Commissioner of GST and Central Excise vs M/s Citi Bank N. A.

Referring the matter to Appropriate Bench, the Court HELD: 1. Per K. M. JOSEPH, J. : It is clear that interchange fee is earned by the respondent as issuing bank. It may be true that the respondent may also be engaged in the credit card transaction both in its capacity as issuing bank and an acquiring bank. In such an event, the aggregate sum earned for the service rendered in its capacity as issuing bank and its capacity as acquiring bank, would become the measure of tax or, in other words, value of the taxable service but legally they are for separate services as the nature of service rendered by the issuing bank is different from the service rendered by the acquiring bank. The fee is also different. Undoubtedly, it would be dependant on the terms of the contracts in question. In a scenario, however, where the issuing bank and the acquiring bank are different, as is the case in the present case, it would be a case where both the issuing bank and the acquiring bank are rendering separate services as part of the credit card transaction. Indisputably, the interchange fee is no gift. Such a fee is not the subject matter of the service tax, falling under the transaction between the issuing bank and the card holder relatable to Clause (i) of Section 65(33a). The nature of the entire transaction, having been laid bare from the moment the card gets swiped in a transaction, till the amount is paid to the merchant establishment, there is, indeed, service performed by the issuing bank in relation to the settlement of the amount transacted through the card. As already noticed, the issuing bank, as part of its agreement with the card association and the acquiring bank, which is also under agreement with the card association, is engaged in the unique activity of being on the electronic platform hosted by the card association, which, admittedly, fixes the interchange fee and the amount to be earned by the issuing bank and acquiring bank and, under the auspices of which, transaction data, in millions, is processed by the issuing bank and it is only with the approval of the issuing bank that the merchant bank permits the purchase using the card. This is on the clear understanding that the amount will be paid by appropriate debit and credit in the accounts maintained, both by the issuing bank and acquiring bank. Rs.2/-, in the example given, is, however, retained by the issuing bank and it is Rs.98/- which alone gets credited in the account of the acquiring bank. The actual payment is finally received by the merchant establishment on the agreed date on settling the account by the acquiring bank paying the amount, after deducting Rs. 5/- as amount of merchant discount. This amount of merchant discount is made up of Rs.2/- earned by the issuing bank. [Paras 54 & 55][485-E-H; 486-A-E]

2. It is inconceivable that without the role played by the issuing bank, which tantamounts to activity and, therefore, service, the very credit card transaction, would become possible. It is also clear that credit card system is fundamentally based on the issuing bank, undertaking the risk. Rs.98/-, in a transaction of Rs.100/-, gets debited from the account, which the respondent bank, as issuing bank, maintained. It is the funds of the issuing bank, which is utilised, in other words, to effect the payment. It is, therefore, clear that there is service rendered by the bank, which is in connection with Clause (iii) of Section 65(33a). It is another matter that under the agreement between the issuing bank and the cardholder, the cardholder would be paying the sum of Rs.100/- to the issuing bank, within the stipulated period and, if he does not pay, he would incur the liability to pay interest, as stipulated, under the terms of the contract. The fact remains that there is the risk undertaken, in the first instance, of making available the funds to satisfy and settle the amount transacted through the card to the merchant establishment. [Paras 56 & 57][486-E-H; 487-A]

SECTIONS 67 TO 70; WHO IS LIABLE TO PAY

SERVICE TAX, OBTAINED REGULATION AND FILE

RETURN?

3. As far as payment of service tax is concerned which is governed by Section 68 of the Act, the liability to pay service tax is cast on every person providing the taxable service to any person. Sub- section (2) contemplates a departure from the mandate of Section 68(1) in that, in regard to taxable services as may be notified by the Central Government in the gazette, the service tax is to be paid by such person in the manner prescribed at the rate specified in Section 66 and the provisions of the chapter (which is in fact “persons responsible for payment of service tax”) applies as if he is a person liable to pay service tax relating to such service. Section 68 must be read with Section 69, for it provides for the liability of a person to get registered. The liability is cast on the person liable to pay service tax under Chapter V. There is no case for the respondent that the case is governed by Section 68(2) for which the taxable service must be notified thereunder. That the person liable to pay tax under Section 68 must get himself/itself registered in the manner prescribed is made clear from Rule 4 of the Rules as it clearly provides that every person liable to pay service tax shall apply to get himself/itself registered and the entire provisions of rules is premised upon the liability to get registered being on the person made liable to pay service tax. No doubt, endorsement of an existing registration may be possible. Section 70 also cast the liability on the person liable to pay service tax, to assess the tax due and furnish return. [Para 59][487-F-H; 488-A-C]

4. The contention of the Respondent, however, in regard to Section 67(1)(i), in its written submission before this Court, is that the expression “service provider” will include both issuing bank and the acquiring bank and the gross amount will be Rs. 5/-, which includes the consideration of Rs.2/- payable to the issuing bank and Rs.3/- which is payable to the acquiring bank. This contention is qualitatively distinct from the case, which has been set up before the Commissioner and the Tribunal, in the sense that the case of the Respondent appears to have been that under Section 67, the service provider was to pay tax on the gross amount, for which it provided the service and the attempt has been to contend that no service, as such, was being provided by the issuing bank. I take it that this is, in effect, an implied admission that the issuing bank does provide service in the matter of settling of the amount transacted through the credit card, for which it earns Rs.2/- as interchange fees. Now, that it is contended that the expression “service provider”, in Section 67(1)(i), will include, the issuing bank and the acquiring bank, I would feel more reassured in our finding that, all throughout, the respondent was, indeed, as issuing bank, liable to pay service tax on the service contemplated under Section 65(33a)(iii). Section 67(1)(i), as already decoded by me, after its substitution by the Finance Act, 2006, provides that the value of taxable service will be the gross amount charged by the service provider for such service provided or to be provided by him. The contention that the gross amount would be Rs.5/-, which is made of Rs.3/- for the service provided by the acquiring bank and Rs.2/- payable to the issuing bank (interchange fee), overlooks the fact that the gross amount is predicated with reference to the service actually provided or to be provided by the particular service provider. Proceeding on the basis that the words “service provider”, includes issuing bank and the acquiring bank, it is, therefore, clear that the gross amount to be charged by both the service providers, viz., the issuing bank and the acquiring bank, must be premised on the separate service provided or to be provided by them. The words “gross amount” cannot be the aggregate of the value of the services provided by the different service holders. The service, provided by the acquiring bank, is different from the service provided by the issuing bank. This is far too clear to require any further elucidation. The value of the service, which constitutes the measure of the tax, is dependant on the nature of the service. Apparently, the measure of the tax by way of value, has been fixed by the Card Association, with which, both the issuing bank and acquiring bank, have entered into separate agreements. The activity of the acquiring bank, and, therefore, the services rendered by the acquiring bank is distinct from the activity of the respondent bank and, therefore, the service is different and distinct. In law, therefore, there could not be a gross amount by adding the value of two distinct services by two different service providers. Expression “gross amount” is to be understood with reference to the service provided or to be provided by a particular service provider and the provision does not appear to me to embrace within its scope, adding of what would be different gross amounts for arriving at the gross amount of the service provided by a particular service provider. In this context, I may notice that the words “gross amount charged” have been defined as, including payment in the many forms, which are mentioned therein, which includes debit notes, book adjustment and any amount credited or debited in any account. The interchange fee, in a transaction of Rs.100/-, is the amount of Rs.2/-, which remains to the credit of the respondent-issuing bank, when it suffers the debit of Rs.98/- only, in a transaction of Rs.100/-. In other words, the Respondent got paid Rs.2/-. It is only Rs.98/-, which makes its way into the account of the acquiring bank. The merchant establishment, no doubt, is paid Rs.94.30, in the example given by the Respondent, out of Rs.98/- received by the acquiring bank. From the above, it appears to be clear that the Respondent, as issuing bank, provides service within the meaning of Section 65(33a)(iii). It is towards the same that the Respondent is paid Rs.2/- as interchange fee. Interchange fee, therefore, is exigible to service tax. Admittedly, the respondent has not paid any service tax on the said amount. [Paras 61-63][488-E-H; 489-A-H; 490-A-B]

IS INTERCHANGE FEE INTEREST AND THEREFORE

NOTCONSIDERATION FOR SERVICE?

5. The respondent is a Banking Institution. Undoubtedly, it falls to be regulated under the Banking Regulation Act. It is, in fact, a scheduled bank. Interestingly, the Interest Tax Act, 1978, provides for a charge in Section 4 on interest earned by a credit institution, which includes the respondent-bank. Undoubtedly, under Section 18, the tax paid on interest under the Interest Tax Act canbe deducted under the Income-Tax Act. If the interchange fee, has been regarded as interest, then, undoubtedly, it would have been brought to tax under the Interest Tax Act. The respondent has no case that tax has been paid on the interchange fee treating it as interest. It is inconceivable that there is a creditor and debtor relationship between the respondent as issuing bank and the Card Association or the acquiring bank or even the merchant establishment. The respondent cannot be described as a lender of money and the other three players, as just hereinbefore described, as borrowers. In the context of the relationship of the respondent as issuing bank, interchange fee cannot be described as compensation fixed by the parties for use or forbearance of the borrowed money. In fact, the concept of borrowed money, is predicated on the existence of creditor-debtor relationship which is absent. Interest, in the context of the definition, in Law Lexicon by Ramanathan Iyer, places a time value on the funds or money involved and further, it would also involve the rate, at which, the interest is calculated. Again, this definition is apposite in the context of the relationship between a lender and a borrower. The nature of the service, I have unravelled, performed by the issuing bank includes the act of approval of the credit card transactions. It is an integral and indispensable part of a credit card transactions. It was partly for this service that the interchange fee is earned by the respondent as issuing bank. There is no scope for an implied contract as the interchange fee is apparently paid in terms of the contract. Quite clearly, there is no scope for applying equity as the basis for the interchange fee as interchange fee is payable under the contract and towards service rendered by the respondent. I am, in the circumstances, of the view that the contention of the respondent is meritless. [Paras 66, 69][490-G-H; 491-A-B; 493-C-G] WHETHER CREDIT CARD TRANSACTION A

TRANSACTIONIN MONEY?

6. The interchange fee is earned by the issuing bank as consideration for service which is provided by the issuing bank. The complex web of activities indulged in by the three main players namely the issuing bank, the card association and the acquiring bank culminates in the settling of the amount due to the merchant establishment which stood persuaded to make available goods and services initially on credit but on assurance that the credit card transaction will be taken to its logical culmination. It is clear that the active role which necessarily means the activity indulged in by the issuing bank is indispensable and at the heart of the transaction in the system under which though through machines available by the acquiring bank with the merchant establishment the Merchant gets paid. The issuing bank for each transaction must approve the transaction. The risk which is undertaken by the issuing bank which again makes available the funds and maintains the fund from time to time as per requirement and under the contractual obligations is part of the service performed by the issuing bank. What is sought to be taxed under the act is the interchange fee and not the amount which is made available. Therefore, the contention of the respondent that it constitutes merely transaction in money involves overlooking the service provided by the respondent as issuing bank. There is clearly activity in relation to the use of money within the Explanation. [Para 73][496-B-F]

DEVIATION FROM SHOW CAUSE NOTICE [NUMBER

ONE];

7. One of the contentions raised by the respondent is that in the Show Cause Notices issued by the Commissioner he proceeded on the basis of rejection of the version of the respondent that no service was being performed by the respondent bank as issuing bank towards the acquiring bank. However, it is pointed out that there is a deviation in the order and what is found is service is being performed by the issuing bank in terms of the agreement with the card association. A perusal of the order of the Commissioner does indicate that the respondent has defended the Show Cause Notices by contending that it was not performing any service to the acquiring bank. The Courts have not allowed an authority to go beyond the Show Cause Notice on the basis of the prejudice which is occasioned to the noticee. In this regard, I must notice that while the Show Cause Notice does indicate that the Commissioner had proceeded in a manner rejecting the contention of the respondent that they are not rendering any service to the acquiring bank has been not correct, there is indeed reference to the basis for the final finding indicated in the notice in indicating that the respondent has earned service income, viz., interchange fee, which is taxable under Section 65(105)(zzzw) read with Section 65(33a). Moreover, being a question of applying the law to certain facts which are not in dispute namely the manner in which the credit card system operates about which there is no dispute and on our finding that service is indeed provided by the respondent in relation to the settlement of the amount transactions under the credit card, in the facts of this case, the respondent should not succeed on this point. [Para 84][499-D-H; 500-A-B]

CERTAIN CIRCULARS; DOUBLE TAXATION

8. Circular No. ST-51/13/2002 dated 07.01.2003, which was, in fact, relied upon by the respondent before the Commissioner, came to be issued in the light of doubts raised regarding classification of certain services, which appeared to fall under two or more categories simultaneously. The above Circular contemplates that if the one service provider provides more than one taxable service, one registration is sufficient but is to be endorsed for all the taxable services. Further, tax liability will have to be discharged for each of the taxable services separately. In the context of the credit card transaction, as issuing bank for the cardholder, the respondent is providing taxable service to the card holder. That apart, if, under Section 65 (33a) of the Act, the respondent has been engaging in other services till 01.07.2012 and, thereafter, has been providing different services, it would have to discharge its tax liability of the taxable services separately. No doubt, the Circular, in paragraph-3, did go on to deal with the issue of correct classification of a particular service. But it is one thing to say that there is one service and the question is one of classification of that service and another to say that if there are more than one service provided by the same service provider, each of which is separately taxable, then, the service provider has to pay only one tax. It is clear that qua each of separate service provided, the service provider would be liable to pay tax separately. [Paras 86, 87][500-C, G-H; 501-A-C] EFFECT OF SERVICE TAX BEING A VALUE ADDED

TAX

9. As far as contention of the appellant that service tax is a value added tax, is concerned, there can be no quarrel. The service provided by each of the service provider in a chain of transactions where there is value addition, must bear the burden of service tax on the value of the service. The law also provides for tax credit being availed. However, when it comes to the question relating to taxing a single service, it is clear that there cannot be taxation more than once. It is one thing to say, in other words, that when there are different services, provided under the taxing entry, each of the taxable services became taxable under the previous regime, as also the framework after 01.07.2012, for the same service, the law does not permit repetition of the same tax on the same measure of tax, with regard to the same service. In other words, if for the services rendered by the respondent as issuing bank, it has earned interchange fee, which should constitute the measure of the tax, the acquiring bank, in terms of a practice followed, it has paid tax on the said amount, then, it would be illegal and unfair to tax the respondent all over again. It is another thing that, that the respondent is the person who was liable to pay the tax on the interchange fee, after filing return under Section 70 and treating the interchange fee as the value of the taxable service. These are all matters, which I am in agreement with the learned Additional Solicitor General. However, it is difficult to agree with the learned Additional Solicitor General that even if the acquiring bank has discharged the liability qua the interchange fee also, treating it as part of MDR, then, the respondent is liable to pay tax. I am conscious that the argument of the appellant involves the following reasoning. In law the respondent being found liable to pay tax on the interchange fee and, as admittedly, the tax has not been paid by it, it is not the lookout of the Department to consider, whether the payment of the tax by the acquiring bank, was effected, even assuming, it was on an amount including the interchange fee. But this involves, in effect, double taxation. [Paras 92 & 93] [503-A-G]

SHOW CAUSE NOTICE: DIVERGENCE FROM THE

ORDEROF THE COMMISSIONER [NUMBER TWO];

10. Another aspect pointed out by the respondent is that in the Show Cause Notice, the Commissioner has proceeded on the basis that payment by the acquiring bank of service tax on the interchange fee, will not exonerate the liability of the respondent to pay the service tax. It is pointed out thereafter to go on to find that the respondent has not produced proof of payment, involves depriving the respondent of the opportunity to meet such a case and also to depart from the admitted position that acquiring bank has paid the tax. In other words, when the Commissioner proceeded on the basis in the Show Cause Notice that the payment, by the acquiring bank, will not detract from the liability of the respondent, it is impermissible to turn around and find that the respondent has not proved that the acquiring bank has paid the tax. It may be true that the Show Cause Notice contains the statement that the fact of payment of service tax on the interchange fee by the acquiring bank, does not exempt the assessee from payment of service tax, on the consideration received by them towards rendering of service as each person is liable to pay service tax for the service rendered by them. Essentially, it would appear that the Commissioner was referring to the case of the respondent that acquiring bank had paid the tax on the interchange fee. No doubt, it does create the impression that the Commissioner proceeds, as if, there was payment by the acquiring bank, which was the case of the respondent during audit. As noted, there is also the case for the appellant that being a value added tax, even if, payment is made by the acquiring bank, the respondent would remain liable. It is to be noted that when the Order of the Commissioner was challenged before the Tribunal, no material is produced in support of the claim that the acquiring bank had discharged the liability even on the amount of interchange fee. [Paras 94 & 95][503-G-H; 504-A-E]

11. In this regard, it is apposite to notice that in the Appeal filed before the Tribunal, produced along with the Compilation No. 3, by the respondent, one of the grounds taken, no doubt, is that the impugned Order travelled beyond the scope of the SCNs. Thereunder, however, the complaint, which was sought to be made out was that in the SCN, the case set up by Commissioner was that the service was to the acquiring bank, whereas, the Order passed by the Commissioner was to the effect that service was provided to the Card Association. There is no ground taken in the Appeal, as such, in relation to the SCNs proceeding on the basis of the payment made by the acquiring bank, being accepted, and thereby, a new case being found in the Order. In the Order passed by the Tribunal, the Tribunal notices the complaint about the Commissioner departing from the SCN in terms of the ground in the Appeal, which have been set out. Last but not the least, it is relevant to notice the actual reasoning of the Tribunal, which led to the Order of the Commissioner being set aside. On the basis of the said Order of the Tribunal, and finding no reason to differ from it, on this legal ground, the Order of the Commissioner was set aside. I may notice that in the said case, in paragraph-6, the Department, in fact did not dispute that service tax was being paid by the acquiring bank. In such circumstances, the argument of the respondent in this regard, does not appeal to me. I must notice that respondent has not produced any material to establish its case. [Paras 96, 97, 99 & 100][504-E-H; 505-D-E, G-H; 506-A]

WHETHER

THE

EXTENDED

PERIOD

OF

LIMITATION IS AVAILABLE IN REGARD TO THE DEMAND UNDER SHOW CAUSE NOTICE DATED 24.04.2013?

12. The Commissioner has rejected the contention of the respondent that there is no positive act by it towards wilful suppression and there was only mere inaction by holding that the factum of receipt of interchange fee being not in dispute and the provisions being clear, the act of non-payment constituted a positive act. In the milieu of self- assessment, it is for the respondent to assess and declare the full details and pay tax. The Commissioner also rejected the case that the department had knowledge based on audit. It is found by him that the banking industry is ever evolving and with new business models and the Department cannot be faulted not knowing the implications. It was further found that the decisionsrelied upon by the respondent related to the period when classification lists, valuation lists and gate passes were to be approved. The assessment itself was done by the officers. It was further found that there was no effort made by the respondent at seeking clarification. I must notice that in the impugned order, that tribunal did not deal with the issue relating to the legality of the respondent availing the extended period. It instead has chosen to set aside the impugned order of the Commissioner on merits. [Paras 104-106][509-A-E]

13. Therefore, the upshot of the above discussion is as follows:

I)

It is found that the respondent, as issuing bank, was providing service, as found by the Commissioner; II)

For the period prior to 01.07.2012, the service of the respondent, as issuing bank, squarely fell within Section 65(33a)(iii) of the Act;

III)

The contention of the respondent that interchange fee is to be treated as interest and, therefore, not taxable under the Act is rejected;

IV)

The case based on the credit card transaction, being a transaction in money and, therefore, excluded from the definition of “service” in Section 65B(44), is unacceptable;

V)

The Order of the Tribunal in ABM Amro, dealing with the position of an issuing bank, under the framework of the Act, is patently unsustainable;

VI)

In the facts of this case, I decline to dismiss the Appeal only on the ground that no Appeal was carried against the Order in ABN Amro;

VII) The respondent, as issuing bank, was liable to pay service tax, under Section 68(1), being the service provider. Being liable to pay the tax under Section 68(1), it was also liable to file the Return including the amount of interchange fee;

VIII) The acquiring bank was obliged to value the service, which it provided or agreed to provide. The measure of tax, which is found in Section 67(1)(i), is entirely related to the service that the acquiring bank provided and agreed to provide. Likewise, the value of the service provided by the issuing bank, as found by me, and which would be the value of the service, for the purpose of Section67(1), is relatable to the services it provided. Therefore, the respondent bank was liable to include the interchange fee and file Return and pay the tax on the same;

IX)

While the service tax may be a value added tax, all that it can mean, is that, for separate services, tax is payable on each separate service. The concept of value added tax cannot mean that if the tax is already paid by the acquiring bank in this case, on the amount of interchange fee, for the service provided by the respondent as issuing bank, the respondent bank should be called upon to pay the service tax all over again. Such an exercise, would undoubtedly constitute double taxation;

X)

The Tribunal has not considered whether there was suppression within the meaning of Section 73 of the Act by the respondent in relation to part of the period covered by Show Cause Notice dated 24.04.2013. I am also of the view that the respondent should be provided an opportunity to establish that the acquiring bank has discharged the tax liability in regard to interchange fee. [Para 109][509-G-H; 510-A-H; 511-A-C]

M/s ABN Amro Bank v. Commissioner of Central Excise and Customs [2011] 2 SCR 874; Standard Chartered Bank And Ors. v. CST, Mumbai-i And Others 2015 [40] S.t.r. 104 (Tri. - Del) : [2010] 13 Scr 381; M/s ABN Amro Bank NV Presently Known As Royal Bank Of Scotland NV v. Commissioner Of Central Excise, Customs And Sevice Tax, Noida [Decision Rendered On 23.7.2018] 2018-TIOL-2811-CESTAT / MANU/CN/0079/2018;

Commissioner of Central Excise, Vishakhapatnam v. Mehta and Company (2011) 4 SCC 435 : [2011] 2 SCR 874; Association of Leasing & Financial Service Companies v. Union of India and others (2011) 2 SCC

352 : [2010] 13 SCR 381; Commissioner of Central Excise Nagpur v. Ballarpur Industries Ltd. (2007) 8 SCC 89: [2007] 9 SCR 650 / [2007] 215 ELT 489 (SC); Larsen & Toubro Ltd. v. Commissioner of Central Excise, Pune II (2007) 9 SCC 617 : [2007] 5 SCR 1141 2007 /[211] ELT 513 [SC]; U.S. Tax Court in Capital One Financial Corporation and Subsidiaries v.

Commissioner, 133 TC No.8 (September 21, 2009); Ferro Alloys Corpn. Ltd. v. A.P. State Electricity Board and another 1993 Supp (4) SCC 136; State of

Karnataka and others v. Karnataka Pawn Brokers Association and others (2018) 6 SCC 363 : [2018] 10 SCR 409; Union of India and others v. Kaumudini Narayan Dalal and another (2001) 10 SCC 231 : 2001

(4) SCALE 227; Commissioner of Central Excise v. Tata Engineering and Locomotives Co. Ltd. (2003) 11 SCC 193: 2003 (8 ) JT 557; Birla Corpn. Ltd. v.

Commissioner of Central Excise (2005) 6 SCC 95 : [2005] 1 Suppl. SCR 821; Jayaswals NECO Ltd. v. Commissioner of Central Excise, Nagpur (2007) 13 SCC 807; Sri Krishna Das v. Town Area Committee (1990) 3 SCC 645 : [1990] 2 SCR 13; Union of India (UOI) and others v. Tata Iron and Steel Company Limited, Jamshedpur (1976) 2 SCC 123 : [1976] 2 SCR 1044; Commissioner of Central Excise, Aurangabad v. Bajaj Auto Ltd., Waluj, Aurangabad Through Its VicePresident (Materials) and others (2010) 13 SCC 117 : [2010] 14 SCR 184 - referred to.