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Citi Bank N.A. Versus Commissioner of Service Tax, Chennai

2016 (2) TMI 983 - CESTAT CHENNAI

Demand - currency conversion charges - Credit Card Services - Debit Card Service - ‘mark up’ considered as service - whether the mark up/currency conversion charges in case of foreign currency transactions which were done, using either a credit or a debit card under the category of “Banking and other Financial Services”? - Held that: - the mark-up is essentially a part of the exchange rate that is to be applied for arriving at the cost of goods or services purchased by the cardholder and hence i .....

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- Demand on the amount of “mark up” charges accruing to the issuing bank when cardholder uses debit card to pay in foreign exchange abroad - Held that: - the adjudicating authority demanded service tax under, “operation of Bank a/c” Section 65(12)(ix), under Banking and Other Financial Services. For the identical issue of “mark up”, amount for credit card and debit card, the department cannot demand service tax one under “credit card services - Section 65(12)(ii) and the other under “Operatio .....

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y the adjudicating authority in the impugned order is liable to be set aside. As we have already held that service tax is not payable on mark up charges accruing on both credit card and debit card, on merits, we do not go into the other issues, viz. limitation, export of services, place of provision, etc - As regards the penalty imposed under Section 78 of the Act, since the demand of service tax is set aside, the question of penalty does not arise. Accordingly, the penalty imposed under Section .....

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The appellant is Citi Bank engaged in providing banking service registered with service tax for discharging service tax on their banking operations and also credit card/debit card services. The DGCEI issued SCN No. 68/2007, dated 18-10-2007 demanding service tax of ₹ 5,12,64,532/- payable on the currency conversion charges (mark up of 3%) in respect of under Credit Card Services for the period April, 2002 to April, 2006 and ₹ 24,51,538/- towards service tax payable on currency conver .....

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the form of two paper books Vol-I & Vol-II and reiterated the same. He submits that they are registered with service tax and are regularly paying service tax. They are paying ₹ 172 crores towards service tax to the LTU during the relevant period under Banking and Financial Services. He drew our attention to scheme of both credit card and debit card transactions. The flow diagram is enclosed at Page 2 of the paper book for both domestic as well as for overseas transactions of credit car .....

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and not for providing any service and submits that they have already discharged service tax credit including interest. He mainly relied on Tribunal s LB decision in the case of Standard Chartered Bank and Others v. CST - 2015-TIOL-1713-CESTAT-LB = 2015 (40) S.T.R. 104 (Tribunal-LB). He submits that the Larger Bench has discussed genre of Credit Card Services under Banking and Other Financial Services (BOFS) prior to 1-5-2006. The relied Paragraphs 3, 4 and 45, 46. 3.1 He further submits th .....

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and raised on Mark up on Debit Card Transaction, he submits that the nature of activity towards credit card or debit card is one and the same. In the case of credit card, the department demanded service tax under the category of Credit Card Services whereas in the case of debit card, for the same activity, the department is taking a different stand and demanding tax under BOFS under the category of operation of bank accounts. In both the cases, the mark up is essentially part of the foreign exch .....

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dered outside India, where cardholder used credit card. The services were consumed abroad since cardholder enable to make a transaction in foreign currency abroad and services were rendered outside India and hence not taxable which is outside the scope of levy itself. He drew our attention to Para 16 of SCN where the allegation in the SCN is made and also referred to Page 98 of appeal memo of the order which confirms that the activities were rendered outside India. He relied the following decisi .....

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Federation of Tax Practitioners v. UOI - 2007 (7) S.T.R. 625 (S.C). 3.3 Ld. counsel submits that even if it is considered that services were rendered outside India, it is not taxable. In their case, service rendered is towards an individual and not to a commercial concern. He submits that notwithstanding above plea, for the period 15-3-2005 to 30-4-2006, the appellant s demand would be considered as exports. The services are provided and used other than in relation to commerce or industry s .....

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ubmits a copy of letter C. No. IV/16/630/2003, dated 2-12-2003 issued by the Superintendent of Service Tax, seeking clarification as to whether any service tax is paid while converting foreign exchange sales abroad to Indian currency and commission charged, etc. He drew our attention to their reply letter dated 4-12-2003 at Page 185 of the paper book wherein they have given a detailed information in respect of credit card business and also the nature of other activities. He further submits that .....

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) Prolite Engineering Co. v. UOI - 1995 (75) E.L.T. 257 (Guj.). As there is no suppression of intention to evade payment of service tax, no penalty is imposable. There is bona fide belief entertained by appellant that mark up on foreign currency transactions done using credit/debit card is not liable for service. Therefore, they are entitled for waiver of penalty by invoking Section 80. He relied the following case laws :- (1) Hindustan Steel Ltd. v. State of Orissa - (1969) 2 SCC 627 (SC) = 197 .....

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y service provided to any person in relation to ..... banking and other financial services . He also refers to Section 65(12) of BOFS wherein credit card services is covered. He drew our attention to Paras 5.2 to 5.8 of OIO wherein the adjudicating authority has clearly discussed the domestic transaction as well as international transactions in respect of credit card services. He particularly referred to Para 5.5 wherein the adjudicating authority clearly discussed the mark-up that it is not tow .....

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He submits that w.e.f. 1-5-2006 credit card service is chargeable under BOFS under clause (ii) of the services. He submits that levy on the credit card services is charged annually. Therefore nature of transaction is indirectly relatable to credit card service activity. Any mark up is foreign exchange consideration or integral part of the credit card service during the relevant period. 5. Ld. AR countered the arguments of the counsel on the reliance of Tribunal s LB decision in the case of .....

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the compilation (Vol.-I). He submits that Tribunal itself has held that there is no dispute that the fees, charges, amounts collected by the issuing bank from its cardholder is a consideration received for rendition of credit card services and it is legitimate taxable value. The dispute was confined to taxability of Interchange fee earned by the issuing bank and the Merchant Establishment (ME) discount retained by the acquiring bank while settling the dues of the ME with which an acquiring bank .....

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the card and only thereafter the transaction completes. He relied Board s circular dated 25-4-2003 (Page 85) and submits that even if appellant is collecting towards foreign exchange transaction, no charges can be collected as reimbursement from the cardholder. All the amounts were included in the credit card services. He relied Tribunal s LB decision in the case of Sri Bhagavathy Traders v. CCE, Cochin - 2011 (24) S.T.R. 290 (Tri.-LB). 5.2 On the limitation issue, ld. AR submits that even .....

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le Supreme Court s decision in the case of UOI & Ors v. Bombay Tyre International Ltd. and others - 1983 (14) E.L.T. 1896 (S.C.). The said decision is pertaining to excise valuation and the same is applicable to this case as far as leviability of service tax and also marketability is concerned. 6. In rejoinder, learned counsel countered the arguments of the ld. AR and again he reiterated that 3% mark-up fee is only towards cost of goods or services purely on account of foreign exchange .....

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y other person in relation to settlement of any amount transacted through such card. (Page 30). He also relied Para 19 of the citation wherein the as per the definition of credit card services , under BOFS is discussed. He submits that credit card services prior to 1-5-2006 is not covered under the definition of BOFS services. He submits that after 1-5-2006, they started regularly paying the charges. Regarding Revenue s contention that services were rendered outside India, he referred to the all .....

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allowed the appeals. 7.  After carefully going through the records and hearing both sides, we find that the issue is as to whether the mark up/currency conversion charges in case of foreign currency transactions which were done, using either a credit or a debit card under the category of Banking and other Financial Services . In the synopsis, the appellant Bank has explained their transaction in the form of a chart which is reproduced below : Pictoral depiction of a Credit/Debit card trans .....

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s given by Visa which are generally the rates prevailing in the wholesale currency market on the date of the transaction or when Reserve Bank of India (RBI) notifies exchange rates on the date of transaction Plus (or minus) any adjustment which the appellant determines. The period involved is April, 2002 to April, 2006 in respect of credit card services and Sept., 2004 to April, 2006 in respect of debit card services. There is no dispute on the fact that the bank discharged service tax on credit .....

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categories of income linked to credit card business : (a) revenue generated from interchange - the differential amount generated by the appellant for funding the receivables. (b) Revenue generated in the name of mark-up amount over and above the official conversion rate when credit card is used abroad by the cardholder. .... .... ..... 10. We have heard both the sides and examined the connected appeal papers. The point for decision is tax liability of income accruing to appellant as mark-u .....

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s below : Section 65(10) of Finance Act, 1994 : Banking and Financial Services means the following services provided by a banking company or a financial institution including a non-banking financial company, namely :- (i) ......... (ii) credit card services; (iii) ........... Later on amendments were carried out by Finance Acts, 2002, 2003, 2004. Vide Finance Act, 2006 Credit Card Services was omitted from BOFS and a new entry was introduced separately. In the absence of statutory definition of .....

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f currency. The cardholder is settling his dues with appellant only in rupees. The card is used for payment in foreign exchange. As such the mark up charge is directly attributable to the conversion of currency. This much is clear from the terms of usage and the cardholder is also aware of the nature of mark up. The case of Revenue is that since card is an instrument which only enables such conversion of currency, hence any mark up collected on this account is leviable to tax as credit card serv .....

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ed 9-7-2001 confirmed the restricted scope of levy prior to 1-5-2006. We find on examining the discussion in the said order and the nature of transaction now in dispute, that the mark up charges attributable to currency conversion will not fall under the category of Credit Card Services during the impugned period. 12. Without prejudice to the above findings we find strong force in appellants claim on service being outside the taxable territory of India. Admittedly the card transaction happe .....

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y facility of use of card for payment, is rendered outside India and duly consumed by the recipient cardholder outside India. We find service tax liability on such service is not sustainable for want of jurisdiction. Even if it is considered, conceding the plea of revenue that the card is issued in India and the service availed abroad is in continuation of such card usage, it is clear that the identified service element has been wholly rendered and consumed abroad. As Hon ble Supreme Court in th .....

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enue is considered, in the present case the whole of service rendered and consumed outside India is beyond the taxable territory as per Finance Act, 1994. 13. Considering the above discussion and findings we hold that the mark up charges accruing to the appellant when cardholder uses card to pay in foreign exchange abroad is not liable to service tax under Credit Card Services during the impugned period. This conclusion is based both on merit of scope of Credit Card Services during relevant .....

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dard Chartered Bank (supra) and the Hon ble Supreme Court s decision in the case of Ishikawa-Ima-Harima Heavy Industries Ltd. and Tribunal s decision in Cox & Kings India Ltd. (supra). 9. The learned Authorized Representative had relied upon the decision of the Hon ble Supreme Court in the case of Union of India and Others v. Bombay Tyre International Ltd. reported in 1983 (14) E.L.T. 1896 (S.C.) which decided various disputes on valuation. The learned AR had relied on this judgment for .....

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the then new Section 4 of the Central Excises and Salt Act and the determination of the value in different situation and circumstances which is inapplicable to the present case as the ambit and scope of the Finance Act is on a different footing. With regard to the Larger Bench s decision, the said case dealt with reimbursement in the context of money realized by the service provider. This judgment is also inapplicable to the facts and circumstances of the case. 10. We further hold that the .....

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ervices. The Larger Bench decision in the case of Standard Chartered Bank and others v. CST - 2015-TIOL-1713-CESTAT-LB = 2015 (40) S.T.R. 104 (Tri.-LB) which has discussed the genre of credit card services also holds good and is squarely applicable to the facts of the present case. 11. The above rulings on this issue makes it clear that the mark-up is essentially a part of the exchange rate that is to be applied for arriving at the cost of goods or services purchased by the cardholder and h .....

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