Maintenance Of Minimum Average Balance Not "Consideration": Karnataka High Court Quashes Service Tax Show Cause Notices Against Banks

The Court observed that consideration is a requirement for the levy of service tax and, in the absence of any amount being charged by banks from customers for the facilities in question, the maintenance of MAB cannot be treated as either monetary or non-monetary consideration.

The Court was dealing with a batch of writ petitions filed by Canara Bank, Bank of Baroda and Karnataka Bank challenging show cause notices issued by tax authorities proposing to levy service tax on the premise that customers maintaining MAB constituted non-monetary consideration for services rendered by the banks.

A Bench of Justice S.R. Krishna Kumar observed: “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 clearly contrary to law and facts and the impugned SCNs deserve to be quashed”.

G. Shivadass, Senior Advocate, appeared for the petitioner Banks. Aravind Kamath, Additional Solicitor General, appeared for the respondents.

Background

The petitioners are banks engaged in providing banking and financial services through various categories of customer accounts.

According to the respondents, the facilities extended by the banks were linked to the maintenance of the stipulated Minimum Average Balance by customers. Proceeding on the basis that maintenance of MAB amounted to non-monetary consideration for services rendered by the banks, the authorities sought to assign a notional value to such alleged consideration and demanded service tax, interest and penalties for the pre-GST period.

The banks challenged the show cause notices, contending that maintenance of MAB was merely a contractual condition attached to the operation of particular accounts and that no consideration whatsoever was charged from customers who complied with that requirement.

Court’s Observations

The Court examined Sections 65B(44), 66B, 66E(e) and 67 of the Finance Act and observed that the statutory scheme contemplates a taxable service being provided for consideration. The Court noted that valuation under Section 67 is also predicated upon the existence of consideration.

After analysing the statutory provisions, the Court held that the respondents had fundamentally misconstrued the concept of consideration by attempting to equate maintenance of MAB with consideration for banking services.

Rejecting this premise, the Court observed: “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.”

The Court also considered the respondents' reliance upon Section 2(d) of the Indian Contract Act and their contention that a customer's promise to maintain MAB constituted consideration for services rendered by the banks.

Rejecting the argument, the Court observed: “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.”

The Court further noted that the relationship between the bank and its customer itself demonstrated why maintenance of MAB could not be regarded as consideration. The Court observed that customers maintaining deposits earn interest from the banks, while any failure to maintain stipulated balances attracts penal consequences.

In this regard, the Bench observed: “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 character of a penalty and not ‘consideration’.”

The Court also noted that customers retain complete control over the amounts lying in their accounts and remain free to withdraw the entire balance standing to their credit.

Observing that this feature itself militated against the respondents' case, the Bench held: “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 the maintenance thereof, cannot be regarded as ‘consideration’ for the services rendered by the Banks.”

The Court then examined the respondents' contention that the services provided by the banks constituted a “declared service” under Section 66E(e) of the Finance Act as an agreement “to do an act” in return for customers maintaining MAB.

Referring to Circular No.178/10/2022-GST and the principles governing agreements to refrain from an act, tolerate an act, or do an act, the Court observed that such arrangements necessarily require the existence of consideration flowing from one party to another. In the absence of any consideration being charged by the banks, the respondents could not invoke Section 66E(e) by characterising maintenance of MAB as consideration for services.

The Court further held that the respondents' attempt to assign a notional value to maintenance of MAB was contrary to the statutory scheme of valuation under Section 67 of the Finance Act.

While arriving at its conclusions, the Court relied upon the decisions of the Supreme Court in Commissioner of Service Tax v. Bhayana Builders (P) Ltd., Union of India v. Intercontinental Consultants & Technocrats Pvt. Ltd. and Commissioner of CGST & Central Excise v. Edelweiss Financial Services Ltd., reiterating that service tax can be levied only on consideration recognised by law and cannot be extended through assumptions or artificial valuation mechanisms not sanctioned by statute.

Addressing the question of maintainability, the Bench held: “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”.

Conclusion

Ultimately, the Court concluded: “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 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, were accordingly quashed.

Cause Title: Canara Bank v. Union of India & Ors. connected with Bank of Baroda v. Union of India & Ors. and connected matters (Neutral Citation: 2026:KHC:25416)

Appearances

Petitioners: G. Shivadass, Senior Advocate, along with Advocates Manasa Ananthan and Tanmayee Rajkumar

Respondents: Aravind Kamath, Additional Solicitor General, along with Advocate Jeevan J. Neeralgi