Facts of the Case

The petitioners were banking institutions engaged in providing savings accounts, current accounts and various other banking and financial facilities to customers. Depending upon the account variant selected by a customer, the Banks provided a basket of facilities and privileges, including basic and additional banking services. Certain customers were required to maintain a stipulated Minimum Average Balance (MAB) in their accounts.

The controversy arose in relation to facilities provided to customers who maintained the prescribed MAB and from whom the Banks did not separately receive or charge monetary consideration for those facilities. The Revenue issued show cause notices demanding service tax for various periods up to 30 June 2017, i.e. the pre-GST regime, together with interest and penalty.

The Revenue proceeded on the theory that a customer’s commitment to maintain MAB constituted non-monetary consideration for the banking facilities. According to the notices, a notional or deemed value could be attributed to that alleged consideration by reference to the penalty or charges imposed when a customer failed to maintain the prescribed MAB.

The Department further alleged that the nature and extent of banking facilities were linked to the MAB undertaken to be maintained by the customer. Even where the customer failed to maintain MAB, the facilities allegedly continued subject to prescribed non-maintenance charges. On this basis, the Revenue sought to invoke Sections 65B(44), 65B(51), 66B, 66E(e) and 67, together with the concept of “consideration” under Section 2(d) of the Indian Contract Act, 1872.

The Banks challenged the notices under Article 226 of the Constitution of India, contending that maintenance of MAB was merely a contractual condition governing the account relationship and could not automatically be transformed into consideration for a taxable service. The central dispute, therefore, concerned whether the mere maintenance of MAB could legally supply the missing element of “consideration” necessary for service-tax liability.

Issues Involved

  1. Whether a customer’s maintenance of a stipulated Minimum Average Balance (MAB) constitutes “consideration” or “non-monetary consideration” for banking facilities provided without a separate charge.
  2. Whether service tax could be demanded under Section 66B when the Banks had not charged or received consideration for the facilities in question.
  3. Whether the facilities provided by Banks could be classified as a declared service under Section 66E(e) on the theory that the Banks had agreed to an obligation “to do an act” in return for the customer maintaining MAB.
  4. Whether a customer’s promise or contractual commitment to maintain MAB could be valued notionally under Section 67 by using the charges imposed for non-maintenance of MAB as a valuation benchmark.
  5. Whether a condition of contract could, without the necessary reciprocal nexus and actual taxable consideration, be treated as the consideration for the contract.
  6. Whether the definition of “consideration” under Section 2(d) of the Indian Contract Act, 1872 could independently justify the proposed service-tax demand.
  7. Whether the impugned SCNs were contrary to 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.
  8. Whether the High Court could entertain writ petitions directly against show cause notices despite the Revenue’s objection concerning prematurity and availability of an alternative statutory remedy.
  9. Whether an SCN founded on an allegedly non-existent taxable consideration and lacking statutory jurisdiction could be quashed at the threshold under Article 226.

Petitioner’s Arguments

The petitioner Banks argued that they had not charged any consideration for the facilities provided to customers who maintained MAB. According to them, MAB represented only one of the contractual conditions applicable to the chosen banking account and did not constitute payment, remuneration, reciprocal recompense or taxable consideration for the facilities.

They submitted that where a customer complied with the condition of maintaining MAB, the facilities were provided without any separately charged consideration. If the customer defaulted in maintaining the prescribed balance, the Banks could continue providing facilities while imposing applicable non-maintenance charges. This distinction, according to the Banks, demonstrated that the contractual condition of maintaining MAB could not be artificially equated with consideration for the services.

The Banks strongly disputed the Revenue’s attempt to value the alleged non-monetary consideration by reference to the penalty charged for failure to maintain MAB. A charge triggered by breach or non-compliance with a contractual condition, they argued, could not automatically become the monetary equivalent of consideration supposedly flowing when the condition was complied with.

The petitioners further submitted that the statutory concept of “service” required an activity carried out by one person for another for consideration. In the absence of consideration, the foundational requirement of a taxable service was missing. They argued that Section 67 is fundamentally a valuation provision and could not be used to create or invent consideration where no consideration legally existed.

The Banks also contended that Section 66E(e) could not apply merely because the Banks had undertaken to provide facilities. For the declared-service entry concerning an obligation to refrain from an act, tolerate an act or situation, or do an act, there must be the necessary contractual reciprocity and consideration linked to the relevant obligation. A taxable agreement could not simply be presumed.

The petitioners relied heavily upon the Department’s own circulars, particularly Circular No. 178/10/2022-GST, which explains that an agreement to do, refrain from doing, or tolerate something cannot be imagined merely because money or some alleged benefit moves between parties; an express or implied agreement and sufficient nexus between the supply and consideration are necessary.

They further argued that the SCNs were inconsistent with Circular No. 214/1/2023-Service Tax and CBEC Circular No. 62/11/2003-ST, apart from being contrary to the statutory scheme.

On maintainability, the Banks submitted that the controversy raised a pure question of law, did not require adjudication of disputed factual questions, and went to the very jurisdiction of the authorities. Therefore, the mere existence of an alternative remedy could not bar the High Court from exercising jurisdiction under Article 226.

Respondent’s Arguments

The Revenue argued that the writ petitions were premature, because the Banks could submit replies to the impugned SCNs and allow the adjudicating authorities to decide the matter in accordance with law. According to the respondents, the petitioners should ordinarily participate in the statutory adjudication process instead of seeking immediate quashing of show cause notices.

On merits, the Revenue contended that the fact that penal or non-maintenance charges were imposed when MAB was not maintained indicated that customers maintaining MAB were receiving facilities or additional services connected with such maintenance.

The respondents maintained that a customer’s commitment to keep the prescribed MAB constituted non-monetary consideration. According to this theory, the customer’s undertaking had economic significance and could be valued and quantified under Section 67 of the Finance Act and the applicable valuation framework.

The Revenue further asserted that the Banks had undertaken an obligation to provide services or facilities and that, in return, customers maintained MAB. Therefore, according to the respondents, the arrangement possessed reciprocal elements capable of attracting service tax.

The Department also sought support from Section 2(d) of the Indian Contract Act, 1872, contending in substance that a promise or act undertaken by the customer could constitute consideration and that the maintenance of MAB was capable of being regarded as the reciprocal element supporting the Banks’ obligation to provide facilities.

Accordingly, the respondents sought dismissal of the petitions and argued that all objections should first be raised before the adjudicating authorities.

Court Order / Findings

The Karnataka High Court rejected the Revenue’s foundational theory and held that the impugned SCNs were legally unsustainable.

1. No Consideration Was Charged for the Facilities in Question

The Court treated as crucial the undisputed position that the petitioner Banks had not charged any consideration for rendering the facilities in question to customers maintaining MAB.

The Court held that, in the absence of the required legal foundation under Section 67 and having regard to the governing judicial principles, the act of customers maintaining MAB could not be construed, treated, categorised or described as “consideration” for the services provided by the Banks.

Consequently, the demand based on the premise that maintenance of MAB itself amounted to consideration was held contrary to law and facts.

2. Maintenance of MAB Is Not Automatically Non-Monetary Consideration

The Court rejected the proposition that a customer’s act of keeping a prescribed balance in the account automatically represented non-monetary consideration.

A contractual requirement or condition does not become taxable consideration merely because it forms part of the broader banking relationship. The necessary legal relationship between the alleged consideration and the alleged taxable service must independently exist.

3. A Promise Must Result in a Legally Relevant Benefit or Consideration

The Court examined the Revenue’s reliance upon Section 2(d) of the Indian Contract Act and clarified that, for the alleged promise made by customers to qualify as “consideration”, the promise must necessarily fructify into a benefit or consideration accruing to and receivable by the Banks.

Only after satisfying that foundational requirement could a monetary value potentially be attributed for service-tax purposes. In the absence of those indispensable prerequisites, it was untenable to contend that maintenance of stipulated MAB constituted consideration for banking facilities.

4. Section 67 Cannot Supply a Missing Taxable Foundation

The Court’s reasoning makes clear that valuation cannot substitute for the prior legal existence of consideration. The Revenue could not first presume that MAB was consideration and then assign it a notional value by referring to charges imposed when MAB was not maintained.

In substance, the valuation mechanism could not be deployed to manufacture a taxable consideration where the essential statutory foundation itself was absent.

5. Condition of Contract and Consideration for Service Are Distinct

A major legal principle emerging from the judgment is that a contractual condition must not automatically be confused with taxable consideration.

The Banks’ requirement that customers maintain MAB formed part of the terms governing account operation. The mere presence of that requirement did not establish that the customer was paying for particular banking facilities through the maintenance of MAB.

This distinction is consistent with the petitioners’ reliance upon Commissioner of Service Tax, Chennai vs REPCO Home Finance Ltd., where the distinction between a contractual condition and consideration received for a taxable service was central to the analysis.

6. Revenue’s Theory Was Contrary to Its Own Circulars

The Court found the impugned SCNs contrary to the relevant departmental circulars. Of particular importance was Circular No. 178/10/2022-GST dated 03.08.2022, which explains the necessity of contractual reciprocity and sufficient nexus between an obligation and consideration.

The Court noted that the Board itself had clarified the concepts of “contract” and “consideration” and the need for consideration to flow in return for the relevant contractual obligation. The Revenue’s attempt to presume such consideration merely from maintenance of MAB was inconsistent with that framework.

7. Declared Service Under Section 66E(e) Could Not Be Presumed

The Court rejected the attempt to treat the facilities as taxable declared services merely by describing the Banks’ conduct as an agreement “to do an act.”

For such taxability, there must be a legally sustainable contractual arrangement with the necessary reciprocal consideration. The taxable agreement cannot be imagined or presumed simply because the customer complies with an account condition.

8. Writ Petitions Were Maintainable Despite Alternative Remedy

The Revenue’s objection based on alternative remedy was rejected. The Court found that the foundational jurisdictional ingredients required to support the SCNs were missing and conspicuously absent.

The Court further noted that the dispute involved a pure question of law, without disputed questions of fact, and that the action of the authorities was ex facie illegal and without jurisdiction or authority of law. The Court also took account of the wider ramifications of the notices for the banking industry.

9. SCNs Held Arbitrary, Without Jurisdiction and Bereft of Statutory Sanction

The High Court ultimately held that the impugned SCNs were:

  • manifestly unsustainable in law;
  • arbitrary;
  • without jurisdiction;
  • bereft of statutory sanction;
  • contrary to the relevant departmental circulars; and
  • inconsistent with the scheme and mandate of the Finance Act.

Accordingly, the Court quashed the SCNs together with all proceedings emanating from and consequential to them.

10. Final Operative Order

The High Court:

  • allowed W.P. No. 10234/2020 and quashed the SCN dated 08.01.2020 and all further proceedings;
  • allowed W.P. No. 10363/2020 and quashed the SCN dated 20.01.2020 and all further proceedings;
  • allowed W.P. No. 11574/2020 and quashed the SCN dated 13.01.2020 and all further proceedings; and
  • allowed W.P. No. 2173/2021 and quashed the SCN dated 11.06.2020 and all further proceedings.

Important Clarification

This judgment establishes an important principle for service-tax and wider indirect-tax jurisprudence: the maintenance of Minimum Average Balance by a bank customer cannot, merely by itself, be deemed to be non-monetary consideration for banking facilities supplied without a separate charge.

The decision further clarifies that:

A condition of contract is not automatically consideration for a taxable service. Tax authorities must establish the legally required reciprocal nexus between the identified service and the identified consideration.

A customer’s promise or conduct cannot be labelled “consideration” in the abstract. The alleged promise must satisfy the necessary legal requirements and result in a relevant benefit or consideration accruing to and receivable by the service provider.

A valuation provision such as Section 67 cannot be used to create consideration where none exists. Valuation follows the existence of a taxable foundation; it does not manufacture that foundation.

The charge imposed for non-maintenance of MAB cannot automatically be treated as the deemed or notional value of an alleged consideration arising from maintenance of MAB. The two situations cannot be mechanically equated.

The expression “agreeing to the obligation to refrain from an act, tolerate an act or situation, or do an act” requires a legally sustainable agreement and consideration nexus. Such an agreement cannot be presumed merely from surrounding contractual conditions.

A show cause notice may be quashed under Article 226 where the jurisdictional foundation is absent, the issue is a pure question of law, the action is ex facie illegal, and the notice is contrary to the governing statutory scheme and binding departmental circulars.

The ruling has substantial importance for the banking industry, particularly where tax authorities seek to attribute a notional value to customer behaviour, account conditions, minimum-balance requirements or other non-monetary features without first proving legally cognisable consideration.

Sections Involved

Finance Act, 1994 / Finance Act, 2012 Service-Tax Framework

Section 65B(44) – Definition of “Service”
An activity carried out by one person for another for consideration, including a declared service, subject to statutory exclusions.

Section 65B(51) – Definition of “Taxable Service”
A service on which service tax is leviable under Section 66B.

Section 66B – Charge of Service Tax
Provides for levy of service tax on the value of taxable services, other than negative-list services, provided or agreed to be provided in the taxable territory by one person to another.

Section 66E(e) – Declared Service
Covers agreeing to the obligation to refrain from an act, tolerate an act or situation, or do an act.

Section 67 – Valuation of Taxable Services
Governs valuation where consideration is in money, partly or wholly non-monetary, or not ascertainable.

Indian Contract Act, 1872

Section 2(d) – Definition of “Consideration”
Relied upon by the Revenue in support of its theory that the customer’s commitment to maintain MAB represented consideration.

Constitution of India

Article 226 – Writ Jurisdiction of High Courts
Invoked to challenge SCNs alleged to be without jurisdiction, contrary to statutory provisions and founded on a legally non-existent taxable premise.

Link to download the order - https://mytaxexpert.co.in/uploads/1783066949_451compressed.pdf

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