2020 (10) TMI 379 - AT - Service Tax

Levy of service tax - mark-up charged by them for recovery from the holders of credit cards issued by them towards transactions entered into with overseas merchant establishments - export of services - period from April 2002 to April 2007 - HELD THAT - The amount recovered from the card holder to the extent paid out by issuing bank to acquiring bank is not in dispute. The claim made on behalf of the appellant is that the mark-up is also an element of the foreign exchange rate for conversion of the invoice amount to Indian currency. This submission does not find favour as this mark-up is demonstrably not shown separately either as exchange rate or additionally in the statement issued to the card holder . Exchange rate for reimbursement to acquiring bank is contractually enshrined and in the absence of any other cost associated with the conversion taxation to be borne by the issuing bank is not an element of the rate for conversion of the invoice amount to domestic currency. The amount charged by the appellant from the card holder is in excess of the purchase price contracted with the member establishment for the goods or service transacted and as the issuing bank escapes tax liability only to the extent of the purchase price the mark-up represents consideration for a service. This is thus liable to tax except if the consideration was as claimed by Learned Counsel transacted for export of service. In the intangible world of service transactions the location of recipient and flow of consideration in foreign currency are sure demonstration of exports. In the present dispute there is no doubt that the recipients are domestically based and the claim of overcoming the first test by temporary location overseas is but a poor excuse. Learned Counsel submits that for the entire period of the dispute repatriation of consideration in convertible foreign currency was not a necessary qualification. Notification no. 6/99-ST dated 9th April 1999 circular no. 36/4/2001 dated 8th October 2001 of Central Board of Excise Customs and notification no. 2/2003-ST dated 1st March 2003 do not address exemption to export of services but with taxability when the services are rendered in India even though clarifying for exemption or otherwise in the circumstances narrated therein. This is apparent from circular no. 56/5/2003 dated 25th April 2003 of Central Board of Excise Customs which distinguishes exports for exemption despite domestic rendition of services being taxable even if transacted in convertible foreign currency. The essential qualification of export is the delivery thereof outside the territory of India and in the absence of palpable markers there can be no alternative to receipt of consideration in foreign currency as the underlying condition even if not articulated specifically - there is no statutory basis for arriving at the conclusion that delivery of service outside the tax jurisdiction could be established without corresponding inflow of convertible foreign currency. The complexity of exports and the lack of distinguishment for exports during much of the period of dispute is obvious from our exposition supra and it may not be unnatural for an assessee to resort to superficial interpretation without intention to evade tax - the show cause notice and the impugned order lack convincing evidence of suppression or misrepresentation and in the circumstances of discharge of tax liability along with interest for the period of dispute it would have been appropriate for the proceedings to have terminated under section 73(3) of Finance Act 1994 without issue of show cause notice. The imposition of penalty under section 78 of Finance Act 1994 is not merited - Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Taxability of the 'mark-up' charged by the appellant for transactions with overseas merchant establishments.
2. Applicability of section 65(105)(zm) and section 65(105)(zzzw) of Finance Act, 1994.
3. Determination of whether the service was exported and thus exempt from taxation.
4. Inclusion of recovery by the 'issuing bank' from the 'cardholder' within the scope of section 67 of Finance Act, 1994.
5. Relevance of receipt of payment in foreign exchange for qualifying as export of service.
6. Applicability of penalties under section 78 of Finance Act, 1994.

Detailed Analysis:

1. Taxability of the 'mark-up' Charged:
The primary issue is whether the 'mark-up' charged by the appellant for transactions with overseas merchant establishments constitutes a taxable service under section 65(105)(zm) and section 65(105)(zzzw) of Finance Act, 1994. The Tribunal noted that the 'mark-up' is not shown separately in the billing statement and is not part of the exchange rate for conversion. The 'mark-up' is considered a service provided by the appellant and is thus liable to tax.

2. Applicability of Section 65(105)(zm) and Section 65(105)(zzzw):
The Tribunal examined the scope of 'banking or financial services' and 'credit card services' as defined in the Finance Act, 1994. It was determined that the 'mark-up' charged by the issuing bank from the cardholder falls within the ambit of these sections. The Tribunal referenced the Standard Chartered Bank case to clarify that the transactions between the issuing bank and the cardholder are taxable.

3. Determination of Export of Service:
The appellant argued that the service was exported and thus exempt from taxation. However, the Tribunal found no evidence that the transactions were conducted outside India. The billing and payment occurred in India, and the 'rate of exchange' was applied domestically. The Tribunal concluded that the service was not exported as the cardholder was not located outside India during the transactions.

4. Inclusion of Recovery within Section 67:
The Tribunal addressed whether the recovery by the issuing bank from the cardholder, including the 'mark-up,' falls within the scope of section 67 of Finance Act, 1994. It was determined that the 'mark-up' represents consideration for a service and is therefore taxable.

5. Relevance of Receipt of Payment in Foreign Exchange:
The Tribunal considered various circulars and notifications to determine the relevance of receipt of payment in foreign exchange for qualifying as an export of service. It was concluded that the receipt of convertible foreign currency is a necessary condition for establishing the delivery of service outside the tax jurisdiction. The 'mark-up' charged by the appellant was neither received nor billed in convertible foreign currency, thus failing the criteria for export of service.

6. Applicability of Penalties:
The Tribunal found that the complexity of export rules and the lack of clear distinction for exports during the disputed period could lead to superficial interpretation by the assessee without intent to evade tax. The show cause notice and the impugned order lacked convincing evidence of suppression or misrepresentation. Consequently, the imposition of penalties under section 78 of Finance Act, 1994, was deemed inappropriate, and the penalties were set aside.

Conclusion:
The appeal was allowed to the extent of setting aside the penalties, but the 'mark-up' charged by the appellant was held to be taxable under the relevant sections of the Finance Act, 1994. The service was not considered exported due to the lack of evidence of transactions conducted outside India and the absence of receipt in convertible foreign currency.