certificate, is chargeable to service tax.
It is proposed to treat the aforesaid activities under
GST as supply of service (Model GST Law).
2.1 Under the Service Tax law, an activity which
constitutes merely transfer of title in goods or immovable
property is excluded from the definition of service [section
65B (44) of Finance Act].
2.2 Under the GST regime, it is proposed to subject
supply of goods or services to GST. Goods have been
defined under the Constitution to include “all materials,
commodities and articles”. Likewise, services have been
defined under the Constitution “as anything other than
goods”. Goods and services tax have been defined in the
Constitution to mean “any tax on supply of goods, or services
or both except taxes on the supply of the alcoholic liquor for
human consumption”. Supply has been defined in the model
GST law in the broadest possible sense and includes sale.
2.3 What is presently being taxed under service tax
law is provision of service in relation to land and buildings.
Under the proposed GST, the taxable event is supply of
goods or services [Articles 246A & 286 of the Constitution].
However, immovable property has not been included in the
definition of goods in the model GST law. As mentioned in
paras 1.1 and 1.2, only supply of services in relation to land
and building has been proposed to be subjected to GST.
2.4 Thus, supply of immovable property (land and
buildings) has been kept outside the purview of GST. It is felt,
that this would distort the GST particularly when there is no
constitutional or legal impediment to levy GST on supply of
land and building to GST due to the following reasons: -
(i) Stamp duty, which is levied under Article 268, is
with reference to documents and is collected by the Centre
on documents listed in Entry 91 of the Union List while by the
States on documents listed in Entry 63 of the State List.
Therefore, the argument that because legal conveyance of
title of land and buildings attracts stamp duty, they cannot be
subjected to GST is facile because stamp duty is levied on
documents while GST would be levied on the supply of land
- 78 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
and buildings, whether as goods or services (“aspect theory”
upheld by the Supreme Court in a host of judgements).
Renting/leasing are subjected to service tax presently.
Documents pertaining to such renting/leasing are subjected
to stamp duty.
(ii) Entry 49 of the State List reads thus: -
“Taxes on lands and buildings”
It is felt that this entry is not an impediment to levy of GST
on supply of lands and buildings because of the “aspect
theory” upheld by the Supreme Court: while the stock of
lands and buildings is subjected to tax by the States on the
aspect of possessing land and buildings, the supply aspect
can be subjected to GST.
(iii) Most international jurisdictions subject supply of land
and building to GST/VAT (Australia, Canada, New Zealand,
Malaysia, Singapore, South Africa, EU & UK).
(iv) Presently, because both VAT and service tax are
leviable on under construction property and not on flats sold
after completion of construction, buying an under
construction flat is more taxing for a buyer.
(v) Further, though service tax and VAT are charged
generally @ 4.5% and 1% of the value of the flat (which
includes the value of the undivided share of land)
respectively, there are embedded taxes in the flat. The total
tax incidence in respect of flats in non metros is more than
that in metros. In fact, where the value of land is less, the
incidence of service tax and VAT is more (embedded taxes).
GST on supply of land and building will equalize the tax
incidence in respect of houses in metros and non-metros.
(vi) Without levying GST on supply of land and building, it
would be very difficult to complete the input tax credit chain
(ITC) and allow ITC in respect of construction services and
construction material used in creation of immovable property
which is further used for carrying out taxable activities. This
is highly distortionary. While at the behest of business and
industry, the ITC chain would get liberalized, the tax
administration would forever be saddled with non-completion
of ITC chain thereby resulting in disincentives to obtain
- 79 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
taxable invoices for availing input tax credit. Non inclusion of
land and building in GST results in cascading of taxes.
(vii) Gains from GST arising out of a comprehensive tax
base, would be negated owing to a large hole in the tax base
[As per MOSPI data, construction sector constitutes almost
9% of the total gross value added (GVA) in the country]. This
is for the reason that levy of GST on supply of land and
buildings would be an impediment to the generation, flow
and parking of black money.
(viii) Land and building are not on the same footing as
alcoholic liquor for human consumption as the latter is
constitutionally outside the definition of goods and services
tax (para 2.2 above).
3. In view of the discussion in the forgoing paras, it is
imperative that supply of land and building is subjected to
GST. However, certain categories of such supplies may be
exempted in public interest. These are listed below: -
(I) Supply of vacant land for the purposes of agriculture.
(II) Supply of land for construction of, -
(a) a civil structure or any other original works pertaining
to a scheme under Jawaharlal Nehru National Urban
Renewal Mission or Rajiv Awas Yojana;
(b) a civil structure or any other original works pertaining
to the ‘In –situ rehabilitation of existing slum dwellers using
land as a resource through private participation’ under the
Housing for All (Urban) Mission/Pradhan Mantri Awas
Yojana, only for existing slum dwellers;
(c) a civil structure or any other original works pertaining to
the Beneficiary-led individual house construction
/enhancement under the Housing for All (Urban)
Mission/Pradhan Mantri Awas Yojana;
(d) a structure meant for funeral, burial or cremation of
deceased;
(e) a single residential unit, on land admeasuring not more
than 100 square metres;
(f) low-cost houses up to carpet area of 60 square meters
per house in a housing project approved by competent
- 80 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
authority empowered under the ‘Scheme of Affordable
Housing in Partnership’ framed by the Ministry of Housing
and Urban Poverty Alleviation, Government of India;
(g) low cost houses up to a carpet area of 60 square
meters per house in a housing project approved by the
competent authority under:
1) the “Affordable Housing in Partnership” component of
the Housing for all (Urban) Mission/ Pradhan Mantri Awas
Yojana;
2) any housing scheme of a State Government.
(h) Post-harvest storage infrastructure for agriculture
produce including cold storage for such purposes.
(III) Sale of:
a) houses constructed under Rajiv Awas Yojana;
b) houses constructed under ‘In –situ rehabilitation of
existing slum dwellers using land as a resource through
private participation’ under the Housing for All (Urban)
Mission/Pradhan Mantri Awas Yojana, only for existing slum
dwellers.
c) low-cost houses up to carpet area of 60 square meters
per house in a housing project approved by competent
authority empowered under the ‘Scheme of Affordable
Housing in Partnership’ framed by the Ministry of Housing
and Urban Poverty Alleviation, Government of India;
d) low cost houses up to a carpet area of 60 square
meters per house in a housing project approved by the
competent authority under:
i. the “Affordable Housing in Partnership” component of
the Housing for all (Urban) Mission/ Pradhan Mantri Awas
Yojana;
ii. any housing scheme of a State Government.
(IV) Sale of residential premises other than new
residential premises.
Note: - 1) A residential premise is new when any of the
following apply:
- 81 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
1. it has not previously been sold as residential premises
2. a new building replaces a demolished building on the
same land.
4.1 We may prescribe a different rate of GST for supply of
land vis-à-vis supply of buildings, with full ITC of both.
4.2 Further, the amount of stamp duty paid on land or
buildings, may be allowed to be excluded from the value of
land or buildings, for levy of GST on their respective supply.
4.3 Alternatively, the amount of GST payable may be
reduced by the amount of stamp duty paid on the land or
buildings, subject to the condition that no refund of ITC would
be availed under the duty inversion clause of GST law.
(xviii) As rightly contended by the learned Senior
counsel for the petitioners, this Agenda Item to tax
immovable property transactions was not agreed upon and
nd rd
at the GST council meeting held on 22 and 23 of
December 2016, which is broadly set out hereunder:
Agenda Item 2A - CST Treatment of Land and Building (Real
Estate)
10. The Secretary to the Council introduced this agenda
and explained that in Section2(49), the definition of 'goods'
included only movable property. He pointed out that under the
Constitution, States had power to charge stamp duty on
transactions in land and building and that the rate of this duty
ranged between 5% and 6%. He emphasized that under this
agenda item , no change in the scheme of stamp duty was
proposed as entry 63 of the State List of Schedule 7 of the
Constitution empowering S tates to charge stamp dut y remained
intact. He pointed out that today , there existed a dichotom y in
rates of Service Tax on property depending upon the fact whether
i t was bought as an under construction property (which attracted
Service Tax) or as a ready-built property after obtaining
completion certificate (which did not attract Service Tax). He
explained that this created a cost arbitrage of about 6% in favour
of buying ready-built property . He stated that , in addition, there
were embedded taxes as no ITC was available on inputs li k e
steel, cement , floor tiles, sanitar y fittings , etc. used in the
construction of the property. Shri Arvind Subramanian , Chief
- 82 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
Economic Advisor to the Government of India stated that the cost
arbitrage between ready-built and under-construction property
could range between 6% to18% due to embedded taxes . In view
of this , the Secretary to the Council proposed that GST could be
imposed on supply of land and building and the rate could be
12% or 18% with a provision to block refund if there was an
incidence of dut y inversion between input tax and the output tax
on the final supply. He stated that such a measure would take
care of the present anomaly of taxation between constructed and
under-construction property.
Starting the discussion on this agenda item, the Hon'ble
Minister from Uttar Pradesh raised the question as to what
percentage of sale of property was fully-constructed vis-à-vis
those under construction. The Secretary to the Council stated
that such data was not readily available. The Hon ' ble Minister
from Uttar Pradesh observed that most propert y sales would be
of under-construction property as it would be difficult for
developers to full y fund by themselves the development of a
propert y . The Hon ' ble Minister from Uttarakhand stated that the
hill States should ha v e special exemption. The Hon ' ble
Chairperson observed that this would be decided once the main
issue was sett l ed. The Hon ' ble Minister from Punjab observed
that if a developer constructed the property on his own , then the
completed project ' s cost would be higher as the developer would
also r ecover the cost of capital investment. The Hon'ble Deputy
Chief Minister of Gujarat did not support the proposal under this
agenda item. He observed that in almost 90% cases , an under-
construction flat was booked by customers and mone y was paid
b y them for construction. He stated that stamp duty was on value
addition and the proposal made now would lead to double
taxation. The Secretary to the Council stated that another
important consideration for introducing this agenda i tem was that
if sale o f property was considered as a supply and tax was
charged at the rate of 18%, it would complete the ITC chain and
there would be greater incentive to bu y tax paid inputs like
cement, steel , sanitary fittings , tiles , etc. The Hon'ble Deputy
Chief Minister of Gujarat stated that levying GST on Land and
Building would put additional dut y burden on the small house-
owners . The Hon'ble Minister from Telangana observed that after
demonetization, the real estate business had suffered and
introduction of GST on it would further worsen the situation. The
Hon ' ble Minister from Bihar suggested to form a small committee
to further e x amine this proposal.
The Commissioner (GST) CBEC stated that if tax was
imposed on re-sale of property , sa y, a hotel, this would help in
claiming ITC and lowering the cost of business for the buyer of
- 83 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
the hotel. He also stated that charging GST on re-sale of property
would also capture the value addition over a period of time. The
Hon ' ble Deputy Chief Minister of Gujarat po i nted out that there
w as stamp duty on re-sale . The Hon ' ble Minister from West
Bengal stated that he supported the views expressed b y the
Hon ' ble Deputy Chief Mini s ter of Gujarat and the Hon'ble
Ministers from Uttar Pradesh and Telangana. He observed that
all fittings and raw mater i als used in buildings would largely be
tax-paid and this was presently an additional ta x gain for the
State as no ITC was available on them. He expressed that the
p r oportion of evaded inputs like s teel , cement , etc. might not be
ver y high . He further stated that there were much larger
tr a nsactions in smaller and medium houses and these should not
be taxed in addition to the lev y of stamp dut y . He cautioned that
this would also be a bad political message. The Chief Economic
Advisor observed that low-cost housing could remain exempt
from GST . He further observed that the final , effective rate of tax
on the consumer would not change but there would be greater
flow of ITC and a self-policing mechanism would come into play.
The Hon ' ble Minister from Punjab stated that for residential
property , ITC could not be availed . The Hon'ble Minister from
Kerala stated that he did not support the proposal under this
agenda item. He observed that the Transfer o f Propert y Act gave
power to States to levy stamp duty on the transfer of propert y
after completing the paper work . He informed that in Ker a la ,
rebate of stamp duty was given against pa y ment of VA T . He
further stated that cement , etc. were not obtained from the gre y
market as this could risk collapse of the building. He emphasised
that stamp dut y was a source of revenue for the State
government and that it should be left with the States. The Hon ' ble
Minister from Tamil Nadu stated that the proposal under this
agenda item appeared to be unconstitutional as stamp duty was
constitutionally retained. He also added that the definition of
goods in the Constitution did not include land and building. The
Hon'ble Chairperson summed up the two broad v iew points
namely that incidence of tax was likel y to go up and the other that
the tax amount would remain the same due to availabilit y of I T C
on inputs used a s construction material.
The Hon ' ble Minister from Punjab observed that if GST
was imposed on land and building , the cost for the customer
would go up. The Chief Economic Advisor stated that if GST was
extended to land and building , it would be a transformational GST
and would also have a strong anti-corruption, anti-black money
signalling. He reminded the House that internationally , GST was
charged on supply of property. The Hon'ble Chairperson
observed that this idea was transformational but instead of
- 84 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
introducing it at this stage, this suggestion could be revisited aft e r
a year or so of the GST implementation.
The Hon ' ble Deputy Chief Minister of Delhi suggested that
instead of closing the issue at this stage , it could be further
e x amined by a group of of f icers or Ministers constituted for this
purpose. However , taking into view the general sense of the
House, the Council agreed that this issue could be revisited after
a year or so of the implementation of GST.
11. In view of the discussion above for agenda item 2A,
the Council decided not to introduce GST on land and building at
this stage and agreed that this issue could be revisited after a
y ear or so of the implementation of GST.
(xix) Having regard to the judgment of the Apex Court
in VKC Footsteps case supra and the discussion of the
GST Council, it can be concluded that transactions such as,
acquisition and transfer of immovable property were not
sought to be subsumed under the GST regime.
(xx) At this stage, it would be relevant to understand
that immovable property in its traditional sense always
meant the tangible property but as there were developments
and changes in the practices of society, it came to be
recognized as a bundle of rights in immovable property. As
rightly contended by the learned Senior counsel, rights in
immovable property is different from the usage to which it
could be put and the latter may or may not amount to
services depending on the statute but the former would
certainly not be a service in the light of the discussions held
above.
(xxi) It is relevant to note that a perusal of the
definition of ‘immovable property’ in various statutory
enactments including General Clauses Act, Transfer of
Property Act, Registration Act etc., would clearly show that
- 85 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
not only the physical property but also the rights and
benefits arising out of such property are recognised as
immovable property.
(xxii) The Apex Court in the case of Jilubhai
Nanbhai Khachar and others v. State of Gujarat and
another - 1995 Supp (10) SCC 596, analysed the definition
of ‘land’ given in Black’s Law dictionary and Law Lexicon as
under:
“11. In Black's Law Dictionary (Sixth Edition) at page 877,
land is defined to mean-"in the most general sense,
comprehends any ground, soil or earth whatsoever,
including......rocks. "Land" may include any estate or interest in
lands, either legal or equitable, as well as easements and
incorporeal hereditaments. Technically, land signifies everything
comprehending all things of a permanent nature, and even of an
unsubstantial provided they be permanent. Ordinarily, the term is
used as descriptive of the subject of ownership and not the
ownership. Land is the material of the earth, whatever may be the
ingredients of which it is composed, weather, soil, rock, or other
substance, and includes free or occupied space for an indefinite
distance upwards as well as downwards, subject to limitations
upon the use of airspace imposed, and rights in the use of
airspace granted by law.
12. According to the Law Lexicon (Reprint edn. 1987) by
Ramanatha Iyer p. 701, the word 'land" in the ordinary legal
sense comprehends everything of a fixed or permanent nature
and, therefore, growing trees, land includes the benefit arise out
of the land and things attached to the earth or permanently
means everything attached to the earth and also the share in or
charges on, the revenue or rent of villages or other defined
portions of territory. Land includes the bed of the sea below high
water mark. Land shall extend to messuages, and all other
hereditaments, whether corporal or incorporeal and whether
freehold or of any other tenure and to money to be paid out in the
purchase of land. Land in its widest signification would therefore
include not only the surface of the ground, cultivable, uncultivable
or waste lands but also everything on or under it. In Jagannath
Singh v. State of U.P., AIR (1960) SC 1563 p. 1568, this Court
held that the word "land" is wide enough to include all lands
whether agricultural or non-agricultural land. In State of U.P. v.
Sarju Devi, [1978] 1 SCF 18, this court held that the definition of
the land in Section 3 (14) shows that it is not necessary for the
- 86 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
land to fall within its purview that it must be actually under
cultivation or occupied for purposes connected with agriculture.
The requirement is amply satisfied even if the land is either held
or occupied for the purposes connected with agriculture. The
word "held" only means possession of legal title and does not
require actual connected occupation. In State of Gujarat v. Kamla
Ben Jivan Bhai, [1979] Supp. 2 SCC 440, this Court held that
actual cultivation is not necessary to constitute an estate and the
right to collect grass is a right annexed to land which was held to
be an estate and abolition of the right to pay annual amount was
an agrarian reform. In Sri Ram Ram Narain Medhi v. State of
Bombay, [1959] Supp. 1 SCR 489, this Court held that the Code
is a law relating to land tenures. The right in relation to an estate
used in Article 31A has been noted in a very com-prehensive
sense. In Digvijay Singh Hamirsinhji v. Manji Savda, [1969] 1
SCR 405, this Court interpreting Section 18 of Saurashtra Land
Re-forms Act, 1951 held that the Girasdar to whom the ruler
made the grant was bound by the provisions of that Act and that
he was not entitled to have his tenant evicted except in
accordance with the provisions of the Act.”
(xxiii) As rightly contended by learned Senior Counsel
for the petitioners, compulsory acquisition of land would fall
under Entry 5 of Schedule III r/w Section 7(2) of the
CGST/KGST Act and that this Entry is only by way of ‘ex
abundanti cautela’ to show the Legislative intent not to tax
sale of land and completed building, i.e., excess of caution
does no harm; in the case of Gokaraju Rangaraju vs. State
of Andhra Pradesh -1981 (3) SCC 132, the Apex Court held
as under:
18. We do not agree with the submission of the learned
Counsel that the de facto doctrine is subject to the limitation that
the defect in the title of the judge to the office should not be one
traceable to the violation of a constitutional provision. The
contravention of a constitutional provision may invalidate an
appointment but we are not concerned with that. We are
concerned with the effect of the invalidation upon the acts done by
the judge whose appointment has been invalidated. The de facto
doctrine saves such acts. The de facto doctrine is not a stranger to
the Constitution or to the Parliament and the legislatures of the
States. Article 71(2) of the Constitution provides that acts done by
- 87 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
the President or Vice-President of India in the exercise and
performance of the powers and duties of his office shall not be
invalidated by reason of the election of a person as President or
Vice-President being declared void. So also Section 107(2) of the
Representation of the People Act, 1951 (43 of 1951) provides that
acts and proceedings in which a person has participated as a
member of Parliament or a member of the legislature of a State
shall not be invalidated by reason of the election of such person
being declared to be void. There are innumerable other
Parliamentary and State legislative enactments which are replete
with such provisions. The twentieth amendment of the Constitution
is an instance where the de facto doctrine was applied by the
constituent body to remove any suspicion or taint of illegality or
invalidity that may be argued to have attached itself to judgments,
decrees, sentences or orders passed or made by certain District
Judges appointed before 1966, otherwise than in accordance with
the provision of Article 233 and Article 235 of the Constitution. The
twentieth amendment was the consequence of the decision of the
Supreme Court in Chandra Mohan v. State of U.P. [AIR 1966 SC
1987 : (1967) 1 SCR 77 : (1967) 1 LLJ 412] that appointments of
District Judges made otherwise than in accordance with the
provisions of Articles 233 and 235 were invalid. As such
appointments had been made in many States, in order to pre-empt
mushroom litigation springing up all over the country, it was
apparently thought desirable that the precise position should be
stated by the constituent body by amending the Constitution. Shri
Phadke, learned Counsel for the appellants, argued that the
constituent body could not be imputed with the intention of making
superfluous amendments to the Constitution. Shri Phadke invited
us to say that it was a necessary inference from the twentieth
amendment of the Constitution that, but for the amendment, the
judgments, decrees etc. of the District Judges appointed otherwise
than in accordance with the provisions of Article 233 would be
void. We do not think that the inference suggested by Shri Phadke
is a necessary inference. It is true that as a general rule the
Parliament may be presumed not to make superfluous legislation.
The presumption is not a strong presumption and statutes are full
of provisions introduced because abundans cautela non
nocet (there is no harm in being cautious). When judicial
pronouncements have already declared the law on the subject, the
statutory reiteration of the law with reference to particular case
does not lead to the necessary inference that the law declared by
the judicial pronouncements was not thought to apply to the
particular cases but may also lead to the inference that the
statute-making body was mindful of the real state of the law but
was acting under the influence of excessive caution and so to
silence the voices of doubting Thomases by declaring the law
- 88 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
declared by judicial pronouncements to be applicable also to the
particular cases. In Chandra Mohan case [AIR 1966 SC 1987 :
(1967) 1 SCR 77 : (1967) 1 LLJ 412] this Court had held that
appointments of District Judges made otherwise than in
accordance with Article 233 of the Constitution were invalid. Such
appointments had been made in Uttar Pradesh and a few other
States. Doubts had been cast upon the validity of the judgments,
decrees etc. pronounced by those District Judges and large
litigation had cropped up. It was to clear those doubts and not to
alter the law that the twentieth amendment of the Constitution was
made. This is clear from the Statement of Objects and Reasons
appended to the Bill which was passed as Constitution (20th
Amendment) Act, 1966. The statement said:
“Appointments of District Judges in Uttar Pradesh and a few other
States have been rendered invalid and illegal by a recent judgment
of the Supreme Court on the ground that such appointments were
not made in accordance with the provisions of Article 233 of the
Constitution.... As a result of these judgments, a serious situation
has arisen because doubt has been thrown on the validity of the
judgments, decrees, orders and sentences passed or made by
these District Judges and a number of writ petitions and other cases
have already been filed challenging their validity. The functioning of
the District Courts in Uttar Pradesh has practically come to a
standstill. It is, therefore, urgently necessary to validate the
judgments, decrees, orders, and sentences passed or made
heretofore by all such District Judges in those States....”
(xxiv) In the case of Chotanagpur Banking
Association Ltd vs. Govt. of India - 1957 SCC Online
Patna 81 , the Patna High Court held as under:
46. The use of the word “absolutely” in Sections 16 and 17
of the Land Acquisition Act, and the absence of this word in R.
75A(3) will not make any difference, in that, the word “absolutely”
only makes the intention of the Legislature more emphatic, and
nothing more. It has been used only as abundans cautela as an
abundant caution, in that Abundans Cautela Non Nocet, that is,
excess of caution does no harm. The words “the property shall
vest in Government free from any mortgage, pledge, lien, or other
similar encumbrance” alone are clear manifestations of the
intention of the Legislature that the vesting of the property is not
for any limited purpose or limited duration.
- 89 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
(xxv) It is therefore clear that even if Entry 5 of
Schedule III were not there, sale of land and building cannot
be brought under GST as they are covered under the State
List II and there is no intention to tax sale/ acquisition
immovable property per se under the GST legislations. It is
also significant to note that this position is clarified by the
aforesaid Circular No. 177/09/2022-TRU dated 03.08.2022
which clearly states that Sale of land either as it is or after
some development is covered by Entry No.5 of Schedule III
of the CGST/KGST Act and accordingly, does not attract
GST; in other words, even if the said entries were not
present in the said schedule, there was still no intention to
tax stamp duty transactions of the nature which could be
subsumed under the GST and consequently, not only sale
of land or completed building, even compulsory acquisitions
of such land cannot be the subject matter of a GST levy.
(xxvi) Learned Senior Counsel is also right in
contending that after the retrospective amendment in
Section 7 to exclude 7(1)(d) and include Section 7(1A),
Schedule II is merely a classification schedule; Entry 5(e) of
Schedule treats "agreeing to the obligation to refrain from
an act or to tolerate an act or a situation, or to do an act" as
a supply of service and would only be a classification entry
and the need to prove that an activity or transaction is a
supply stems from Section 7(1).
(xxvii) Circular No. 178/10/2022-GST dated
03.08.2022 issued by the respondents explains the three
expressions as under (para 2):
- 90 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
(i) Agreeing to the obligation to refrain from an act -
Example of activities that would be covered by this part of the
expression would include non-compete agreements, where one
party agrees not to compete with the other party in a product,
service or geographical area against a consideration paid by the
other party. Another example of such activities would be a
builder refraining from constructing more than a certain number
of floors, even though permitted to do so by the municipal
authorities, against a compensation paid by the neighbouring
housing project, which wants to protect its sunlight, or an
industrial unit refraining from manufacturing activity during
certain hours against an agreed compensation paid by a
neighbouring school, which wants to avoid noise during those
hours.
(ii) Agreeing to the obligation to tolerate an act or a
situation - This would include activities such a shopkeeper
allowing a hawker to operate from the common pavement in
front of his shop against a monthly payment by the hawker, or an
RWA tolerating the use of loudspeakers for early morning
prayers by a school located in the colony subject to the school
paying an agreed sum to the RWA as compensation
(iii) Agreeing to the obligation to do an act - This would
include the case where an industrial unit agrees to install
equipment for zero emission/discharge at the behest of the RWA
of a neighbouring residential complex against a consideration
paid by such RWA, even though the emission/discharge from
the industrial unit was within permissible limits and there was no
legal obligation upon the individual unit to do so.
13. In Intercontinental Consultant’s case supra , the Apex
Court held as under:-
24. Section 66 of the Act is the charging section which
reads as under:
“ 66. Charge of service tax .— (1) There shall be
levied a tax (hereinafter referred to as the service tax) @
12% of the value of taxable services referred to in sub-
clauses … of Section 65 and collected in such manner as
may be prescribed.”
- 91 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
25. Obviously, this Section refers to service tax i.e. in
respect of those services which are taxable and specifically
referred to in various sub-clauses of Section 65. Further, it
also specifically mentions that the service tax will be @ 12%
of the “value of taxable services”. Thus, service tax is
reference to the value of service. As a necessary corollary, it
is the value of the services which are actually rendered, the
value whereof is to be ascertained for the purpose of
calculating the service tax payable thereupon.
26. In this hue, the expression “such” occurring in
Section 67 of the Act assumes importance. In other words,
valuation of taxable services for charging service tax, the
authorities are to find what is the gross amount charged for
providing “such” taxable services. As a fortiori, any other
amount which is calculated not for providing such taxable
service cannot be a part of that valuation as that amount is
not calculated for providing such “taxable service”. That
according to us is the plain meaning which is to be attached
to Section 67 (unamended i.e. prior to 1-5-2006) or after its
amendment, with effect from 1-5-2006. Once this
interpretation is to be given to Section 67, it hardly needs to
be emphasised that Rule 5 of the Rules went much beyond
the mandate of Section 67. We, therefore, find that the High
Court was right in interpreting Sections 66 and 67 to say that
in the valuation of taxable service, the value of taxable
service shall be the gross amount charged by the service
provider “for such service” and the valuation of tax service
cannot be anything more or less than the consideration paid
as quid pro qua for rendering such a service.
- 92 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
27. This position did not change even in the amended
Section 67 which was inserted on 1-5-2006. Sub-section (4)
of Section 67 empowers the rule-making authority to lay
down the manner in which value of taxable service is to be
determined. However, Section 67(4) is expressly made
subject to the provisions of sub-section (1). Mandate of sub-
section (1) of Section 67 is manifest, as noted above viz. the
service tax is to be paid only on the services actually
provided by the service provider.
28. It is trite that rules cannot go beyond the statute.
In Babaji Kondaji Garad [Babaji Kondaji Garad v. Nasik
Merchants Coop. Bank Ltd., (1984) 2 SCC 50] , this rule was
enunciated in the following manner: (SCC p. 63, para 15)
“15. … Now if there is any conflict between a statute
and the subordinate legislation, it does not require elaborate
reasoning to firmly state that the statute prevails over
subordinate legislation and the bye-law if not in conformity
with the statute in order to give effect to the statutory
provision the rule or bye-law has to be ignored. The statutory
provision has precedence and must be complied with.”
29. The aforesaid principle is reiterated in S.
Chenniappa Mudaliar [CIT v. S. Chenniappa Mudaliar,
(1969) 1 SCC 591 : (1969) 74 ITR 41] holding that a rule
which comes in conflict with the main enactment has to give
way to the provisions of the Act.
30. It is also well-established principle that Rules are
framed for achieving the purpose behind the provisions of
the Act, as held in Taj Mahal Hotel [CIT v. Taj Mahal Hotel,
(1971) 3 SCC 550 : (1971) 82 ITR 44] : (SCC p. 554, para
11)
- 93 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
“11. … the Rules were meant only for the purpose of
carrying out the provisions of the Act and they could not take
away what was conferred by the Act or whittle down its
effect.”
14. As noticed hereinabove, even the Circulars emanating
from the respondents unequivocally postulate that a "declared
service" must be supported by "consideration" and must, in
addition, partake the character of an independent service rendered
under a contract for separate consideration; the arrangement
between the parties should be an independent arrangement to do
an act, for which, consideration should flow. In the instant case,
maintenance of the stipulated MAB constitutes merely one of the
contractual stipulations governing the relationship between the
petitioner Banks and their customers and, in the event of a breach
or default thereof, the only consequence that ensues is the levy of
a penalty. Such penal charges can by no stretch of imagination be
construed, characterised, categorised or treated as "consideration"
flowing to the Banks, particularly when no monetary accrual or
pecuniary benefit enure to the petitioners - Banks merely by reason
of the maintenance of such MAB. Significantly, a customer remains
at liberty to withdraw the entire amount standing to the credit of the
account, which inexorably leads to the conclusion that the MAB, or
- 94 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
the maintenance thereof, cannot be regarded as "consideration" for
the services rendered by the Banks. Further, it is not the case of
the respondents that they are entitled to appropriate the entire MAB
as their consideration for providing services and / or that the same
was recognised as such in their books; under these circumstances,
in the light of the principles laid down in the aforesaid judgments,
the Circulars issued by the Board and the contract entered into
between the petitioners – Banks and their customers, I am of the
considered opinion that the impugned SCNs proceed on a
fundamentally erroneous premise by conflating a contractual
condition with "consideration", a patent infirmity which vitiates the
very foundation of the impugned proceedings and warrants their
quashing.
15. A perusal of the material on record would reveal that the
genesis of the transaction under consideration lies in the opening
of a bank account by the customer, whereupon all customers,
without any distinction or discrimination, become entitled to avail
themselves of the bouquet of services offered by the respective
petitioner Banks. Though customers may be classified into different
categories such as rural, urban and the like, a uniform set of
- 95 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
facilities and services is extended to all customers falling within a
particular category. All features, facilities and services appurtenant
to the chosen category of account are made available to the
customer, who retains absolute autonomy in selecting the account
offering best suited to his requirements, without any interference on
the part of the petitioner Banks. It is the customer who introduces
funds into the account by way of deposits and, insofar as the
impugned transactions are concerned, the quantum, frequency and
manner of deposit or withdrawal remain entirely within the
customer's unfettered discretion.
16. The stipulated MAB constitutes merely one of the terms
and conditions governing the account opening arrangement
pursuant to which the account is opened and funds are deposited.
These contractual stipulations remain uniform and are made
applicable to all customers falling within the same category of
accounts, with the attendant features, facilities and services being
equally available to every such customer. The discretion to avail or
not avail a particular account offering rests entirely with the
customer and the petitioner Banks do not foist or thrust any MAB
stipulation upon a customer so as to derive any corresponding
- 96 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
benefit or "consideration" therefrom. It therefore follows that the
availability of the features, facilities and services is category based,
while the decision to opt for a particular account and maintain the
stipulated MAB lies exclusively within the domain of the depositor.
The petitioner Banks neither influence nor dictate such choice and
do not, in any manner, compel or insist upon maintenance of the
MAB by their customers.
17. A customer who opts for an account category carrying a
stipulated MAB is required to maintain such minimum balance and,
in the event of a failure to adhere thereto, becomes liable to the
penal consequences envisaged under the very contract governing
the account relationship. Thus, non maintenance of the MAB
merely attracts a penalty. The maintenance of an MAB is, in
essence, nothing more than the maintenance of a deposit in a bank
account and such deposit entitles the customer to the interest
accruing thereon, whereas any breach of the MAB stipulation is
visited with a penalty. Put differently, for agreeing to maintain a
deposit, the account holder receives interest, while any infraction of
that obligation attracts a penal charge. The amount recovered by
the Bank on account of such breach unmistakably partakes the
- 97 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
character of a penalty and not "consideration". To the extent such
penal charges are recovered by the Banks, the corresponding tax
consequences are attracted and the same are not in dispute.
Equally, the stipulation relating to maintenance of MAB is uniformly
applicable to all customers falling within the concerned category
and those customers who maintain the requisite deposit are
compensated by the petitioner Banks through payment of interest,
which, admittedly, is not exigible to Service Tax.
18. It is of considerable significance to note that the
petitioner Banks neither foist nor compel any customer to maintain
the stipulated MAB, the choice in this regard is being left entirely to
the customer. Irrespective of whether a customer maintains the
prescribed MAB, deposits falling within the concerned category
continue to earn the same rate of interest. Non maintenance of the
MAB merely results in an amount becoming payable by the
customer to the petitioner Banks by way of penalty. It therefore
becomes manifest that even in cases of breach or default of the
MAB requirement, the customer continues to earn interest on the
deposits maintained with the petitioner Banks. The Banks do not
suspend or discontinue payment of interest on the account balance
- 98 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
merely on account of such default; the breach is visited only with a
penalty, on which the applicable Service Tax has already been
discharged. In essence, the transaction comprises the maintenance
of a deposit in a bank account and the levy of a penalty in the event
of a breach, upon which the requisite Service Tax stands duly
discharged. Consequently, the transaction does not give rise to any
further taxable element or facet warranting examination through the
prism of Service Tax.
19. The impugned SCNs proceed on the fundamentally
erroneous assumption that the stipulated MAB confers certainty
and assurance of liquidity upon the petitioner Banks by virtue of the
deposits maintained by customers. This premise is wholly
fallacious, since there exists no restriction, limitation or fetter either
on the withdrawal of funds or on the maintenance of deposits in
excess of the prescribed MAB. Consequently, it cannot be
presumed that the declared MAB represents liquidity invariably
available to the Banks at any given point in time. This is particularly
so when banking institutions cater to thousands, if not millions, of
customers simultaneously and every account holder remains at
liberty to breach the MAB stipulation, continue availing the
- 99 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
attendant services and merely incur the prescribed penalty for such
default. The notion of assured liquidity, therefore, is a complete
misnomer, since the mere existence of a stipulated MAB does not,
by itself, translate into assured liquidity available to the petitioner
Banks.. The stipulated MAB is, in essence, nothing but a form of
deposit and, like all deposits, the funds remain fungible in
character. Every such deposit earns interest at the same applicable
rate and no intrinsic, tangible or discernible benefit accrues either to
the customer or to the petitioner Banks solely by reason of the
maintenance of MAB. There is neither any enhanced interest
enuring to the benefit of the depositor nor any corresponding
diminution of interest operating to the advantage of the Bank.
Equally, the Bank does not assume custody of the funds in a
manner that denudes the customer of the unfettered right of
withdrawal, nor does a breach of the MAB stipulation result in the
customer being disentitled to the attendant features, facilities or
services associated with the account. If the MAB deposit were to be
construed as "consideration", it is elementary that such
consideration must accrue to and vest in the petitioner Banks, a
proposition wholly divorced from commercial reality. For the MAB to
- 100 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
qualify as "consideration", the funds would necessarily have to be
irretrievably parted with by the customer and irrevocably
appropriated by the petitioner Banks. Stated differently, if the MAB
were indeed "consideration", the depositor could not retain the
unfettered right to withdraw such funds at will. However, the
petitioner Banks function merely as custodians of the deposits,
which are reflected as liabilities repayable to the customers, and
the decision regarding the quantum and duration of deposits
remains entirely within the dominion and control of the customer.
Furthermore, customers, irrespective of whether they maintain the
stipulated MAB, continue to receive consideration from the
petitioner Banks in the form of interest at identical rates applicable
to similarly situated account holders. Viewed thus, the very
foundation upon which the impugned SCNs proceed stands
substantially eroded, rendering them liable to be quashed on this
ground as well.
20. A perusal of the provisions contained in Section 67 of
the Finance Act, will indicate that it is absolutely essential that
consideration should be charged and the transaction should
contemplate charging or existence of a consideration that can be
- 101 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
quantified in monitoring terms which is a positive act which should
be done for making the subject transaction amenable / exigible to
payment of service tax; in Bhayana Builder’s case supra , the
Apex Court negatived the contention of the Revenue / Department
that free supply done by a service recipient could be included as
consideration under a contract for construction and held as under:
11. As already pointed out in the beginning, all these
assessees are covered by Section 65(25-b) of the Act as
they are rendering “construction or industrial construction
service”, which is a taxable service as per the provisions of
Section 65(105)(zzq) of the Act. The entire dispute relates to
the valuation that has to be arrived at in respect of taxable
services rendered by the assessees. More precisely, the
issue is as to whether the value of goods/materials supplied
or provided free of cost by a service recipient and used for
providing the taxable service of construction or industrial
complex, is to be included in computation of gross amount
charged by the service provider, for valuation of taxable
service. For valuation of taxable service, provision is made in
Section 67 of the Act which enumerates that it would be “the
gross amount charged by the service provider for such
service provided or to be provided by him”. Whether the
value of materials/goods supplied free of cost by the service
recipient to the service provider/assessee is to be included to
arrive at the “gross amount”, or not is the poser. On this
aspect, there is no difference in amended Section 67 from
- 102 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
unamended Section 67 of the Act and the parties were at ad
idem to this extent.
12. On a reading of the above definition, it is clear that
both prior and after amendment, the value on which service
tax is payable has to satisfy the following ingredients:
(a) Service tax is payable on the gross amount charged
— the words “gross amount” only refers to the entire contract
value between the service provider and the service recipient.
The word “gross” is only meant to indicate that it is the total
amount charged without deduction of any expenses. Merely
by use of the word “gross” the Department does not get any
jurisdiction to go beyond the contract value to arrive at the
value of taxable services. Further, by the use of the word
“charged”, it is clear that the same refers to the amount billed
by the service provider to the service receiver. Therefore, in
terms of Section 67, unless an amount is charged by the
service provider to the service recipient, it does not enter into
the equation for determining the value on which service tax is
payable.
(b) The amount charged should be for “for such service
provided” — Section 67 clearly indicates that the gross
amount charged by the service provider has to be for the
service provided. Therefore, it is not any amount charged
which can become the basis of value on which service tax
becomes payable but the amount charged has to be
necessarily a consideration for the service provided which is
taxable under the Act. By using the words “for such service
provided” the Act has provided for a nexus between the
amount charged and the service provided. Therefore, any
- 103 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
amount charged which has no nexus with the taxable service
and is not a consideration for the service provided does not
become part of the value which is taxable under Section 67.
The cost of free supply goods provided by the service
recipient to the service provider is neither an amount
“charged” by the service provider nor can it be regarded as a
consideration for the service provided by the service
provider. In fact, it has no nexus whatsoever with the taxable
services for which value is sought to be determined.
13. A plain meaning of the expression “the gross
amount charged by the service provider for such service
provided or to be provided by him” would lead to the obvious
conclusion that the value of goods/material that is provided
by the service recipient free of charge is not to be included
while arriving at the “gross amount” simply, because of the
reason that no price is charged by the assessee/service
provider from the service recipient in respect of such
goods/materials. This further gets strengthened from the
words “for such service provided or to be provided” by the
service provider/assessee. Again, obviously, in respect of
the goods/materials supplied by the service recipient, no
service is provided by the assessee/service provider.
Explanation 3 to sub-section (1) of Section 67 removes any
doubt by clarifying that the gross amount charged for the
taxable service shall include the amount received towards
the taxable service before, during or after provision of such
service, implying thereby that where no amount is charged
that has not to be included in respect of such
materials/goods which are supplied by the service recipient,
- 104 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
naturally, no amount is received by the service
provider/assessee. Though, sub-section (4) of Section 67
states that the value shall be determined in such manner as
may be prescribed, however, it is subject to the provisions of
sub-sections (1), (2) and (3). Moreover, no such manner is
prescribed which includes the value of free goods/material
supplied by the service recipient for determination of the
gross value.
14. We may note at this stage that Explanation (c) to
sub-section (4) was relied upon by the learned counsel for
the Revenue to buttress the stand taken by the Revenue and
we again reproduce the said Explanation hereinbelow in
order to understand the contention:
“(c) “ gross amount charged ” includes payment by
cheque, credit card, deduction from account and any form of
payment by issue of credit notes or debit notes and book
adjustment, and any amount credited or debited, as the case
may be, to any account, whether called “suspense account”
or by any other name, in the books of account of a person
liable to pay service tax, where the transaction of taxable
service is with any associated enterprise.”
(emphasis supplied)
15. It was argued that payment received in “any form”
and “any amount credited or debited, as the case may be…”
is to be included for the purposes of arriving at gross amount
charges and is leviable to pay service tax. On that basis, it
was sought to argue that the value of goods/materials
supplied free is a form of payment and, therefore, should be
added. We fail to understand the logic behind the aforesaid
- 105 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
argument. A plain reading of Explanation (c) which makes
the “gross amount charges” inclusive of certain other
payments would make it clear that the purpose is to include
other modes of payments, in whatever form received; be it
through cheque, credit card, deduction from account, etc. It
is in that hue, the provisions mentions that any form of
payment by issue of credit notes or debit notes and book
adjustment is also to be included. Therefore, the words “in
any form of payment” are by means of issue of credit notes
or debit notes and book adjustment. With the supply of free
goods/materials by the service recipient, no case is made
out that any credit notes or debit notes were issued or any
book adjustments were made. Likewise, the words, “any
amount credited or debited, as the case may be”, to any
account whether called “suspense account or by any other
name, in the books of accounts of a person liable to pay
service tax” would not include the value of the goods
supplied free as no amount was credited or debited in any
account. In fact, this last portion is related to the debit or
credit of the account of an associate enterprise and,
therefore, takes care of those amounts which are received
by the associated enterprise for the services rendered by the
service provider.
16. In fact, the definition of “gross amount charged”
given in Explanation (c) to Section 67 only provides for the
modes of the payment or book adjustments by which the
consideration can be discharged by the service recipient to
the service provider. It does not expand the meaning of the
term “gross amount charged” to enable the Department to
- 106 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
ignore the contract value or the amount actually charged by
the service provider to the service recipient for the service
rendered. The fact that it is an inclusive definition and may
not be exhaustive also does not lead to the conclusion that
the contract value can be ignored and the value of free
supply goods can be added over and above the contract
value to arrive at the value of taxable services. The value of
taxable services cannot be dependent on the value of goods
supplied free of cost by the service recipient. The service
recipient can use any quality of goods and the value of such
goods can vary significantly. Such a value, has no bearing
on the value of services provided by the service recipient.
Thus, on first principle itself, a value which is not part of the
contract between the service provider and the service
recipient has no relevance in the determination of the value
of taxable services provided by the service provider.
17. Faced with the aforesaid situation, the argument
of the learned counsel for the Revenue was that in case the
assessees did not want to include the value of
goods/materials supplied free of cost by the service
recipient, they were not entitled to the benefit of Notification
dated 10-9-2004 read with Notification dated 1-3-2005. It
was argued that since building construction contract is a
composite contract of providing services as well as supply of
goods, the said notifications were issued for the convenience
of the assessees. According to the Revenue, the purpose
was to bifurcate the component of goods and services into
67% : 33% and to provide a ready formula for payment of
service tax on 33% of the gross amount. It was submitted
- 107 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
that this percentage of 33% attributing to service element
was prescribed keeping in view that in the entire construction
project, roughly 67% comprises the cost of material and 33%
is the value of services. However, this figure of 67% was
arrived at keeping in mind the totality of goods and materials
that are used in a construction project. Therefore, it was
incumbent upon the assessees to include the value of
goods/material supplied free of cost by the service recipient
as well otherwise it would create imbalance and disturb the
analogy that is kept in mind while issuing the said
notifications and in such a situation, the AO can deny the
benefit of aforesaid notifications. This argument may look to
be attractive in the first blush but on the reading of the
notifications as a whole, to our mind, it is not a valid
argument.
18. In the first instance, no material is produced
before us to justify that aforesaid basis of the formula was
adopted while issuing the notification. In the absence of any
such material, it would be anybody's guess as to what went
in the mind of the Central Government in issuing these
notifications and prescribing the service tax to be calculated
on a value which is equivalent to 33% of the gross amount.
Secondly, the language itself demolishes the argument of
the learned counsel for the Revenue as it says “33% of the
gross amount “charged” from any person by such
commercial concern for providing the said taxable service”.
According to these notifications, service tax is to be
calculated on a value which is 33% of the gross amount that
is charged from the service recipient. Obviously, no amount
- 108 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
is charged (and it could not be) by the service provider in
respect of goods or materials which are supplied by the
service recipient. It also makes it clear that valuation of gross
amount has a causal connection with the amount that is
charged by the service provider as that becomes the
element of “taxable service”. Thirdly, even when the
explanation was added vide Notification dated 1-3-2005, it
only explained that the gross amount charged shall include
the value of goods and materials supplied or provided or
used by the provider of construction service. Thus, though it
took care of the value of goods and materials supplied by the
service provider/assessee by including value of such goods
and materials for the purpose of arriving at gross amount
charged, it did not deal with any eventuality whereby value of
goods and material supplied or provided by the service
recipient were also to be included in arriving at “gross
amount charged”.
19. Matter can be looked into from another angle as
well. In CCE v. Larsen & Toubro Ltd. [CCE v. Larsen &
Toubro Ltd., (2016) 1 SCC 170] this Court was concerned
with exemption notifications which were issued in respect of
“taxable services” covered by sub-clause (zzq) of clause
(105) read with clause (25-b) and sub-clause (zzzh) of
clause (105) read with clauses (30-a) and (91-a) of Section
65 of Chapter V of the Act. This Court in the aforesaid
judgment in respect of five “taxable services” [viz. Sections
65(105)(g), (zzd), (zzh), (zzq) and (zzzh)] has held as under:
(SCC p. 195, para 23)
- 109 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
“23. A close look at the Finance Act, 1994 would show
that the five taxable services referred to in the charging
Section 65(105) would refer only to service contracts
simpliciter and not to composite works contracts. This is
clear from the very language of Section 65(105) which
defines “taxable service” as “any service provided”.
(emphasis in original)
Further, while referring to exemption notifications, it
observed: (SCC p. 206, para 42)
“42. … Since the levy itself of service tax has been found
to be non-existent, no question of any exemption would
arise.”
It is clear from the above that the service tax is to be
levied in respect of “taxable services” and for the purpose of
arriving at 33% of the gross amount charged, unless value of
some goods/materials is specifically included by the
legislature, that cannot be added.
20. It is to be borne in mind that the notifications in
questions are exemption notifications which have been
issued under Section 93 of the Act. As per Section 93, the
Central Government is empowered to grant exemption from
the levy of service tax either wholly or partially, which is
leviable on any “taxable service” defined in any of sub-
clauses of clause (105) of Section 65. Thus, exemption
under Section 93 can only be granted in respect of those
activities which Parliament is competent to levy service tax
and covered by sub-clause (zzq) of clause (105) and sub-
clause (zzzh) of clause (105) of Section 65 of Chapter V of
the Act under which such notifications were issued.
- 110 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
21. So also, in Edelweiss Financial Services case supra ,
the Apex Court held as under:-
2. Heard Mr. Tathagat Sharma, learned counsel for
the petitioner.
3. The challenge here is to the concurrent finding in
favour of the assessee recorded by the Principal
Commissioner GST which was upheld by the CEST Tribunal,
through the impugned order on 16.02.2022. The learned
counsel would submit that this case is similar to Civil Appeal
No. 428/2020 @ Diary No.42703/2019 (Commissioner of
12:57:51 IST Reason: Service Tax Audit II Delhi IV Vs. M/S
DLF Cyber City Developers Ltd.). and therefore the matter
should be admitted and tagged with the pending case.
4. Responding to the above, Mr. Bharat Rai
Chandani, learned counsel for the assessee on caveat would
read Section 65 (12) of the Finance Act, 1994 to point out
that issuance of corporate guarantee to a group company
without consideration would not fall within banking and other
financial services and is therefore not taxable service. He
would also read Section 65B (44) of the Finance Act 1994 to
point out that the definition of service would indicate that it
relates to only such service which is rendered for valuable
consideration.
5. The counsel would next advert to paragraph 3.1.12
of the Commissioner’s order where the following was
recorded:-
“further, the consideration can be of two types viz.,
monetary consideration and non monetary consideration. In
the present case, the Assessee has argued that they have
- 111 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
not received any consideration. In such case it’s for the
department to prove that the Assessee’s claim is wrong. It is
observed that nowhere in the Show Cause Notice, attempt
has been made to prove that the Assessee received either
monetary or non- monetary consideration in any form. It is
not alleged or proved in the Show Cause Notice as to how
the Assessee got any benefit from their subsidiaries in
monetary or non-monetary terms for the Corporate
Guarantees issued. Missing this vital point, valuation of the
consideration using provisions of Section 67(1) of the
Finance Act, 1994 become a futile exercise.”
6. Mr. Rai Chandani then read paragraphs 8 and 9
of the judgment of the Tribunal, which are extracted below;
“8. The criticality of ‘consideration’ for determination of
service, as defined in section 65B(44) of Finance Act, 1994,
for the disputed period after introduction of ‘negative list’
regime of taxation has been rightly construed by the
adjudicating authority. Any activity must, for the purpose of
taxability under Finance Act, 1994, not only, in relation to
another, reveal a ‘provider’, but also the flow of
‘consideration’ for rendering of the service. In the absence of
any of these two elements, taxability under Section 66B of
Finance Act, 1994 will not arise. It is clear that there is no
consideration insofar as ‘corporate guarantee’ issued by
respondent on behalf of their subsidiary companies is
concerned.
9. The reliance placed by Learned Authorised
Representative on the ‘non-monetary benefits’ which may, if
at all, be of relevance for determination of assessable value
under section 67 of Finance Act, 1994 does not extend to
ascertainment of ‘service’ as defined in section 65B(44) of
Finance Act, 1994. ‘Consideration’ is the recompense for the
‘contractual’ undertaking that authorizes levy while
‘assessable value’ is a determination for computing the
measure of the levy and the latter must follow the former.”
7. The above would suggest that this was a case
where the assessee had not received any consideration
while providing corporate guarantee to its group companies.
- 112 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
No effort was made on behalf of the Revenue to assail the
above finding or to demonstrate that issuance of corporate
guarantee to group companies without consideration would
be a taxable service. In these circumstances, in view of such
conclusive finding of both forums, we see no reason to admit
this case basing upon the pending Civil Appeal No. 428 @
Diary No.42703/2019, particularly when it has not been
demonstrated that the factual matrix of the pending case is
identical to the present one.
8. In consequence, the Civil Appeal stands dismissed.
9. Pending application(s), if any, stand closed.
22. In the instant case, it is an undisputed fact and a matter
of record that the petitioners – Banks have not charged any
consideration for rendering the facilities in question and as such, in
the absence of the legal mandate contained in Section 67 of the
Finance Act and the judgments of the Apex Court referred to supra,
I am of the view that the act of the customers in maintaining MAB
cannot be construed, treated, categorized or described as
‘consideration’ towards the services provided by the petitioners-
Banks leading to the sole / unmistakable conclusion that the
demand for payment of service tax on the erroneous premise that
maintaining MAB in the accounts of the customers amounts to
consideration as sought to be contended in the impugned SCNs is
- 113 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
clearly contrary to law and facts and the impugned SCNs deserve
to be quashed on this ground also.
23. The impugned SCNs seek to invoke the definition of
‘consideration’ as defined under Section 2(d) of the Indian Contract
Act for the purpose of making the impugned demand; in this
context, it is apposite to observe that for the alleged promise made
by the customers to be construed as "consideration", such promise
must necessarily fructify into a benefit or consideration accruing to
and receivable by the petitioners-Banks. It is only upon satisfaction
of this foundational requirement that a monetary value can be
ascribed to such "consideration" for the purposes of levy of Service
Tax. In the absence of these indispensable prerequisites being
satisfied, it would be wholly untenable to contend that the
maintenance of the stipulated MAB by the customers constitutes
the "consideration" for the services rendered by the petitioners -
Banks.; in fact, this aspect has been explained by the respondents
themselves in paragraphs 4, 5, 6 and 7 of their aforesaid Circular
dated 03.08.2022, wherein the expression “contract” and
“consideration” in the Contract Act are referred by the Board itself
nd
by specifically clarifying that the 2 party must pay consideration to
- 114 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
st
the 1 party doing an act and that there must necessarily be
sufficient nexus between the agreement to do an act and the
consideration so received failing which, the services provided by
the petitioners – Banks would not be exigible / amenable to service
tax and as such, even this contention urged by the respondents
cannot be accepted.
24. A perusal of the material on record will also indicate that
during the pendency of the present petitions, the respondents who
had initiated identical / similar proceedings against the South Indian
Bank Ltd., issued show cause notice dated 28.09.2023 to the said
Bank demanding payment of GST. The said Bank submitted a reply
dated 15.11.2023 putting forth identical / similar contentions as
urged in the present petitions and requested the respondents to
drop the proceedings. The respondents considered the said reply
and noticed that the definition of consideration, supply etc., under
the GST regime was identical to the definitions under the pre-GST
service tax regime and placed reliance upon the judgment of the
Apex Court in Bhayana Builder’s case supra and other judgments
relied upon by the petitioners herein and passed an order dated
30.12.2023 dropping the proceedings which was subsequently
- 115 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
accepted by the respondents on merits on 08.06.2024 as can be
seen from the information provided by the respondents themselves
under the RTI Act. The said order dated 30.12.2023 passed by the
respondents is as under:-
“ 29. At the outset the taxpayer has explained the various
facilities and services provided by them to the customers, which are
detailed below:
a) The taxpayer is a banking company having registered
office at Thrissur and branches/ offices located in 30 States/ Union
Territories in India. The principal place of business registered in GST
for the State of Kerala is "The South Indian Bank Ltd, SIB House, TB
Road, Mission Quarters, Thrissur - 680 001 ", and the Bank is
regularly paying GST on the value of taxable supply of goods and
services made by them.
b) Their major business income consists of income from
banking operations viz: acceptance of deposits in various forms such
as fixed deposits, recurring deposits, savings bank deposits, current
deposits etc. and provide various lending activities in the form of term
loans, overdraft, cash credit, housing loans, gold loans, consumer
loans etc. income from money transfer business and purchase or
sale of foreign currency etc. and allied activities permitted by the RBI
such as safe deposit vaults, marketing of insurance products, mutual
funds etc.
c) For the purpose of discharging the applicable GST, the
Bank is registered under the provisions of Central Goods and
Services Tax Act, 201 7 (hereinafter referred to as 'CGST Act') and
Kerala Goods and Services Tax Act, 2017 (hereinafter referred to as
'KGST Act') vide GSTIN 32AABCT0022F2Z6.
- 116 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
d) The taxpayer provides to its customer various variant of
bank accounts as explained above. Based on the type of account,
the Customer opts for the Bank to provide certain
features/facilities/service (like debit card/ Internet banking/SMS
banking etc.,). It is imperative for the Bank to provide the facility of
withdrawing the money deposited by the customers with the Bank.
Further, in the case of operative accounts such as saving bank or
current account, the Bank should provide for withdrawing the money
in a frequent manner as and when required by the customer.
e) The Bank provides cheque books, demand drafts, ATM
cards, internet banking facilities etc. to enable the customers to
withdraw the money deposited by him. The Bank does not charge
any fee for certain basic facilities.
f) The Bank also provides additional value added services to
account holders in lieu of the customers maintaining/ maintenance of
a Minimum Average Balance (monthly/ quarterly) in their accounts.
The services offered are over and above normal services and it
vanes in each account requiring minimum balance.
g) The consent or commitment for maintaining average
minimum balance with the customer is obtained by the Bank in the
form of "Declaration by Applicants" as "Request/
Agreement/Undertaking" in the account opening form. In the event of
non-maintenance of the average minimum balance, the Bank
imposes a non-maintenance charge, as may be determined and fixed
by the Bank for each account type according to policies of the Bank
and rules framed from time to time in accordance with RBI
guidelines.
h) As a Bank they typically provide a catena of banking
services to its customers. In relation to the Current Account and
Savings Account services which are relatable to the impugned notice,
the services can be broadly classified into taxable and exempt, which
have been tabulated as under:
- 117 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
Taxable
service (where
charges and
fees are
recovered)
Non-taxable
services
Operation of Current
Accounts and Savings
Accounts Deposit and
Withdrawal of Funds
Cheque book issuance
Debit Cards Issuances
of demand drafts pay
orders Cheque
collection Outward
NEFT/RTGS/IMPS/Tra
vellers cheque
encashment Home
Banking facility Stop
payment requests
standing instructions
Cheque bounce
charges, Charges for
card/ATM transactions
Foreign currency
conversion.
Extending of
Deposits,
Loans or
Advances, in
so far as the
consideration is
represented by
way of interest
discount.
i) On the services which are taxable, the Bank is discharging
applicable GST by filing periodical returns.
j) Since the Bank offers a variety of bank accounts, the Bank
first explains the different varieties of bank accounts and also informs
the Customer about the features/ facilities/ services that are offered
by the Bank as a part of each kind of bank account. Further, the Bank
also explains the different terms and conditions that are attached with
each kind of bank account. This is done so as to enable the
Customers to choose the bank account that satisfies their
requirements.
k) Once the Customers finalize the kind of bank account
which the Customers wish to open with the Bank, the Bank provides
an account opening form. The account opening form is required to be
- 118 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
filled by the customers selecting the type of bank account which he
desires to open. Pursuant to which, the customers agree to the terms
and conditions laid down under each type of bank account.
30. The taxpayer further submitted their para-wise reply to
the contentions raised in the SCN, which is as given below:
a) There is no consideration charged by the bank and
consequently there is no supply of goods or services by the bank.
i) The taxpayer has submitted that under the GST laws, the
taxable event prescribed is 'Supply'. The term 'supply' is defined
under Section 7 of CGST Act, 201 7 which is reproduced below:
"7. for the purposes of this Act, the expression "supply"
includes-(a) all forms of supply of goods or services or both such as
sale, transfer, barter, exchange, licence, rental, lease or disposal
made or agreed to be made for a consideration by a person in the
course or furtherance of business:"
ii) They further submitted that as per the above, a transaction
will be construed to be a 'supply' if the following requisites are
satisfied
• It must be in the nature of sale, barter, exchange, rent or
such other similar activity;
• It must be in respect of goods or services;
• It must be undertaken for a consideration;
• It is must be undertaken in the course or furtherance of
business.
iii) Further the term 'consideration' has been defined under
Section 2 (31) of CGST Act, 201 7 which is reproduced below:
"(31) "consideration" in relation to the supply of goods or
services or both includes-
a) any payment made or to be made, whether in money
or otherwise, in respect of, in response to, or for the inducement of,
the supply of goods or services or both, whether by the recipient or
- 119 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
by any other person but shall not include any subsidy given by the
Central Government or a State Government;
b) the monetary value of any act or forbearance, in respect of
in response to, or for the inducement of the supply of goods or
services or both, whether by the recipient or by any other person but
shall not include any subsidy given by the Central Government or a
State Government:
Provided that a deposit given in respect of the supply of
goods or services or both shall not be considered as payment made
for such supply unless the supplier applies such deposit as
consideration for the said supply;"
iv) They added that the definition of 'consideration' under
Section 2(31) includes any payment made or to be made, in respect
of supply of goods or services or both by the recipient or by any other
person. It also includes the monetary value of any act or forbearance,
in respect of, in response to; or for the inducement of, the supply of
goods or services or both, whether by the recipient or by any other
person.
v) They further submitted that for the purpose of
understanding the scope of the term 'Consideration', a reference is
required to be made to the understanding as provided under the
Indian Contract Act, 1872 ('Contract Act'); that the concept of
consideration has been derived from the Latin phrase "quid pro quo"
which means "something for something"; that in line with the above,
consideration means anything, monetary or otherwise, that is paid or
made towards an activity of service undertaken.
vi) Furthermore, the taxpayer referred to the definitions for
the ‘consideration’ given as per various dictionaries as follows:
Black Law Dictionary;
"Consideration means something which is of value in the eye
of law, moving from the plaintiff, either of benefit to the plaintiff or of
detriment to the defendant.
Webster's Dictionary:
- 120 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
"Something of value given or done in exchange for
something of value given or done by another, in order to make
binding contract; inducement for a contract."
vii) The taxpayer further stated that the aforesaid definitions
clearly indicate that consideration would mean 'something for
something in return' and it signifies the benefit which must be
bargained for between the parties and is an essential reason for a
party entering into a contract; that any consideration, monetary or
otherwise, should flow from the recipient of service to the supplier of
service and accrue to the benefit of the latter; therefore, not all
money flow from the service recipient to the service provider can
constitute 'consideration'; it shall be some benefit which would
ultimately accrue to the service provider in exchange for rendering an
activity to the benefit of the service recipient.
viii) The taxpayer added that there have been multiple
instances, when the same concept under the Finance Act, 1994, the
erstwhile law governing taxation of services, had come up for
consideration before the Courts.
a. They have placed reliance on the case of Bhayana
Builders (P) Ltd vs CST, Delhi reported in 201342.STR-49-Tri- LB,
where the Larger Bench of the Hon'ble CESTAT determined the
scope of definition of 'consideration'. Though the issue related to
inclusion of cost of material supplied by the service recipient in the
value of the output service, the following observations with reference
to the expression 'consideration’ in Section 67 may be referred;
"(iv) The expression "consideration" occurring in the U.P.
Imposition of Ceiling on Land Holdings Act, 1961 fell for
consideration in Ku. Sonia Bhatia v. State of U.P. and Others - AIR
1981 SC 1274 the Court explained that since the expression
'consideration" was not defined in the U.P. Act, its meaning as
derived from the definition of the expression in Section 2(d) of the
Contract Act, 1872 could be considered. After considering the
definition of the expression in the Contract Act and referring to
Black's Law Dictionary; other dictionaries, English judgments and
Corpus Juris Secundum, the Supreme Court held that: the
inescapable conclusion that follows is that consideration means a
- 121 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
reasonable equivalent for other valuable benefit passed on by the
promisor to the promisee or by the transfer of to the transferee.
(v) Clearly, Section 67 of the Act deals with valuation of
taxable services and intends to define what constitutes the value
received by the service provider as "consideration" from the service
recipient for the service provided. Implicit in this legislative
architecture is the concept that any consideration whether monetary
or otherwise should have flown or should flow from the service
recipient to the service provider and should accrue to the benefit of
the later"
b. They have further submitted that the Apex Court while
affirming the aforesaid view of the Larger Bench in the case of
Commissioner of Service Tax vs Bhayana Builders (P) Ltd reported
at 2018 (10) GSTL 118 (SC) further held that the value on which
service tax is payable has to satisfy the following ingredients:
Service tax is payable on the gross amount charged: - the
words "gross amount" only refers to the entire contract value
between the service provider and the service recipient. The word
"gross" is only meant to indicate that it is the total amount charged
without deduction of any expenses. Merely by use of the word
"gross" the Department does not get any jurisdiction to go beyond the
contract value to arrive at the value of taxable services. Further, by
the use of the word "charged", it is clear that the same refers to the
amount billed by the service provider to the service receiver.
Therefore, in terms of Section 67, unless an amount is charged by
the service provider to the service recipient, it does not enter into the
equation for determining the value on which service tax is payable.
The amount charged should be for such service provided":
Section 67 clearly indicates that the gross amount charged by the
service provider has to be for the service provided. Therefore, it is not
any amount charged which can become the basis of value on which
service tax becomes payable but the amount charged has to be
necessarily a consideration for the service provided which is taxable
under the Act. By using the words 'for such service provided" the Act
has provided for a nexus between the amount charged and the
service provided. Therefore, any amount charged which has no
nexus with the taxable service and is not a consideration for the
service provided does not become part of the value which is taxable
under Section 67. The cost of free supply goods provided by the
service recipient to the service provider is neither an amount
"charged" by the service provider nor can it be regarded as a
consideration for the service provided by the service provider. In fact,
it has no nexus whatsoever with the taxable services for which value
is sought to be determined"
- 122 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
c. Further they have referred to the case of Commissioner v.
Larsen & Toubro Ltd (2016) reported at 44 STR 391 (Guj) where the
court held that that there must be services provided for value to be
amenable to charge under service tax Act.
"The question of charging service tax however, needs to be
looked from a slightly different angle. Section 66 of the Finance Act,
1994, as noted, provides for levy of taxes at the rate of prescribed
percentage of the value of taxable services referred to in various sub-
clauses of clause ( 105) of Section 65. For applicability of this
charging Section, therefore, what is needed is to ascertain the value
of taxable service. In other words, service tax can be levied only if the
service is provided, even if it is otherwise, a taxable service, carries a
certain value. If the value of service provided is nil, there would be no
occasion for charging the service tax. In essence, thus, Section 66
aims at collecting service tax when a certain service is provided for a
value. To put it conversely, when the service is provided but no value
thereof is charged, there would be no question of collecting service
tax. No provision has been brought to our notice in the Finance Act,
1994 under which though the service provider has not charged any
value for service, service tax thereon still can be levied on its deemed
value, be it market value or fair value. It is a different matter
altogether if the departmental authority disbelieves that though
service was provided but no charge was collected and in such a
case, the authority would have ample power to inquire into the matter
and come to appropriate conclusion on the basis of available
materials on record However, if the department proceeds on the
premise that a certain service though otherwise a taxable service, the
service provider did not collect any charge for the same from the
service recipient, in our opinion, it would simply not be possible for
the authority to collect any service tax on such service.
Thus, the term taxable service has a direct relation to the
consideration either paid in cash or by way of deferred payment or by
mentioning of any other valuable consideration. This would reinforce
our belief that when no charge was collected for providing the
service, there would be not question of applying a rate of tax on the
value of such service.
In this context we may recall, according to the assessee,
providing of service-by its SEZ unit to its DTA unit was merely for the
purpose of convenience and SEZ unit had not collected any charge
for such service from its DTA unit. Though the Assessing Officer in
his order has made a brief reference to the SEZ unit receiving
consideration for such service, we do not find any basis for such a
conclusion. In fact, the case of assessee all along has been that
invoices were raised for such services merely for the purpose of
convenience and in fact, since promotional programmes were being
organised, which would benefit the entire company and its different
units, there was no question of charging a particular unit by SEZ unit
- 123 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
for such service and that raising of invoices was merely for the
purpose of convenience. If that be so, in our opinion, no service tax
could be levied not on the Principle of Mutuality but, as noted, on the
ground that service provided carried no actual value.
d. The taxpayer further submitted that in the case of Philips
India Ltd v. Collector of Central Excise (1997) 91 ELT 540(SC) the
court held that Legitimate business considerations to be kept in mind
while determining the assessable value.
As to the after sales service that the dealer was required
under the agreement to provide, it did of course enhance in the eyes
of intending purchasers the value of the appellant's product, but such
enhancement of value enured not only for the benefit of the
appellant; it also enured for the benefit of the dealer for, by reason
thereof, the dealer got to sell more and earn a larger profit. The
guarantee attached to the appellant's products specified that they
could be repaired during the guarantee period by the appellant's
dealers anywhere in the country. Thus, though one dealer might have
to repair goods sold by another dealer and incur costs in that regard,
he also had the benefit of having the goods he sold reparable
throughout the country. The Provision as to after sales service,
therefore, benefited not only the appellant; it was as provision of
mutual benefit to the appellant and the dealer. We think that in
adjudicating matters such as this, the Excise, authorities would do
well to keep in mind legitimate business considerations.
e. The taxpayer added that the Hon'ble Supreme Court
Commissioner of CGST an Central Excise vs Edelweiss Financial
Services Ltd reported in (2023) 5 Centex 58 (SC) has confirmed the
view of the Tribunal that no Service Tax can be levied on corporate
guarantee, in the absence of consideration collected by the provider
of such guarantee.
ix) The taxpayer further submitted that from a perusal of the
aforesaid decisions, it is essential for a consideration to be there in
order to make a transaction subject to GST and in the present case
there is no consideration received by them in respect of the account
holders maintaining MAB, accordingly, the same is not subject to
GST and no demand can be confirmed pursuant to the impugned
Notice.
x) The taxpayer also submitted that it is an admitted position
that where MAB is not maintained by the customers, the Bank
- 124 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
charges a fee, on which GST is discharged; that a mere promise of
providing a service will not make it a consideration. Further, they
added that there is nothing in the terms and conditions agreed to
between the Bank and the customers that establish the nexus
between the facilities provided by the Bank and maintenance of MAB
by the customers; that with each account variant, the Bank offers
several facilities which are either free of cost i.e., without
consideration or partially free in which case, on the consideration
received, GST is paid. It is also stated that the charges collected by
bank for non maintaining of MAB is a condition of contract and the
same cannot be constructed as construed as consideration of
contract.
xi) In this regard, the taxpayer made reference to the
decision of the larger bench of the Hon'ble Tribunal in the case of
Commissioner of Service Tax, Channel v Repco Home Finance Ltd
2020 (42) G.S.T.L. 104 (Tri. - LB) wherein the aspect of conditions of
contract vis a vis consideration of contract came for discussion. In
this regard, it was held as follows:
"32. What needs to be noted from the aforesaid definition of
consideration under Section 2(d) of the Contract Act is that
consideration should flow at the desire of the promisor. Thus, if the
consideration is not at the desire of the promisor, it ceases to be a
consideration. The banks and non-banking financial companies are
promisors and the promisees are the borrowers. The contractual
relationship between the banks and non-banking financial companies
and the customers is repayment of the loan amount over an agreed
period. The banks and non-banking financial companies would not
desire premature termination of the loan advanced by them as it is in
their interest that the loan runs the entire agreed tenure for the banks
thrive on interest earned from lending activities. As premature
termination of a loan results in loss of future interest income, the
banks charge an amount for foreclosure of loan to compensate for
the loss in interest income. It is the customer who has taken the loan,
who moves for foreclosure of the loan by making the payment of the
loan amount before the stipulated period and thereby breaching the
promise to service the loan for the agreed period of time. This results
in a unilateral act of the borrower in repudiating the contract and
consequently breach of one of the essential terms of the loan
agreement. A breach of contract may give rise to a claim for
damages."
- 125 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
xii) They also submitted that neither the Customer nor the
Bank recognize the agreement to maintain MAB as consideration for
the commitment to provide services; that the treatment of the
customers agreement to maintain MAB as consideration for an
agreement to provide the facilities is therefore without any basis and
based on conjectures and surmises.
xiii) Further the taxpayer has pointed out that it is a settled
position that taxability is to be determined on the basis of the actual
transaction between the parties and not on the basis of
presumptions; that the FAQs on Banking, Insurance and
Stockbrokers Sector issued by the CBIC at Q.31 is unequivocal that
services supplied by an unrelated party without consideration would
not be liable to GST. This FAQ was specifically relied by them in their
submissions when the present investigation was being undertaken,
however, the same has not been considered while issuing the
impugned notice.
xiv) They further alleged that the consideration has been
presumed in the Show Cause Notice, the fact of which can be
ascertained from the invocation of Rule 27(b) in order to arrive at the
value of the consideration; that the law does not provide for
assumption of consideration; that the consideration should be actual
though it can be either in monetary terms or non-monetary terms;
that a mere promise which cannot be considered to be a
nonmonetary consideration, is not a consideration and it is only an
assumption of consideration which is not permissible under the GST
Act.
xv) Based on the above, the taxpayer has submitted that
there is no taxable service which is being provided by the Bank to its
customer by way of providing features / facilities / services linked to
the deposit accounts maintained by the Customers and hence no
demand can be confirmed pursuant to the impugned notice.
b) There is no service in the nature of entry SE of Schedule II
- 126 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
i) As per entry S(e) of the Schedule II of the CGST Act,
agreeing to the obligation to refrain from an act, or to tolerate an act
or a situation, or to do an act shall also be treated as supply of
services. In this regard the taxpayer has submitted that Schedule II is
subjected to Section 7(1) (a) of the CGST Act and since Section 7(1)
(a) is not satisfied in the present case the impugned notice cannot
legally invoke entry to Schedule II.
ii) The taxpayer further submitted that for the purpose of
understanding the scope of Entry S(e) of Schedule II of the CGST
Act, the Bank places reliance on Circular No.178/ 10/2022 dated
03.08.2022 provides in para 2 wherein instances which would be
covered by the various expressions provided by the said entry; that
sub para (c) specifically explains what would be covered by 'agreeing
to an obligation to do an act'. The relevant extract of the Circular is
produced below:
"2. Agreeing to the obligation to refrain from an act or to
tolerate an act or a situation, or to do an act" has been specifically
declared to be a supply of service in pare S(e) of Schedule ll of
CGST Act if the same constitutes a "supply" within the meaning of
the Act. The said expression has following three -limbs, the third one
being: -
………
(c) Agreeing to the obligation to do an act This would include
the case where an industrial unit agrees to install equipment for zero
emission/ discharge at the behest of the RWA of a neighbouring
residential complex against a consideration paid by such RWA, even
though the emission/ discharge from the industrial unit was within
permissible limits and there was no legal obligation upon the
individual unit to do so.”
iii) The taxpayer added that on a perusal of the aforesaid
para, it can be observed that an activity where there is an obligation
to do a thing on receipt of a consideration would be covered even if
there was no legal obligation for doing such an act. Applying the
above principles to the facts of the present case, they have submitted
that there is no obligation to provide any service to the customer who
- 127 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
maintains MAB, unless the customer specifically requests for a
specified service; that once such a request is made, then the service
is either provided free of charge or at a concessional rate and if such
a charge is collected, GST is paid.
iv) Further , they stated that the promise of a customer to
maintain MAB is not adhered to always by the customer; that the very
fact that penal charges are collected evidence that such
commitments are also not adhered to.
v) The taxpayer further contended that in Para. 6.1 and 7 of
the Circular, supra, it is specifically indicated that the intention of a
positive or negative act in lieu of consideration must be expressly
indicated in the agreement by the parties. The relevant portion of the
Circular reads as under:
"61. A perusal of the entry at serial S(e) of Schedule II would
reveal that it comprises the aforementioned three different sets of
activities viz. (a) the obligation to refrain from an act, (b) obligation to
tolerate an act or a situation and (c) obligation to do an act. All the
three activities must be under an "agreement or a "contract" (whether
express or implied) to fall within the ambit of the said entry. In other
words one of the parties to such agreement/contract (the first party/
must be under a contractual obligation to either (a ) refrain from an
act. or {b l to tolerate an act or a situation or {c) to do an act. Further
some "consideration" must flow in return from the other party to this
contract/agreement (the second party) to the first Party for such (a)
refraining or (b) tolerating or (c) doing. Such contractual arrangement
must be an independent arrangement in its own right Such
arrangement or agreement can take the Jami of an independent
stand-alone contract or may form part of another contract. Thus, a
person (the first person) can be said to be making a supply by way of
refraining from doing something or tolerating some act or situation to
another person (the second person) if the first person was under an
obligation to do so and then performed accordingly.
Agreement to do or refrain from an act should not be
presumed to exist.
7. There has to be an express or implied agreement; oral or
written, to do or abstain from doing something against payment of
consideration for doing or abstaining from such act, for a taxable
supply to exist. An agreement to do an act or abstain from doing an
act or to tolerate an act or a situation cannot be imagined 01·
presumed to exist just because there is a flow of money from one
- 128 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
party to another Unless there is an express or implied promise by the
redolent of money to agree to do or abstain from doing something in
retun1 for the money paid to him it cannot be assumed that such
payment was for doing an act or for refraining from an act or for
tolerating an act or situation. Payments such as liquidated damages
for breach of contract, penalties under the mining act for excess
stock found with the mining company, forfeiture of salary or payment
of amount as per the employment bond for leaving the employment
before the minimum agreed period, penalty for cheque dishonour etc.
are not a consideration for tolerating an act or situation. They are
rather amounts recovered for not tolerating an act or situation and to
deter such acts; such amounts are for preventing breach of contract
or non-performance and are thus mere 'events' in a contract. Further,
such amounts do not constitute payment (or consideration) for
tolerating an act, because there cannot be any contract: (a) for
breach thereof, or (b) for holding more stock than permitted under the
mining contract, or (c) for leaving the employment before the agreed
minimum period or (d) for doing something leading to the dishonour
of a cheque. As has already been stated, unless payment has been
made for an independent activity of tolerating an act under an
independent arrangement entered into for such activity of tolerating
an act, , such payments will not constitute 'consideration' and hence
such activities will not constitute "supply" within the meaning of the
Act. Taxability of these transactions is discussed in greater detail in
the following paragraphs. "
vi) They have submitted that the aforesaid portion of the
Circular squarely applies to the facts of the present case and the
proposal to demand tax on the premise that the promise to maintain
MAB in itself is a consideration for a Service in the nature of Entry
S(e) of Schedule II of the CGST Act is without any basis, as such an
obligation is neither agreed in any agreement nor forthcoming from
the act of the parties.
vii) They added that it is a settled law that Department
authorities are bound by the Circulars issued by the Board and the
present proposal to demand tax is in contravention to the Circular,
which cannot be sustained in law. They have also referred to a few of
the judgments in this regard are as follows:
a. It is submitted that the binding nature of the circular has
recently been reiterated by the Supreme Court in the case
Commissioner of Central Excise and Service Tax, Rohtak v. Merino
Panel Product Ltd2022-TIOL-103-SC-CX , it has been clearly held
- 129 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
that in this case that maintaining predictability in taxation law is of the
utmost importance and that circulars issued within the framework of
the law would be binding on the department.
b. In case of Suchitra Components Ltd v Commissioner of C.
Ex., Guntur, 2008 (11) S.T.R. 430 (S.C.) the Hon'ble Supreme Court
held that beneficial circular has to be applied retrospectively while
oppressive circular has to be applied prospectively. Thus, when the
circular is against, the assessee, they have right to claim
enforcement of the same prospectively.
viii) The taxpayer further submitted that the position of law in
terms of Entry S(e) of Schedule II of the Act is similar to that of
Section 66E (e) of the Finance Act, 1994 and the said entry under
Finance Act, 1994 came up for consideration before the Courts under
the erstwhile regime and the position of law as enunciated in the
aforesaid Circular was applied while deciding the said matters; few of
the judgments are as follows:
• Linde Engineering India Pvt Ltd. V. Commissioner of
Central Excise and Service Tx, Vadodara- (2023) 7 Centex 66 (Tri. -
Ahmd),
• Northern Coalfields Ltd. v. Commissioner CGST, CE and
Customs, Jabalpur- (2023) 3 Centax 211 (Tri. - Del)
• Cholamandalam Investment & Finance Company Ltd. v.
Commissioner Of GST & Central Excise- (2023) 11 Centax 86 (Tri. -
Mad).
ix) In the light of the aforesaid submissions, the taxpayer has
stated that in the facts of the present case, there is no service in the
nature of those mentioned in Entry S(e) of Schedule 11 undertaken
by them and consequently the demand proposed in the impugned
notice is liable to be dropped.
c) Notwithstanding the above, the valuation adopted is
without any basis
- 130 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
i) In this regard the taxpayer has submitted that they provide
host of services to their customers and not every customer uses all
the services rendered by the Bank. Each customer uses the services
provided by the Bank basis their requirements. All the services are
made available to all the customers falling under the respective
categories and the customer is given the option of to avail such
services at his discretion and the Bank does not interfere in any
manner.
ii) They added that the Bank does not thrust on MAB
proposal on any customer so as to assume any derivative benefits or
consideration; as per Section 15 of the CGST Act, 2017, transaction
value is the price actually paid or payable by recipient for the supply
of goods and or/ services to him by the supplier, where supplier and
recipient of supplier are not related and price is the sole
consideration for the supply.
iii) They further submitted that customer and Bank are
unrelated parties and hence Section 15(1) will be applicable to the
facts of the present case and it would be the transaction value which
will be subjected to tax. However, since there is no consideration
charged by the Bank, there is no value available for payment of GST.
iv) The taxpayer also mentioned that notice has invoked Rule
27 of the CGST Rules to contend that there is a non-monetary
consideration received from the customer by the Bank, which is the
commitment to maintain the minimum balance in the account. In this
regard they have submitted that the aforesaid contention is based on
a presumption which is both factually and legally incorrect; that there
is no direct benefit derived by the Bank from the customer who
promises to maintain MAB, infact, there can be account holders who
maintain different levels of balances, which can vary from time to
time but the services provided by the Bank remain the same and
hence, an analogy that there is a non-monetary consideration
received by the Bank is clearly erroneous.
- 131 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
v) Further with regard to invoking Rule 27 of the CGST
Rules, the taxpayer has submitted that, the same deals with value of
supply of goods or services where the consideration is not wholly in
money. It provides that in such cases, the value shall be the
following:
a) be the open market value of such supply;
b) if the open market value is not available under clause (a),
be the sum total of consideration in money and any such further
amount in money as is equivalent to the consideration not in money,
if such amount is known at the time of supply;
c) if the value of supply is not determinable under clause (a)
or clause (b), be the value of supply of goods or services or both ·of
like kind and quality;
d) if the value Is not determinable under clause (a) or clause
(b) or clause (c), be the sum total of consideration in money and such
further amount in money that is equivalent to consideration not in
money as determined by the application of rule 30 or rule 31 in that
order
vi) It is further submitted that the phrase 'open market value'
and 'goods or services or both of like kind and quality' have been
specifically defined after Rule 35 of the CGST Rules as under-
"Explanation - For the purposes of the provisions of this
Chapter, the expressions-
(a) "open market value" of a supply of goods or services or
both means the full value in money, excluding the Integrated tax,
Central tax, State tax, Union Territory tax and the cess payable by a
person in a transaction, where the supplier and the recipient of the
supply are not related and the price is the sole consideration, to
obtain such supply at the same time when the supply being valued is
made;
(b) "supply of goods or services or both of like kind and
quality" means any other supply of goods or services or both made
under similar circumstances that, in respect of the characteristics,
quality, quantity, functional components, materials, and the reputation
of the goods or services or both first mentioned, is the same as, or
- 132 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
closely or substantially resembles, that supply of goods or services or
both.'~ vii) They added that on a perusal of the above definitions, it
can be observed that both the definitions indicate that the value
would be such amount charged from unrelated person to provide
similar service.
viii) It is also mentioned that in the notice, the highest penalty
levied for non-maintenance of MAB is construed to be the value
determined in terms of Rule 27 of the CGST Rules; however, this
assumption is dehors the principle laid down under said Rule, as the
penalty charged for non maintenance of MAB cannot be the value of
the services provided by the Bank to the customers. Further they
added that on a perusal of the maximum amount of penalty
prescribed for different accounts, it can be observed that though
varied services are provided for different kind of accounts, the
amount charged is uniform, viz. Rs.100 or Rs.200 or Rs.500, as the
case may, which also establishes that such amount is only in the
nature of penal charges and cannot be equated to transaction value
of services provided to customer maintaining MAB.
ix) It is also submitted that when the value of the services
cannot be ascertained by applying the provisions of law, then the levy
itself fails. They have placed reliance on the following decisions in
this regard.
a. Suresh Kumar Bansal Union Of India- 2016 (43) S.T.R. 3
(Del.)
b. Commissioner of Central Excise v. Larsen & Toubro Ltd. -
2015 (39) S.T.R. 913 (S. C).
x) Based on the above, the taxpayer has submitted that the
application of penal charges as value of services to allege short
payment of tax is clearly without any basis and on this account also,
no demand can be confirmed as alleged in the impugned Show
Cause Notice.
d. No interest under Section 50 of the CGST Act and Section
14 of the Kerala Finance Act, 2017 ,2019 and no penalty under
- 133 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
Section 73 of the CGST Act,201 7 and Rule 9 of the Kerala Finance
Act, 2017 can be imposed.
i) The taxpayer has submitted that the notice has proposed
to levy interest on the Bank for failure to pay tax on free banking
services provided to the customers; Section 50 of the Act seeks to
recover interest from a taxpayer in case there is a failure on part of
the taxpayer to pay tax to the government.
ii) In this regard, the taxpayer has stated that, Section 50 of
the Act is only applicable when a person who is liable to pay tax as
per the abovementioned provisions, fails to do so and then as a
consequence has to pay interest at the prescribed rate; that as per
the factual matrix as well as their submissions made above, it is
significantly clear that the Bank was never liable to pay tax on the
free banking services provided by the Bank to its customer and
therefore, the question of paying interest does not arise.
iii) In this regard, the taxpayer has placed their reliance on J
.K. Synthetics Ltd. v Commercial Taxes Officers [(1994) 4 SCC 276],
wherein it was held by the Hon'ble Supreme Court that no interest
can be levied on an amount which is not admitted as tax. The
relevant extract from the judgment is as follows
"14 . ... Therefore, the expression 'tax payable' under the
said two sub Sections is the full amount of tax due and 'tax due' is
that amount which becomes due ex-hypothesi on the turnover and
taxable turnover 'shown in or based on the return'. The word
'payable' is a descriptive word, which ordinarily means 'that which
must be paid or is due, or may be paid' but its correct meaning can
only be determined if the context in which it is used is kept in view.
The word has been frequently understood to mean that which may,
can or should be paid and is held equivalent to 'due'. Therefore, the
conjoint reading of Sections 7(1), (2) and (2A) and 1 lB of the Act
leaves no room for doubt that the expression 'tax payable' in Section
1 lB can only mean the full amount of tax which becomes due under
Sub-Sections (2) and (2A), of the Act when assessed on the basis of
the information regarding turnover and taxable turnover furnished or
shown in the return. Therefore, so long as the assessee pays the tax
which according to him is due on the basis of information supplied in
the return filed by him, there would be no default on his part to meet
his statutory obligation under Section 7 of the Act and, therefore, it
would be difficult to hold that the 'tax payable' by him 'is not paid' to
- 134 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
visit him with the liability to pay interest under Clause (a) of Section 1
lB. It would be a different matter if the return is not approved by the
authority but that is not the case here. It is difficult on the plain
language of the Section to hold that the law envisages the assessee
to predicate the final assessment and expect him to pay the tax on
that basis to avoid the liability to pay interest. That would be asking
him to do the near impossible.”
iv) In view of the above, the taxpayer has submitted that no
interest can be levied ·on the instant transaction as there is no
requirement to pay tax at the first instance.
v) With regard to the proposal of penalty under Section 73(9)
of the CGST Act, the taxpayer has submitted that they are not liable
to pay any tax in the first instance, therefore, the question of paying
any interest or penalty on non-payment of the said tax amount does
not arise.
vi) The taxpayer further submitted that where there has been
no contravention of any law, as has been submitted previously, there
can be no imposition of any penalty on the claim of a contravention
and therefore, Section 73(9) of the CGST Act will not be applicable in
the present case and consequently, the Bank is not liable to pay any
penalty under the aforementioned Section.
vii) Further the taxpayer has reiterated that the free banking
services provided by the Bank to its customers cannot be considered
to be a supply of service and the MAB maintained by the customers
cannot be considered to be consideration. For this reason also, no
penalty can be levied on the aforesaid transaction.
viii) In this regard, they have placed reliance on the case of
Hindustan Steel Ltd. v State of Orissa, [AIR 1970 SC 253], wherein it
was held by the Supreme Court that penalty can only be imposed
when a party deliberately acts in defiance of law. The relevant extract
from the judgment is as follows
7 . ... But the liability to pay penalty does not arise merely
upon proof of default in registering as a dealer. An order imposing
penalty for failure to carry out a statutory obligation is the result of a
quasi-criminal proceeding, and penalty will not ordinarily be imposed
- 135 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
unless the party obliged either acted deliberately in defiance of law or
was guilty of conduct contumacious or dishonest, or acted in
conscious disregard of its obligation. Penalty will not also be imposed
merely because it is lawful to do so. Whether penalty should be
imposed for failure to perform a statutory obligation is a matter of
discretion of the authority to be exercised judicially and on a
consideration of all the relevant circumstances. Even if a minimum
penalty is prescribed, the authority competent to impose the penalty
will be justified in refusing to impose penalty, when there is a
technical or venial breach of the provisions of the Act or where the
breach flows from a bona fide belief that the offender is not liable to
act in the manner prescribed by the statute.,,
ix) Further, the taxpayer has also placed reliance on the case
of, EID Parry v ACCT [2000 AIR SCW 86], wherein it was held by the
Supreme Court that, where the Appellants had not included planting
and transport subsidies in the taxable turnover, it was done under a
bona fide belief and the Order of the Authority that imposed and
upheld levy of penalty, was set aside.
x) In view of the aforesaid submissions and case laws cited,
that taxpayer has submitted that no penalty can be levied under
Section 73(9) of the CGST Act and no interest under Section 50 of
the CGST Act can be levied as there has been no contravention of
law by the Bank.
xi) They also added that, where GST is not applicable on the
free banking services as alleged in the Show Cause Notice there is
no scope to levy Kerala flood cess.
xii) The taxpayer further requested an opportunity of personal
hearing before the disposal of the Show Cause Notice, and submitted
to urge further grounds at the time of hearing of the case.
31. The authorised representative of the taxpayer had
appeared for a personal hearing on 11.12.2023, and produced a
written submission and explained the contents.
Discussion and findings
32. In this order, reference to any provision of Central Goods
& Services Tax Act 2017, Central Goods & Services Tax Rules, 2017
- 136 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
and any Notification issued under Central Goods & Services Tax Act,
2017 (hereinafter also referred to as "CGST Act") and Central Goods
and Services Tax Rules, 201 7 (hereinafter also referred to as "CGST
Rules") shall also be Page 1 of 38
GEXCOM/ADJN/GST/ADC/328/2023-ADJN-O/o Pr COMMRCGST-
KOCHI 1/ 1443642/2023 construed as a reference to the
corresponding provision in the Integrated Goods and Services Tax
Act, 2017, Integrated Goods and Services Tax Rules, 2017 and any
Notification issued under Integrated Goods and Services Tax Act,
201 7, in the Kerala State Goods & Services Tax Act, 2017
(hereinafter also referred to as "SGST Act"), Kerala State Goods &
Services Tax Rules 201 7 (hereinafter also referred to as "SGST
Rules") and Notifications issued under Kerala State Goods &
Services Tax Act, 2017, As per Section 6 of Kerala State Goods and
Services Tax Act, 2017 (No. 10017 /Leg.A2/2017 /Law) the Officers
appointed under the Central Goods and Services Tax Act, 2017
(Central Act 12 of 2017) are authorized to be the proper Officers
under SGST Act.
33. I have carefully gone through the records of the case,
submissions made by the tax payer in their reply to the notice and
during the personal hearing and relevant provisions of law and now
make the following findings. In order to determine whether the tax
demand in SCN 11 is sustainable it is absolutely essential to examine
whether the alleged activities of the taxpayer qualify as "supply" as
defined in Section 7(1) of the CGST Act, 2017.
34. Now let me examine the contentions by the Department
in this regard. As per Section 7 (1) of the CGST Act 2017 the
expression supply includes
(a) all forms of supply of goods or services or both such as
sale, transfer, barter, exchange, licence, rental, lease or disposal
made or agreed to be made for a consideration by a person in the
course or furtherance of business;
- 137 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
(b) import of services for a consideration whether or not in
the course or furtherance of business; and]
(c) the activities specified in Schedule I, made or agreed to
be made without a consideration;
34.1. As per Section 7(1A) of the CGST Act 2017, where
certain activities or transactions constitute a supply in accordance
with the provisions of sub-section (1), they shall be treated either as
supply of goods or supply of services as referred to in Schedule II.
34.2. According to clause S(e) of the schedule II of the CGST
Act, 2017, agreeing to the obligation to refrain from an act, or to
tolerate an act or a situation, or to do an act, shall be treated as
supply of service.
34.3. As per Section 2 (31) of the CGST Act 2017,
consideration m relation to the supply of goods or services or both
includes-
(a) any payment made or to be made, whether in money or
otherwise, in respect of, in response to, or for the inducement of, the
supply of goods or services or both, whether by the recipient or by
any other person but shall not include any subsidy given by the
Central Government or a State Government;
(b) the monetary value of any act or forbearance, in respect
of, in response t, or for the inducement of, the supply of goods or
services or both, whether by the recipient or by any other person but
shall not include any subsidy given by the Central Government or a
State Government: Provided that a deposit given in respect of the
supply of goods or services or both shall not be considered as
payment made for such supply unless the supplier applies such
deposit as consideration for the said supply
35. The Department contends that
- 138 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
►
From the time of account opening, the Bank commits to
provide specified service/facilities in lieu of the AMB/AQB maintained
by the account holder;
►
Bank's obligation to provide certain services to their
customers free of cost on the condition that the customers maintain
the stipulated minimum balance in their accounts, satisfies the nature
of activity as narrated under clause S(e) of schedule II read with
Section 2(31)(b) of the CGST Act;
►
The activity of the Bank by way of agreeing to the
obligation to do an act, i.e., provision of certain free services to their
customers, is a supply as defined under section 7(1) of CGST Act,
2017;
►
The customers' act of agreeing to the terms and
conditions put forth by the Bank. Viz., maintenance of the Minimum
Account Balance, which may in turn result in monetary benefit to the
Bank, is the consideration for the or receiving such services from the
bank.
In this regard, Para 5 and 6 of the CBIC Circular 178/10/2022
GST dated 03.08.2022 (reproduced below) were extracted in the
SCN.
“ 5 The description of the declared service in question,
namely, agreeing to the obligation to refrain from an act or to tolerate
an act or a situation, or to do an act in para 5 (e) of Schedule II of
CGST Act is strikingly similar to the definition of contract in the
Contract Act, 1872.
The Contract Act defines ‘ contract' as a set of promises,
forming consideration for each other. 'Promise' has been defined
as willingness of the 'promisor' to do or to abstain from doing
anything. 'Consideration' has been defined in the Contract Act as
what the promisee' does or abstains from doing for the
promises made to him.
- 139 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
6. This goes to show that the service of agreeing to the
obligation to refrain from an act or to tolerate an act or a situation, or
to do an act is nothing but a contractual agreement. A contract to do
something or to abstain from doing something cannot be said to have
taken place unless there are two parties, one of which expressly or
impliedly agrees to do or abstain from doing something and the other
agrees to pay consideration to the first party for doing or abstaining
from such an act. There must be a necessary and sufficient nexus
between the supply (i.e. agreement to do or to abstain from
doing something) and the consideration.
36. From the forgoing, the following facts could be deduced:
• In order to open a Bank account a customer has to agree to
the specified 'terms and conditions' put forth by the Bank, including
maintenance of specified minimum balance in the account.
• The minimum balance requirements, privileges and charges
vary across different types of accounts (product variants).
• The Bank does not charge any fee for certain basic
facilities. • Special privileges are offered for the accounts where
higher AMB /AQB is maintained and certain free services are offered
to account holders who have to maintain high AMB/AQB, vis-à-vis
account holders who are required to maintain only lesser AMB/AQB.
The services offered are over and above normal services.
• Irrespective of whether AMB / AQB was maintained or not,
the bank would provide the agreed upon services to the account
holder.
• Where MAB is not maintained by the customers, the bank
charges a fee, for which GST is charged.
• Stipulations regarding the maintenance of AMB / AQB and
the penal charges for not maintaining the AMB / AQB are available
on the bank's website and the brochures and the bank takes a
- 140 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
declaration from the customer stating that all the rules and conditions
applicable to the product variant have been understood by them.
• The balance amount in the account is payable by the bank
to the customer on demand at any time subject to the specified
charges for non-maintenance of the specified minimum balance
(AMB/ AQB).
Taxpayer's submissions in the reply to the SCN
37. The bank has made the following submissions in their
reply to SCN:
►
There is no consideration charged by the bank and
consequently there is no supply;
►
For the purpose of understanding the 'consideration', a
reference is required scope to be understanding as provided in the
Indian Contracts Act; of the term made to the
►
The concept of consideration has been derived from the
Latin phrase "quid pro quo" which means something for something;
►
Based on the definitions including in Black's law dictionary
and Websters dictionary, consideration signifies the benefit which
must be bargained for between the parties and is an essential reason
for a party entering into a contract;
►
There is nothing in the terms and conditions agreed
between the bank and the customers that establishes a nexus
between the facilities provided by the bank and maintenance of MAB
by the customers;
►
Where MAB is not maintained by the customers, the bank
charges a fee, in which GST is charged;
►
The charges collected by the bank for non-maintenance of
MAB is a condition of contract and the same cannot be construed as
consideration of contract;
- 141 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
►
Neither the customer nor the bank recognizes the
agreement to maintain MAB as a consideration for the commitment to
provide services, and the treatment of customers; agreement to
maintain MAB as consideration for an agreement to provide facilities
is based on conjectures and surmises;
►
FAQs on Banking, Insurance and Stockbrokers Sector
issued by the CBIC is unequivocal that services supplied by an
unrelated party without consideration would not be liable for GST;
►
The promise to maintain MAB, in itself, is a consideration
for a service in the nature of Entry S(e) of Schedule II of the CGST
Act is without any basis, as such an obligation is neither agreed in
any agreement nor forthcoming from the act of the parties.
The bank has cited case laws, including the decisions of the
Hon 'ble Supreme Court in the cases of Bhayana Builders (P) Ltd.,
Philips India Ltd. and Edelweiss Financial Services Ltd, under the
erstwhile laws governing taxation of services and goods, and Para 2,
6.1 and 7 of CBIC Circular 178/10/2022 GST dated 03.08.2022, in
support of their contentions.
38. Since the services provided by banks to their customers
are not in the nature of activities specified in Schedule I, it is clear
from Sub-Sections (1) and (lA) of the CGST Act 2017, that the
activities specified in schedule II of the CGST Act, 2017, including
agreeing to the obligation to refrain from an act, or to tolerate an act
or a situation, or to do an act vide clause S(e), would qualify as a
supply only if the same is for a consideration . Hence the moot
point is whether the alleged services provided to the account holders
maintaining the specified minimum balance (AMB / AQB) were for
any non-monetary consideration (as receipt of monetary
consideration is not alleged in the SCN). After a careful consideration
of the facts on record, legal provisions and rival submissions,
described above, I find that
- 142 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
39. The principal allegation in the SCN is that the activity of
the bank by way of agreeing to the obligation to provide certain
free services to their customers, is a 'supply of services' under
section 7(1) of CGST Act, 2017 read with clause 5(e) of the
schedule II of the CGST Act, 2017, and the customers' act of
agreeing to the terms and conditions put forth by the Bank. Viz.,
maintenance of the Minimum Account Balance, which may in turn
result in monetary benefit to the Bank, is the consideration for such
'supply of services' by the bank.
39.1. As per Clause (b) of Section 2 (31) of the CGST Act
2017 (which relates to non-monetary consideration), consideration in
relation to the supply of goods or services or both includes the
monetary value of any act or forbearance, in respect of, in
response to, or for the inducement of, the supply of goods or
services or both, whether by the recipient or by any other
person but shall not include any subsidy given by the Central
Government or a State Government:
Here, the existence of the act of agreeing to provide free
services to account holders maintaining specified minimum balance,
on the part of the bank, and the act of the act of agreeing to maintain
the specified minimum balance, on the part of the customer, is not in
dispute. Therefore, the issue boils down to the question whether the
obligation undertaken by the customers is in respect of, in
response to, or for the inducement of the obligation undertaken
by the bank. In other words, the question is whether there is
sufficient nexus between the obligations undertaken by the customer
and the bank that meets the requirement of Clause (b) of Section 2
(31).
39.2. In this regard, The Department as well as the bank
have cited CBIC Circular 178/ 10/2022 GST dated 03.08.2022, to
support of their respective contentions (The department has cited
Para 5 and 6 and the bank has cited Para 2, 6.1 and 7). The last
- 143 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
sentence of Para 6 of the Circular cited by the Department is
reproduced below:
"There must be a necessary and sufficient nexus between
the supply (i.e. agreement to do or to abstain from doing something)
and the consideration.
The relevant portions of Para 6.1 and 7, cited by the bank is
reproduced below:
"6.1. A perusal of the entry at serial S(e) of Schedule II would
reveal that it comprises the aforementioned three different sets of
activities viz. (a) the obligation to refrain from an act, (b) obligation to
tolerate an act or a situation and (c) obligation to do an act. All the
three activities must be under an "agreement" or a "contract"
(whether express or implied) to fall within the ambit of the said entry.
In other words, one of the parties to such agreement/ contract (the
first party) must be under a contractual obligation to either (a) refrain
from an act, or (b) to tolerate an act or a situation or (c) to do an act .
Further some "consideration" must flow in return from the other party
to this contract/agreement ( the second party) to the first party for
such (a) refraning to (b) tolerating or (c) doing. Such contractual
arrangement must be an independent arrangement in its own right”
"7. . . . . .. Unless there is an express or implied promise
by the recipient of money to agree to do or abstain from doing
something in return for the money paid to him, it cannot be
assumed that such payment was for doing an act or for refraining
from an act or for tolerating an act or situation." Since the alleged
consideration for obligation (to provide certain services free of cost)
undertaken by the bank is not money but the commitment / obligation
undertaken by the customer (to maintain the specified minimum
balance), the above sentence needs to be adapted by substituting
the word s 'money' / 'money paid' by 'commitment' / 'commitment
made', in order to apply the same in the context of the instant case.
Once that is done, the sentence becomes symmetric (as both parties
are dealing in commitments).
39.3. When Clause (b) of Section 2 (31) of the CGST Act
2017 is analysed in the light of the contents of CBI Circular dated 03-
08-2022, described in the above para, it is clear that the existence of
mutual obligations in a contract does not necessarily imply that the
obligation of one party is in consideration of obligations undertaken
by the other party. In the absence of an express or implied
promise establishing a necessary and sufficient nexus between
the mutual obligations / commitments in a contract, the same
can only be treated as mere conditions of contract.
- 144 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
39.4. The SCN has failed to cite any concrete evidence to
show that the obligation / commitment undertaken by the customers
to maintain minimum balance was towards the obligations
undertaken by the bank (to provide certain services free of cost to
account holders maintaining the specified minimum balance. On the
contrary, the facts on record indicate that they are mere conditions of
contract, as descried below:
39.5. It is an undisputed fact that where minimum balance
(MAB / QAB) is not maintained by the customers, the bank charges a
fee and penalise the customer for his lapse. Moreover, the balance
amount in the account is payable by the bank to the customer on
demand at any time subject to the specified charges for non-
maintenance of the specified minimum balance (AMB/AQB). One
method that can be used to test the nexus between the mutual
obligations in a contract is to apply the inversion test. That is to
analyse / observe the effect of an instance of one party failing to
meet the obligation, on the obligations of the other party in the
contract. In the instant case, there is no provision in the account
opening form, which represents the contract between the bank and
the customer, to increase the charges in respect of a customer who
failed to maintain the specified minimum balance, and the charges
applicable to the concerned product variant (as per the Schedule of
Charges in the website of the bank) continue to be applicable. The
bank offers different types of account (product variants) carrying
different combinations of obligations and privileges for the customers
to choose from. The customers make an informed choice of the
product variant, keeping in mind his requirements and other relevant
factors. There is no indication in the SCN or the relied upon
documents that he would cease to receive getting the contracted
services at the contracted rate, or lose his right to receive free
services or other privileges associated with the particular product
variant chosen by him, if he fails to maintain the minimum balance
associated with the variant in a month or a quarter. The only
consequence, he may have to face, as per the SCN, is that he has to
- 145 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
pay the fee or penal charges for his lapse. The above facts reinforce
that maintenance of minimum balance is merely one of the conditions
of contract, and not a consideration for the commitment to provide
the free services associated with the product chosen.
39.6. The taxpayer has cited some case laws in their reply to
SCN 11, including the decisions of the Honourable Supreme Court in
the cases of Bhayana Builders (P) Ltd., Philips India Ltd. and
Edelweiss Financial Services Ltd., which are mentioned in the
preceding paragraphs. Though the decisions in these case laws
relate to the erstwhile laws including the Finance Act, 1994, I find
them relevant to the case at hand. Those decisions were made
interpreting the definition of "consideration" in the Indian Contracts
Act, to make them relevant to the Finance Act, 1994 since the term
was not defined in the Finance Act, 1994. I have gone through these
case laws and find that they are of help to the taxpayer and seriously
undermine the allegations of SCN 11 in this case.
39.7. Having gone through the submissions made by the
bank in reply to the SCN, in the light of facts / documents on record
and legal provisions, I find considerable force in the bank's
submissions and am inclined to accept their contention that there is
nothing in the terms and conditions agreed between the bank and the
customers that establishes a nexus between the facilities provided by
the bank and maintenance of MAB by the customers. I am also
inclined to accept that the treatment of customers' commitment to
maintain MAB as consideration for the obligation to provide facilities
(provision of certain services frees of cist / at concessional rate) in
the SCN is based on conjectures and surmises, as the SCN has
failed to establish the necessary "quid pro quo".
40. In view of the analysis of relevant facts and legal
provisions described in the foregoing paragraphs, I hold that
commitment to maintain minimum balance by the customers cannot
be treated as consideration for the commitment by the bank, to
provide certain services free of cost / concessional rate, and
- 146 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
accordingly the latter does not qualify as a supply under Section 7 of
the CGST Act, 2017. I find that the crucial factor that there must be a
necessary and sufficient nexus between the supply (i.e. agreement
to do or to abstain from doing something) and the consideration
cannot be established . In the light of the above discussion, I find that
the demand for GST and other proposals in the SCN can be
dropped. Consequently, I give up the exercise of valuation.
41. Since no CGST, SGST or Kerala Flood Cess is liable to
be paid by the taxpayer, as discussed above, I find that no interest on
such taxes is payable.
42. Also, since no CGST, SGST or Kerala Flood Cess is in
default, penalty under Section 73(9) of the CGST Act, 2017 and
under Rule 9 of Kerala Flood Cess Rules, 2019 read with Section
14(4) of the Kerala Finance Act, 2019 is NOT to be imposed on the
taxpayer.
43. In view of the foregoing discussions, I pass the following
order and dispose of Show Cause Notice No. 11/2023-24/GST [ADC]
dated 28/09/2023. ”
25. The information provided by the respondents under the
RTI Act to the aforesaid South Indian Bank specifically /
categorically stating that the aforesaid order dated 30.12.2023
passed by the respondents dropping the proceedings against the
said Bank by accepting its contentions is as hereunder:-
F.No.GEXCOM/RTI/APP/1636/2024-ADT Date:28.11.2024
RTI/URGENT
To
Smt.Rose Mary Thomas
South Indian Bank,
- 147 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
SIB Building,
A2, Infopark Exp,
Rajagiri Valley,
Chittethukara,
Kakkanad-682039
Sir,
Sub: Information sought under RIT Act, 2005-Reg.
Please refer to your RTI application Registration
No.CCECH/R/E/24/00043 dated 20.11.2024 received in this
office.
The response to the information sought is
provided here; The Order in Original No.41/2023-
24/GST(ADC) dated 30.12.2024 was accepted on Merits
on 08.06.2024.
In case you are not satisfied with this reply, you may
prefer an appeal to Shri.Kommisetty Muralidhar, Joint
Commissioner & First Appellate Authority (RTI), Office of
the Commissioner of Central Tax & Central Excise,
C.R.Building, I.S.Press Road, Kochi-8 within 30 days of
receipt of this letter.
Yours faithfully,
Sd/-
(Raja Tomy)
(Assistant Commissioner/CPIO)
26. The aforesaid undisputed facts and circumstances
coupled with the fact that there is no change whatsoever insofar as
demand for payment of service tax or GST in the pre-GST / post-
- 148 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
GST regime is concerned, is sufficient to come to the conclusion
that the respondents having accepted the aforesaid order dated
30.12.2023 by accepting very same / identical / similar contentions
urged by South Indian Bank on 08.06.2024 as noticed supra, the
impugned SCNs issued by the respondents containing the very
same allegations deserve to be quashed on this ground also.
27. Insofar as the objection canvassed on behalf of the
respondents regarding the maintainability of the present petitions in
view of the availability of an equally efficacious alternative remedy
is concerned, it is pertinent to note that, prior to instituting the
present proceedings, the petitioner Banks, several other banking
institutions and the Indian Banks' Association had submitted
representations to the respondents raising objections to the
proposed levy of Service Tax on account of non-maintenance of
MAB by bank customers. Despite such representations, no
remedial or corrective measures were forthcoming from the
respondents and, on the contrary, the impugned SCNs came to be
issued not only to the petitioner Banks but also to several other
banking institutions similarly situated.
- 149 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
28. In Magadh Sugar’s case supra , the Apex Court held as
under:-
20. While a High Court would normally not exercise its
writ jurisdiction under Article 226 of the Constitution if an
effective and efficacious alternative remedy is available, the
existence of an alternative remedy does not by itself bar the
High Court from exercising its jurisdiction in certain
contingencies. This principle has been crystallised by this
Court in Whirlpool Corpn. v. Registrar of Trade
Marks [Whirlpool Corpn. v. Registrar of Trade Marks, (1998)
8 SCC 1] and Harbanslal Sahnia v. Indian Oil Corpn.
Ltd. [Harbanslal Sahnia v. Indian Oil Corpn. Ltd., (2003) 2
SCC 107] Recently, in Radha Krishan Industries v. State of
H.P. [Radha Krishan Industries v. State of H.P., (2021) 6
SCC 771] a two-Judge Bench of this Court of which one of
us was a part of (D.Y. Chandrachud, J.) has summarised the
principles governing the exercise of writ jurisdiction by the
High Court in the presence of an alternative remedy. This
Court has observed : (Radha Krishan Industries case [Radha
Krishan Industries v. State of H.P., (2021) 6 SCC 771] , SCC
p. 795, para 27)
27. The principles of law which emerge are that:
27.1. The power under Article 226 of the Constitution
to issue writs can be exercised not only for the enforcement
of fundamental rights, but for any other purpose as well.
27.2. The High Court has the discretion not to
entertain a writ petition. One of the restrictions placed on the
power of the High Court is where an effective alternative
remedy is available to the aggrieved person.
- 150 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
27.3. Exceptions to the rule of alternative remedy
arise where : (a) the writ petition has been filed for the
enforcement of a fundamental right protected by Part III of
the Constitution; (b) there has been a violation of the
principles of natural justice; (c) the order or proceedings are
wholly without jurisdiction; or (d) the vires of a legislation is
challenged.
27.4. An alternative remedy by itself does not divest
the High Court of its powers under Article 226 of the
Constitution in an appropriate case though ordinarily, a writ
petition should not be entertained when an efficacious
alternative remedy is provided by law.
27.5. When a right is created by a statute, which itself
prescribes the remedy or procedure for enforcing the right or
liability, resort must be had to that particular statutory remedy
before invoking the discretionary remedy under Article 226 of
the Constitution. This rule of exhaustion of statutory
remedies is a rule of policy, convenience and discretion.
27.6. In cases where there are disputed questions of
fact, the High Court may decide to decline jurisdiction in a
writ petition. However, if the High Court is objectively of the
view that the nature of the controversy requires the exercise
of its writ jurisdiction, such a view would not readily be
interfered with.”
(emphasis supplied)
21. The principle of alternate remedies and its
exceptions was also reiterated recently in the decision
in Commr. of State Tax v. Commercial Steel Ltd. [Commr. of
State Tax v. Commercial Steel Ltd., (2022) 16 SCC 447]
In State of H.P. v. Gujarat Ambuja Cement Ltd. [State of
H.P. v. Gujarat Ambuja Cement Ltd., (2005) 6 SCC 499] this
Court has held that a writ petition is maintainable before the
High Court if the Taxing Authorities have acted beyond the
scope of their jurisdiction. This Court observed : (Gujarat
Ambuja Cement case [State of H.P. v. Gujarat Ambuja
Cement Ltd., (2005) 6 SCC 499] , SCC pp. 517-18, para 23)
- 151 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
“23. Where under a statute there is an allegation of
infringement of fundamental rights or when on the
undisputed facts the Taxing Authorities are shown to have
assumed jurisdiction which they do not possess can be the
grounds on which the writ petitions can be entertained. But
normally, the High Court should not entertain writ petitions
unless it is shown that there is something more in a case,
something going to the root of the jurisdiction of the officer,
something which would show that it would be a case of
palpable injustice to the writ petitioner to force him to adopt
the remedies provided by the statute. It was noted by this
Court in L. Hirday Narain v. CIT [L. Hirday Narain v. CIT,
(1970) 2 SCC 355] that if the High Court had entertained a
petition despite availability of alternative remedy and heard
the parties on merits it would be ordinarily unjustifiable for
the High Court to dismiss the same on the ground of non-
exhaustion of statutory remedies; unless the High Court finds
that factual disputes are involved and it would not be
desirable to deal with them in a writ petition.”
22. The above principle was reiterated by a three-
Judge Bench of this Court in Southern Electricity Supply Co.
of Orissa Ltd. v. Sri Seetaram Rice Mill [Southern Electricity
Supply Co. of Orissa Ltd. v. Sri Seetaram Rice Mill, (2012) 2
SCC 108] . In that case, a show-cause notice/provisional
assessment order was issued to the assessee on the
ground of an unauthorised use of electricity under Section
126(1) of the Electricity Act, 2003 and a demand for
payment of electricity charges was raised. The assessee
contended that Section 126 was not applicable to it and
challenged the jurisdiction of the Taxing Authorities to issue
such a notice, before the High Court in its writ jurisdiction.
The High Court entertained the writ petition. When the
judgment [Sri Seetarama Rice Mill v. Jeypore Electrical
Division, 2010 SCC OnLine Ori 467] of the High Court was
appealed before this Court, it held that the High Court did
- 152 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
not commit any error in exercising its jurisdiction in respect
of the challenge raised on the jurisdiction of the Revenue
Authorities. This Court made the following observations :
(Sri Seetaram Rice Mill [Southern Electricity Supply Co. of
Orissa Ltd. v. Sri Seetaram Rice Mill, (2012) 2 SCC 108] ,
SCC p. 140, paras 81 & 82)
“81. Should the courts determine on merits of the case
or should they preferably answer the preliminary issue or
jurisdictional issue arising in the facts of the case and remit
the matter for consideration on merits by the competent
authority? Again, it is somewhat difficult to state with
absolute clarity any principle governing such exercise of
jurisdiction. It always will depend upon the facts of a given
case. We are of the considered view that interest of
administration of justice shall be better subserved if the
cases of the present kind are heard by the courts only
where they involve primary questions of jurisdiction or the
matters which go to the very root of jurisdiction and where
the authorities have acted beyond the provisions of the Act.
…
82. It is argued and to some extent correctly that the
High Court should not decline to exercise its jurisdiction
merely for the reason that there is a statutory alternative
remedy available even when the case falls in the above
stated class of cases. It is a settled principle that the
courts/tribunal will not exercise jurisdiction in futility. The law
will not itself attempt to do an act which would be vain, lex
nil frustra facit, nor to enforce one which would be
frivolous—lex neminem cogit ad vana seu inutilia—the law
will not force anyone to do a thing vain and fruitless. In other
words, if exercise of jurisdiction by the tribunal ex facie
appears to be an exercise of jurisdiction in futility for any of
the stated reasons, then it will be permissible for the High
Court to interfere in exercise of its jurisdiction. This issue is
no longer res integra and has been settled by a catena of
judgments of this Court, which we find entirely unnecessary
to refer to in detail.”
(emphasis supplied)
- 153 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
23. In Union of India v. State of Haryana [Union of
India v. State of Haryana, (2000) 10 SCC 482] the
assessing authorities imposed sales tax on the rentals
charged for supply of telephones. Writ petitions were filed in
the High Court challenging the levy. The writ petitions were
dismissed on the ground that an alternative remedy of a
statutory appeal was available. An appeal against these
orders was filed before this Court. The appeal was allowed
and the matter was remanded back to the High Court for
determination since it involved a question of law on whether
the supply of telephones amounted to sale.
24. It is not the case of the appellant that the
respondents have miscalculated the duty and penalty
imposed on it. The appellant contends that the State
Government does not have the power to levy tax on its sale
of electricity to BSEB. Thus, the plea strikes at the exercise
of jurisdiction by the Government. In view of the law
discussed above on the rule of alternative remedy, the High
Court can exercise its writ jurisdiction if the order of the
authority is challenged for want of authority and jurisdiction,
which is a pure question of law.
25. The appellant is admittedly a sugar mill producing
electricity from bagasse (a byproduct of sugar production).
The electricity that is produced is used for running the Mill
and the excess is sold to BSEB. There is no dispute about
the nature of the transaction between the appellant and
BSEB. The petition before the High Court was initially
tagged with the petition filed by NTPC since it involved
similar issues. However, it was subsequently de-tagged and
- 154 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
heard separately on the ground that the appellant in this
case is a sugar mill that also produces electricity, while
NTPC is a power generation company. The writ petition filed
by the appellant was dismissed by the impugned judgment
[New Swadeshi Sugar Mills v. State of Bihar, 2017 SCC
OnLine Pat 3688] . Both the petitions — filed by the
appellant and NTPC before the High Court challenged the
power of the State Government to levy tax on sale of
electricity to Electricity Boards. A three-Judge Bench of this
Court in Sree Meenakshi Mills Ltd. v. CIT [Sree Meenakshi
Mills Ltd. v. CIT, 1956 SCC OnLine SC 42 : (1957) 31 ITR
28 : AIR 1957 SC 49] succinctly explained the tests for the
identification of questions of fact, questions of law and
mixed questions of law and facts. T. L. Venkatarama Aiyar,
J. writing for the Bench observed that:
“9. … To take an illustration, let us suppose that in a suit
on a promissory note the defence taken is one of denial of
execution. The court finds that the disputed signature is
unlike the admitted signatures of the defendant. It also finds
that the attesting witnesses who speak to execution were
not, in fact, present at the time of the alleged execution. On
a consideration of these facts, the court comes to the
conclusion that the promissory note is not genuine, Here,
there are certain facts which are ascertained, and on these
facts, a certain conclusion is reached which is also one of
fact. …
10. In between the domains occupied respectively by
questions of fact and of law, there is a large area in which
both these questions run into each other, forming so to say,
enclaves within each other. The questions that arise for
determination in that area are known as mixed questions of
law and fact. These questions involve first the
ascertainment of facts on the evidence adduced and then a
determination of the rights of the parties on an application of
the appropriate principles of law to the facts ascertained. To
take an example, the question is whether the defendant has
- 155 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
acquired title to the suit property by adverse possession. It
is found on the facts that the land is a vacant site that the
defendant is the owner of the adjacent residential house
and that he has been drying grains and cloth and throwing
rubbish on the plot. The further question that has to be
determined is whether the above facts are sufficient to
constitute adverse possession in law. Is the user continuous
or fugitive? Is it as of right or permissive in character? Thus,
for deciding whether the defendant has acquired title by
adverse possession the court has firstly to find on an
appreciation of the evidence what the facts are. So far, it is
a question of fact. It has then to apply the principles of law
regarding acquisition of title by adverse possession, and
decide whether on the facts established by the evidence,
the requirements of law are satisfied. That is a question of
law.”
The test that is to be applied for the determination of a
question of law is whether the rights of the parties before
the court can be determined without reference to the factual
scenario. In this case, the High Court was entrusted with the
determination of the meaning of the phrases used in
Section 3 of the Act to determine if the supply of electricity
by the appellant would fall within its ambit. Unlike a dispute
on the execution of a promissory note or a plea of adverse
possession, there is no adjudication on facts required here.
There is also no dispute on the nature of the transaction
involved.
26. The issues raised by the appellant are questions of
law which require, upon a comprehensive reading of the
Bihar Electricity Act, a determination of whether tax can be
levied on the supply of electricity by a power generator
(which also manufactures sugar) supplying electricity to a
distributor; and whether the first respondent has the
legislative competence to levy duty on the sale of electricity
- 156 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
to an intermediary distributor in view of the decision of this
Court in State of A.P. [State of A.P. v. NTPC Ltd., (2002) 5
SCC 203] The question of whether the appellant is liable to
file returns under Sections 6-B(1) and 5-A of the Act is
directly related to the issue of whether the sale of electricity
by the appellant to BSEB falls under the charging provisions
of Section 3(1). The questions raised by the appellant can
be adjudicated without delving into any factual dispute.
Thus, the present matter is amenable to the writ jurisdiction
of the High Court.
29. A perusal of the impugned SCNs would indicate that the
respondents have already pre-determined and concluded that the
petitioner Banks are liable to pay Service Tax in respect of the
services rendered to customers qua the maintenance of MAB,
thereby clearly suggesting that the impugned proceedings are
premeditated in nature; moreover, the stand adopted by the
respondents in their statement of objections leaves little room for
doubt that they have wholeheartedly endorsed the proposal
contained in the impugned SCNs. In such circumstances,
relegating the petitioners to pursue alternative remedies would
amount to a mere ritualistic exercise, devoid of any real efficacy,;
as stated supra, it is the specific contention of the petitioners that
the relevant / requisite / necessary jurisdictional facts which confer
- 157 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
authority upon the respondents and form the basis to issue the
SCNs are missing, conspicuously absent and are not contained in
the impugned SCNs which are patently illegal and contrary to the
very basic tenets of service law and in the light of the findings
recorded by me hereinbefore in favour of the petitioners – banks
that the impugned SCNs are without jurisdiction or authority of law
coupled with the fact that the question / issue which arises for
consideration in the present petitions is a pure question of law
without there being any disputed questions of fact, it cannot be said
that the petitioners are to be relegated to avail alternative remedies
in the present petitions, especially having regard to the findings
above that the action of the authorities is ex-facie illegal and without
jurisdiction or authority of law and also considering the
ramifications, the impugned SCNs have on the banking industry
and consequently, even this contention urged by the respondents
cannot be accepted.
30. In light of the foregoing discussion and for the reasons
recorded hereinabove, I am of the considered opinion that the
impugned SCNs are manifestly unsustainable in law, being
arbitrary, without jurisdiction and bereft of statutory sanction. The
- 158 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
same are ex facie contrary to the aforesaid Circulars as well as the
scheme and mandate of the provisions of the Finance Act.
Consequently, the impugned SCNs, together with all proceedings
emanating therefrom and consequential thereto, are liable to be
and accordingly stand quashed.
31. In the result, I pass the following:-
ORDER
(i) W.P.No.10234/2020 is hereby allowed.
(ii) The impugned show cause notice at Annexure-A dated
08.01.2020 issued by the respondents and all further proceedings
pursuant thereto are hereby quashed.
(iii) W.P.No.10363/2020 is hereby allowed.
(iv) The impugned show cause notice at Annexure-A dated
20.01.2020 issued by the respondents and all further proceedings
pursuant thereto are hereby quashed.
(v) W.P.No.11574/2020 is hereby allowed.
(vi) The impugned show cause notice at Annexure-A dated
13.01.2020 issued by the respondents and all further proceedings
pursuant thereto are hereby quashed.
(vii) W.P.No.2173/2021 is hereby allowed.
- 159 -
NC: 2026:KHC:25416
WP No. 10234 of 2020
C/W WP No. 10363 of 2020
WP No. 11574 of 2020
HC-KAR
AND 1 OTHER
(vii) The impugned show cause notice at Annexure-A dated
11.06.2020 issued by the respondents and all further proceedings
pursuant thereto are hereby quashed.
Sd/-
(S.R.KRISHNA KUMAR)
JUDGE
Srl.
List No.: 19 Sl No.: 2