Custom, Excise & Service Tax Tribunal
Commissioner Of Service Tax vs Hdfc Bank Ltd on 20 June, 2013
IN THE CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL,WEST ZONAL BENCH AT MUMBAI COURT No. II Appln.No.ST/CO/228 & 229/07 APPEAL No.ST/143 to 145/07 & ST/117/10 (Arising out of Order-in-Original No. No.51/BR-47/ST/Th-I/2009 dated 15/12/2009 passed by the Commissioner of Central Excise, Thane-I, 01/STC/SJS/07-08 dated 22/05/2007, 01/STC/SJS/07-08 dated 22/05/2007 03/STC/SJS/07-08 dated 23/05/2007 passed by the Commissioner of Service Tax, Mumbai.) For approval and signature: Honble Mr. P.R. Chandrasekharan, Member (Technical) Honble Mr. Anil Choudhary, Member (Judicial) 1. Whether Press Reporters may be allowed to see :No the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982? 2. Whether it should be released under Rule 27 of the :Yes CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not? 3. Whether Their Lordships wish to see the fair copy :Seen of the Order? 4. Whether Order is to be circulated to the Departmental :Yes authorities? ========================================
Commissioner of Service Tax, Appellant Mumbai Vs. HDFC Bank Ltd., HSBC Bank Ltd., Respondents ICICI Bank Ltd., Standard Chartered Bank Appellant Vs. Commissioner of Central Excise, Thane-1 Respondent Appearance: Shri.Shobha Ram, Comm. (AR) for appellant Shri.Abhijit Saha, Consultant for HDFC Bank Shri.Prasad Paranjape, Advocate for HSBC Bank Shri. Naresh Thacker, Advocate, Ms. Sweta Rajan & Ranjeet Mahtani, Advocate for ICICI Bank CORAM: Honble Mr. P.R.Chandrasekharan, Member (Technical) Honble Mr.Anil Choudhary, Member (Judicial) Date of Hearing : 20/06/2013 Date of Decision : /2013 ORDER NO Per: P.R. Chandrasekharan S. No. Appeal No. Appellant Respon-dent O-in-O No. & Date Service Tax involved (Rs.) Period of demand 1 ST/144/07-Mum Commissioner of Service Tax Mumbai HSBC Ltd. 01/STC/SJ5/07.08 dtd 22.05.2007 7,59,85,594 16-7-01 to 10-9-04 2 ST/145/07-Mum -do- ICICI Bank Ltd. 02/STC/SJ5/07.08 dtd 23.05.2007 11,78,92,198 1-4-02 to 31-3-05 3 ST/143/07-Mum -do- HDFC Bank Ltd. 03/STC/SJ5/07.08 dtd 22.05.2007 9,40,20,442 16-7-01 to 31-3-05 4 ST/117/10-Mum Standard Chartered Bank Commissio-ner, Thane-1, Mumbai 51/BR-47/ST/Th-I/2009 dtd. 15.12.2009 4,47,67,101 April 02 to May 2006
There are four appeals, three filed by the Revenue and one filed by M/s Standard Chartered Bank as detailed below.
As the issue involved is common in all these appeals they are taken up together for consideration and disposal.
2. 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 makes payment 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 recover 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. In the order dated 15/12/2009, the Ld. Commissioner of Central Excise, Thane, 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 thereon and also imposing penalties under Section 76 & 78 of the Finance Act, 1994. Aggrieved of the same, the Standard Chartered Bank, the appellant in the said case is before us. In the other three appeals where the Revenue is the appellant, the adjudicating authority, i.e. the Commissioner of Service Tax, Mumbai dropped the demands of service tax for the period prior to 01/05/2006 on the ground that the activities of the acquiring bank and the credit card issuer were brought under the purview of service tax only with effect from 01/05/2006 under the category of credit card, debit card, charge card or other payment card services. Accordingly, he set aside the service tax demands of Rs.9,40,20,442/- for the period 16/07/2001 to 31/03/2005 in respect of HDFC Bank Ltd., Rs.11,71,97,278/- for the period 01/04/2002 to 31/03/2005 in respect of ICICI Bank Ltd. and Rs.7,59,85,594/- for the period 16/07/2001 to 10/09/2004 from HSBC Bank Ltd. Aggrieved of the same, the Revenue is before us.
3. The submissions of the Ld. Counsels for the banks can be summarized as follows:-
(1) The issue involved is whether, the Acquiring bank, was liable to pay services tax on the Merchant Establishment Discounts (commonly known as ME Discount) received from the merchants, prior to 1 May 2006, under section 65(105)(zm) read with section 65(12) of the Finance Act, 1994 under Banking and other Financial Services.
(2) The nature of transaction arising out of the use of the credit card is as follows. There are five persons involved in a credit card transaction, namely:
Sr.No. Player Role 1 Card holder The person possessing and using the card 2 Issuing bank The Bank issuing the card to its customer viz. the card holder 3 Card association (VISA/Mastercard, etc) Provides the payment infrastructure and issuing/acquiring banks are its members 4 Merchant Establishment The vendor of goods or service who accepts the card in lieu of cash payment from the card holder 5 Acquiring bank Provides payment processing services to Merchant Establishments by entering into a separate agreement with the merchant and placing a swipe machine at the merchant outlet ME Discount which is the subject matter of the dispute is earned by Acquiring bank as under:
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 amount, 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/Mastercard 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 (3) The transaction can be diagrammatically shown as under:
(4) The present appeals are only with respect to taxability of transactions between Merchant Establishments and Acquiring Bank in the Part B of the diagram above. The ME Discount earned by the Acquiring Bank (the Appellant herein) 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.
(5) The Merchant Discount earned by Acquiring Bank is not taxable for the period prior to 1 May 2006 since the definition of taxable service under section 65(105)(zm) read with the definition of banking & other financial service in Section 65(12) of the Finance Act, 1994 (the Act) covered in its ambit only services provided by the Bank to its customer. The expression to to a customer appearing in Section 65(105)(zm) was substituted with to any person vide Finance Act, 2008 with effect from 16 May 2008. As per the clarification given in TRU Circular dated 9 July 2001, customer is the Credit Card Holder, who enjoys credit limit and pays specified fees to the issuing bank. Thus the definition, as it stood at the relevant time, did not cover all the services arising out of the credit card transaction and covered only those services, which were provided by the issuing bank to its customer, viz., card holder. The fees specified in the said TRU circular dated 9 July 2001 did not include ME Discount fees. 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.
(6) The Honble Bombay High Court in C.K.P. Mandals case 2006 (4) STR 183 (Bom) interpreted the phrase in relation to and held in the context of Mandap Keeper service that only services to customer can be subjected to service tax. Similarly the Honble High Court in Indian National Ship Owners Association case 2009 (14) STR 289 (Bom) case held that the expression in relation to has to be interpreted contextually.
(7) With effect from 1 May 2006, the statutory definitions were amended to include services of settlement of amount transacted through credit card vide Section 65(33a)(iii) of the Finance Act,1994. Credit card services were excluded from the scope of 65(12). The TRU circular dated 28 February 2006 issued in the context of these changes clarified that the proposal is to comprehensively tax credit card services. Thus, only after 1 May 2006, the settlement services provided to merchants became taxable and ME Discount became liable to service tax.
(8) The Honble Supreme Court in Andhra Sugar Ltd 1998 (38) ELT 564 (SC) has held that meaning ascribed by the authority issuing notification is a good guide for interpretation. Thus, the TRU circulars of 2001 and 2006 are good aids to understand the intention of the legislature in levying tax at the respective times. It is also a settled position in law that introduction of an altogether new service suggests that the said service was earlier not covered under any earlier existing entries for levy of tax . Supreme Court decision in Balaji Enterprises 1997 (92) ELT 3 (SC) refers.
(9) With respect to the demand on ATM usage fee received, the Banks receive share of income from other banks when their ATM infrastructure is used by the customer of other banks. For example, if an HDFC Bank's customer uses ATM of Standard Chartered Bank, then HDFC Bank would charge its customer an ATM usage fee, say of Rs. 50. HDFC Bank would pay service tax on Rs. 50 charged to its customer and this fact is undisputed. HDFC Bank would share the said fee of Rs.50 with Standard Chartered Bank. The question in the appeal is about the taxability of the share of fee received by Standard Chartered Bank from HDFC Bank. The said share is not taxable in the hands of Standard Chartered Bank, inter alia, for the following reasons. Standard Chartered would receive the said share from HDFC Bank which is not its customer. For Standard Chartered, this income is not in relation to credit card services as the credit card used was not issued by the Standard Chartered Bank nor is the person using the ATM its customer. Such revenue became taxable for the first time with introduction of entry under section 65(33a)(ii).
(10) Without prejudice to the submissions on merits, in any case, since the question relates to interpretation of law of a new provision where three Commissioners had held in favour of the assessee, the Appellants should succeed on limitation to the extent the notices are issued beyond normal period of limitation. Without prejudice to the submissions on merits and as an alternatively plea, the Appellants should be granted cum-tax benefit if the demands are found to be sustainable.
(11) With respect to the reliance placed by the Revenue on the decision of this Honble Tribunal in ABN Amro Bank 2011 (23) STR 529 (Tri Del), the same is not applicable in the facts of the present Appeal. ABN Amro Bank acted as an Issuing bank and as an Acquiring bank. In the present case, the Appellantw acted as Acquiring Banks and not as issuing banks. Therefore, the facts of ABN Amro case are totally different than the facts in the present appeals.
(12) The Honble Supreme Court in Ispat Industries case 2006 (202) ELT 561 (SC) held that It must be remembered in this context that a case is only an authority for what it actually decides. As observed by the Supreme Court in State of Orissa v. Sudhansu Sekhar Misra - AIR 1968 SC 647 - A decision is only an authority for what it actually decides. What is of the essence in a decision is its ratio and not every observation found therein nor what logically follows from the various observations made in it. In Ambica Quarry Works v. State of Gujarat & others 1987 (1) SCC 213, the Apex Court observed that- The ratio of any decision must be understood in the background of the facts of that case. It has been said long time ago that a case is only an authority for what it actually decides, and not what logically follows from it. In Bhavnagar University v. Palitana Sugar Mills Pvt. Ltd - 2003(2) SCC 111, this Court observed that- It is well settled that a little difference in facts or additional facts may make a lot of difference in the precedential value of a decision.
(13) In Bharat Petroleum Corporation Ltd. & another v. N.R. Vairamani & another - AIR 2004 SC 4778, it was held that a decision cannot be relied on without disclosing the factual situation. In the same judgment this Court held as under:
Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. Observations of courts are neither to be read as Euclids theorems nor as provisions of the statute and that too taken out of their context. These observations must be read in the context in which they appear to have been stated. Judgment of Courts are not to be construed as statutes. To interpret words, phrases and provisions of a statute, it may become necessary for judges to embark into lengthy discussions but the discussion is meant to explain and not to define. Judges interpret statutes, they do not interpret judgment. They interpret words of statutes; their words are not to be interpreted as statutes.
Same was held by the Honble Supreme Court in the case of Alnoori Tobacco Products 2004 (170) ELT 135 (SC) where it observed that:
13.?Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases. Disposal of cases by blindly placing reliance on a decision is not proper.
14.?The following words of Lord Denning in the matter of applying precedents have become locus classicus :
Each case depends on its own facts and a close similarity between one case and another is not enough because even a single significant detail may alter the entire aspect, in deciding such cases, one should avoid the temptation to decide cases (as said by Cordozo) by matching the colour of one case against the colour of another. To decide therefore, on which side of the line a case falls, the broad resemblance to another case is not at all decisive. ??***????????***?????????????*** Precedent should be followed only so far as it marks the path of justice, but you must cut the dead wood and trim off the side branches else you will find yourself lost in thickets and branches. My plea is to keep the path to justice clear of obstructions which could impede it. The Honble Supreme Court in Toyota Kirloskar Motor Pvt Ltd 2007 (213) ELT 4 (SC) has held that the ratio of a decision, must be culled out from the facts involved in a given case. A decision, as is well-known, is an authority for what it decides and not what can logically be deduced therefrom.
(14) In ABN Amros case, the Honble Tribunal was concerned with deciding taxability of Interchange fee and not ME Discount. The Tribunal has not given categorical finding on applicability of section 65(zzzw)(iii) from 1 July 2001 and hence the ratio of the said decision cannot be applied to decide the present case. In any case, 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 revenues. The Appellant, in the present Appeal, has been issued demand notices demanding service tax in its capacity as an Acquiring bank and not as Issuing bank.
(15) Without prejudice to the above submissions, with respect, it is submitted that the decision in the case of ABN Amro is not a correct law and hence, the present appeals may be referred to a Larger Bench for re-consideration of the law declared in ABN Amro case.
4. The Ld. Commissioner (AR) appearing for the Revenue refuted the contentions raised by the banks and the submissions on behalf of Revenue can be summarized as under :-
(a) Common issue involved in above appeals is whether service tax is leviable on the charges commission collected by the acquiring banks from merchant establishments which accept the credit cards from credit cards holders for sale of their goods or services and receive the payments for said sales through acquiring banks from credit card issuing banks. In the above appeals, the banks involved had acted as acquiring banks and collected charges/commission from merchant establishments.
(b) Banking and other financial services were brought under tax net for the first time w.e.f. 6-7-01 and the charging section 65(72)(zm) in the Finance Act 1994 read as under :
65(72) taxable service means any service provided (zm) to a customer, by a banking company or a financial institution including a non-banking financial company, in relation to banking and other financial services. The term banking and other financial services used in Section 65(72)(zm) of the Act was defined by clause (10) of Section 65 as under :
(10) banking and other financial services means, the following services provided by a banking company or a financial institution including a non-banking financial company, namely :
(i) financial leasing services including equipment leasing and hire-purchase by a body corporate;
(ii) credit card services;
(iii) merchant banking services;
(iv) securities and foreign exchange (forex) broking;
(v) asset management including portfolio management, all forms of fund management, pension fund management, custodial depository and trust services, but does not include cash management;
(vi) advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisitions and advice on corporate restructuring and strategy; and
(vii) provision and transfer of information and data processing;
(c) The word customer appearing in section 65(72) has not been defined in the Act and therefore, ordinary meaning attached to it in common parlance shall prevail. The dictionary meanings of the term customer are as follows :
A person who buy goods or services from a shop or business (Oxford English Reference Dictionary).
Once who regularly or repeatedly makes purchase of, or business dealings with a tradesman or business. Ordinarily one who has repeated business dealings with another; a buyer, purchase, consumer or patron(Blacks Law Dictionary).
A person with whom a business house or a businessman has regular or repeated dealings; a purchaser of goods; one who frequents any place of sale for the sake of purchasing or ordering goods. A business customer is one who has the use and habit or resorting to the same person or place to do business (Law Lexicon by P Ramanatha Iyer.) Thus, the customer is a person who buys merchandise or service from another. The purchase of goods or services may be from a shop or a business establishment. There is no reason to presume that the meaning of customer receiving credit card services covered under the banking and other financial services defined under Section 65 (10) is restricted to Credit Card holders alone and merchant establishments are not covered within the meaning of a customer. It is pertinent to note that acquiring banks make payment to the merchant establishments for the goods or services purchased by a card holder by use of credit card issued to him by the issuing bank. The payments are made by the acquiring bank to merchant establishments after deducting merchant fees, service charge, discount, commission at a pre-agreed rate of the transaction value in consideration to the business generated on Credit Cards at the merchant establishment location. Acquiring bank collects the payments from the card holder, if they are their own card holder or otherwise collect the same from the card issuing bank. Therefore. there is no reason to presume that acquiring bank does not provide service in relation to Credit Card to merchant establishments. If the intention was to restrict the levy of tax to the charges collected by issuing bank from a credit card holder the legislature would have used the words service provided to a credit card holder instead of service provided to a customer in section 65(72). There is no justification to give a restricted meaning to the word customer and to limit its meaning to credit card holder when the charges are being collected by the bank from their other customers also, namely, merchant establishments for the services provided in relation to credit cards. Collecting and making payment to a merchant establishment for the goods/ services purchased by a credit card holder using his credit card is undoubtedly a service provided in relation to the credit card. The acquiring bank retains part of the amount which is recovered from the Credit Card holder when he purchases good/ services from a merchant establishment using his Credit Card instead of paying in cash. Therefore it cannot be said that no services have been provided by the acquiring bank to the merchant establishment and the Credit Card holder.
(d) As regards Boards communication vide B.11/1/2001-TRU, dated 9-7-2001 it can be seen from para 2.2.2 thereof that the examples of the charges indicated therein is only illustrative and not exhaustive.
2.2.2?For rendering the service, the service provider collects joining fee, additional card fee, annual fee, replacement card fee, cash advance fee, charge slip/statement retrieval fee, surcharge/service charges on railway fare, fuel charges, and utility bill payments, charges on over limit accounts and late payment fee, interest on delayed payment, interest on revolving credit, etc. The fees may vary based on the type of card and from bank to bank. All these charges including interest charges are made for the services rendered. Hence they all form part of the value of the taxable service in this case.
(e) Subsequently, all such card facilities were brought under one definition in clause (33a) of Section 65 of the Act read with Section 65(105)(zzzw) vide Finance Act, 2006. Accordingly, credit card service which was considered as banking and other financial services in 2001 was under clause (33a) of Section 65 of the Act and continued to be taxed u/s 65(105)(zzzw) of the Act. The said taxing entry reads as under :
65(105)?taxable service means service provided or to be provided :-
(zzzw) to any person, by another person, in relation to credit card, debit card, charge card or other payment card service, in any manner.
Similarly, Clause (33a) introduced in section 65 w.e.f 1-5-2006 read as under :
(33a)?credit card, debit card, charge card or other payment card service includes any service provides :
(i)?by a banking company, financial institution including non-banking financial company or any other person (hereinafter referred to as the issuing bank), issuing such card to a card holder;
(ii)?by any person to an issuing bank in relation to such card business, including receipt and processing of application, transfer of embossing data to issuing banks personalization agency, automated teller machine personal identification number generation, renewal or replacement of card, change of address, enhancement of credit limit, payment updation and statement generation;
(iii)?by any person, including an issuing bank and an acquiring bank, to any other person in relation to settlement of any amount transacted through such card.
Explanation - For the purposes of this sub-clause, acquiring bank means any banking company, financial institution including non-banking financial company or any other person, who makes the payment to any person who accepts such card.
(f) Board vide D.O.F. No. 334/4/2006-TRU, dated 28-2-2006 explained the purpose of the above changes in the law, as under :-
3.19?Credit Card Related Services :- Credit card services are presently taxable under banking and other financial services. The proposal is to tax comprehensively all services provided in respect of, or in relation to, credit card, debit card, charge card or other payment card in any manner. The major services provided in relation to such services are specifically mentioned under the definition credit card, debit card, charge card or other payment card services.
From the above letter of the board, it can be seen that the scope of credit card services was extended to cover debit card, charge card or other payment card in any manner. Clearly, the credit card services which were taxable prior to the above amendment continued to be taxed. The clause (i), (ii) and (iii) of section 65(33a) above have only grouped the different customers of the banks into separate categories. As already submitted above, Services provided by the banks to their customers in relation to credit cards were taxable even prior to above amendment.
(g) The Tribunal in the case of ABN AMRO BANK Versus COMMISSIONER OF CENTRAL EXCISE, NOIDA 2011 (23) S.T.R. 529 (Tri. - Del.) considered the issue whether Service Tax was leviable on the charges collected from merchant establishment. The relevant extracts from the said judgement are reproduced below:-
15.?It may be noted that credit card services was taxable prior to enactment of Finance Act, 2006 for the obvious reason that legislature intended in 2006 to bring all such card services to one place by a definition separating credit card services from banking and other financial services. Both the Acts, i.e. Finance Act, 2001 and Finance Act, 2006 had the charging provision to tax credit card services for the relevant period. The relation between card issuing bank and acquiring bank was made explicit by Finance Act, 2006 as is in Clause (33a) of Section 65 of the Act. Credit card services was segregated from banking and other financial services from Section 65(12) of the Act by Finance Act, 2006 bringing that under Section 65(33a) of the Act in terms of Section 68 of the Finance Act, 2006, Govt. of India by a communication in D.O. F.No. 334/4/2006-TRU, dated 28-2-2006 in terms of para 3.19 conveyed its intention as under :-
3.19?Credit Card Related Services :- Credit card services are presently taxable under banking and other financial services. The proposal is to tax comprehensively all services provided in respect of, or in relation to, credit card, debit card, charge card or other payment card in any manner. The major services provided in relation to such services are specifically mentioned under the definition credit card, debit card, charge card or other payment card services.
Govt. of India in its communication vide No. D.O.F. No. 334/4/2006-TRU, dated 28-2-06 in terms of para 3.19 did not say credit card service was taxable for the first time by Finance Act, 2006. Misinterpretation of definition clause by the appellant shall defeat the purpose of legislation when taxing provision all along appeared in Section 65(72)(zm) and later 65(105)(zzzw) of the Act. It was therefore, consciously explained by Govt. that credit card service earlier belonged to banking and other financial services prior to enactment of Finance Act, 2006 was regrouped in Section 65(33a) by Finance Act, 2006.
16.?The proposal by Finance Act, 2006 was to bring comprehensively all types of card under one definition clause so that all services provided in relation to such credit cards shall be conveniently dealt by the tax administration following cannon of convenience which is one of the considerations of classification rule. Therefore at no point of time, credit card service cannot be presumed to be excluded from levy before enactment of Finance Act, 2006. It may be stated that what was expressively clear soon after enactment of Finance Act, 2001 bringing Section 65(72)(zm) to statute book read with Section 65(10) of the Act was to tax credit card service. Therefore, express statutory grant took within its fold all incidental and ancillary service using the term in relation to credit card through the charging provision of Section 65(72)(zm) and subsequently Section 65(105)(zzw) of the Act to make the grant effective. Therefore, contentions of Revenue has immense force. Accordingly, it is prayed that Revenues appeals ST/144/07-Mum, ST/145/07-Mum and ST/143/07-Mum be allowed and Appeal No. ST/117/10-Mum filed by M/s Standard Chartered Bank rejected by upholding the O-i-O.
5. We have carefully considered the submissions made by both the sides. We have also perused the decision of this Tribunal in the case of ABN Amro Bank.
5.1 Before we proceed further, it would be useful to understand how the credit card system works. Extracts taken from Wikipedia (suitably edited) explain the position.
A credit card is a payment card issued to users as a system of payment. It allows the cardholder to pay for goods and services based on the holder's promise to pay for them. The issuer of the card creates a revolving account and grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user.
Credit cards are issued by a credit card issuer, such as a bank or credit union, after an account has been approved by the credit provider, after which cardholders can use it to make purchases at merchants accepting that card. When a purchase is made, the credit card user agrees to pay the card issuer. The cardholder indicates consent to pay by signing a receipt with a record of the card details and indicating the amount to be paid or by entering a personal identification number (PIN).
Electronic verification systems allow merchants to verify in a few seconds that the card is valid and the credit card customer has sufficient credit to cover the purchase, allowing the verification to happen at time of purchase. The verification is performed using a credit card payment terminal or point-of-sale (POS) system with a communications link to the merchant's acquiring bank. Data from the card is obtained from a magnetic stripe or chip on the card.
The following are the Parties involved in a credit card transaction.
* Cardholder: The holder of the card used to make a purchase; the consumer.
* Card-issuing bank: The financial institution or other organization that issued the credit card to the cardholder. This bank bills the consumer for repayment and bears the risk that the card is used fraudulently.
* Merchant: The individual or business accepting credit card payments for products or services sold to the cardholder.
* Acquiring bank: The financial institution accepting payment for the products or services on behalf of the merchant.
* Independent sales organization: Resellers (to merchants) of the services of the acquiring bank.
* Merchant account: This could refer to the acquiring bank or the independent sales organization, but in general is the organization that the merchant deals with.
* Credit Card association: An association of card-issuing banks such as Discover, Visa, MasterCard, American Express, etc. that set transaction terms for merchants, card-issuing banks, and acquiring banks.
* Transaction network: The system that implements the mechanics of the electronic transactions. May be operated by an independent company, and one company may operate multiple networks.
* Affinity partner: Some institutions lend their names to an issuer to attract customers that have a strong relationship with that institution, and get paid a fee or a percentage of the balance for each card issued using their name. Examples of typical affinity partners are sports teams, universities, charities, professional organizations, and major retailers.
* Insurance providers: Insurers underwriting various insurance protections offered as credit card perks, for example, Car Rental Insurance, Purchase Security, Hotel Burglary Insurance, Travel Medical Protection etc. The flow of information and money between these parties always through the card associations is known as the interchange, and it consists of a few steps.
* Authorization: The cardholder presents the card as payment to the merchant and the merchant submits the transaction to the acquirer (acquiring bank). The acquirer verifies the credit card number, the transaction type and the amount with the issuer (Card-issuing bank) and reserves that amount of the cardholder's credit limit for the merchant. An authorization will generate an approval code, which the merchant stores with the transaction.
* Batching: Authorized transactions are stored in "batches", which are sent to the acquirer. Batches are typically submitted once per day at the end of the business day. If a transaction is not submitted in the batch, the authorization will stay valid for a period determined by the issuer, after which the held amount will be returned to the cardholder's available credit .
* Clearing and Settlement: The acquirer sends the batch transactions through the credit card association, which debits the issuers for payment and credits the acquirer. Essentially, the issuer pays the acquirer for the transaction.
* Funding: Once the acquirer has been paid, the acquirer pays the merchant. The merchant receives the amount totaling the funds in the batch minus either the "discount rate," "mid-qualified rate", or "non-qualified rate" which are tiers of fees the merchant pays the acquirer for processing the transactions. 5.2 As per the information available in the State Bank of India web-site, Credit Card scheme is to provide hassle-free credit to customers based on the assessment of cash-flow without insistence on security, purpose or end-use of the credit. Thus the essence of the service is provision of hassle-free credit by the Issuing Bank (service provider) to the Card holder (service recipient). In the process of operationalising or rendering of the service, other players come into the picture such as Merchant Establishments, Acquiring Bank, Credit Card Association and so on. For the credit card services rendered, the service provider charges various types of fees such as, annual/renewal fee, additional card fee, charges on revolving credit, charges on over-limit account, cash advance charges, late payment charges, cash processing fees, reward redemption fee, balance transfer processing charges, petrol transaction surcharge, railway ticket purchase fee, re-issue of lost, stolen or damaged card retrieval fee and foreign currency transaction fees. The credit card services include grant of credit for purchase of goods and services, withdrawal of cash up to certain limits, payment of utility bills such as water, electricity, telephones, etc., payment for fuel for the conveyance, booking of tickets for travel by road/air/railways, booking of tickets for movies/theatre/music programs and the like, and so on. But the essential nature of the service is provision of credit taking into account the requirements and creditworthiness of the customer who is the card holder. Understanding this essential nature of the service is very relevant and germane to interpretation of levy of service tax on credit card services.
5.3 Prior to 01/05/2006, as per Section 65 (12) of the Finance Act,1994, - banking and financial services means the following services provided by a banking or a financial institution including a non-banking financial company, namely:
i) financial leasing services including equipment leasing and hire-purchase by a body corporate;
ii) credit card services;
iii) merchant banking services;
iv) securities and foreign exchange (forex) broking;
v) asset management including portfolio management, all forms of fund management, pension fund management, custodial depository and trust services, but does not include cash management;
vi) advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisition and advice on corporate restructuring and strategy; and
vii) provision and transfer of information and data processing.
The taxable service was defined under 65 (72)(zm) as - the service provided to a customer by a banking company or a financial institution including a non-banking financial company in relation to banking and other financial services. In respect of credit card services, considering the essential nature of the service, from a laymans 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.
5.4 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 nationalized banks, multi-national banks and private banks.
2.2.2 For rendering the service, the service provider collects joining fee, additional card fee, annual fee, replacement card fee, cash advance fee, charge slip/statement retrieval fee, surcharge/service charges on railway fare, fuel charges, and utility bill payments, charges on over limit accounts and late payment fee, interest on delayed payment, interest on revolving credit, etc. The fees may vary based on the type of card and from bank to bank. All these charges, including interest charges are made for the services rendered. Hence, they all form part of the value of the taxable service in this case.
2.2.3 The service tax is leviable only in respect of transactions which are done using a credit card on or after 16th of July 2001. Any amount paid by a customer to credit card service provider in respect of transaction done prior to 16th July, 2001 is not liable to service tax even though such amount is paid on or after the 16th July, 2001.
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 referred 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.
5.5 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, -
i) by a banking company, financial institution including non-banking financial company or any other person (hereinafter referred to as the issuing bank), issuing such card to a card holder;
ii) by any person to an issuing bank in relation to such card business, including receipt and processing of application, transfer of embossing data to issuing banks personalization agency, automated teller machine personal identification number generation, renewal or replacement of card, change of address, enhancement of credit limit, payment updation and statement generation;
iii) by any person, including an issuing bank and an acquiring bank, to any other person in relation to settlement of any amount transacted through such card. (Explanation For the purposes of this sub-clause, acquiring bank means any banking company, financial institution including non-banking financial company or any other person, who makes the payment to any person who accepts such card;
iv) in relation to joint promotional cards or affinity cards or co-branded cards;
v) in relation to promotion and marketing of goods and services through such card;
vi) by a person, to an issuing bank or the holder of such card, for making use of automated teller machines of such person; and
vii) by the owner of trade marks or brand name to the issuing bank under an agreement, for use of the trade mark or brand name and other services in relation to such card, whether or not such owner is a club or association and the issuing bank is a member of such club or association.
Explanation For the purposes of this sub-clause, an issuing bank and the owner of trade marks or brand name shall be treated as separate persons).
Thus, the definition and concept of service underwent a significant change to include services not 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.
5.6 This change in the scope of the levy was clarified by the CBEC vide D.O.F. No. 334/4/2006-TRU, dated 28-2-06.
3.19 CREDIT CARD RELATED SERVICES: Credit card services are presently taxable under banking and other financial services. The proposal is to tax comprehensively all services provided in respect of, or in relation to, credit card, debit card, charge card or other payment card in any manner. The major services provided in relation to such services are specifically mentioned under the definition credit card, debit card, charge card or other payment card service.
5.7 The banking and financial services 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 card 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 Honble High Court of Bombay in the case of Indian National Ship Owners Association 2009 (13) STR 235 (Bom) and affirmed by the Honble 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 Honble Supreme Court in Andhra Sugar Ltd 1998 (38) ELT 564 (SC) and has to be given due weightage.
5.8 Similar issues have arisen in respect of other taxable services also. Prior to the levy of service tax on all services except those specified in the negative list in the Budget 2012, the approach adopted was selective taxation of services. In every budget, the scope of levy was extended either bringing new services under the tax net or by expanding the scope of the existing taxable services. That does not mean that the expanded coverage was applicable retrospectively. For example, in respect of telephone services, which was one of the three services on which service tax was imposed in 1994 budget, the coverage was limited to services rendered to a telephone subscriber. Services rendered by one telecom operator to another was not subject to tax. The scope and coverage of telephone services was comprehensively revised and expanded in the 2007 budget when services rendered by one telecom operator to another, commonly known as interconnectivity usage service was also brought under the tax net. In that context, a question arose whether prior to 2007, whether service tax was leviable on such interconnection services rendered by one telecom operator to another. It was clarified by the CBEC vide Circular No. 91/2/2007 dated 12-3-2007 as follows:-
4. .Vide Finance Bill, 2007, a new definition of telecommunication service has been incorporated vide clause (104) of section 65 of the Finance Act, 1994 and IUC has been specifically incorporated in the definition of telecommunication service to make it a taxable service. Further, any service provided or to be provided, to any person, by a telegraph authority in relation to telecommunication service has been made taxable. This amendment will come into effect from a date to be notified by the Government after enactment of Finance Bill, 2007. Therefore, after this amendment comes into effect, service tax would be applicable to IUC charges.
5 It is, therefore, clarified that for the period prior to the date when the amended definition of telecommunication service comes into effect, service tax is not applicable to IUC. In the present case also the same logic would apply. 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 Establishments 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. Similar expansion in the coverage of services has taken place in respect of a large number of services such as man power recruitment or supply service, business auxiliary service, management, maintenance or repair service, erection, commissioning and installation service and so on. In all these situations, the consistent stand of the Revenue as well as the Tribunal and the Courts has been to give effect to expanded coverage only prospectively. The same logic applies in the present case also.
5.9 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).
5.10 Since the view that we have taken is at variance with that taken by the co-ordinate Bench of this Tribunal in the ABN Amro case, it would be appropriate to refer the matter to the Larger Bench in deference to the decision of the honble Apex Court in Jayaswals Neco Ltd. v. CCE,Nagpur [2006(195) ELT 142 (SC)] -
10. A bench of co-ordinate jurisdiction must not disregard the decision of the bench of the same strength on its own on an identical question. The rationale of this rule is that the need for consistency, certainty and predictability in the administration of justice. Classification of particular goods adopted in earlier decisions must not be lightly disregarded in subsequent decisions, lest such judicial inconsistency shake public confidence in the administration of justice, it is undoubtedly vital in the administration of justice that those exercising judicial power must have the necessary freedom to doubt the correctness of an earlier decision if and when subsequent proceedings bring to light what is perceived by them as an erroneous decision in the earlier case. In such circumstances, it is reasonable and indeed efficacious to refer the case to a Larger Bench. In view of the reference to be made to the Larger Bench, we do not go into the other questions raised by the Banks with regard to invocation of extended period of time, imposition of penalties and treating the total consideration received as cum tax now and the same shall be considered after the reference made to the Larger Bench is replied.
5.11 Accordingly, we refer 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? Registry is directed to place the matter before the Honble President, CESTAT for constitution of the Larger Bench.
(Pronounced in Court on.) (Anil Choudhary) Member (Judicial) (P.R. Chandrasekharan) Member (Technical) pj 1 32