Court holds that maintaining Minimum Account Balance is a contractual condition, not "consideration" for services, rendering Show Cause Notices arbitrary and without jurisdiction.
In a landmark judgment dated June 1, 2026, the Karnataka High Court, presided over by Mr. S.R. Krishna Kumar, J., quashed multiple Show Cause Notices (SCNs) issued by the tax authorities demanding service tax from public sector banks for services allegedly provided under the condition of customers maintaining Minimum Account Balance (MAB). The petitions were filed by Canara Bank and other banks challenging the demand raised by the Union of India and others.
The tax authorities contended that the maintenance of MAB by customers amounted to non-monetary "consideration" under Sections 66B, 65B(44), 65B(51), 66E(e), and 67 of the Finance Act, 2012, thus attracting service tax liability on the banking services rendered. They argued that the banks’ obligation to provide services was contingent upon customers maintaining MAB, and this constituted a declared service under Section 66E(e) of the Finance Act.
Rejecting this contention, the High Court held that the maintenance of MAB is merely a contractual stipulation and not "consideration" for the services rendered by banks. The Court noted that customers are free to choose account types with or without MAB requirements, and the banks do not compel customers to maintain any stipulated balance. In cases where MAB is not maintained, banks levy penal charges on which service tax has already been paid. Therefore, the act of maintaining MAB does not confer any assured liquidity or pecuniary benefit to the banks and cannot be treated as consideration for taxable services.
The Court analyzed the relevant statutory provisions, including the definition of "service" and "consideration" under the Finance Act, 2012, the Indian Contract Act, 1872, and binding circulars issued by the Central Board of Excise and Customs (CBEC), notably Circular No.178/10/2022-GST and Circular No.214/1/2023-Service Tax. These circulars clarify that for a declared service under Section 66E(e) to be taxable, there must be an express or implied contractual agreement with a direct flow of consideration between parties. Mere contractual conditions or penalties for breach of contract do not constitute consideration.
The Court also referred to the orders passed by the tax authorities against South Indian Bank, wherein identical demands were dropped after considering the same legal principles, further reinforcing the untenability of the SCNs issued against the petitioners.
On the maintainability of the writ petitions despite the availability of alternative remedies, the Court observed that the impugned SCNs were issued without jurisdiction or authority of law, involving pure questions of law. The Court held that the existence of alternative statutory remedies does not bar judicial review in such cases.
In conclusion, the Karnataka High Court quashed the impugned SCNs and all consequential proceedings, emphasizing that the demand for service tax on services rendered by banks in relation to MAB maintenance is arbitrary, lacking statutory basis, and contrary to settled legal principles.
The judgment brings clarity to the taxation of banking services and safeguards banks from unwarranted service tax demands based on contractual conditions that do not amount to consideration under the Finance Act.
Bottom line:-
Service Tax - Maintenance of Minimum Account Balance (MAB) by customers does not constitute "consideration" for the services provided by banks under the Finance Act, 2012. Impugned Show Cause Notices quashed for being arbitrary, without jurisdiction, and contrary to statutory provisions and circulars.
Statutory provision(s): Finance Act, 2012 Sections 66B, 65B(44), 65B(51), 66E(e), 67; Indian Contract Act, 1872 Section 2(d); CGST Act, 2017 Sections 7(1), 2(31); CBEC Circulars No.178/10/2022-GST, No.214/1/2023-Service Tax, No.62/11/2003-ST
Canara Bank v. Union of India, (Karnataka) : Law Finder Doc id # 2927123
