Service tax liability on bank commissions pre-2006 referred to Larger Bench for review

The Tribunal referred the appeal regarding the liability of service tax on the commission/discount earned by acquiring banks from Merchant Establishments before 01.05.2006 to a Larger Bench for further consideration. The Tribunal highlighted that the expanded coverage of credit card services in 2006 applied prospectively, not retrospectively, and disagreed with an expansive interpretation of the taxable service definition. The matter was directed to be heard with a related case for a comprehensive review by the Larger Bench.

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Issues involved:
Whether the commission/discount earned by the acquiring bank from the Merchant Establishment is liable to service tax under the category of banking and financial services for the period prior to 01.05.2006.

Analysis:
The appeal in question arose from an Order-in-Original passed by the Commissioner of Central Excise & Service Tax, Thane-I. The central issue pertains to the liability of service tax on the commission/discount earned by the acquiring bank from the Merchant Establishment before 01.05.2006. The Tribunal noted that the coverage of credit card services was expanded in 2006 to include transactions/services between various entities involved in credit card operations. This expansion was effective only from 2006 onwards and not retrospectively from 2001. The Tribunal highlighted that the consistent approach in similar situations has been to apply expanded coverage prospectively, not retrospectively.

The Tribunal also considered a conflicting decision by a co-ordinate Bench regarding the interpretation of the expression "in relation to" preceding banking and financial services in the taxable service definition. The Tribunal disagreed with the expansive interpretation, emphasizing that the expression only expands the scope of credit card services and does not alter the identity of the service provider or recipient. The Tribunal concluded that all transactions related to credit card services became taxable only from 01.05.2006 when the new entry was introduced, encompassing credit card, debit card, charge card, or any other payment card services.

Due to the conflicting views, the Tribunal referred the present appeal to a Larger Bench for consideration on specific points of law. These points include the substantive nature of the new definition of credit card services introduced in 2006, the retrospective applicability of certain clauses, the classification of merchants/merchant establishments as customers, and the characterization of Merchant Establishment Discount in relation to credit card services. The matter was directed to be heard along with a related case for a comprehensive review by the Larger Bench.

In conclusion, the Tribunal referred the appeal to a Larger Bench for further consideration and directed the Registry to place the matter before the Honorable President for the constitution of the Larger Bench.

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