By TIOL News Service

MUMBAI, SEPT 16, 2013: THE banks are engaged in providing banking and other financial services to individuals and offer wholesale banking capabilities to corporate and institutional clients. They also provide credit card services to their customers and charge service charges on which service tax liability is discharged.

The credit card holder uses the card for purchasing goods and services from various merchant establishments. The merchant establishments accept the credit cards towards payment of the goods/services supplied. Thereafter, the merchant establishments get the reimbursements from the Acquiring Banks, who can be the same as issuing bank or any other bank. The acquiring bank charges the merchant establishments discounts/service fees. The acquiring banks report such transactions to the respective credit card issuers (master card, visa card, etc.) which make payments to the acquiring banks and charge for the services. The credit card issuer, in turn, claims the amounts paid by it to the acquiring bank from the concerned issuing bank and the issuing bank at its end bills and recovers from the customers (credit card holder) the amount of purchases made from the merchant establishments. In this chain of transactions, the acquiring bank shares commission/discount earned from the merchant establishments on pre-arranged basis with the concerned issuing bank.

The question is whether the commission/discount earned by the acquiring bank from the merchant establishments is liable to service tax under the category of banking and financial services for the period prior to 01/05/2006.

The nature of transaction arising out of the use of the Credit Card and the five persons involved and their role is tabulated below -

The Merchant Establishment discount is earned by the Acquiring Banker on account of the following transaction model -

a. The card holder does a purchase at the merchant outlet and signs the transaction-slip generated by the merchant using the swipe-machine placed by Acquiring bank, say purchase of Rs.100.

b. The merchant deposits the transaction-slip with the Acquiring bank via settlement procedure.

c. The VISA/MasterCard network generates reports for merchant settlement and sends them to the Acquiring Bank who pays the merchant after deducting certain discount, say Rs. 3. This amount of Rs.3 is called Merchant Discount and is subject matter of present dispute.

d. A settlement report is sent to the Issuing Bank for reimbursement to the Acquiring bank via the Interchange Network provided by VISA/Master Card.

e. Rs.3 earned by the Acquiring bank in (c) above is shared with Issuing bank and VISA/MasterCard as Interchange fee.

f. Issuing bank accounts for the transaction for recovery from the cardholder and sends the cardholder a monthly statement.

g. Cardholder makes the payment of Rs.100 to the Issuing bank.

The CCE, Thane-I held that the services rendered by the acquiring bank to the merchant establishments come under the category of banking and other financial services and accordingly confirmed the demand of service tax of Rs.4,47,67,101/- for the period 01/04/2002 to 17/05/2006 along with interest and penalties. Against this order, Standard Chartered Bank is before the CESTAT. This order is dated 15/12/2009.

Incidentally, the Commissioner of Service Tax, Mumbai had dropped similar proceedings initiated against HSBC Ltd., ICICI Bank Ltd. & HDFC Ltd. and resultantly Service Tax demands of Rs.7.59 Crores, Rs.11.78 Crores & Rs.9.40 Crores were set aside. The period involved in these cases varies from 16/07/2001 to 31/03/2005.All the three orders were passed in May 2007. Against this dropping of demands, the Revenue is also before the CESTAT and, therefore, all the appeals were taken up together for consideration and disposal.

Lengthy arguments sprinkled with Apex court and High Court judgements were made by the appellant bank/respondent banks. Of particular mention are the following submissions -

+ Merchant is not the customer of the issuing bank and does not avail the services of credit card and is not a credit card holder for the issuing bank. There exists a separate and independent agreement between the Acquiring bank and the merchant which gives rise to ME Discount income in the hands of Acquiring bank. Thus what was taxable, prior to 1-5-2006 was only the transaction of the Issuing bank with the card holder. The services to the merchant establishment cannot be subjected to service tax in the absence of any statutory provisions existing at the relevant time.

+ Merchant Establishment (ME) Discount earned by the Acquiring Bank is shared with Issuing Bank and Card Association as Interchange Fee. Thus, ME discount and Interchange Fee are different in characteristics and arise out of different transactions.

+ With respect to the reliance placed by the Revenue on the decision in ABN Amro Bank - (2011-TIOL-1147-CESTAT-DEL) the same is not applicable as the facts are totally different inasmuch as in the present case the Appellant acted as Acquiring Bank and not as issuing bank.

+ In ABN Amro's case, the Bench was concerned with deciding taxability of Interchange fee and not ME Discount; that the ratio in the context of Issuing bank cannot be applied to Acquiring banks as the acquiring transaction is independent of card issuing transaction and related revenue.

+ Without prejudice it is also submitted,with due respect,that the decision in the case of ABN Amro is not a correct law and hence, the present appeals maybe referred to a Larger Bench for re-consideration of the law declared in ABN Amro case.

The Revenue representative refuted the contentions made by placing reliance on the Board's communications dated 09/07/2001, 28/02/2006 and the decision in ABN Amro Bank.

The Bench extracted liberally from the Wikipedia and the information available on the website of State Bank of India to elucidate the working of the Credit Card system and emphasized that understanding the essential nature of the service is very relevant and germane to interpretation of levy of Service Tax on Credit Card services.

Referring to the definition of "Banking & Financial Services" as existing prior to 01/05/2006, the Bench observed -

+ In respect of credit card services, considering the essential nature of the service, from a layman's point of view and interpreting the legal provisions as they stood at the relevant time from a common sense perception, in our considered view, the service provider is the bank which issues the card and the service recipient is the credit card holder, who receives the credit.

+ The CBE&C, the apex body for levy and collection of service tax, also understood the scheme of levy as discussed above as is evident from letter F.No. B-11/1/2001-TRU dated 09/07/2001 clarifying the scope of the levy in respect of credit card services at the time of its inception as under:-

"Credit card services

2.2.1 This is a service where the customer is provided with credit facility for purchase of goods and services in shops, restaurants, hotels, railway bookings, petrol pumps, utility bill payments, etc. Cash advances are also permitted upto specified limits in most of the cases. This service is provided by nationalised banks, multi-national banks and private banks.

2.2.2 xxx

2.2.3 xxx"

From the above clarification, especially the underlined portions, it is clear that the service related to provision of credit facility by the banks to the credit card holder. Thus it is the card holder who is the customer specified in the taxable service returned to in section 65(72)(zm) and the levy is on the consideration received by the bank from the cardholder by way of various types of fees/charges.

+ Subsequently, vide Finance Act, 2006, credit card services were excluded from banking and other financial services and brought under "credit card, debit card, charge card or other payments card services" under Section 65 (33a) of the Finance Act and the said services read as follows:

"(33a) "credit card, debit card, charge card or other payment card service" includes any service provided,- …"

Thus, the definition and concept of service underwent a significant change to include services only in respect of credit cards but also other types of cards such as debit card, charge card and other payment cards and the scope of the term "service provider" was also widened to include not only the bank issuing the card but also acquiring bank, various transaction processors, ATM service providers, brand name/trade mark holders and so on as defined in sub-clauses (ii) to (vii) of clause (33a). Sub-clause (i) covered the services rendered by the issuing bank to the card-holder which was previously covered under sub-clause (ii) of clause (12) of section 65 prior to 01/05/2006. Thus both the concept of service and the service provider underwent significant changes in 2006.

+ The banking and financial service under which credit cards services were taxed prior to 1-5-06 covered only the services rendered by a bank to its customer. From the instructions issued by Ministry in this regard vide instructions dated 09/07/2001, the customer was the credit card holder who was provided with the credit facility and who paid various charges to the issuing bank. Thus, the customer referred to in Section 65 (12) was only the card holder and not anybody-else. The transactions with the merchant establishments or with the acquiring bank or the credit association were not under the ambit of tax. These transactions were brought under the tax net only with effect from 01/05/2006 under the new entry "Credit card, debit card, charge card or other payment card services". It is a settled position in law that whenever a new entry is made in the tariff schedule covering various services rendered, the same is taxable only from the date of its inception and not prior to that date as held by the Hon'ble High Court of Bombay in the case of Indian National Ship Owners Association - (2009-TIOL-150-HC-MUM-ST) and affirmed by the Hon'ble Apex Court. It is also an equally settled position in law that meaning ascribed by the authority issuing a notification is a good guide for interpretation as held by the Hon'ble Supreme Court in Andhra Sugar Ltd - (2002-TIOL-513-SC-CX) and has to be given due weightage.

+ When credit card services were brought under the tax net in 2001, what was brought under the levy was the service rendered by the issuing bank to the credit card holder. Subsequently in 2006, the coverage of credit card services was expanded to bring into tax net the transactions/services between Merchant Card Association and Acquiring Bank, Acquiring Bank and Credit Card Association and Credit Card Association and Issuing Bank. In addition other types of card services, such as, debit card, charge card and other payment card were also brought under the tax net. This widening of the coverage is effective only from 2006 onwards and not retrospectively from 2001 onwards.

+ In the ABN Amro case, a co-ordinate bench of this Tribunal has taken a view that in view of the expression "in relation to" preceding banking and financial services occurring in taxable service defined under section 65 (72)(zm) and such an expression is expansive in nature and scope, and therefore all services rendered in relation to credit card services, whether by merchant establishments, acquiring banks or others would be chargeable to service tax even prior to 1-5-2006. We respectfully disagree with the said view taken for the following reason. The expression "in relation to" qualifies only the "credit card services" and not the customer who is the service recipient nor the service provider, the issuing bank. Thus only the scope of credit card services is expanded by the said term. The credit card services comprises of a number of services such as extending credit for the purchase of goods and services, withdrawal of cash up to permissible limits, payment of utility bills, payments for travel, foreign exchange transactions and so on. All such services for which credit is given by the issuing bank would get covered under the levy. However, it does not, in any way, alter the scope of "service provider" who is the issuing bank nor the "service recipient" who is the card holder. In our considered view, all other transactions involved in operationalising the credit card services became taxable only with effect from 1-5-2006 when the new entry relating to "credit card, debit card, charge card or any other payment card service" was brought under the tax net vide sections 65 (33a) read with 65 (105)(zzzw).

Noting that it would be appropriate to refer the matter to the Larger Bench in deference of the decision of the Apex Court in the case of Jayaswals Neco Ltd. v. CCE, Nagpur - (2006-TIOL-21-SC-CX) the Bench referred the following points of law for consideration by the Larger Bench -

"(i) Whether the introduction of the new, comprehensive definition of "credit card, debit card, charge card or other payment card service" vide section 65(33a) read with section 65(105)(zzzw) by the Finance Act, 2006, is substantive and seeks to levy all the transactions covered by use of Credit/Debit/Charge Card or is in continuation of the levy under Section 65(10) or (12), as the case may be, as held in the case of ABN Amro decision in so far as credit card services are concerned?

(ii) Whether the sub-clause (iii) in the definition of taxable service viz. "credit card, debit card, charge card or other payment card service" in section 65(33a) can be said to be applicable retrospectively, i.e. from 16 July 2001 when section 65(72)(zm) became effective?

(iii) Can ‘merchants/merchant establishments' be considered as ‘customer' as envisaged in Section 65 (72)(zm) of the Finance Act, 1994 as it stood prior to 1-5-2006?

(iv) Whether Merchant Establishment Discount can be said to be received "in relation to" credit card services when in fact in a particular transaction, the Acquiring bank receiving ME Discount may not have issued that particular credit card at all?"

Last bite - Money is a poor man's credit card - Marshall McLuhan

(See 2013-TIOL-1363-CESTAT-MUM)