19 August 2015 EY Tax Alert Delhi Tribunal (Larger Bench) rules that interchange fees and merchant establishment discounts earned in respect of credit card transactions not subject to Service tax prior to May 2006 Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This Tax Alert summarizes the decision of the Larger Bench 1 of the Delhi Tribunal wherein it addresses the dispute regarding the taxability of interchange fee and merchant establishment discount earned during settlement of amounts in respect of credit card transactions. In this case the Larger Bench held that a customary relationship exists between issuing bank, acquiring bank and merchant establishments in context of credit card services as mentioned under Banking and other Financial Services (BOFS). It was also held that credit card services enumerated in BOFS cover only those services that are provided by an issuing bank to a card holder. Consequently services in relation to settlement of amounts transacted through credit/ debit/ charge cards are not covered within the scope of credit card services under BOFS prior to 1 May 2006. The Larger Bench overruled the decision of the Delhi Tribunal in the case of ABN Amro Bank vs Union of India 2 and held that the conclusions in the said case were incorrect. 1 TS-423-CESTAT-2015-EXC 2 2011-23-STR-529 (Tri-Del)
Background The assessees, engaged in the business of banking and other financial services, also provide credit card services. The following chain of transactions are undertaken for providing credit card services: The credit card holder uses credit card issued by the issuing bank for purchase of goods and services from various merchant establishments (ME). ME accepts credit card in lieu of cash payment. This amount is then reimbursed by acquiring bank, which provides payment processing services to ME. Acquiring bank charges ME discounts for providing the said payment processing services. A percentage of this ME discount is shared with the card association and issuing bank as interchange fee. The reimbursement given to ME is recovered by the acquiring bank from issuing bank which in turn recovers the amount from card holder. credit card service is in continuation of the already existing BOFS so far as credit card services are concerned? Whether services in relation to settlement of amount transacted through card, as expressly defined in credit card services, can be applicable retrospectively w.e.f introduction of BOFS? Can ME be considered as customer in relation to credit card services under BOFS? Can ME discount and interchange fees be said to be received in relation to credit card services? In view of conflicting Tribunal decisions with respect to the aforesaid issues, the matter was referred to the Larger Bench of CESTAT. Several appeals were taken up together for consideration and disposal by the Larger Bench in this case. Assessees contention A customer, in respect of credit card services, means the holder of a card of the issuing bank. Only those services that are rendered to a customer will be liable to Service tax. BOFS was introduced as a taxable service from 16 July 2001. Up till 1 May 2006, credit card service was enumerated within BOFS. However from 1 May 2006 credit card service was deleted from BOFS and incorporated in a distinct service called credit card, debit card, charge card or other payment card service (credit card service). Services in relation to settlement of amount transacted through such cards were expressly covered under the newly introduced category of credit card services. Prior to May 2006, the scope of credit card service under BOFS was not defined to include such services. In this regard the following issues were raised; Whether introduction of the new ME is not a customer of the issuing bank nor has any contractual relationship with it. Also, it is also not a customer of acquiring bank in the banking business sense and merely pays a fee by way of ME discount. Similarly, acquiring bank cannot be considered as a customer of the issuing bank. Credit card service generally means provision of credit for purchase of goods and services. Such credit is provided only by an issuing bank to its card holders. Board Circular dated 9 July 2001 explains that credit card service is a service of providing credit facility to a customer. Credit facility is provided by issuing bank to its card holders and not ME or acquiring bank. Also, RBI circular dated 12 December 2003 clarifies the scope of credit card
business in terms of reciprocal obligations between issuing bank and its card holder. Neither ME discounts/ interchange fee, nor services rendered between issuing and acquiring banks or between acquiring banks and ME are considered in the RBI circular. Thus, obligation of settling payments by an issuing bank to the acquiring bank or by acquiring bank to ME is not in relation to credit card services. Legislative intent of not covering interchange fee or ME discount within the scope of BOFS is clear since only after the introduction of credit card service w.e.f 1 May 2006, services provided by issuing bank to acquiring bank and acquiring bank to ME were brought within the ambit of taxable service. The assessee also contended that the decision of a division bench of Delhi Tribunal in case of ABN Amro Bank (supra), which held that credit card services under BOFS also covers services connected and related to credit card services, is misconceived. Revenue contentions Credit card service under BOFS is not restricted to rendition of service only to account holder of a bank or financial institution. Thus the contention that neither acquiring bank nor ME is a customer, is misconceived. In the decision of Delhi High Court in the case of CIT vs JDS Apparels Pvt Ltd 3, it was held that acquiring bank provides banking services to ME while protecting the interests of card holders and the amount retained by acquiring bank was the fee for provision of credit card service. The word in relation to under BOFS signifies the legislative intent to widen and expand the scope, meaning and content. Thus all integral, ancillary and intermediary activities essential for credit card transaction fall within the 3 Appeal no. 608/2014 dated 18 November 2014 ambit of credit card services under BOFS. Services provided to ME by acquiring bank and those provided to acquiring bank by issuing bank are for furtherance of and contribute to effectuation of credit card service. Thus they are provided in relation to such services. Since services provided in relation to settlement of amount transacted through credit card were already included in the scope of credit card services under BOFS, such service does cannot be said to have a retrospective effect. Larger Bench s decision A series of interdependent and seamless but distinct transactions occur between ME, acquiring bank and issuing bank to complete a credit card transaction. Therefore it is considered that a customary relationship exists amongst these parties. Also, confining the expression customer to an individual or an entity which has savings or current account with a bank is inappropriate. Since banks are expanding commercial transactions, it would be appropriate to conclude that a customer of a bank includes any person or entity having a continuum of relationship with the bank. In the context of credit card services under BOFS, acquiring bank could be considered as a customer of issuing bank and ME a customer of acquiring bank. In respect of the scope of term in relation to, the Tribunal held that services provided by issuing bank to acquiring bank and acquiring bank to ME are interdependent and distinct. They are not intended to be covered within the purview of credit card services prior to 1 May 2006. Thus, in the context of BOFS, credit card services cover only those services that are provided by an issuing bank to a card holder. A contrary interpretation which accords unrestricted scope, locus and amplitude to credit card services would result in a
serious textual ambiguity, indeterminacy and inchoateness to scope of taxable event in BOFS. Board Circular dated 9 July 2001 accurately captures the scope of credit card services under BOFS during the period 16 July 2001 to 30 April 2006. The said Circular does not specify interchange fee and ME discount as consideration received for rendition of credit card service either expressly or by implication. Thus these receipts are not for providing credit facility. The Larger Bench overruled the decision of the Delhi Tribunal in the case of ABN Amro Bank (supra) by holding that the conclusions in the said case were incorrect. Comments This decision would provide respite to the banking industry in respect of pending litigation on identical matters for the period prior to May 2006. However, the verdict of the Supreme Court is awaited in the case of ABN Amro Bank which would ultimately resolve the dispute regarding the taxability of interchange fees and merchant establishment discounts earned in respect of credit card transactions prior to May 2006.
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