2019 (2) TMI 14 – CESTAT CHENNAI – TMI – Classification of services – credit card services or not – distinct contractual (service) relationships – Interchange Fees which accrues to the appellant as a fallout of each credit card transactions by a holder of a credit card issued by the former – taxability or otherwise – Held that:- In a very recent decision of the Tribunal in the case of ABN Amro [2018 (7) TMI 1750 – CESTAT ALLAHABAD], it has been categorically held that the amount received by the appellant does not qualify as credit card services that when acquiring bank has discharged service tax liability on the entire amount, no service tax is payable by the appellant and that the amount offered by the appellant does not qualify a credit – the very issue that is in dispute in the present appeal has been conclusive decided by the Tribunal in the final order (ABN Amro) against Revenue.
–
The impugned order is not sustainable – appeal allowed – decided in favor of appellant. – ST/Mi
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
nsactions, the acquiring banks provide the required infrastructure like Card Wiping Terminal (Point of Sale Machines), payment gateway etc.; that assessee s credit card customers are using Point of Sale (POS) machines installed by acquiring banks in various merchant establishments / service establishments; that the acquiring banks make payments to the merchant establishments / service establishments and charge them a pre-contracted rate known as Merchant Discount Rate (MDR) to facilitate the credit card transaction; that acquiring bank submit the transactions settled by merchant establishments to the assessee (Issuing Bank) through Card Association and in-turn the assessee makes payments to the acquiring bank through Card Association; that Card Association (Master Card, Visa and Diners Club International) acts as a bridge between the assessee (Issuing Bank) and acquiring banks; that Card Association provides the required network and platform to the issuing banks and acquiring banks for
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
rt of their service income in relation to credit card or other payment card services and that service tax under credit card, debit card, charge card or other payment card services. During the period from October 2007 to June 2012, the assessee had received interchange fee of ₹ 6,04,28,07,230/- from the acquiring banks and service tax payable on the said interchange fee worked out toRs.65,53,24,371/-. On being pointed out by audit, the assessee vide letter dated 12.4.2013 stated that the gross amount of consideration received for taxable service under the taxing entry of Credit Card Services , has already been subjected to service tax, in the hands of acquiring banks, that the interchange fee received by the issuing bank is just a share of the MDR received from acquiring bank; that issuing bank is not rendering any service to acquiring bank and hence no service tax is applicable on the proportionate share of MDR received by issuing bank in the form of interchange; that taxing the
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
adjudicated by a common Order-in-Original No. 71 to 74/2016 – 2017 dated 24.1.2017, wherein the proposed tax liabilities were confirmed with interest thereon, and penalties also imposed under various provisions of law. Hence appellants are before this forum. 2.1 When the matter came up for hearing, on behalf of the appellants learned Senior Advocate Shri N. Venkataraman made various oral and written submissions, which can be broadly summarized as under:- (i) In any credit card transaction, there arises the following distinct contractual (service) relationships, between: a) the Issuing Bank and the Card Holder, b) the Acquiring Bank and the Merchant Establishment, c) the Card Network and the Issuing Bank, d) the Card Network and the Acquiring Bank. (ii) In each of these contractual relationships, services are provided by the former to the latter and service tax is charged on the consideration for the respective services, none of which is contested by the Department: a) service provided
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
tomers (Merchant Establishments and Card Holders respectively), the entire fees are collected and culminate at a single source point, i.e., in the hands of the Acquiring Bank. There are effectively two parties jointly acting for settlement of a single transaction. (v) Said differently, the settlement (payment for) the transaction takes place in a reverse manner, inasmuch as the Acquiring Bank charges the entire fees for services provided by itself and by the Issuing Bank, and thereafter, the fees so received is shared with the Issuing Bank. This settlement system is followed since there is no privity of contract between the Acquiring Bank and Issuing Bank, or the Merchant Establishments and Issuing Bank inter se. Therefore, by default, the Interchange Fee (as part of the MDF) can only be collected at the Acquiring Bank s end through his client, and in no other way, in the process of settlement which is based on a technological platform. (vi) If the collection of fees (of the Acquiring
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
he Interchange Fees earned by the Issuing Bank does suffer service tax, although in the hands of the Acquiring Bank. (viii) The judgment in the case of Standard Chartered (supra) is not applicable in the present case for the following reasons: a. The period in question in that case was prior to 01.05.2006, during which the law applicable differed. The issue in question in the Standard Chartered case was whether Interchange Fee received by the Issuing Bank from the Acquiring Bank fell within the scope of the taxing entry of Banking and other Financial Services ( BFS ) and should be taxed. In the present case, the demand is raised under the taxing entry of CCS, the definition of which is entirely different from the definition of BFS. b. The premise in the Standard Chartered case was that there was a service by the Issuing Bank to the Acquiring Bank, therefore, whether or not Interchange Fee was consideration for service was not in question before the Hon ble Tribunal. This is contrarian
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
Vs. Commissioner of Central Excise, Noida has held that since the acquiring bank has paid service tax on whole of the amount (MDF and Interchange Fees), and out of which only some amount has been shared with the issuing bank, no service tax is payable by the issuing bank. The said judgment is directly applicable and binding in the present case since (a) the demand in ABN Amro s case was for the period 2006 – 2008, which period is covered in the present case as well, (b) the demand was raised under the taxing entry of Credit Card Services as in the case of this appellant and (c) in practice, the banking industry has followed a uniform approach by taxing the entire amount (of MDF and Interchange Fee) in the acquiring bank s hands and thereafter sharing the Interchange Fee component with the issuing bank, which fact has been clearly brought forth and informed in the filing with the CBEC on various dates and way back in 2006. (x) The United States Tax Court in the case of Capital One Fina
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
for service provided by the issuing bank to the card network. (xii) The proceedings are also hit by limitation. The issue is common to the entire banking industry and is not unique to the appellant alone. The ld. counsel drew attention to representation from the Indian Banks Association (IBA) on17.7.20016 to the Commissioner of Service Tax, CBEC inter alia on the issue in appeal. The IBA wrote further letters to Commissioner of Service Tax on 20.11.2006, 14.7.2007, 16.2.2008, 17.10.2012. In fact, even in the letter dated 20.11.2006, the IBA drew attention to a meeting with Commissioner of Service Tax on 22.6.2006 and requested for early clarification to the effect that no service tax has to be paid by the issuing bank on its interchange income. As CBEC was fully aware of the entire issue, and in fact, the clarifications were being awaited by IBA of which the appellant is a member, the allegation of suppression, fraud, mis-statement or intention to evade payment of tax could not be foi
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
ustomer. 4. Heard both sides and have carefully gone through the concerned records. 5.1 We find that the issue in dispute concerns taxability or otherwise of Interchange Fees which accrues to the appellant as a fallout of each credit card transactions by a holder of a credit card issued by the former. 5.2 From the submissions made by both sides, we have been able to comprehend the roles of various parties involved in such credit card transactions as under:- In credit card transactions, following five parties are involved, namely: a) Issuing Bank (IB) – The Issuing Bank issues credit cards and therefore, effectively lends monies to its Card Holders. The contractual relationship between an Issuing Bank and its Card Holders is spelt out in the cardholder agreement / terms & conditions. Service fees are charged to service tax. b) Credit Card holders (CH) – The Card Holder is the customer to whom the Issuing Bank issues a credit card. The credit card evidences a potential line of credit
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
Bank to enable it to accept card payments, for a fee (Merchant Discount Fee / MDF) which is pre-agreed and deducted at the time of settlement of the transactions. For this, the Merchant operates a bank account with the Acquiring Bank for credit (payments) for sales made to Card Holders. e) Card Network (CN) – For example, Visa or MasterCard who provide the infrastructure / gateway system for electronic (credit card) transactions to effectuate. They also process transactions between Acquiring Banks and Issuing Banks, allowing purchases to be made, authorized and settled. Card Networks function as an interface between the Acquiring Banks and Issuing Banks, operating like an exchange or clearing platform. Thus, they have the key role in settlement of a Credit Card transaction. The Card Network prescribes the Operating Rules and the 'Interchange Fees‟ that IBs earn besides manage interchange flow between banks. The CN in most cases is located outside India. The charges levied by
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
udgment in the case of Standard Chartered not applicable in the present case. 5.6 On the other hand, the adjudicating authority has found that interchange fee is paid for facilitating the purchase using the card and not for lending the money for the purchase; that interchange fee is a consideration that accrues to the issuing bank for verifying, facilitating and extending the purchase value in line with the contractual agreement, the issuing bank has with the card association and taking the risk for collection of amounts from the card holder. 5.7 In response to the appellant s contention that service tax is being paid on the entire MDR (Merchant Discount Rate), the adjudicating authority in para 8.11 of the impugned order has taken a stand that no proof has been furnished to that extent. Moreover, the interchange fee is the consideration given to issuing bank for validating the transaction and the MDR is the consideration for the acquiring bank for settling the merchant establishment.
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
from the definition of Banking and Other Financial Services. Further, the premise in Standard Chartered Bank was that there was a service by the issuing bank to the acquiring bank. Therefore, the question of interchange fee was not in consideration before the Larger Bench of the Tribunal. We are also in agreement with the contention of the ld. counsel that in the Standard Chartered Bank case, it was not the submission of the assessee therein that interchange fee was not consideration for services. Therefore, the Tribunal did not have any occasion to examine whether or not the activity of issuing bank was a service and covered by the taxing entry for Credit Card Services. 5.9 We further find that in the recent decision of the Tribunal in ABN Amro Bank (supra), the case law of Standard Chartered Bank had been agitated before the Bench. Further, on going through Standard Chartered Bank decision, we find that the primary issue that was dealt with by the Larger Bench of the Tribunal was in
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
does not qualify as credit card services that when acquiring bank has discharged service tax liability on the entire amount, no service tax is payable by the appellant and that the amount offered by the appellant does not qualify a credit. The relevant portion of the order is as under:- 5. Considered the submissions. 6. It is a fact on record that the acquiring bank is discharging his service tax liability on the amount in question, in that circumstances, no service tax is payable by the appellant (and the said fact has not been disputed by the learned AR during the course arguments) as held by the Hon ble Allahabad High Court in the case of Commissioner of C. Ex. Lucknow vs. Chotey Lal Radhey Shyam reported at 2018 (8) G.S.T.L. 225 (All.). 7. Moreover, we have gone through the definition as under Section 65(33A) Clause (iii) herein is reproduced below:- By any person, including an issuing bank and an acquiring bank, to any other person in relation to settlement of any amount transact
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =