By TIOL News Service

NEW DELHI, AUG 17, 2015: VIDE order dated 16.08.2013, the Mumbai Bench of the Tribunal referred the issue of taxability of the commission earned by the Acquiring Banks from the Merchant Establishments in respect of credit card transactions under the entry "Banking and Other Financial Services" during the period prior to 01.05.2006. (Please see - 2013-TIOL-1363-CESTAT-MUM and case analysis for more details to understand the transactions involving Acquiring Bank, Issuing Bank, Merchant Establishment, Card holder and the Card association - VISA/Mastercard, etc). From 01.05.2006, these transactions are comprehensively covered under Section 65(33a) of the Finance Act, 1994, but the dispute is whether these can be taxed under pre-amended entry of "Banking and Other Financial Services" (BOFS).

In case of ABN Amro Bank, the Tribunal held that Service Tax is applicable even before the amendment made vide Finance Act, 2006 - 2011-TIOL-1147-CESTAT-DEL whereas the referral Bench viewed that the transactions with the merchant establishments or with the acquiring bank or the credit associations were not under the ambit of tax before 01.05.2006 and placed the issue before the Larger Bench, in view of the contrary view in ABN Amro Case.

It is the case of revenue that any service provided "in relation to credit card services" is a taxable service covered under BOFS. Thus settlement of payments undertaken by an issuing bank in favour of an acquiring bank and by an acquiring bank in favour of the ME being services in relation to credit card services fall within the purview of the taxable service in BOFS. The assessee banks contested that the demand prior to 01.05.2006 is not sustainable on various grounds.

After hearing both sides, the Larger Bench ruled on the issues referred as under:

1. Can 'Merchants / Merchant Establishments' be considered as 'customer' as envisaged in Section 65 (72)(zm) of the Finance Act, 1994?

The interdependent and seamless but distinct transactions that occur between the ME, an acquiring bank and an issuing bank fall to be considered as a customary relationship amongst these parties. The Bench is fortified in this conclusion by the circumstance that the Act specifies that the provider of credit card services is identified as a banking company, a financial institution including a non-banking financial company or any other body corporate or a commercial concern as well. In the circumstances, confining the expression "a customer", to an individual or an entity which has a savings or a current account with a bank, is textually inappropriate. Further, banking companies, in the current scenario of expanding commercial transactions undertake a variety of activities which were not conceived as part of ancient or traditional banking activities. It would therefore be appropriate to conclude (in the context of BOFS), that a customer of a bank includes any person or entity having a continuum of relationship or transactional intercourse with a banking company, within the ambit of activities pursued by the later as a part of its authorised business. This is the interpretation the Bench is persuaded to in the context of the definition and enumeration of BOFS (Banking and Other Financial Services) as a taxable service. This is not to say that other statutes may not expand or restrict the scope of the expression, customer of a bank.

Accordingly, the Bench concluded that in the context of credit card services in BOFS, as the taxable service is defined and enumerated, acquiring bank and the ME could be considered to be a customer of the issuing bank and an acquiring bank, respectively.

2. WHETHER INTERCHANGE FEE AND "ME" DISCOUNT FORM PART OF THE TAXABLE VALUE OF BOFS :

Whether interchange fee or ME (Merchant Establishment) discount amount to consideration received for rendition of credit card services depends on whether services provided by an acquiring bank to the ME and those provided by an issuing bank to the acquiring bank fall within the ambit of services provided in relation to credit card services.

On a literal construction of the relevant provisions it appears at first blush that any service provided to a customer by a banking company etc. in relation to credit card services, is a taxable service. Acceptance of this construction would lead to infinite expansion of the taxable event. Not only would credit facilities provided by an issuing bank to its card holder fall within the scope of this service but services such as receipt and processing of credit card applications; transferring of embossing data to the issuing bank's personalisation agency; teller machine personal identification number generation; renewal or replacement of a credit card; change of address; payment updation and statement generation; settlement of amounts transacted through credit card; services provided by the owner of trade marks or bank name to an issuing bank for use of the trade mark or brand name; and a host of other services which are interspersed in the sequence of transactions occurring on the use of a credit card, would all be services provided in relation to credit card services. These services are expressly enumerated in sub-clauses (ii), (iii), (vi) and (vii) of Section 65 (33a), w.e.f. 01.05.2006. On Revenue's interpretation, these services are subsumed within credit card services on account of the "in relation to" phrase. Wherever an issuing bank hives of some of its activities in relation to credit card operations, such as receipt and processing of credit card applications and the like and these services are provided by an outside agency, these would nevertheless fall within the ambit of BOFS, though not statutorily so identified and expressed. The scope of credit card services and BOFS would therefore be perpetually nebulous and its contours indeterminate, assessees contend. Assessees also urge that acceptance of Revenue's interpretation would lead to perpetual ambiguity in ascertaining the range and variety of transactions falling within the ambit of credit card services and such interpretation should therefore be avoided on the principle of doubtful and ambiguous taxation and inchoate specification of the taxable event in a fiscal legislation.

While services provided by an issuing bank to an acquiring bank and an acquiring bank to the ME are intermediary, ancillary and interdependent integers for effective use of credit cards, it is to be concluded that these services though interdependent are distinct and are not intended to be covered within the purview of credit card services prior to 01.05.2006, notwithstanding the phrase "in relation to" employed in the enumerative provision. This is because a contrary interpretation which accords unrestricted scope, locus and amplitude to credit card services would result in introducing a serious element of textual ambiguity, indeterminacy and inchoateness to the scope of the taxable event in BOFS. The formidable precedential authority adverted to in paragraph 23 (of the order) and decisions in Naveen Chemicals and in Indian National Shipowners Association as well, posit adoption of an interpretive principle which leads to clear and definite identification of the taxable event, to avoid doubtful taxation.

On the basis of the principles and guidance derived from aforementioned authority, the Bench is compelled to the conclusion that in the context of BOFS, credit card services cover only such services as are provided by an issuing bank to a card holder. This conclusion is fortified by the clarification issued in Board circular dated 09.07.2001, RBI circular dated 12.12.2003, RBI master circular and the express and specific statutory explication of several services which Parliament has specified to be included in card services, incorporated in the definition of card services, for the subsequent period w.e.f. 01.05.2006, in Section 65 (33a). Credit card services is included in card services and stands deleted from BOFS, w.e.f. 01.05.2006. To interpret the several services specifically enumerated in Section 65(33a) and other services like those provided by credit information companies or telephone or internet network providers, which equally contribute to and are essential for effectuation of credit card transactions as also comprehended within BOFS, would lead to perpetual uncertainty and non-temporal inflation of the scope of credit card services in BOFS. Such interpretation must clearly be avoided, is the mandate of established interpretive principles.

3. ABN AMRO Bank overruled:

The ABN Amro Bank analyses reveals a factual misconception that the appellant had contended that credit card services was not taxable prior to 01.05.2006. This assumption is clearly contrary to pleadings of the appellant set out in para 6. The appellant's challenge and the demand confirmed by the impugned adjudication order was in respect of interchange fee received from acquiring banks. It was not the appellant's contention that credit card services was taxable only w.e.f. 01.05.2006. The appellant clearly asserted that services provided by it to the acquiring bank fall outside the purview of credit card services during the relevant period and prior to 01.05.2006 since these are specifically enumerated in the definition of card services, only in Section 65(33a), w.e.f. 01.05.2006.

The conclusion in ABN Amro Bank that the express statutory grant [in Section 65(10) read with Section 65(72), 65(105)(zzw)] takes within its fold all incidental or ancillary services "in relation to" credit card services, proceeds on a textual analyses and resonance to the amplitudinous expression in relation to, in the enumerative provision.

The judgment fails to consider the resultant ambiguity, uncertainty and indeterminacy regarding the variety of taxable events that could conceivably fall within "services provided in relation to credit card services", on such interpretation and the effect of such irresoluble ambiguity regarding contours of the taxable event.

The Bench is of the considered view that paragraph 2.2 of the Board circular dated 09.07.2001 accurately captures the scope of credit card services under BOFS during the period 16.07.2001 to 30.04.2006 i.e. as meaning a service where the customer is provided credit facility for purchase of goods and services; whereby cash advances are also permitted upto specified limits; where for rendition of the service, the service provider collects joining fee, additional card fee, annual fee etc; and all these charges, including interest charges for the service rendered, form part of the value of the taxable service, in BOFS.

With respect, it is held that the analyses and conclusions in ABN Amro Bank are incorrect and this ruling is accordingly overruled.

4. Revenue's Preliminary objection on constituting Larger Bench unsustainable:

The Principal Commissioner, Service Tax (Mumbai-I and IV) has filed miscellaneous application seeking adjournment hearing of this reference until final disposal of "this matter" by the Hon'ble Supreme Court of India, as the dispute is pending in Supreme Court.

Mere filing or pendency of an appeal against the decision in ABN Amro Bank Limited, neither eclipses this decision nor operates as a fetter on another Division Bench, which would be free to either follow the ABN Amro Bank Limited decision or could doubt its correctness and seek interpretation, by a Larger Bench. There is also no purpose served in adjourning the reference to await the decision of the Hon'ble Supreme Court. In case the ABN Amro Bank Limited decision is confirmed by the Supreme Court that would be the governing law and the reference would not survive. The same would be the position if ABN Amro Bank Limited decision is reversed in appeal. Till a final pronouncement by the Supreme Court emerges, there exist diametrically contrary views in the Tribunal; one the final order in ABN Amro Bank Limited and the other which is expressed in the order of reference and in respect of the same subject matter, namely identification of the scope of "credit card services" in BOFS, during the period prior to 01.05.2006.

Resolution of such a conflict at the level of the Tribunal is therefore a salutary course of action, in interests of interpretative stability which would operate until an authoritative decision is received from the judgment of Supreme Court.

Accordingly, the Larger Bench answered the references as under:

Held:

(a) introduction of a comprehensive definition of "credit card, debit card, charge card or other payment service" in Section 65(33a) read with Section 65(105) (zzzw), by the Finance Act, 2006 is a substantive legislative exertion which enacts levy on the several transactions enumerated in sub-clauses (i) to (vii) specified in the definition set out in Section 65(33a); and all these transactions are neither impliedly covered nor inherently subsumed within the purview of credit card services defined in Section 65(10) or (12) as part of the BOFS;

(b) sub-clause (iii) in Section 65(33a) is neither intended nor expressed to have a retroactive reach i.e. w.e.f. 16.07.2001. Services enumerated in these sub-clauses are not implicit in the scope of credit card services;

(c) a Merchant/ Merchant Establishment is "a customer" in the context of credit card services enumerated in Section 65(72)(zm), subsequently Section 65(105)(zm) and a fortiori an acquiring bank is "a customer" of an issuing bank.

(d) ME discount, by whatever name called, representing amounts retained by an acquiring bank from out of amounts recovered by such bank for settlement of payments to the ME does not amount to consideration received "in relation to" credit card services.

(See 2015-TIOL-1713-CESTAT-DEL-LB)