AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2019 (2) TMI 14
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....nsactions, the acquiring banks provide the required infrastructure like Card Wiping Terminal (Point of Sale Machines), payment gateway etc.; that assessee's credit card customers are using Point of Sale (POS) machines installed by acquiring banks in various merchant establishments / service establishments; that the acquiring banks make payments to the merchant establishments / service establishments and charge them a pre-contracted rate known as Merchant Discount Rate (MDR) to facilitate the credit card transaction; that acquiring bank submit the transactions settled by merchant establishments to the assessee (Issuing Bank) through Card Association and in-turn the assessee makes payments to the acquiring bank through Card Association; that Card Association (Master Card, Visa and Diners Club International) acts as a bridge between the assessee (Issuing Bank) and acquiring banks; that Card Association provides the required network and platform to the issuing banks and acquiring banks for facilitating the cards transactions; that normally acquiring bank submits the transactions (settled by merchants) to the Card Association in a standard file format for onward submission to the assess....
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....ces were issued to the appellants covering the period from October 2007 to March 2015 alleging that service tax liability is required to be discharged on these fees under taxing entry for "Credit Card Services" amounting to Rs. 1,64,28,86,059/- with interest thereon as also proposing imposition of penalties under various provisions of law. All these four notices / statement of demand were adjudicated by a common Order-in-Original No. 71 to 74/2016 - 2017 dated 24.1.2017, wherein the proposed tax liabilities were confirmed with interest thereon, and penalties also imposed under various provisions of law. Hence appellants are before this forum. 2.1 When the matter came up for hearing, on behalf of the appellants learned Senior Advocate Shri N. Venkataraman made various oral and written submissions, which can be broadly summarized as under:- (i) In any credit card transaction, there arises the following distinct contractual (service) relationships, between: a) the Issuing Bank and the Card Holder, b) the Acquiring Bank and the Merchant Establishment, c) the Card Network and the Issuing Bank, d) the Card Network and the Acquiring Bank. (ii) In each of these contractual relations....
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....red service tax. Numerically, as a result of the settlement mechanism presently followed, the entire transaction has suffered service tax. The Interchange Fees that is earned by the Issuing Bank is taxed as part of and in the hands of the Acquiring Bank i.e. at first point. Since service tax is already levied on the Interchange Fees, the same cannot once again be subjected to service tax in the hands of the Issuing Bank. (vii) The adjudicating authority has relied upon the decision of the Larger Bench of the Tribunal in Standard Chartered Bank Vs. Commissioner of Service Tax, Mumbai - I - 2015 (40) STR 104 (Tri. LB). However, the judgment is distinguishable from the present case for various reasons. Without prejudice, the present factual matrix, in fact addresses the said judgement, inasmuch as the Interchange Fees earned by the Issuing Bank does suffer service tax, although in the hands of the Acquiring Bank. (viii) The judgment in the case of Standard Chartered (supra) is not applicable in the present case for the following reasons: a. The period in question in that case was prior to 01.05.2006, during which the law applicable differed. The issue in question in the Standard Ch....
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....ee component with the issuing bank, which fact has been clearly brought forth and informed in the filing with the CBEC on various dates and way back in 2006. (x) The United States Tax Court in the case of Capital One Financial Corporation & Subsidiaries Vs. Commissioner of Internal Revenue as reported in 133 T.C. No. 6, involving similar service has held that "interchange is not a fee for any service other than the lending money to cardholders, the income from which is generally treated as interest; interchange compensates banks for the costs of lending". The US Tax Court has concluded "that interchange is not a fee for any service other than lending money to cardholders, income from which is generally treated as interest. The petitioners have shown that interchange fees are a form of interest compensating Capital One for the costs of lending money". (xi) The impugned order traverses beyond the scope of the show cause notice. The demand in the show cause notices is on the premise that interchange fee is consideration for service provided by the issuing bank to the acquiring bank. The impugned order on the other hand confirms the demand of service tax on the basis that interchange....
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....ehend the roles of various parties involved in such credit card transactions as under:- In credit card transactions, following five parties are involved, namely: a) Issuing Bank (IB) - The Issuing Bank issues credit cards and therefore, effectively lends monies to its Card Holders. The contractual relationship between an Issuing Bank and its Card Holders is spelt out in the cardholder agreement / terms & conditions. Service fees are charged to service tax. b) Credit Card holders (CH) - The Card Holder is the customer to whom the Issuing Bank issues a credit card. The credit card evidences a potential line of credit established by the Issuing Bank using which the Card Holder may purchase goods or services at any of the Merchant Establishments. c) Acquiring Bank (AB) - The Acquiring Bank is a bank which recruits, screens, and accepts Merchant Establishments into a Card Network's network. They provide a Point of Sale (hereinafter referred to as 'POS') machines to Merchant Establishments which enable Merchant Establishments to validate and accept credit card payments. The Acquiring Bank processes credit card transactions for Merchant Establishments within the respective Card Networ....
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....ax * Transaction in its entirety is one of 'trading' * Judgment in the case of Standard Chartered not applicable in the present case. 5.6 On the other hand, the adjudicating authority has found that interchange fee is paid for facilitating the purchase using the card and not for lending the money for the purchase; that interchange fee is a consideration that accrues to the issuing bank for verifying, facilitating and extending the purchase value in line with the contractual agreement, the issuing bank has with the card association and taking the risk for collection of amounts from the card holder. 5.7 In response to the appellant's contention that service tax is being paid on the entire MDR (Merchant Discount Rate), the adjudicating authority in para 8.11 of the impugned order has taken a stand that no proof has been furnished to that extent. Moreover, the interchange fee is the consideration given to issuing bank for validating the transaction and the MDR is the consideration for the acquiring bank for settling the merchant establishment. 5.8 We further find that although the appellant in the course of adjudication proceedings had contended that the decision of the Larger B....
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....ed. 5.10 Viewed in this light, notwithstanding the contentions of the ld. AR, we find that the Standard Chartered Bank decision of Larger Bench supra does not help the case of the Revenue and on the other hand it only, in our view, buttresses the stand of the case of the appellant. 5.11 Be that as it may, we find that in a very recent decision of the Tribunal in the case of ABN Amro (supra), it has been categorically held that the amount received by the appellant does not qualify as credit card services that when acquiring bank has discharged service tax liability on the entire amount, no service tax is payable by the appellant and that the amount offered by the appellant does not qualify a credit. The relevant portion of the order is as under:- "5. Considered the submissions. 6. It is a fact on record that the acquiring bank is discharging his service tax liability on the amount in question, in that circumstances, no service tax is payable by the appellant (and the said fact has not been disputed by the learned AR during the course arguments) as held by the Hon'ble Allahabad High Court in the case of Commissioner of C. Ex. Lucknow vs. Chotey Lal Radhey Shyam reported at 2018 (....