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CUSTOMS EXCISE & SERVICE TAX APPELLATE TRIBUNAL
West Block No.2, R. K. Puram, New Delhi, Court No. 1
Date of hearing: 18.05.15 to 20.05.2015
02.06.2015 and 04 - 05 June 2015
Date of decision: 14.08.2015
Service Tax Misc. Application No. 93629 of 2015 in
Service Tax Appeal Nos. 117/2010, 143 to 145/2007
Standard Chartered Bank
IDBI Bank
American Express Bank Limited
SBI Cards and Payments Services Pvt. Limited
Appellant
Vs.
CST, Mumbai-I
Respondent
AND
Service Tax Appeal Nos. 711/2011, 462/2008 and 405 of 2009
CST, Mumbai-I/ CST, Delhi
Appellant
Vs.
HDFC Bank
HSBC Bank Limited
ICICI Bank Limited
Respondent
Appearance:
Shri V. Lakshmi Kumaran, Shri Badarinarayan, Shri Yogendra Aldak, Shri
Mihir Mehta, Shri Prakash Shah, Ms. Nupur Maheshwari, Learned counsel;
Ld. Consultants Shri Nihal Kothari, Ms. Prajakta Menezes, C.A., Shri Sunil
Gabhawala and Shri Kewal Shah for the several assessees.
Shri. B.K. Singh, Shri. Rajiv Tandon, Shri. Govind Dixit and Shri. Amresh Jain
for Revenue., Advocate for the Respondent.
Coram:
Hon’ble Mr. Justice G. Raghuram, President
Hon’ble Mr. Ashok Jindal, Member (Judicial)
Hon’ble Mr. R. K. Singh, Member (Technical)
Interim Order No. 162 / 2015
Per: Justice G. Raghuram:
Whether services provided by a banking company, a financial
institution, a non-banking financial company or any other body corporate or a
commercial concern, towards settlement of payments to an acquiring bank
and a merchant establishment (ME), in relation to sale transactions at such
2
establishment also constitute credit card services,
in ‘Banking and Other
Financial Services’ (BOFS), a taxable service defined and enumerated in the
Finance Act, 1994 (the Act), is the core issue falling for our consideration.
The period involved is 16-07-2001 to 30-04-2006, during which credit card
services was enumerated within Banking and other Financial services, a
taxable service introduced w.e.f 16-07-2001 by the Finance Act, 2001. On
and from 01-05-2006 credit card services was deleted from BOFS and
incorporated into a distinct service, which we shall for convenience refer to as
card services.
2.
We are assembled to answer the reference made by a Ld. Division
Bench vide the order dated 16-08-2013 in ST. Appeal Nos. 143 to 145 of
2007 and 117 of 2010, being appeals preferred by Revenue and an assessee
Bank, against adjudication orders. The issues referred are exclusively a
classification issue.
3.
The order dated 16-08-2013 referred the following questions of law:
i)
Whether the introduction of the new, comprehensive
definition of “credit card, debit card, charge card or other
payment care service” vide Section 65(33a) read with
Section
65(105)(zzzw)
by
the
Finance
Act,
2006,
is
substantive and seeks to levy all the transactions covered
by use of Credit/Debit/Charge Card or is in continuation of
the levy under Section 65(10) or (12), as the case may be, as
held in ABN Amro decision in so far as credit card services
are concerned?
ii)
Whether the sub-clause (iii) in the definition of taxable
service viz. “credit card, debit card, charge card of other
payment card service” in Section 65(33a) can be said to be
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applicable retrospectively, i.e., from 16 July 2001 when
section 65(72)(zm) became effective?
iii)
Can
‘merchants/merchant
establishments’
be
considered ‘customer’ as envisaged in Section 65(72)(zm) of
the Finance Act, 1994 as it stood prior to 1-5-2006?
iv)
Whether Merchant Establishment Discount can be said
to be ‘received in relation to’ credit card services when in
fact in a particular transaction, the Acquiring bank receiving
ME Discount may not have issued that particular credit card
at all?
4.
We have heard Shri V. Lakshmikumaran, Shri Badarinarayan, Shri
Yogendra Aldak, Shri Mihir Mehta, Shri Prakash Shah, Ms. Nupur
Maheshwari, Learned counsel; Ld. Consultants Shri. Nihal Kothari, Shri Sunil
Gabhawala and Shri Kewal Shah for the several assessees; and Shri B. K.
Singh, Shri Rajiv Tandon, Shri Govind Krishna Dixit and Shri Amresh Jain for
Revenue. Textual and contextual ambiguity in enumeration and definition of
relevant provisions of the Act pertaining to BOFS invite interpretive exertion
and have occasioned conflicting views regarding the reach and trajectory of
the taxable service, at the level of departmental adjudication and in CESTAT
as well. The reference order exemplifies the conflict of views on this aspect,
in the Tribunal.
5.
A division Bench of CESTAT in ABN Amro Bank vs. Union of India1
concluded that the charging section (insofar as credit card services in BOFS)
brought the service of credit card facility provided and its connected and
related activities to fold of taxation (para 17.6).
6.
Assessees contend that the analyses leading to and the conclusion
above are woolly and misconceived. Per contra, Revenue urges that the
1
2011 (23) STR 529(Tri-Del)
4
ABN
Amro
Bank
reasoning
is
impeccable
and
its
conclusion
unexceptionable. The reference order however records empirical reservations
to the trajectory and coverage of credit card services in BOFS, diametrically
contrary to the ABN Amro ruling, as under:
In the ABN Amro case, a co-ordinate bench of this Tribunal has taken a
view that in view of the expression “in relation to” preceding banking
and financial services occurring in taxable service defined under
section 65(72)(zm) and such an expression is expansive in nature and
scope, and therefore all services rendered in relation to credit card
services, whether by merchant establishments, acquiring banks or
others would be chargeable to service tax even prior to 1-5-2006. We
respectfully disagree with the said view taken for the following reason.
The expression “in relation to” qualifies only the “credit card services”
and not the customer who is the service recipient nor the service
provider, the issuing bank. Thus only the scope of credit card services
is expanded by the said term. The credit card services comprises of a
number of services such as extending credit for the purchase of goods
and services, withdrawal of cash upto permissible limits, payment of
utility bills, payments for travel, foreign exchange transactions and so
on. All such services for which credit is given by the issuing bank would
get covered under the levy. However, it does not, in any way, alter the
scope of “service provider” who is the issuing bank nor the “service
recipient” who is the card holder. In our considered view, all other
transactions involved in operationalizing the credit card services
became taxable only with effect from 1-5-2006 when the new entry
relating to “credit card, debit card, charge card or any other payment
card service” was brought under the tax net vide sections 65(33a) read
with 65(105)(zzzw) (para 5.9).
7.
The reference order was passed in four appeals; three preferred by
Revenue against adjudication orders which dropped demands of service tax
for periods prior to 01.05.2006, on a conclusion that activities of acquiring
and credit card issuing banks were brought under the purview of service tax
only w.e.f. 01.05.2006.
Consequently, the adjudicating authority dropped
demands for service tax for periods prior to 01.05.2006.
Another appeal
before the referring Bench was preferred by Standard Chartered Bank. This
appeal was against an adjudication order confirming demand of service tax
against the appellant (an acquiring bank), in respect of ME discount retained
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by it for a pre- 01.05.2006 period.
It is thus apparent that different
adjudicating authorities adopted inconsistent interpretations of identical
provisions of the Act, in respect of periods prior to 01.05.2006.
Adjudications orders dated 21.11.2006, 22.05.2007 and 23.05.2007,
passed by the Commissioners of Service Tax, Chennai and Mumbai,
respectively had dropped, proceedings against acquiring and issuing banks in
respect of commissions/ discounts / service charges received by Citi Bank,
HSBC and HDFC on an interpretation that the provisions of BOFS (prior to
01.05.2006) do not authorise levy of service tax on consideration received in
relation to settlement of payments by banks or those received for use of the
automated teller machines belonging to other banks by card holders of these
banks.
8.
In ABN Amro Bank, service tax, interest and penalties were confirmed
against the appellant, for the period prior to 01.05.2006. The appellant was
an issuing bank (which issued credit cards) and had received “Interchange
fee” from acquiring banks. It was the specific contention of the appellant
(before the Tribunal) that since it did not serve any customer, while making
settlements of dues of merchant establishments, arising out of sales
transactions concluded through credit cards, “Interchange fee” was not a
consideration received on rendition of credit cards services as defined in
Section 65(10) or 65(12) read with Section 65(72)(zm) and it consequently
incurred no liability to
tax. Per contra, Revenue contended that relevant
provisions (as extant prior to 01.05.2006 as well) were comprehensive
enough to authorise levy and collection of service tax on consideration or
commission received or retained by either an “issuing bank” or an “acquiring
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bank” in respect of transactions of sale and purchase conducted through a
credit card. Revenue also contended that amendments to the Act introduced
w.e.f. 01.05.2006, deleting credit card services from the ambit of BOFS and
relocating it along with other card services under Section 65(33a) read with
Section 65 (105) (zzzw), did not impact or restrict the scope of credit card
services enumerated in BOFS, prior to 01.05.2006.
9.
The ABN Amro Bank analyses and reasons suggest the ratio that
consideration earned by either an issuing bank or an acquiring bank in
respect of any activity relatable to a credit card transaction, whether by way of
fees and other charges realised by an issuing bank from the card holder;
interchange fee received by such bank from the acquiring bank towards
settlement of ME payment; or the consideration or commission retained by
the acquiring bank by way of merchant establishment discount (ME discount),
would all amount to consideration received in relation to rendition of credit
card services and would exigible to service tax under BOFS.
We will
consider the analysis in ABN Amro Bank in greater detail, later in this
judgment.
10.
(A)
Parties involved in credit card transactions:
Transactions
arising out of the use of credit cards normally involve five parties.
Sr.
No.
Player
Role
1
Card holder
The person possessing and using the card.
2
Issuing bank
The Bank issuing the card to its customer viz. the card holder.
3
Card association
(VISA/Mastercard
, etc.)
Provides the payment infrastructure. Issuing/ acquiring banks
are its members.
4
Merchant
Establishment
The vendor of goods or service who accepts the card in lieu of
cash payment from the card holder.
5
Acquiring bank
Provides payment processing services to Merchant
Establishments by entering into a separate agreement with the
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merchant and places a swipe machine at the merchant outlet.
(B) Transactional flow in a credit card use scenario:
Transaction Flow
Part A
Part B
4
1
Payment of Rs. 100 to
Issuing Bank in monthly bill.
Issuing Bank
Charges paid
2
purchase of merchandise Recoupment of discounted
of Rs. 100.
Amount to Merchant
Establishment, say Rs. 97.
Card Holder
Merchant
Establishment
charges paid Acquiring
Bank
By cardholder
by Merchant
to issuing bank:
establishment
- Joining fees,
- Additional card fee,
- Annual fee,
- Replacement card fee,
- Cash advance fee,
- Statement retrieval fee,
- Surcharge/ service charges
On railway fare, fuel charges
- Utility bill payments
- Charges on over limit
account
to acquiring
bank – Merchant
discount/interchange
fee.
3
Network settlement between
Issuing bank and Acquiring Bank
Card Network (visa,
mastercard etc)
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(C)
The process by which sale of goods or rendition of services
through a credit card takes place, generally follows this sequence:
i) Card associations, such as Visa or Mastercard provide a
settlement platform network and a payment infrastructure to its
members, which are banks or financial institutions comprising
issuing and acquiring banks.
ii) An issuing bank issues a credit card to its customer (the
cardholder), specifying the particular card association involved; the
issuing bank’s identity; the tenure of the credit card; an embedded
electronic chip to facilitate transactions through the card; and
provides the card holder an identification code (PIN No.) to be
entered by the card holder while procuring goods or services (so as
to safeguard against unauthorized use).
iii) A card holder makes a purchase at an ME; completes the
transaction by swiping his card, employing the swipe machine
provided to the ME by the acquiring bank; and signs a transaction
slip generated by the swipe machine.
This is the point of sale
(POS).
iv) The network platform provided by the card association facilitates
authentication of the card employed at the ME and clears the use of
the card for concluding the transaction, by validating the card use.
v) The ME deposits transaction slips with the acquiring bank via the
settlement procedure protocol.
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vi) The card association network (Visa or Mastercard) generates
reports for merchant settlement and forwards these to the acquiring
bank.
The acquiring bank (within a couple of days) settles
payments to the merchant establishment after deducting a small
percentage towards discount/ commission amount (ranging from
3% to 5%).
This amount is called the merchant establishment
discount.
vii)
A settlement report is forwarded to the issuing bank via the
interchange network maintained by the card association, for
reimbursement to the acquiring bank.
viii)
Out of the discount/ commission retained by the acquiring
bank, a percentage is shared with the issuing bank as “Interchange
fee” and with the card association.
ix) The issuing bank accounts for the transaction (for the purpose of
recovery from the card holder) and sends the card holder a monthly
(or periodical) statement.
x) The card holder is thereupon liable to make payment to the
issuing bank, of the full value of his transaction with the merchant
establishment (within a period of 30 to 40 days, specified in the
credit card agreement between the issuing bank and the card
holder).
(D)
On an interactive analysis of parties to a credit card transaction;
the transactional flow that occurs in a credit card use; and the process
involved when sale of goods or rendition of services through a credit card
takes place, it is apparent that an issuing bank, an acquiring bank and the
card association network receive consideration for participation in and
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facilitation of several obligations inherent in the sequence of events
contributing to successful culmination of a transaction involving use of a
credit card.
The issuing bank recovers from its card holder certain
charges such as the joining fee; additional card fee; annual fee etc. (set
out in the transaction flow table, supra). An acquiring bank (which may or
may not be the issuing bank) enters into an agreement with the Merchant
Establishment (ME) in terms whereof the acquiring bank undertakes to
settle amounts owed to the ME by the cardholder in terms of and for
goods supplied or services rendered by the ME to the cardholder through
use of the credit card.
Under the terms of the said agreement the
acquiring bank settles dues of the ME arising out of the card transaction,
less the ME discount specified in such agreement. The liability of the
acquiring bank to settle dues of the ME is independent of its ability to
recover from the issuing bank. On conclusion of a transaction, reports are
generated by the network facilitation platform provided by the card
association and forwarded to the acquiring bank. The acquiring bank is
thereafter required to settle payments to the ME less its agreed ME
discount. A settlement report is simultaneously forwarded to the issuing
bank through the interchange network maintained by the card association.
The issuing bank assumes the obligation to reimburse the acquiring bank
less the interchange fee the issuing bank may retain. Card associations
provide the network settlement platform, generate reports on ME
transactions,
forward these to the acquiring bank, forward settlement
reports to issuing banks and thus facilitate credit card use, under
agreements between card associations and its members which include
issuing and acquiring banks. The fee or charges, if any, collected by card
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associations from its member banks is however not the subject matter of
any of the disputes involved in this reference.
11.
The respective parties are agreed that the fees/ charges / amounts
collected by an issuing bank from its card holder is a consideration received
for rendition of credit card services, and that this is a legitimate taxable value.
The dispute is confined to taxability of the interchange fee earned by the
issuing bank and the ME discount retained by the acquiring bank while
settling dues of the ME with which an acquiring bank has a contractual
agreement obligating settlement of such dues after retaining its commission/
discount. Assessees who participated in the hearing before us are acquiring
as well as issuing banks and contest the taxability of ME discount and
interchange fee. They contend that these do not amount to consideration
received for rendition of credit card services under BOFS.
12.
BOFS was introduced w.e.f. 16.07.2001 by the Finance Act, 2001.
“Credit Card Services” was a component of BOFS as defined, since its
inception in 2001 until its deletion from BOFS by the Finance Act, 2006, w.e.f.
01.05.2006. The definition and enumeration of BOFS during 2001 to 2006
underwent several amendments, in its numerical signification and location in
the Act, in the scope of its components as well as the trajectory of the several
components of this service, during this period. W.e.f. 01.05.2006, Finance
Act, 2006 introduced a distinct Card Services which was defined in Section
65(33a) and enumerated to be a taxable service in Section 65(105)(zzzw).
Credit Card Services was deleted from the ambit of BOFS and incorporated
as a specie of Card Services, w.e.f. 01.05.2006.
Relevant statutory
provisions pertaining to BOFS and Card Services is extracted hereinafter.
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13.
Relevant Statutory Provisions:
BOFS:
On its introduction w.e.f. 16.07.2001, BOFS was defined in Section
65(10) of the Act, as under:
“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)
financial leasing services including equipment leasing and
hire purchase by a body corporate;
(ii)
credit card services;
(iii) merchant banking services;
(iv) securities and foreign exchange (forex) broking;
(v)
asset management including portfolio management, all
forms of fund management, pension fund management, custodial
, depository and trust services, but does not include cash
management;
(vi) advisory and other auxiliary financial services including
investment and portfolio research and advice, advice on mergers
and acquisition and advice on corporate restructuring and
strategy; and
(vii) provision and transfer of information and data processing:”
W.e.f. 16.08.2002, vide the Finance Act, 2002 sub-sections (9), (10)
and (11) of the Act defined the expressions banking; banking company; and
BOFS. Sub section (11) of Section 65 expanded the scope of the service
provider in BOFS to include any other body corporate, as well.
The
components of BOFS were however unamended.
Finance Act, 2003, w.e.f. 14.05.2003 relocated the definition of BOFS
to sub-section (12) of Section 65.
This amendment also added foreign
exchange broking provided by a foreign exchange broker other than those
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covered under sub-clause (a) to the category of services enumerated in the
definition of BOFS. BOFS now read:
(12) banking and other financial service means(a) the following services provided by a banking company or a
financial institution including a non-banking financial company or
any other body corporate, namely:(i) financial leasing services including equipment leasing and
hire-purchase by a body corporate;
(ii) credit card services;
(iii) merchant banking services;
(iv)
securities and foreign exchange (forex) broking;
(v) asset management including portfolio management, all
forms of fund management, pension and management,
custodial, depository and trust services, but does not include
cash management;
(vi)
advisory and other auxiliary financial services
including investment and portfolio research and advice,
advice on mergers and acquisitions and advice on corporate
restructuring and strategy; and
(vii)
provision and transfer of information and data
processing;
(viii)
foreign exchange broking provided by a foreign
exchange broker other than those covered under sub-clause
(a);”
(b) foreign exchange broking provided by a foreign exchange broker
other than those covered under sub-clause (a);
Finance Act, 2004 further expanded the scope of the service provider
spelt out in BOFS by extending rendition of this service when provided by a
commercial concern as well, w.e.f. 10.09.2004.
Finance Act, 2006 omitted Credit Card Services from the definition of
BOFS; substituted the expression commercial concern with any other person,
in the definition of this service provider; relocated components of BOFS
enumerated in sub-clause (viii) to sub-clause (ix) and substituted in place of
pre-existing components in (viii), the words, Banker to issue services; and.
Initially BOFS was enumerated to be a taxable service in Section
65(72) (zm), later renumbered as Section 65(105)(zm).
Throughout the
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relevant period in issue i.e. 16.07.2001 to 30.04.2006, relevant provisions
Section 65(72)(zm) or Section 65(105)(zm) as the case may be, enumerated
BOFS as meaning any service provided (or to be provided) to a customer
by the “provider” of this service (as the provider was defined, from time to
time, in the definitional part of the Act i.e. in Section 65(10), (11) or (12), as
the case may be).
Card Services (w.e.f. 01.05.2006):
Section (33a) Credit card, debit card, charge card or other payment card
service” includes any service provided,(i)
by a banking company, financial institution including non-banking
financial company or any other person (hereinafter referred to as the
issuing bank), issuing such card to a card holder;
(ii)
by any person to an issuing bank in relation to such card
business, including receipt and processing of application, transfer of
embossing data to issuing bank’s personalisation agency, automated
teller machine personal identification number generation, renewal or
replacement of card, change of address, enhancement of credit limit,
payment updation and statement generation;
(iii)
by any person, including an issuing bank and an acquiring bank,
to any other person in relation to settlement of any amount transacted
through such card.
Explanation.- For the purposes of this sub-clause, “acquiring bank”
means any banking company, financial institution including non-banking
financial company or any other person, who makes the payment person
who accepts such card;
(iv)
in relation to joint promotional cards or affinity cards or cobranded cards;
(v)
in relation to promotion and marketing of goods and services
through such card;
(vi)
by a person, to an issuing bank or the holder of such card, for
making use of automated teller machines of such person; and
(vii)
by the owner of trade marks or brand name to the issuing bank
under an agreement for use of the trade mark or brand name and other
services in relation to such card, whether or not such owner is a club or
association and the issuing bank is a member of such club or
association.
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Explanation. – For the purposes of this sub-clause, an issuing bank and
the owner of trade marks or brand name shall be treated as separate
persons;”
Section 65(105)(zzzw) enumerated as a taxable service any service
provided or to be provided: to any person, by any other person, in relation to
credit card, debit card, charge card or any other payment card service, in any
manner.
14.
We have carefully considered oral arguments, written submissions,
relevant statutory provisions, executive clarifications, regulatory guidelines
and textual and curial authorities presented by respective parties on the
scope of credit card services. Before we proceed to analyses of the issues
referred, we summarize the competing positions regarding interpretation of
the scope of credit card services in BOFS, during the pre - 01.05.2006 era.
15.
Summary of contentions on behalf of assessees:
(a)
Credit Card Services (prior to 01.05.2006), is a service provided
(or to be provided), in relation to credit card services by a banking
company, a financial institution including a non-banking financial
company, any other body corporate or a commercial concern
(provider), to a customer of the provider. Thus, services rendered to a
customer of the provider in relation to credit card services would alone
amount to the taxable service;
(b)
The word Customer is not defined in the Act. In law, customer
means one who has a habitual or continual business relationship with a
bank (provider).The word signifies a relationship in which, while the
duration thereof is not determinative and the relationship commences
as soon as the first transaction is entered into, yet the relationship must
16
be in respect of the business of banking. Contextually and in respect of
credit card services, a customer must therefore mean the holder of a
card of the issuing bank;
(c)
The ME has a contractual arrangement with an acquiring bank,
which undertakes settlement of payments to the ME in respect of the
value of goods sold or services provided under a credit card
transaction, employing the point of sale (POS) machine provided by the
acquiring bank. ME is not a customer of the issuing bank nor has a
contractual relationship with it.
ME is also not a customer of the
acquiring bank in the banking business sense and merely pays a fee by
way of ME discount to such bank. Neither the ME nor the acquiring
bank can therefore be considered a customer of the acquiring bank nor
an acquiring bank a customer of the issuing bank, respectively.
(d)
Board Circular dated 09.07.2001 clarified the scope of credit card
services and the legislative intent underlying introduction of this aspect
of the taxable services, catalogued in BOFS. The circular explains that
it is a service whereby credit facility is provided to a customer. Credit
facility in respect of credit cards, is provided by the issuing bank to its
card holders and to none else. Services provided by an issuing bank to
the acquiring bank or those provided by the acquiring bank to the ME,
are not credit facility and in the transactional sequence, neither the
acquiring bank nor the ME receive any credit facility;
(e)
The expression Credit Card Services is not defined nor its scope
annotated in the Act, during the relevant period. The general meaning
of the term connotes provision of a credit facility for purchase of goods
17
and services. Such facility is provided only by an issuing bank to its
card holders;
(f)
An acquiring bank merely undertakes payment to or bill
discounting of, the ME. It undertakes the liability to settle payments for
goods or services provided by the ME and consumed by the card
holder, irrespective of the acquiring bank’s ability to recover such
amount from the issuing bank.
(g)
RBI Circular dated 12.12.2003 clarifies the scope of credit card
business in terms of reciprocal obligations between an issuing bank
and its card holder. Neither ME discounts and interchange fee, nor
services rendered between issuing and acquiring banks or between
acquiring banks and ME’s are considered in the RBI circular. Thus, (i)
providing of a credit facility by an issuing bank to its card holder, on the
one hand; and (ii) undertaking an obligation of settling payments by an
issuing bank to the acquiring bank or by the acquiring bank to the ME,
on the other, are distinct and dissimilar transactions. The later class of
transactions/ obligations are not comprehended within the scope of the
expression any service in relation to credit card services. Obligations
undertaken by an issuing bank in respect of card use related
transactions in favour of an acquiring bank or obligations undertaken by
an acquiring bank to settle payments to the ME, are not legally
enforceable obligations arising out of the activity of the issuing bank
providing a card not do they per-se arise out of possession of a credit
card by its holder. These obligations are predicated in law, upon
independent agreements between an issuing and an acquiring bank
and an acquiring bank and the ME, respectively;
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(h)
While the process of effectuation of credit card transactions is
accomplished by confluence of activities and undertaking of obligations
by several participants [set out in para 10(A), (supra)], there is no privity
of contract qua which an ME acquires a right in law to payment for its
transactions with card holders through use of credit cards. Similarly in
respect of an acquiring bank’s liability to the ME for settlement of dues
arising out of a credit card transaction, the obligation is legally
enforceable on the basis of a distinct contract. Settlement of payments
to the ME by the acquiring bank; to the acquiring bank by the issuing
bank and to the issuing bank by the card holder, thus arise out of
distinct contractual agreements. Services provided by an issuing bank
to an acquiring bank or by an acquiring bank to ME cannot therefore be
brought within the scope of services provided in relation to credit card
services, particularly since the legislative reach is expressed to be
directed towards any service provided in relation to credit card services
and not in relation to credit card.
(i)
The right of an ME to receive payment from the acquiring bank is
subject to strict conformity with and compliance of terms and conditions
of the agreement between these parties. The authenticity and validity
of the credit card, authentication of the transaction by a card
association’s network platform and several other conditions in such
agreement must be fulfilled before the right of the ME for settlement of
its dues under the credit card transaction, arises.
An agreement
between the acquiring bank and the ME also comprehends several
other types of cards such as debit cards, which are admittedly outside
the purview of the taxable service during the relevant period.
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(j)
W.e.f. 01.05.2006 “Card Service” is introduced as a distinct
service defined in Section 65(33a) read with Section 65(105)(zzzw).
With effect from this date the ambit of the service was also expanded,
to include several categories of cards and a variety of activities in
relation to card transactions as well.
These were explicitly brought
within the scope of the service with clarity and precision. Only since
01.05.2006, services provided by an issuing bank to an acquiring bank
and by an acquiring bank to the ME by way of settlement of payments
arising out of all specified card transactions were brought within the
purview of this taxable service.
Sub-clause (iii) of Section 65(33a)
explicates the expanded reach of activities now covered by the service.
The absence of such an express provision prior to 01.05.2006, in the
definition of credit card services within BOFS, is a clear pointer to the
legislative intent not to cover interchange fee or ME discount within the
scope of BOFS.
(k)
Board Circular dated 28.02.2006, clarifying the scope of card
services introduced w.e.f. 01.05.2006 as being comprehensive,
supports the interpretation that the scope of Credit Card Services as a
component of BOFS, covered a limited and narrow locus.
(l)
W.e.f. 01.05.2006 and introduction of Card Services, sub-clause
(iii) of Section 65(33a), considered in an interactive context reads:
Credit card, debit card, charge card or other payment card
service includes any services provided, by any person, including
an issuing bank and an acquiring bank, to any other person in
relation to settlement of any amount transacted through such
card.
20
Thus only w.e.f. 01.05.2006 services of settlement of amounts
transacted through credit card, debit card etc. are brought within the
purview of services provided in relation to card services, not earlier.
(m)
Neither the expression issuing bank nor acquiring bank were
defined in the Act including in Section 65(10), (11) or (12). These
expressions are defined only on enactment of Card Services and in
Section 65(33a). Services provided by an issuing bank to the acquiring
bank or those provided by an acquiring bank to the ME are neither
credit facilities nor services in relation to Credit Card Services and are
either expressed nor intended to be exigible to service tax, prior to
01.05.2006.
(n)
Revenue contends that any services provided in relation to card
transactions are taxable under BOFS prior to 01.05.2006, as well. On
the basis of this contention Revenue argues that interchange fee and
ME discount would constitute consideration received for rendition of
credit card services.
This contention is misconceived.
Though
expression “in relation to” is generally considered to be wide in scope,
the width of its coverage must nevertheless be understood in a context.
Precedents explain that the phrase “in relation to” must be read as
meaning a direct and proximate relationship to the subject matter to
which the expression is intended to apply.
On Revenue’s
interpretation, since a credit card transaction cannot be concluded
without authentication and settlement facilitation provided by employing
telephony or internet network, consideration charged by telephone /
telecommunication and internet service providers would equally fall
21
within the scope of Credit Card Services. Such an interpretation would
lead to absurd and indeterminate results.
(o)
Assessees further
contend that if
service tax is held to be
leviable on interchange fee and ME discounts, cum tax benefit as
provided in Section 67(2) of the Act should be allowed; that extended
period of limitation cannot legitimately be invoked since there is a
bonafide dispute about the interpretation and scope of Credit Card
Services in BOFS; that penalties under Sections 76 and 78 should be
dropped as there was a reasonable cause for non-remittance of tax;
and penalties under Sections 76 and 78 being mutually exclusive
should not be levied simultaneously;
16.
Since the Larger Bench is constituted only to answer issues referred for
its consideration, determination of issue, in sub-para (o) supra is outside the
scope of the reference. These would be considered during the course of
disposition of each of the appeals on merits, by the appropriate Bench.
17.
Summary of the Revenue position:
(i)
During 2001 to April 2006 credit card services were covered
within the purview of BOFS. This component of the taxable service (to
the extent relevant and material) was defined during this period as any
service provided to a customer by a banking company or a financial
institution including a non-banking financial company or any other body
corporate or commercial concern, in relation to credit card services.
(ii)
The contention on behalf of assessees that neither an acquiring
bank nor ME was a customer of the issuing bank or the acquiring bank,
is misconceived. Section 65(72), later Section 65(105) employ different
expressions to identify persons to whom different taxable services are
22
provided, so as to cover only so specified transactions between
specified parties. Different taxable services identify recipients of the
several services as:
a subscriber; a policy holder; a client; a shipping line; any person;
and a customer. While expressions like policy holder; investor; and
subscriber indicate a specified status of the service recipient; where the
service recipient is expressed as being, a client or a customer; the
legislative intention is to cover a broader class of recipients. Credit
card services in BOFS is not expressed to restrict rendition of the
service to only an account holder of a bank or financial institution.
(iii)
In the enumerative provision relating to this taxable service i.e.,
Section 65 (72)(zm) or Section 65(105) (zm), it is expressed that the
recipient is a customer, not only of a banking company but of a nonbanking company, a financial institution, any other body corporate or a
commercial concern, as well. Therefore, it is impermissible to confine
the recipient of this taxable service merely to an account holder of a
banking company. The expression “a customer” must therefore mean
a recipient of goods, services, products, or ideas obtained from a seller,
vendor or supplier for monetary or other valuable consideration.
(iv)
Agreements between ME’s and acquiring banks clearly indicate
that ME’s maintain an account with acquiring banks with whom a
contract is entered into for settlement of payments arising out of credit
card transactions.
(v)
The judgment of the Delhi High Court in CIT vs. JDS Apparels
Pvt. Ltd. 2 , clearly rules that an acquiring bank provides banking
2
Dt.18.11.2014 in IT Appeal.No.608/2014
23
services to the ME while protecting interests of the card holder and that
the amount retained by the acquiring bank was the fee for rendition of
such service.
(vi) To constitute a customer it is not necessary that the relationship
should be continuous or for any specified duration. The relationship of
a bank and a customer commences as soon as the first transaction is
entered into.
(vii)
Credit card services commence with issuance of the card by the
issuing bank. These services however do not end with swiping of the
card at the ME. The entire process by which credit card transactions
are successfully concluded i.e. issuance of the card; the card holder
obtaining goods or services at the ME; authentication and verification of
the card through the network platform; settlement of payment by the
acquiring bank to the ME; settlement of payment by the issuing bank to
the acquiring bank; issuance of a bill/ statement by an issuing bank to
its card holder; and payment by a card holder to the issuing bank are
an integrated and seamless sequence of transactions/activities which
together effectuate a credit card transaction.
Services provided by
issuing and acquiring banks are thus clearly comprehended within
scope of services provided in relation to credit card services, under
BOFS.
(viii) The word in relation to signifies the legislative intention to widen
and expand the scope, meaning and content. Thus, all integral,
ancillary and intermediary activities essential for effective operation of a
credit card transaction fall within the ambit of credit card services, on an
24
interactive interpretation of the enumerative and definitional provisions
of BOFS.
(ix)
Services provided to ME by an acquiring bank and those
provided to an acquiring bank by an issuing bank are services in
furtherance of and contribute to effectuation of credit card services and
are thus provided in relation to credit card services. The interchange
fee retained by an issuing bank or the settlement fee / ME discount
retained by the acquiring bank are exclusively in relation to rendition by
these entities, of credit card services.
(x)
The
definition
and
enumeration
of
card
services
w.e.f.
01.05.2006 does not support a narrow interpretation/ construction of
the scope of credit card services in BOFS, for the prior period. While
drafting Section 65(33a), including sub-clause (iii) thereof, Parliament
adopted a different, detailed and annotative form of drafting, than in
BOFS. In so far as credit card services under BOFS, the same result
was achieved by enacting that any service provided in relation to credit
card services is the taxable service. The expansion brought about by
words used in the definition of card services in Section 65(33a) is in
several other areas. All services provided by an issuing bank whether
to a card holder or to an acquiring bank and by an acquiring bank to the
issuing bank (by facilitating card transactions as an intermediary) or for
providing settlement of payments to the ME, are services provided in
relation to credit card services.
(xi)
One of the issues referred namely whether sub-clause (iii) in the
definition of card services has retrospective operation, is misconceived.
This is so since all services provided by an issuing bank and an
25
acquiring bank, which are necessary and integral to effectuation of sale
of goods or rendition of services through the instrumentality of credit
cards are services provided in relation to credit card services. Subclause (iii) of Section 65(33a) need not be considered as having a
retrospective operation. The difference in phraseology in enumeration
and definition of credit card services in BOFS and of card services
(during pre and post 01.05.2006 periods) are mere differences in
drafting techniques employed and do not restrict the scope of credit
card services in BOFS to services provided between an issuing bank
and its card holder.
ANALYSES:
18.
To ascertain, whether services provided by an issuing bank to an
acquiring bank and by an acquiring bank to ME amount to credit card
services under BOFS and consequently whether interchange fee and ME
discount earned by these banks amount to
consideration received for
rendition of credit card services, two aspects need to be considered:
(a)
Whether an issuing bank could be considered a customer of an
acquiring bank or ME; an acquiring bank, a customer of an issuing bank; or
the ME, a customer of the acquiring bank;
(b)
Which of the transactions, in the sequence of transactions necessary
for successful sale of goods or rendition of services through a credit card
amount to services provided in relation to credit card services; and
(c)
Whether ambiguity in drafting of the relevant provisions; failure to
identity
several
species
of
interdependent
transactions
inherent
in
effectuation of use of credit cards in the contemporaneous context; and
failure to specify ingredients of the taxable service with precision and
26
exactitude, render the provision ambiguous and invite purposive construction
to moderate the pathology of textual ambiguity or incoherence.
WHO IS A CUSTOMER?
19.
Section 67 of the Act (a provision relating to valuation of taxable
services) states that the value of any taxable service shall be the gross
amount charged by the service provider for such service rendered by him.
During the relevant period, i.e. the period during which credit card services
were in BOFS, enumeration of this taxable service was in Section 65
(105)(zm).
This provision specified the service as one provided or to be
provided, to a customer, by a banking company, a financial institution,
including a non banking financial company (for a later period, any other body
corporate or a commercial concern, as well), in relation to BOFS.
Thus,
services provided to a customer, in relation to credit card services, by a
provider (as defined) was alone the taxable service.
On 09.07.2001, the Board
(TRU) issued a clarificatory circular
explaining the scope of BOFS. Para 2.2 of this circular sets out clarifications
in respect of credit card services. These read:
2.2 Credit card services
2.2-1 This is a service where the customer is provided with credit
facility for purchase of goods and services in shops, restaurants,
hotels, railway bookings, petrol pumps, utility bill payments, etc. Cash
advances are also permitted upto specified limits in most of the cases.
This service is provided by nationalised banks, multi-national banks
and private banks.
2.2-2 For rendering the service, the service provider collects joining
fee, additional card fee, annual fee, replacement card fee, cash
advance fee, charge slip/ statement retrieval fee, surcharge/ service
charges on railway fare, fuel charges, and utility bill payments, charges
on over limit accounts and late payment fee, interest on delayed
payment, interest on revolving credit, etc. The fee may vary based on
the type of card and from bank to bank. All these charges, including
27
interest charges are made for the service rendered. Hence they all
form part of the value of the taxable service in this case.
From the clarification it is apparent that the service provider is the bank
which provides credit facilities to its customer, for purchase of goods and
services apart from providing cash advances; such services are provided by
nationalised banks, multi-national banks and private banks; and the
consideration for rendition of credit card services is by way of joining fee,
additional card fee, annual fee, replacement card fee, cash advance fee,
charge slip/ statement retrieval fee, surcharge/ service charges on railway
fare, fuel charges etc; charges on over limit accounts; late payment fee;
interest on delayed payment; interest on revolving credit and like
fees/charges. All these charges including interest charges are collected for
the rendition of credit card services and comprise the taxable value of this
service.
The Board circular does not specify interchange fee and ME
discount as consideration received for rendition of credit card services either
expressly or by implication from contents of the circular; and these receipts
are not for providing credit facility.
RBI issued a Notification dated 12.05.2001 addressed to all scheduled
commercial banks, directing adoption of additional safeguards to ensure
proper credit card operations. Paragraphs (i) and (v) of the RBI circular are
relevant and read:
(i)
Recovery of overdues
Credit card debit card is an unsecured line of credit. Repayment of
credit card dues depends primarily upon the card holders capacity to
repay. The highly competitive environment in credit card business has
provided customers with opportunity to hold more than one credit card
from different banks with the intention to pay only minimum monthly
payments on outstanding balances. As a result, the card holders are
often overextended and unable to repay the dues in full. As banks are
aware, credit card operations entail credit risk in their overall credit
portfolio.
Relaxed underwriting standards, aggressive solicitation
28
programmes, inadequate account management increase credit risk and
may lead to overdues and non-performing assets in the credit card
portfolios of banks. It is therefore imperative that banks take immediate
steps to reduce the incidence of default in the business and closely
monitor the recovery of credit card outstandings. Banks may formulate
specific Action Plans to this effect with the approval of their Board of
Directors.
(v)
Fees/Charges on credit cards
Fees are charged by banks for services in respect of credit card
operations. These include membership/ entrance fees, renewal /
annual fees, service charges on revolving credit card facility and penal
charges for overdue payments. Disputes often occur between card
issuing banks and card holders regarding the basic level of penal
charges. Banks are advised to clearly spell out fees/ charges to the
cardholder at the time of their applying for credit card, if not done so
far. In particular, banks should bring to the notice of the cardholder, the
rates of interest to be charged in case of delays and default in
payments, besides the membership/ renewal fees.
Assessees refer to a master circular issued by RBI on credit card
operation of banks. This circular specifies rules, regulations and standards
and identifies good practices for guidance and compliance by issuing banks/
NBFC’s for credit card business. The master circular sets out the background
and structure of credit card operations; basic features and types of credit
cards; fair practices to be adopted; methodology for issue of cards; interest,
trade and other charges which may be collected; guidelines for avoidance of
wrong
billing;
norms
for
protection
of
customer
rights;
customer
confidentiality; fair practices in debt collection; mechanism for redressal of
grievances; internal control and monitoring systems; fraud control; and
declares the right of RBI to impose penalties on banks / NBFC’s for violation
of guidelines contained in the circular. Assessees point out that guidelines in
this master circular also indicate that credit facility provided by an issuing
bank to a card holder is the singular context in which credit card facilities are
conceived and the master circular does not deal with or advert to any
services provided to an acquiring bank or the ME.
29
Assessees also refer to textual authorities, of Chitty on Contracts
(Twenty-Seventh Edition); Paget’s Law of Banking (Ninth and 12th Edition;
Goode on Commercial Law (Fourth Edition); and Halsbury’s Laws of
England (third edition); to explain the nature of and distinction between credit
and other payment cards, sequence of events and transactions that occur in
a credit card use, structure of several types of credit card agreements; the
meaning of “credit”; and what constitutes “customer” in the realm of banking
law and practice.
To support the contention that since the expression “customer” was not
defined in the Act, this expression being a technical expression must be
understood as ordinarily and naturally comprehended in trade or business,
assessees refer to Principles of Statutory Interpretation by G. P. Singh
(Seventh edition), in particular the statement on the relevant principle by Lord
Jowitt, L.C. and Lord Esher, M.R. in London and North Eastern Co. vs.
Berriman3 and Unwil vs. Hanson4. The principle is this. In construing a
legislation relating to a particular industry, it is legitimate to give to the words
used, a special technical meaning if it can be established that at the date of
passing the statute such meaning was well understood and accepted by
those conversant with the industry. Assessees point out that this principle
was quoted with approval and followed in several decisions including Indian
Cable Co. Limited vs. Collector of Central Excise5; Union of India vs.
Garware Nylons Limited 6 ; and Indian Aluminium Cables Limited vs.
Union of India7.
3
(1946) 1 ALL. E.R. 255
(1891) 2 QB 115 (C.A.)
5
AIR 1995 SC 64
6
AIR 1996 SC 3509
7
(1985) 3 SCC 284.
4
30
Assessees also refer to the decision in The Great Western Railway
Company vs. London and County Banking Co. Ltd.; 8 of the Court of
Appeal in E. B. Savory and Company vs. Lloyds Bank, Limited9; and
Woods vs. Martins Bank Limited and Another 10 ; to judgments of the
Madras High Court in N.M.N. Duraiswami Chettiar vs. The Dindigul Urban
Cooperative Bank Ltd., and another;11 and the Official Assignee, Madras
vs. Natesan Pillai12; and judgment of the Kerala High Court in Central Bank
of India Limited vs. Gopinathan Nair and Ors.13.
Revenue cited the judgment of the Court of Appeal in Importers
Company. Limited vs. Westminister Bank Limited 14. While dismissing the
appeal, Bankes L.J. observed that while the most ordinary meaning of a
customer of a bank, is a person who keeps an account at the bank, it must be
noticed that banks do various kinds of business and in all those, individuals or
companies with whom they do business may properly be called customers,
whether they be individuals or banks; that in the present case, the class of
business of collecting cheques was done between banks and it seems
impossible to contend, as a matter of law, that the bank for which the
respondents were doing the business, was not, in reference to that business,
their customer. Atkin L.J. however recorded a caveat and to this extent. He
observed that where a non-clearing bank regularly employs a clearing bank to
clear its cheques, the non-clearing bank would be a customer of the clearing
bank. However, a non-clearing bank may have a lay customer and would
employ a clearing bank as its bank for collection if the cheque is to be cleared
8
(1901) AC 414;
1932 (2KB) 122;
10
(1959) 1 QB 55
11
AIR 1957 Mad 745
12
(51) LW 144
13
AIR 1970 Ker 74
14
(1927) 2 K.B. 297
9
31
with the Clearing House; and it may well be that the agent for collection
collects for a customer when the cheque is collected for the benefit of the
customer of the non clearing bank; but that point was not argued and it is not
necessary to decide.
The above judgments consider provisions of the English Bills of
Exchange Act, 1882 or reciprocal rights and obligations and existence or
otherwise of a relationship of a banker and a customer, in distinct
transactional situations.
The issue before us is however, what is the
intendment of Parliament in confining BOFS “provided to a customer”, by a
banking company, financial institution including a non-banking financial
company or any other body corporate or commercial concern in relation to
BOFS, while specifying the taxable event and defining the taxable service.
The Act has not defined “customer”. Overseas and Indian authorities,
referred to in preceding sub–paras do not guide us to a singular normative
destination, as to circumstances which alone signify the relationship of a
banker and its customer, regardless of factual or statutory contexts. The
definition of BOFS alongwith the relevant enumerative provision does not
confine the status of the provider (of the service) only to a banking company
but includes any other body corporate as well.
Paget’s law of Banking
explains, by reference to precedents, that while continuum of transactions
may not be necessary nor is the duration of a relationship of the essence,
entering upon a course of dealing with a banking entity is sufficient to
establish the relationship of a banker and a customer and that it is the
business relation, a continued practice of rendition of banking services, as
distinct from an isolated act or a transaction, that is the essence of a
customership relation.
32
It is a settled position that the legislature is authorised to identify
persons, things, transactions or events for legislating a social or taxation
policy; and where legislature provides a definition or a meaning distinct from
what an expression in its technical sense connotes or is understood by the
concerned trade or business, the artificial or distinct meaning given to such
persons,
things,
transactions,
events
or
expressions,
must
prevail.
Assessees do not contend that Parliament has no power to define the
expression “a customer”, to include an acquiring bank or ME. The specific
contention is that since the taxable event is services provided to a customer
in relation to credit card services, services provided by an issuing bank to an
acquiring bank or the later bank to the ME, were not intended by Parliament
to fall within the scope of services provided in relation to credit card services.
Only services provided by an issuing bank to its card holder comprised
extension of credit facilities and these alone were covered under BOFS.
Both parties provided sample copies of agreements entered into
between the ME and an acquiring bank. The agreements are substantially
similar and indicate a continuing relationship (during the tenure of agreement)
between the ME and the acquiring bank.
Agreements set out reciprocal
obligations of the parties and incorporate terms and conditions, the
compliance whereof would trigger the reciprocal obligations specified in the
agreements. Under these terms, an acquiring bank inter-alia undertakes to
accept all valid charges transacted by card holders excluding those whose
names appear on a current warning bulletin; to pay the ME the amount
payable on authorized card transactions, after deducting fee/ commission
service at the stipulated rate; with a further stipulation that the acquiring bank
would be entitled to charge back the charges indicated in the terms pertaining
33
to charge backs. The provision in the agreements relating to charge backs
stipulates several circumstances on the occurence of which an acquiring
bank would be entitled to recover amounts paid to the ME under card
transactions, from the account of the ME. These and several other terms in
agreements between acquiring banks and ME’s clearly indicate that the ME is
conceived by the parties as a customer of the acquiring bank.
In the series and sequence of interdependant transactions that occur in
the use of credit cards, acquiring banks generate reports for merchant
settlement which are also forwarded to issuing banks through the card
association network. There after issuing banks settle the amounts payable to
acquiring banks after retaining an interchange fee, which is shared with the
card association.
The continuity and regularity of such commercial
intercourse between acquiring and issuing banks, in our considered view
leads to the position of acquiring banks being customers of issuing banks.
Issuing and acquiring banks are recognised participants in the nuanced
business of credit card transactions.
The interdependant and seamless but distinct transactions that occur
between the ME, an acquiring bank and an issuing bank therefore fall to be
considered as a customary relationship amongst these parties.
We are
fortified in this conclusion by the circumstance that the Act specifies that the
provider of credit card services is identified as a banking company, a financial
institution including a non-banking financial company or any other body
corporate or a commercial concern as well. In the circumstances, confining
the expression “a customer”, to an individual or an entity which has a savings
or a current account with a bank, is textually inappropriate. Further, banking
companies, in the current scenario of expanding commercial transactions
34
undertake a variety of activities which were not conceived as part of ancient
or traditional banking activities. It would therefore be appropriate to conclude
(in the context of BOFS), that a customer of a bank includes any person or
entity having a continuum of relationship or transactional intercourse with a
banking company, within the ambit of activities pursued by the later as a part
of its authorised business. This is the interpretation we are persuaded to in
the context of the definition and enumeration of BOFS as a taxable service.
This is not to say that other statutes may not expand or restrict the scope of
the expression, customer of a bank.
We accordingly conclude that in the context of credit card services in
BOFS, as the taxable service is defined and enumerated, acquiring bank and
the ME could be considered to be a customer of the issuing bank and an
acquiring bank, respectively.
WHETHER INTERCHANGE FEE AND ME DISCOUNT FORM PART OF
THE TAXABLE VALUE OF BOFS:
20.
Whether interchange fee or ME discount amount to consideration
received for rendition of credit card services depends on whether services
provided by an acquiring bank to the ME and those provided by an issuing
bank to the acquiring bank fall within the ambit of services provided in relation
to credit card services.
Relying on the Board Circular dated 09.07.2001, RBI Notification dated
12.05.2001 and RBI master circular on credit card operation of banks
(referred to in the previous para), assessees contend that irrespective of
whether ME or an acquiring bank is a customer of an acquiring bank and the
issuing bank respectively, services provided by a bank other than to its card
35
holder fall outside the ambit of services provided in relation to credit card
services.
To support this contention reliance is placed on decision of Courts
constituted under the EEC treaty, in Chaussures Bally SA vs. Belgian State
dated 25.05.1993; Commissioner of Customs and Excise vs. Primback
Limited, dated 15.05.2001; and Dixons Retail plc vs. Commissioners for
Her Majesty’s Revenue and Customs, dated 21.11.2013; judgments of the
Court of Appeal in In Re Charge Card Services Limited15; Customs and
Excise Commissioners vs. Diners Club Limited and Another
16
;
Commissioner of Customs and Excise vs. Debenhams Retail plc 17 ;
Custom and Excise Commissioner vs. FDR Limited18.
In Bally, the EEC Court negated a creative contention of the ME, that
since it received a lesser amount than what was reflected in the bill issued to
a purchaser of goods transacted through use of a credit card, sales tax (VAT)
was payable on the actual value received by the ME but not on the amount
reflected in the bill issued to the purchaser.
The Court opined that the
reduction made by the card issuing organisation towards consideration for the
service rendered by it to the supplier, is qua an independent transaction in
respect of which the purchaser is a third party.
Primback Limited reiterated the analyses and the ruling in Bally to
hold that the relationship between the seller and purchaser and between the
seller and the finance house, must be distinguished for the purpose of
determining the basis for calculating VAT. Consequently, the fact that the
supply of services by the finance house is, in principle VAT – exempt has no
15
(1989) CL 497
(1989) 1 WLR 1996
17
(2005) EWCA Civ 892
18
(2000) STC 672
16
36
bearing on the basis of assessment for charging of VAT, in respect of
transactions between the seller and purchaser.
Dixons Retail plc reiterated and followed the principle evolved in
Bally, though in a different factual context.
The appellant, an ME sold
electrical items and the transaction was concluded through cards.
ME
remitted VAT on the transaction value despite fraudulent use of the cards.
The card issuers did not resort to charge back and thus ME retained
payments made by card issuers which included the VAT element.
ME
claimed refund of the sales tax (VAT) remitted. The Second Chamber of the
EEC Court ruled in the circumstances, that the physical transfer of goods to a
purchaser who fraudulently uses the bank card as a means of payment yet
constitutes a supply of goods within the meaning of the relevant provisions of
applicable Council Directives and consequently in the context of such
transfer, the payment made by a third party under an agreement concluded
between it and the supplier of those goods, by which the third party has
undertaken to pay the supplier for goods sold by the latter to purchasers
using such a card as a means of payment, constitutes “consideration” within
the meaning of the relevant Directives and Articles
In In Re Charge Card Services, the Court of Appeal held that
transactions using a credit or charge card are made in the context of an
underlying scheme of separate bilateral contracts; between the card company
and the supplier, and between the company and the card holders, whereby
suppliers agreed to receive cards towards payment for the goods and card
holders were entitled to use the cards to commit the card issuing company to
honour its obligation to pay suppliers. The card holders were obliged to pay
the issuing company the full price charged by the supplier; and there was no
37
general principle of law that a method of payment involving risk of nonpayment by a third party created a presumption that acceptance of that
method constituted conditional payment only. The Court held that on a true
construction of the supplier agreement, a card holder’s obligation to pay the
card issuer arose when the transaction is debited to his account, irrespective
of whether the issuer paid the ME; since it was not intended that a card
holder’s liability might arise twice, to pay both the card issuer and the garage,
payment by the card was to be taken as an absolute discharge of the card
holder’s liability to the ME. Accordingly, the debt due from card holders were
payable to the card issuer or to the factor, with whom the card issuing
company had entered into an invoice discounting agreement, to finance its
activities and had sold its receivables to such factor.
The Court of Appeal in Diners Club Limited also noticed distinct
contractual agreements between a card issuer and a card holder; and
between ME (retailer) and the Card issuer (tax payer), in the context of
determining whether the card issuer was entitled to recover only a reduced
portion of input tax on taxable supplies made to it during the course of
separate agreements. On facts, the card issuer (appellant) operated a credit
card scheme whereunder its card holders were liable for all charges incurred
on the use of the card. The card issuer also entered into a contract with the
ME whereunder it purchased all accounts created by use of the card, less a
discount. Revenue claimed that the card issuer made exempt supplies for
the purposes of VAT and were therefore entitled to recover only a reduced
portion of input tax on taxable supplies made to it. In the factual context, the
Court held that the services provided by the card issuer was the making of
payments to the ME pursuant to a contractual obligation and in consideration
38
for deduction of a discount and that the entire transaction was for supply of a
service to the ME by the card issuer, falling within the ambit of provisions of
the VAT Act, 1983.
In Debenhams Retail plc,
the respondent an ME introduced a
scheme whereby sales through a card transaction required the purchaser to
sign a till slip which set out an agreement by the purchaser that 2.5% of the
value of the transaction was payable to DCHS, a wholly owned subsidiary of
the ME towards card handling services provided by the subsidiary. The card
holder thus presumptively signed two contracts, one for remittance of a
percentage to the card handling entity and the other for a substantial
percentage of the total consideration to the ME. Allowing Revenue’s appeal,
the Court held that for a customer paying by card, once the card is accepted
at the till the transaction is completed in relation to the store and settlement of
payment obligations resulting from use of the card is a matter between the
store and the card issuer.
The purchaser has nothing to do with that,
whatever may occur between the card issuer and the store or via the
acquirer, where there is one.
Even if the documentation seen by the
customer/ card holder could otherwise be read as indicating that the customer
was required to contract with the card handling entity, contracts are not made
by mere assertion. Consequently, the natural interpretation of the course of
events and documentation accordingly would be that any card handling, other
than that covered by the agreement between the card holder and the card
issuer was and remains the responsibility of the ME accepting the card in
discharge of the price, ruled the Court.
In FDR Limited the Court of Appeal had occasion to consider a distinct
type of transaction, also involving credit card use. The respondent supplied
39
credit card services to banks. Its clients were either issuing or acquiring
banks or some which acted in both capacities. Some banks outsourced their
obligations in respect of typical credit card transactions to the respondent
which maintained two accounts; card holders accounts and merchants
accounts.
On being notified that a credit card transaction occurred, the
respondent posted a credit to the merchant account. And made an entry on a
magnetic tape which was supplied on a daily basis to another entity which
operated as an automated clearing house, instructing the later to effect a
credit in the merchants own banks accounts and enter a corresponding debit
in the acquirer’s central accounts.
Respondent reconciled the accounts
between issuing and acquiring banks by establishing the net position of each
and the net amount which needed to be transferred to the relevant bank.
Respondent made a payment out of its own funds to each client bank which
was a net claimant and received on the same day a payment from each bank
which was a net debtor and thereafter posted a debit to the card holder’s
account, to which it also posted credit entries when the card holder paid the
monthly bill. The respondents also provided connected services comprising
arranging of credit card embossing, preparing and sending to the card holder
periodic statements of indebtedness to the issuing bank and like services.
Revenue considered services provided by the respondent as exigible to VAT.
This was contested on the plea that the services in issue were supplies falling
within relevant provisions of the EC Council Directive which exempted from
VAT transactions including negotiations concerning deposit and current
account,
payments,
instruments.
transfers
debts,
cheques
and
other
negotiable
Dismissing Revenue’s appeal, the Court held that where a
single supply for VAT purposes consisting not of any one supply to which
40
others were ancillary, but comprised a bundle of supplies none of which
predominated over others, it was necessary to identify elements which
comprised the core supplies and arrive at a decision on the facts, whether
taxable or exempt elements predominated. In the instant case, the making of
transfers was at the centre of the core supply of the respondents transactions
and this was exempt under the relevant EC Council Directive, ruled the Court.
Provisions of Section 131 of the Negotiable Instrument Act, 1881 are
referred on behalf of assessees, in support of the contention that a customery
relationship cannot be said to arise between issuing bank and an acquiring
bank and between an acquiring bank and the ME. This statutory provision
does not, in our view, assist in identifying the scope of the expression “a
customer” in the context of BOFS.
The several decisions, of EEC Courts and of the Court of Appeal notice
and recognise existence of distinct contractual arrangements between an
issuing bank and a card holder; the ME and an acquiring bank; an acquiring
bank and the issuing bank; and between issuing and acquiring banks and
another entity which provides services such as netting – off services, as seen
in the facts of FDR Limited. The existence of such distinct agreements and
the legal consequences thereof were however considered in the context of
the relevant legislation/ norms, whether VAT legislation or Directives of EEC
Council.
In the context of BOFS, in our considered view, these decisions provide
if at all, guidance to this limited extent (and that is also the reality of the
factual matrix), that reciprocal rights and obligations between an issuing bank
and its card holder; between the ME and the acquiring bank; between
acquiring and issuing banks; or between banks and the card association are
41
predicated upon distinct contractual arrangements. The fact that services
flow between these several players, which are sequential and interdependent
for effectuation of credit card transactions, is indisputable. The problematic is
however in identifying which among the such distinct but sequential and
interdependant transactions amount to services provided in relation to credit
card services, in the context of the definition and enumeration of BOFS, in
relevant provisions of the Act.
SCOPE OF SERVICES PROVIDED IN RELATION TO CREDIT CARD
SERVICES:
21.
Under the Act and during the period in issue any service provided or to
be provided, by a banking company, a financial institution including a nonbanking financial company or any other body corporate to a customer, in
relation to credit card services, is the taxable service we are concerned with.
On a textual and grammatical construction, the integers of the taxable service
are:
(a) The provider should be a banking company etc. and the recipient
a customer of the provider; and
(b) The taxable rendition should be any service in relation to credit
card services.
On a grammatical construction of the relevant provisions, since services
provided by an acquiring bank to the ME and an issuing bank to the acquiring
bank are as essential to conclusion of transactions employing credit cards as
are the services provided by an issuing bank to the card holder i.e. in issuing
the credit card and the integral credit facility, it could be contended, as has
been,
that an acquiring bank and an issuing bank receive taxable
consideration by way of ME discount and interchange fee.
42
Assessees however contend that services provided by an acquiring bank to
the ME and those provided by an issuing bank to the acquiring bank are not
credit card services but are bill discounting or settlement of payments
services, in contra-distinction to services provided by an issuing bank to the
card holder, which alone fall within the ambit of the taxable service, since the
issuing bank extends credit facility to the card holder. To buttress this line of
interpretation assessees refer to the definition of card services w.e.f.
01.05.2006.
22.
As noticed earlier, card services were introduced w.e.f. 01.05.2006,
defined in Section 65(33a).
Section 65(105)(zzzw), the enumerative
provision states that services provided to any person (not merely a customer),
by any other person in relation to credit card, debit card, charge card or other
payment card service in any manner is a taxable service (emphasis added).
Clause (33a)(i) defines an “issuing bank” as a banking company, financial
institution including a non-banking financial company or any other person
(instead of, any other body corporate), which issues such a card to a card
holder.
Sub-clauses (ii) to (vii) of this provision enumerate categories of
services which fall within the scope of the taxable service. Sub-clause (ii)
enumerates receipt and processing of applications, transfer of embossing
data to issuing bank’s personalisation agency, automated teller machine
personal identification number generation, renewal or replacement of card,
change of address, enhancement of credit limit, payment updation and
statement generation. Sub-clause (iii) enumerates services provided by any
person including an issuing bank or an acquiring bank, to any other person in
relation to settlements of any amount transacted through such card. The
explanation under sub-clause (iii) defines an acquiring bank as one which
43
makes payments to any person who accepts such card.
Sub-clause (iv)
enumerates services provided in relation to joint promotional cards, affinity
cards or co-branded cards. Sub-clause (v) enumerates services provided in
relation to promotion and marketing of goods and services through such card.
Sub-clause (vi) enumerates services provided to an issuing bank or the
holder of such card, for making use of automated teller machines of the
provider.
Sub-clause (vii) enumerates services provided by the owner of
trademarks or brand name to the issuing bank under an agreement for the
use of the trade mark or brand name and other services in relation to such
card, whether or not such owner is a club or association and the issuing bank
is a member of such club or association. The explanation to this sub-clause
(vii) states that for the purposes of this sub-clause, an issuing bank and the
owner of credit card and brand name shall be treated as separate persons.
From the detailed specification of varieties of services defined as falling
under card services, it is apparent that w.e.f. 01.05.2006 three significant
changes are introduced, in contrast with the scope and definition of credit
card services under BOFS.
Finance Act, 2006 also deleted “credit card
services” from the scope of BOFS in Section 65(12).
The changes introduced w.e.f. 01.05.2006 are:
(a)
Card services include debit card, charge card or other payment
card, apart from credit card;
(b)
The scope of the service provider is expanded. The service
provider is now “any other person” as well;
(c)
The identity of the service recipient also stands expanded in sub-
clause (zzzw);
44
(d)
Any service provided by any person in relation to credit card,
debit card, charge card or other payment card, in any manner, is now
the taxable service;
(e)
The nature and variety of services included within the ambit of
card services is now specifically enumerated, notwithstanding use of
“includes” prefixed in clause (33a) and a comprehensive clause “in
any manner” in Section 65(105)(zzzw); and
(f)
Services enumerated in sub-clauses (i), (ii), (iii), (vi) and (vii)
could well be conceived as those provided in relation to credit card
services as well.
Assessees urge that in the definition of BOFS, any service provided to
a customer in relation to credit card services is the defined taxable service.
As services enumerated in sub-clauses (i) to (iii) and (vi) and (vii) of Section
65(33a) could well be urged to fall within the taxable service prior to
01.05.2006 as well, the definition of credit card services in BOFS would be in
serious jeopardy on grounds of arbitrariness, ambiguity and failure to identify
the taxable event with clarity and precision. Assessees therefore argue that
prior to 01.05.2006, credit card services under BOFS must be understood as
confined to (credit facility) services provided by an issuing bank to its card
holder, as clarified in Board Circular dated 09.07.2001, in the RBI Circular
dated 12.12.2003 and the RBI Master circular.
Revenue contends to the contra and for reasons advanced for this
contention, earlier noticed. Revenue also contends that in construing the
scope of credit card services under BOFS, reference to the definition and
scope of the later introduced “card services” is impermissible. On a true and
fair construction of the definition and enumeration of credit card services,
45
since interchange fee or ME discount are received by an issuing bank and the
acquiring bank for services provided in relation to credit and services, these
would constitute the taxable value, being the consideration received for
rendition of the taxable service, contends Revenue.
23.
Before we proceed to identify transactions which fall within the purview
of credit card services under BOFS, we shall notice settled and overarching
principles of interpretation applicable to taxing statutes. Lord Simonds in St.
Aubyn (LM) vs. A.G.,19 observed that in interpreting a section in a taxing
statute, the question is not at what transaction the section is according to
some alleged general purpose aimed, but what transaction its language
according to its natural meaning fairly and squarely hits and this is the one
and only proper test. This principle was adopted and applied in Mathuram
Agrawal vs. State of M. P.
20
.
Lord Atkinson pointed out in Ormond
Investment Co. vs. Betts 21 that, the proper course in construing revenue
Acts is to give a fair and reasonable construction to their language without
leaning to one side or the other but keeping in mind that no tax can be
imposed without words clearly showing an intention to lay the burden and that
equitable construction of the words is not permissible. Precedents also clarify
that if a taxing provision is, so wanting in clarity that no meaning is reasonably
clear, the courts will be unable to regard it as of any effect vide IRC vs. Ross
and Coulter22, a decision quoted with approval in Gursahai vs. CIT23. If the
words used in a taxing statute are ambiguous and reasonably open to be two
interpretations, benefit of interpretation is given to the subject; vide CIT vs.
19
1952 AC 15 (HL)
(1999) 8 SCC 667
21
(1928) AC 143 (HL)
22
(1948) 1 ALL ER 616 (HL)
23
(1963) 3 SCR 893.
20
46
Karamchand Premchand Limited 24; C.A. Abraham vs. ITO, Kottayam 25;
Diwan Brothers vs. Central Bank, Bombay 26 ; Manish Maheswari vs.
Assistant Commissioner of Income Tax 27 .
It is also an established
principle that before taxing any person it must be shown that he falls within
the ambit of the charging section, by clear words used in the section; vide
Commissioner of Wealth Tax, Gujarat vs. Ellis Bridge Gymkhana 28; and
Commissioner of Customs vs. Acer India (P) Limited29. In interpreting a
taxing statute, considerations of hardship, injustice or anomalies do not play
any useful role, unless there be some real ambiguity vide Mapp vs. Oram 30;
and State Bank of Travancore vs. CIT31.
24.
As noticed, Revenue contends that since under the BOFS regime, any
service provided or to be provided to a customer, by a banking company etc.
in relation to credit card services is the taxable service, services provided by
an issuing bank to the acquiring bank and by an acquiring bank to the ME
and on which rendition these banks collect interchange fee or ME discount,
these services are covered within this taxable service. Revenue argues that
since settlement of payments provided by issuing and acquiring banks are
services integral to effectuation of transactions concluded through the use of
credit card, these services must be considered as provided “in relation to”
credit card services. Reliance is placed on Collector of Central Excise,
Jaipur vs. Rajasthan State Chemical Works, Rajasthan 32 ; Doypack
24
AIR 1960 60 1175
AIR 1961 SC 609
26
(1976) 3 SCC 800
27
(2007) 3 SCC 794
28
(1988) 1 SCC 384
29
(2008) 1 SCC 382
30
(1969) 3 ALL 215 (HL)
25
31
(1986) 2 SCC 11
32
(1991) 4 SCC 473
47
Systems (Pvt.) Limited vs. Union of India33; CCE vs. Solaris Chemtech
Limited and Others34; State of Karnataka vs. Azad Coach Builders 35;
and Flex Engineering Limited vs. Commissioner of Central Excise,
U.P.36.
The meaning of the expression “in relation to” came up for
consideration in Doypack Systems (Pvt.) Limited, in the context of a Central
legislation for acquisition and transfer of undertakings of a textile company.
The Court reiterated the established principle that the expressions “pertaining
to”; “in relation to” and “arising out of” are expressions used in the expansive
sense and are often used interchangeably and to avoid repetition of the same
phrase in the same clause of a sentence, as a principle of good drafting. The
Court also explained that the expression “in relation to” and “pertaining to” are
broad expressions which pre-suppose another subject matter and are words
of comprehensiveness which might have a direct signification as well as an
indirect one depending on the context.
Reiterating the principles of
grammatical construction, the decision pointed out that words in a statute
must, prima-facie, be given their ordinary meaning. Where the grammatical
construction is clear and manifest and without doubt, that construction ought
to prevail unless there are strong and obvious reason to the contrary
(emphasis supplied).
25.
It must however be noticed, that the interpretative rule of grammatical
or literal construction is invariably stated with caveats. It is so expressed in
Doypacks System (Pvt) Limited as well. Precedential and textual authorities
characterise this rule as a golden rule. Francis Bennion in a preface to the
33
(1988) 2 SCC 299
(2007) 7 SCC 347
35
2010 (262) ELT 32 (SC)
36
2012 (276) ELT 153 (SC)
34
48
treatise Statutory Interpretation cautions that the golden rule in statutory
interpretation is that there are no golden rules. There is an equally
established principle of construction, that if the language of the statute is
capable of bearing more than one construction, in selecting the true meaning
regard must be had to the consequences resulting from adopting the
alternative construction; and a construction that results in hardship, serious
inconvenience,
injustice,
absurdity
or
anomaly
or
which
leads
to
inconsistency, uncertainty and friction in the system which the statute
purports to regulate has to be rejected and preference given to that
construction which avoids such results; however this rule of construction has
no application where the words are susceptible to only one meaning and no
alternative construction is reasonably open - vide Tirath Singh vs. Bachittar
Singh37; State of Madhya Pradesh vs. Azad Bharat Finance Company 38;
Union of India vs. Sankalchand 39; K. P. Verghese vs. ITO40; D. Saibaba
vs. Bar Council of India41; Modern School vs. Union of India42.
House of Lords in Grey vs. Pearson
43
The
explained that if the grammatical
construction leads to some absurdity or some repugnance or inconsistency, it
may be departed from so as to avoid such consequences. The Supreme
Court in N.T. Veluswami Thevar vs. G. Raja Nainar
construction giving rise to anomalies should be avoided.
37
AIR 1955 SC 830
AIR 1967 SC 276
39
(1977) 4 SCC 193
40
(1981) 4 SCC 173
41
(2003) 6 SCC 186
42
(2004) 5 SCC 583
43
(1957) 6 HLC 61
44
AIR 1959)SC 422
38
44
cautioned that a
49
26.
On the basis of the above broad principles guiding interpretation
including of taxing statutes we now proceed to analyse the ambit of credit
card services in BOFS, the taxable service in issue. The identification of
which of the transactions among the several transactions that occur during
the use of a credit card, fall within the definition and enumeration of credit
card services, appears to be a facially nebulous and substantially interpretive
problematic issue.
27.
On a literal construction of the relevant provisions it appears at first
blush that any service provided to a customer by a banking company etc. in
relation to credit card services, is a taxable service.
Acceptance of this
construction would lead to infinite expansion of the taxable event. Not only
would credit facilities provided by an issuing bank to its card holder fall within
the scope of this service but services such as receipt and processing of credit
card
applications; transferring of embossing data to the issuing bank’s
personalisation agency; teller machine personal identification number
generation;
renewal or replacement of a credit card; change of address;
payment updation and statement generation; settlement of
amounts
transacted through credit card; services provided by the owner of trade marks
or bank name to an issuing bank for use of the trade mark or brand name;
and a host of other services which are interspersed in the sequence of
transactions occurring on the use of a credit card, would all be services
provided in relation to credit card services. These services are expressly
enumerated in sub-clauses (ii), (iii), (vi) and (vii) of Section 65 (33a), w.e.f.
01.05.2006.
On Revenue’s interpretation, these services are subsumed
within credit card services on account of the “in relation to” phrase. Wherever
an issuing bank hives of some of its activities in relation to credit card
50
operations, such as receipt and processing of credit card applications and the
like and these services are provided by a outside agency, these would
nevertheless fall within the ambit of BOFS, though not statutorily so identified
and expressed. The scope of credit card services and BOFS would therefore
be perpetually nebulous and its contours indeterminate, assessees contend.
Assessees also urge that acceptance of Revenue’s interpretation would lead
to perpetual ambiguity in ascertaining the range and variety of transactions
falling within the ambit of credit card services and such interpretation should
therefore be avoided on the principle of doubtful and ambiguous taxation and
inchoate specification of the taxable event in a fiscal legislation.
28.
To support acceptance of the principle of construction which states that
for avoidance of ambiguity a restrictive construction should be adopted,
assessees contend that the guidance provided by Board Circular dated
09.07.2001 must be accepted as a correct and contemporaneous executive
exposition of the scope of credit card services and on this basis the inference
is compelling that only services provided by issuing bank to the card holder
by way of extending credit facility must be considered as falling within the
scope of this taxable service. Assessees contend that the legislative intention
prior to 01.05.2006 is consistent with the scope of the taxable event under
credit card services as spelt out in the Board circular.
29.
To justify reference to the definition of card services, to comprehend
the true scope of credit card services, assessees state that where an earlier
statutory provision is ambiguous i.e., fairly and equally open to diverse
meanings, a later provision may in certain circumstances serve as a
parliamentary exposition of the former, vide Ram Kishana Ram Nath vs.
51
Janpad Sabha45; Jogendranath Naskar vs. Commissioner of Income-tax
46
; Valley Portland Cement Co. Ltd. vs. General Mining Syndicate Pvt.
Ltd.
47
; U.P. Co-operative Cane Union Federation Ltd. vs. Liladhar 48 ;
Cape Brandy Syndicate vs. IRC
49
and Gem Granites vs. Commissioner
of Income Tax50.
In Cape Brandy Syndicate Lord Sterndale observed:
I think, it is clearly established – that subsequent legislation on
the same subject may be looked to in order to see what is the proper
construction to be put upon an earlier Act where that earlier Act is
ambiguous. I quite agree that subsequent legislation, if it proceeds
upon an erroneous construction of previous legislation, cannot alter
that previous legislation, but if there by any ambiguity in the earlier
legislation then the subsequent legislation may fix the proper
interpretation which is to be put upon the earlier.
In State of Bihar vs. S. K. Roy51 Ramaswami, J. stated: it is a well
recognised principle that subsequent legislation may be looked at in order to
see what is the proper interpretation to be put upon the earlier Act where the
earlier Act is obscure or ambiguous or readily capable of more than one
interpretation.
30.
In Thirumanickam and Co. vs. State of Tamil Nadu
52
Section 15(b)
of the Central Sales Tax Act, 1956 was amended by Act 61 of 1972. Prior to
the amendment this provision did not specifically indicate to whom the Sales
Tax Act paid on declared goods would be refunded in the event the goods are
later sold in the course of inter-State trade or commerce. The amendment
Act which was not retrospective provided that refund of tax was to be made to
45
AIR 1962 SC 1073
AIR 1969 SC 1089
47
(1976) 3 SCC 852
48
1980 Supp SCC 437
49
(1921) 2 KB 403
50
(2005) 1 SCC 289
51
AIR 1966 SC 1995
52
(1977) 1 SCC 199
46
52
the person making the sale in the course of inter-State trade or commerce.
The amendment was considered by the Supreme Court as an exposition by
Parliament itself of its intent contained in the Section before its amendment
and the Court held that it was the person making the sale in the course of
inter --State trade or commerce who was entitled to refund even when the
unamended section was in force.
31.
In Zee Telefilms Ltd. vs. Commissioner of C. Ex. (Appeals),
Mumbai-IV53, the issue was whether services provided by appellants such
as soliciting and booking advertising; conducting correct investigations of
advertisers; supplying the programming and dubbed programming in
languages specified by a customer on a video suitable for the channel and
capable of broadcasting; delivering programming
to the client and like
services fall within the ambit of the taxable, advertising agency service.
Advertising agency is defined in Section 65(2) of the Act as meaning any
commercial concern engaged in providing any service connected with the
making, preparation, display or exhibition of advertisement and including
advertising.
The enumerative provision in Section 65(48) enact that this
service is any service provided to a client, by an advertisement agency in
relation to advertisement in any manner. Allowing the appeals, Tribunal ruled
that appellants do not make or prepare the advertisement; they have neither
the expertise nor skill required in this regard; this is done by the advertising
agency appointed by the advertisers which remits service tax under the head
“Advertising Agency”. It requires to be noticed that Revenue contended that
since the appellants provide a service in relation to advertisement in some
53
2006 (4) STR 349 (Tri. Mum.)
53
manner, the activities are covered under this taxable service. Negating this
contention the Tribunal observed:
Therefore, the definition of ‘advertising agency’ cannot be read
literally and out of context, if done so then every person some way
connected with an advertisement will be advertising agency. That
cannot be and is not the coverage of the Service Tax envisaged. In the
present case, one cannot ignore term being defined i.e. ‘advertising
agency’ and proceed to levy service tax on (i)
any commercial concern.
(ii)
providing service connected with making, preparation, display or
exhibition of advertisements.
If the definition is read in isolation and in an all encompassing manner
out of context, then any person/company employing cameraman
connected with shooting of advertisement film will become an
advertising agency. A caterer supplying tea and biscuits during the
production of advertising film will also become a person connected with
preparation of advertisement and became an advertising agency.
Similarly, a lawyer advising whether advertising film will be violating
copyright law or other laws relating to obscenity etc. would be treated
as advertising agent. Similarly a broadcaster (on radio or television) of
an advertisement will become an advertising agency, or a cinema hall
flashing an advertisement or newspaper/magazine publishing an
advertisement will become an advertising agency. Such absurdities,
from an interpretation have to be avoided, the term ‘service connected
with’ used in the definition of “Advertising Agency” is to be understood
in context of and in a restrictive manner.
32.
In Union of India vs. Martin Lottery Agencies Ltd.,54; the issue was
whether sale, promotion
and marketing of lottery tickets was exigible to
service tax under the Act. The assessees were agents of the State of Sikkim
and purchased lottery tickets in bulk form on “all sold basis” on payment of
about 70% of the face value of each ticket. The tickets are then sold to prestockists on “outright” and “all sold basis” and make a profit on the margin, of
the difference between amounts received from pre-stockists and those paid to
the State Government. Proceedings were initiated for levy of service tax
under Business Auxiliary Service defined in Section 65(19) and enumerated
54
2009 (14) STR 593 (SC)
54
to be a taxable service in Section 65(105)(zzb) of the Act.
According to
Revenue the activity of assessees amounted to promotion or marketing or
sale of goods produced or provided by or belonging to the client. The High
Court of Sikkim allowed the Writ Petition and Union preferred an appeal to the
Supreme Court. After the Special Leave Petition was filed, Finance Act, 2008
inserted an explanation in sub-clause (ii) of Section 65 (19). The Explanation
stated:
For the removal of doubts, it is hereby declared that for the
purposes of this sub-clause, “service in relation to promotion or
marketing of service provided by the client” includes any service
provided in relation to promotion or marketing of games of chance,
organised, conducted or promoted by the client, in whatever form or by
whatever name called, whether or not conducted online, including
lottery, lotto, bingo.
One of
the contentions urged was that in view of the explanation,
which is for removal of doubts, any service provided in relation to promotion
or marketing of lotteries falls within the ambit of “promotion or marketing of
service provided by the client”, in clause (ii) of Section 65(19) of the Act. The
Apex Court negated this contention and observed that while Parliament is
entitled to create a legal fiction, when a new type of tax was introduced so as
to widen the net, it should not be construed to have a retrospective operation
on a premise that it is clarificatory or declaratory in nature.
Assessees refer to the above judgment to contend that even if subclauses (i) to (iii) and (vi) and (vii) of Section 65(33a) i.e. definition of card
services were introduced as an Explanation inserted by way of clarification or
declaration of the ambit of credit card services, but without express
retrospective effect, such an Explanation would have to be construed as
expansive of the scope of the existing provision and as prospective in nature.
55
33.
In support of the contention that though interchange fee and ME
discount are considerations relatable to services provided by an issuing bank
and an acquiring bank to the later and to the ME, and these simultaneous and
inter dependant activities effectuate credit card use, these are nevertheless
separate transactions and do not amount to rendition of credit card services,
assessees rely on the decision of the Judicial Committee of the Privy Council
in
Commissioner of Inland Revenue vs. Databank Systems Limited.
Under an agreement with specified clearing banks, Databank undertook four
major activities viz
(a) providing a financial clearing system covering various types of
transactions forming part of the settlement process;
(b) posting of transactions to customer accounts and maintenance of
computer files;
(c) network management; and
(d) software support and development.
Financial services were exempt from GST but other activities involving
the supply
of goods and services for a consideration were subject to
GST. Privy Council dismissed an appeal preferred by Revenue and
concluded that services performed by Databank as agents for trading
banks are part of the exempt financial services provided by those
banks to their customers. Privy Council agreed with the Court of Appeal
and quoted with approval the following analyses set out in a concurring
opinion of the Court below:
In these circumstances there are three separate activities,
three (at least) separate contracts and three separate supplies
for three separate considerations. The activity of the garage is
the supply of goods, namely petrol; GST is payable by reference
to the price of the petrol unless the supply of petrol is by the Act
of 1985 exempt or zero rated. The activity of the bank is the
56
supply of financial services, namely the payment of the cheque
for the price of the petrol; GST is not payable on the charge (if
any) made by the bank for the services. The activity of Databank
is the supply of computer services to the bank and to the garage;
GST is payable by reference to the charge made by Data bank
for its services. The cost of Databank services is passed on to
the purchaser (and other customers of the garage) who purchase
taxable petrol and are supplied with non-taxable financial
services. The supply of petrol by the garage and the supply of
computer services by Databank do not attract the exemption
afforded to the supply of financial services by the bank. The
supply of financial services by the bank does not lose its
exemption because the bank’s activities take place
simultaneously with the other non-exempt activities or because
the exempt activity of the bank makes use of the non-exempt
activity of Databank for the purpose of completing the nonexempt activity of the garage. The activity of the bank is a
separate activity. The activity of Databank is the instrument
whereby the bank implements its contract with its customer. The
activities of Databank and the supply of computer services by
Databank do not form part, important or integral or otherwise of
the separate activity and supply of financial services by the bank
or part of the separate activity and supply of petrol by the garage.
Three activities are simultaneous and interdependent but they
are separate. These is nothing in the Act which infects separate
activity with the exempt or non-exempt status of another
separate activity.
34.
Learned Jt. CDR Shri Rajiv Tandon referred to the decision of the
Larger Bench of the Tribunal in Commissioner of Central Excise, MumbaiIV vs. GTC Industries Ltd.,55 for the proposition that a legislation should be
construed with reference to the context in which it is issued and a bare
mechanical interpretation of words and application of legislative intent, devoid
of concept and purpose
will reduce most of remedial and beneficial
legislations to futility; and that the word “includes” is generally used in
interpretation clauses in order to enlarge the meaning of words or phrases
occurring in the body of the statute; and so used these words or phrases
must be construed as comprehending, not only such things as they signify
according to their natural import, but also those things which the interpretation
55
2008 (12) STR 468 (Tri. LB)
57
clause declares that they shall include. The Tribunal however cautioned that
in a context however, the word “Include” is susceptible of another
construction, which may become imperative, if the context of the Act is
sufficient to show that it was not merely employed for the purpose of adding
to the natural significance of the words or expressions defined and in such
context it would mean “mean and include”. Shri Tandon also referred to the
decisions, of the Patna High Court in Ashiq Hasan Khan and Ors. vs. Sub
Divisional Office and Ors.56; and the decision in Raj Kumar Shivhare vs.
Asstt. Director, Directorate of Enforcement 57 ; to support the contention
that the expression “any” connotes “all”, in certain contexts. These decisions
are cited to support Revenue’s contention that all services provided in relation
to credit card services are taxable services under BOFS, therefore services
provided by an issuing bank whether to the card holder or an acquiring bank
and by an acquiring bank to the ME fall within the ambit of this taxable
service.
35.
Assessees brought to our notice that Union enacted the Credit
Information Companies (Regulation) Act, 2005 to provide for regulation of
credit information companies and facilitate efficient distribution of credit and
for matters connected therewith or incidental thereto. Section 2(d) of this Act
defines credit information to mean information relating to the amounts, nature
of loans for advances, amounts outstanding under credit card and other credit
facilities granted or to be granted, by credit institution to any borrower; nature
of security taken or proposed to be taken by a credit institution from any
borrower etc. Section 2(f) defines a credit institution to mean banking and
56
57
AIR 1965 Pat 446
2010 (253) ELT 3 (SC)
58
other specified companies including those engaged in the business of credit
cards and other similar cards and companies dealing with distribution of credit
in any other manner. This Act contains provisions for registration,
management and audit of credit information companies, specifies the power
of RBI to determine the policy in relation to functioning of credit information
companies, sets out functions, information privacy principles and obligations if
furnishing credit information for such companies, offences and penalties and
miscellaneous provisions for providing information to specified users for
disclosure of information before any Court, Tribunal or Authority, obligations
as to fidelity and secrecy and other regulatory and house-keeping provisions.
It is contended that credit information entities were operating prior to this Act
as well and the enactment seeks to regulate such companies.
Credit
information companies clearly provide service in relation to credit and other
cards. The contention in specie is that services provided by credit information
companies would equally be comprehended within the scope of “any services
provided in relation to credit card services” under the BOFS regime.
Assessee contend that the scope of credit card services would thus be
perpetually indeterminate and infinitely dynamic.
36.
At this stage of the analyses we recapitulate the competing
interpretation of credit card services. According to Revenue any services
provided in relation to credit card services is a taxable service.
settlement of payments undertaken
Thus
by an issuing bank in favour of an
acquiring bank and by an acquiring bank in favour of the ME being services in
relation to credit card services fall within the purview of the taxable service in
BOFS. On the basis of Revenue’s normative assertions, predicated on the
phrase “in relation to”, the several services enumerated in sub-clauses (i) to
59
(iii) and (vi) and (vii) of Section 66(33a) would also fall within the purview of
credit card services. Per contra assessees contend that the scope of this
taxable service is confined to services provided by an acquiring bank to its
card holders, notwithstanding the phrase “in relation to”.
37.
We earlier noticed that several decisions including Doypack Systems
(Pvt.) Limited explain “in relation to” as indicative of wide import but as
subject to contextual limitations.
Manufacturing
Customs
58
;
and
Trading
Decisions in Naveen Chemicals
Company
Limited
vs.
Collector
of
Commissioner of Central Excise, Chennai vs. MRF
Limited 59 ; Glaxo Smithkline Pharmaceuticals Limited vs. CCE 60 ; and
Indian National Shipowners Association vs. Union of India 61 , have
considered and interpreted the expression “in relation to”; and the scope of
existing provisions were considered in the light of
later provisions, to
ascertain the proper construction to be put upon an existing provision and
indicated applicable interpretative guidance in such contexts.
In Naveen
Chemicals, the Court explained that while the phrase “in relation to” is
ordinarily of a wide import but in the context of its use in Section 129-C of the
Customs Act, 1962 must be read as meaning a direct and proximal
relationship to the rate of duty and to the value of goods, for the purpose of
assessment.
The Bombay High Court in Indian National Shipowners
Association reiterated the established principle that while the scope of the
phrase “in relation to” is indeed wide, its parameters have to be understood in
its context.
58
(1993) 4 SCC 320
2005 (179) ELT 475 (Tri. Chenn)
60
2006 (3) STR 711 (Tri. Mum.)
61
2009 (14) STR 289 (Bom.)
59
60
38.
While services provided by an issuing bank to an acquiring bank and
an acquiring bank to the ME are intermediary, ancillary and interdependant
integers for effective use of credit cards, we are persuaded to the conclusion
that these services though interdependent are distinct and are not intended to
be covered within the purview of credit card services prior to 01.05.2006,
notwithstanding the phrase “in relation to” employed in the enumerative
provision.
We are so persuaded since a contrary interpretation which
accords unrestricted scope, locus and amplitude to credit card services would
result in introducing a serious element of textual ambiguity, indeterminacy
and inchoatness to the scope of the taxable event in BOFS. The formidable
precedential authority adverted to in paragraph 23 and decisions in Naveen
Chemicals and in Indian National Shipowners Association as well, posit
adoption of an interprative principle which leads to clear and definite
identification of the taxable event, to avoid doubtful taxation.
39.
In Collector of Central Excise, Guntur vs. Andhra Sugar
62
the Apex
Court pointed out that it is a well settled principle that the meaning ascribed
by the authority issuing a notification is a good guide and a contemporaneous
exposition of the position of law. K.P. Varghese vs. I.T.O. Ernakulam
63
,
reiterated the established principle that the plain meaning of a statute cannot
be relied upon where it results in absurdity, injustice or uncertainty
(emphasis) and in such circumstances, the Court must construe the text
having regard to the object and purpose which the legislature had in view in
enacting the provision, the context in which it occurs and with a view to
suppress
62
63
the
mischief
(1989) SUPP (1) SCC 144
(1981) 4 SCC 173
sought
to
be
remedied
by
the
legislation.
61
Contemporaneous administrative exposition of the meaning of the statutory
text in the speech by the Minister introducing the bill for enactment of the
legislation in question is considered a legitimate aid to construction of a
statute when the text is grammatically or contextually ambiguous. It is also a
settled principle that a subsequent legislation on the same subject may in
certain circumstances serve as a Parliamentary exposition of the former
provision – vide Precedents referred to in paragraph 29 (supra).
40.
On
the
basis
of
the
principles
and
guidance
derived
from
aforementioned authority we are compelled to the conclusion that in the
context of BOFS, credit card services cover only such services as are
provided by an issuing bank to a card holder. This conclusion is fortified by
the clarification issued in Board circular dated 09.07.2001, RBI circular dated
12.12.2003, RBI master circular and the express and specific statutory
explication of several services which Parliament has specified to be included
in card services, incorporated in the definition of card services, for the
subsequent period w.e.f. 01.05.2006, in Section
65 (33a).
Credit card
services is included in card services and stands deleted from BOFS, w.e.f.
01.05.2006. To interpret the several services specifically enumerated in
Section 65(33a) and other services like those provided by credit information
companies or telephone or internet network providers, which equally
contribute to and are essential for effectuation of credit card transactions as
also comprehended within BOFS, would lead to perpetual uncertainty and
non-temporal inflation of the scope of credit card services in BOFS. Such
interpretation must clearly be avoided, is the mandate of established
interpretive principles.
62
ANALYSES OF ABN AMRO BANK:
41.
After primary analyses of the scope of credit card services in BOFS set
out in preceding paragraphs, we analyse ABN Amro Bank. The appeal was
preferred against an adjudication order confirming demand for service tax,
interest and penalties against the appellant for rendition of credit card
services during the period upto 30.04.2006. The facts set out in para 2 reveal
that the appellant was an issuing bank and received interchange fee from an
acquiring bank.
The chronology of events leading to the impugned
adjudication order are set out in paras 1 to 5 of the judgment; the contentions
on behalf of the appellant are summarised in para 6; those of Revenue in
para 7; appellant’s reply in para 8; and the analysis and findings in paras 9 to
21. The operative order is in para 22.
The appellant had contended inter-alia that while it paid service tax on
fees and other charges received from its card holders, it did not remit tax on
the component of interchange fee received; that settlement services provided
to an acquiring bank as an intermediary was brought within the ambit of the
taxable value only under the card services regime w.e.f. 01.05.2006, not prior
thereto; that the Board circular dated 09.07.2001 also clarified the scope of
the taxable service as limited to extension of credit facility; therefore
interchange fee received by the appellant was not consideration received for
providing credit facility; that the appellant did not serve any customer and it
was the acquiring bank which met payment claims by the ME; that Revenue
was bound by the Board Circular dated 09.07.2001; and that decisions of the
Bombay and Chennai Commissionerates which dropped demands in respect
of identical services support appellant’s interpretation of the scope of credit
card services.
63
Revenue contended that credit card service was not introduced as a
taxable service only w.e.f. 01.05.2006 but was a taxable service since 2001
under BOFS; that credit card services was merely deleted from BOFS and
relocated as a component of card services w.e.f. 01.05.2006; that appellant
misconceived the correct legal position by assuming that credit card services
became taxable only w.e.f. 01.05.2006; that since 2001 upto 01.05.2006 and
thereafter as well, credit card services was taxable; that since the account of
the ME is settled either directly by the issuing bank or through an acquiring
bank, the ultimate services are necessarily provided to the card holder who is
a customer in relation to credit card services and thus all intermediary and
ancillary
transaction are taxable; and that the term “in relation to” is broad
enough to cover all incidental and ancillary services on the subject.
Paras 9 and 10 of the judgment set out relevant statutory provisions
relating to BOFS.
Paras 11 and 12 advert to the Board circular dated
09.07.2001 and reiterate the statutory provisions. Para 13 extracts provisions
pertaining to card services and the relevant analysis is in paras 14 to 17.
It was observed in para 14 that credit card services could not said to
have been brought within the tax net for the first time w.e.f. 01.05.2006 on
enactment of Section 65(33a) and this was taxable even earlier, since
06.07.2001 and there is thus no prospective taxation.
Para 15 observes that both Finance Act, 2001 and Finance Act, 2006
had charging provisions authorizing service tax on credit card services; the
relation between card issuing bank and acquiring bank was merely made
explicit in Section 65(33a), by the Finance Act, 2006 while segregating credit
card services from BOFS and bringing it within the fold of card services; that
64
TRU circular dated 28.02.2006 in para 3.19 thereof clarified that major
services provided in relation to credit card services are specifically mentioned
under the definition; and that this clarification does not state that credit card
services became taxable only since the Finance Act, 2006 but was part of
BOFS earlier as well.
Para 16 observes that Finance Act, 2006 merely brought all types of
cards within the definition clause so that all services provided in relation to
such cards are conveniently grouped; credit card service cannot be presumed
to be excluded from levy before enactment of Finance Act, 2006; and the
express statutory grant in Section 65(10) read with Section 65(72) took within
its fold all incidental and ancillary services, by virtue of the term “in relation
to”, in the charging provision of Section 65(72)(zm), subsequently Section
65(105)(zzw).
In para 17.6 it is observed that since the charging section employs the
term “in relation to”, all connected and related services “touching object of
issue” of credit card facility are embraced and the express statutory grant
takes within its fold all powers required to make the grant effective; and the
charging Section brought not only the credit card facility provided but its
connected and related activities as well, to the fold of taxation.
Paras 18 to 21 of the judgment do not relate to analysis relevant for our
purposes; and in para 22 the conclusion is recorded, confirming the
impugned adjudication order except to the extent of granting cum-tax benefit.
65
42.
The ABN Amro Bank analyses reveals a factual misconception that
the appellant had contended that credit card services was not taxable prior to
01.05.2006. This assumption is clearly contrary to pleadings of the appellant
set out in para 6. The appellant’s challenge and the demand confirmed by
the impugned adjudication order was in respect of interchange fee received
from acquiring banks (para 2).
It was not the appellant’s contention that
credit card services was taxable only w.e.f. 01.05.2006. The appellant clearly
asserted that services provided by it to the acquiring bank fall outside the
purview of credit card services during the relevant period and prior to
01.05.2006 since these are specifically enumerated in the definition of card
services, only in Section 65(33a), w.e.f. 01.05.2006.
The conclusion in ABN Amro Bank that the express statutory grant [in
Section 65(10) read with Section 65(72), 65(105)(zzw)] takes within its fold all
incidental or ancillary services “in relation to” credit card services, proceeds
on a textual analyses and resonance to the amplitudinous expression
in
relation to, in the enumerative provision.
The judgment fails to consider the resultant ambiguity, uncertainty and
indeterminacy regarding the variety of taxable events that could conceivably
fall within “services provided in relation to credit card services”, on such
interpretation and the effect of such irresoluble ambiguity regarding contours
of the taxable event.
43.
Revenue’s defense to the argument on ambiguity may be noticed.
Revenue contends that in view of the phrase “in relation to”, essential, interdependant, incidental and ancillary services which are intermediary in the use
of a credit card are all covered under BOFS but there need be no
66
apprehension that the scope of the taxable service is uncertain or perpetually
inflationary. Services provided by an acquiring bank to the ME and those
provided by an issuing bank to the acquiring bank apart from services
provided by an issuing bank to its card holder, were alone proceeded against
by Revenue for recovery of tax.
It is axiomatic that the scope and interpretation of a provision is not to
be ascertained on the sole basis of executive interpretation or initiation of
proceedings predicated on executive interpretation. Statutory construction is
a neutral and dialectic exertion and the purpose of interpretation is to
ascertain the legal meaning of the statutory provision. As Bennion observes,
the purpose of interpretation is not merely to identify the literal or grammatical
meaning but is in essence of ascertaining the legal meaning of the provision.
The several interpretative principles guide and instruct the proper
interpretation to be put upon a provision.
River Wear Commissioners vs. Adamson64; observed:
But from the imperfection of language, it is impossible to know what
that the intention is without inquiring further, and seeing what the
circumstances were with reference to which the words were used, and what
was the object, appearing from those circumstances, which the person using
them had in view.
The informed interpretation rule is a necessary one. If the drafter had to
frame the enactment in terms suitable for a reader ignorant of past and
contemporary facts and of legal principles, in particular principles of statutory
interpretation, it would be necessary to use far more words than is practicable
in order to convey the meaning intended, observes Bennion. Almost
invariably, authorities on statutory interpretation caution against dangers of
64
(1877) 2 App Cas 743
67
the “first glance” approach and advise that the informed interpretation rule
must be applied no matter how plain the statutory words may seem at first
glance; and that the plainer the words seem, the more one must be on guard.
It is for this reason that inter-alia, in the construction of an enactment, due
attention should be paid to relevant aspects of the state of the law before its
enactment, the history of its passing and the events and legislative
developments subsequent to its passing as well; thus the pre-enacting, the
enacting, and the post – enacting history are all relevant indicia to proper
construction.
44.
Board circular dated 09.07.2001, a contemporaneous executive
guidance issued to clarify the scope of credit card services proposed in
Finance Bill, 2001 clearly explained the reach of this provision as services
whereby credit facility is provided by banks; and no other services are
mentioned in the circular. The Act has not defined even illustratively, the
nature and variety of services which amount to credit card services. From the
orders passed in several Commissionerates it is clear that quite a few, in fact
several adjudicating authorities had considered the scope of credit card
services as not extending to those provided by banks or financial institutions
for which consideration in the nature of interchange fee or ME discount is
received/ retained by providing banks. ABN Amro Bank/Royal Bank of
Scotland, Standard Chartered Bank, HDFC Bank, HSBC Bank Limited, ICICI
Bank, Citibank and American Express Bank had all considered the scope of
credit card services as not extending to activities on which interchange fee or
ME discount is received. It is inconceivable and would strain limits of logical
inference to assume that all these banks
consciously
ambit of credit card services, with a view to evade tax.
misconstrued the
68
For the above reasons as well we are compelled to the interpretation
that the scope of services falling within the ambit of credit card services,
notwithstanding the phrase “in relation to” in the enumerative provision of the
Act during the relevant period, was ambiguous, uncertain and invites
purposive, dynamic and strained interpretation.
The express enumeration of several services falling within the ambit of
card services (including credit card services) post 01.05.2006, in drafting the
definition of this service in Section 65(33a) eradicates the ambiguity and
uncertainty regarding scope of services covered under card services. The
Circular dated 28.02.2006 issued by TRU, Ministry of Finance to explain the
ambit of services introduced by Finance Bill, 2006 clarifies (in para 3.19) as
under:
3.19 CREDIT CARD RELATED SERVICES: Credit card services are
presently taxable under banking and other financial services. The
proposal is to tax comprehensively all services provided in respect of,
or in relation to, credit card, debit card, charge card or other payment
card in any manner. The major services provided in relation to such
services are specifically mentioned under the definition “credit card,
debit card, charge card or other payment card service”.
The speech of the Hon’ble Finance Minister on 28.02.2006 while
presenting the Budget for 2006-07 explains the purposes underlying
introduction inter-alia of card services.
At para 153 of the speech, the
Hon’ble Minister states:
I also propose to expand the coverage on certain services now
subject to service tax. I do not wish to burden the house with the
details which are available in the Budget paper.
The following is clear from Section 65(33a) read with Section
65(105)(zzzw) of the Act.
69
(a) The scope of service tax levy is extended to services provided in
respect of other cards such as
debit card, charge card or other
payment card, apart from credit card;
(b) The several and intervening services which occur in the use of cards
are enumerated in sub-clauses (i) to (vii) of the definition, clearly
conveying the intention to cover these expressly enumerated services
as taxable events under the provisions;
(c) In Section 65(105)(zzzw) while retaining the phrase “in relation to”, the
phrase “in any manner” is added.
The precision and clarity of the
detailed drafting methodology employed in the Finance Act, 2006,
compels the inference that Parliament not only expressed the intention
to expand the scope of the taxable service to cover services provided
“in relation to” other cards as well but has further and expressly
expanded the reach of taxation to services which otherwise may not
indisputedly fall within the ambit of card services. Section 65(33a) thus
excised ambiguity, uncertainty and inchoateness in the statutory text.
45.
For the aforesaid reasons and analyses, we are of the considered view
that paragraph 2.2 of the Board circular dated 09.07.2001 accurately captures
the scope of credit card services under BOFS during the period 16.07.2001 to
30.04.2006 i.e. as meaning a service where the customer is provided credit
facility for purchase of goods and services; whereby cash advances are also
permitted upto specified limits; where for rendition of the service, the service
provider collects joining fee, additional card fee, annual fee etc; and all these
charges, including interest charges for the service rendered, form part of the
value of the taxable service, in BOFS.
70
With respect, we therefore hold that the analyses and conclusions in
ABN Amro Bank are incorrect and this ruling is accordingly overruled.
46.
Preliminary Objections by Revenue to hearing of the Reference:
The Principal Commissioner, Service Tax (Mumbai-I and IV) has filed
miscellaneous
application
No.
ST/MA(ORS)/93629/15-Mum
seeking
adjournment hearing of this reference until final disposal of “this matter” by
the Hon’ble Supreme Court of India.
It is pleaded that against the Tribunal decision in ABN Amro Bank
Limited, the successor to this Bank i.e. Royal Bank of Scotland N.V. filed
Central Excise Appeal No. 693 of 2012 before the Allahabad High Court. The
High Court dismissed the appeal on 28.04.2014, on the ground that an
alternative remedy of an appeal (to the Supreme Court) was available against
the order in ABN Amro Bank Limited. Against this decision Royal Bank of
Scotland N.V. filed SLP (C) 12901 of 2014. By the order dated 08.05.2014,
Supreme Court directed issue of notice on the SLP and that this SLP be
tagged with SLP (C) No. CC.709/2012. The applicant further pleads that the
decision in ABN Amro Bank Limited was independently challenged before
the Supreme Court and is pending consideration.
Revenue pleads that the reference ought not to be heard and be
adjourned to await the decision of the Supreme Court in appeals preferred
against the decision the Allahabad High Court and of this Tribunal in ABN
Amro Bank Limited.
On 18.05.2015 we orally rejected Revenue’s plea for adjournment and
now record our reasons for doing so. The ABN Amro Bank Limited decision
71
by a Division Bench was doubted in the order of reference which referred
specified issues for resolution of the Larger Bench. Mere filing or pendency
of an appeal against the decision in ABN Amro Bank Limited, neither
eclipses this decision nor operates as a fetter on another Division Bench,
which would be free to either follow the ABN Amro Bank Limited decision or
could doubt its correctness and seek interpretation, by a Larger Bench.
There is also no purpose served in adjourning the reference to await the
decision of the Hon’ble Supreme Court.
In case the ABN Amro Bank
Limited decision is confirmed by the Supreme Court, that would be the
governing law and the reference would not survive. The same would be the
position if ABN Amro Bank Limited decision is reversed in appeal. Till a
final pronouncement by the Supreme Court emerges, there exist diametrically
contrary views in the Tribunal; one the final order in ABN Amro Bank
Limited and the other which is expressed in the order of reference and in
respect of the same subject matter, namely identification of the scope of
“credit card services” in BOFS, during the period prior to 01.05.2006.
Resolution of such a conflict at the level of the Tribunal is therefore a
salutary course of action, in interests of interpretative stability which would
operate until an authoritative decision is received from the judgment of
Supreme Court.
There is also precedential guidance on this aspect. A two Member
Bench of this Tribunal disagreed with an earlier decision of a special Bench of
this Tribunal and referred the matter to the President for constitution of a
Larger Bench of five Members, for reconsideration of the earlier decision of
the three Member Bench, while an appeal against the three Member Bench
72
decision was pending before the Supreme Court. The President constituted a
five Member Bench and this was challenged before the Delhi High Court. In
Paras Laminates (Pvt.) Ltd., vs. CEGAT
65
; the Delhi High Court quashed
the order of the President referring the case to a five Member Bench and
inter-alia observed:
Judicial propriety demanded that before the constitution of the
Larger Bench, the President should have waited for the decision of the
Supreme Court which would have been binding on all the Courts.
The order of the special Bench and the order of the President referring
the case to the Larger Bench were quashed for a plurality of reasons
including jurisdictional. Against this order, an appeal was preferred which
was allowed by the Supreme Court in Union of India vs. Paras Laminates
(Pvt.) Limited 66.The Supreme Court ruled that President had the jurisdiction
to order the reference. The observation of the High Court regarding the
propriety of awaiting the decision of the Supreme Court before constituting a
Larger Bench was neither argued nor decided by the Apex Court. The
consequence of allowing the appeal is however that this observation of the
High Court also stood impliedly reversed.
A special (five Member) Bench in Tetragon Chemi (Pvt.) Limited vs.
Collector of Central Excise, Bangalore
67
specifically rejected a similar
objection, also presented by Revenue i.e. to the hearing of a reference by
special Bench when a decision of the earlier Division Bench was the subject
matter of an appeal to the Supreme Court and was pending consideration by
that Court.
65
1990 (45) ELT 521 (Dli)
1990 (49) ELT 322 (SC)
67
2001 (138) ELT 414 (Tri. LB)
66
73
The decisions cited by Revenue in support of its contentions in the
miscellaneous application including the decision in Union of India vs.
Jaiswal Coal Company Limited
68
are irrelevant and do not provide any
guidance on this aspect of the matter.
For the foregoing reasons, Miscellaneous application No. ST/MA(ORS)/
93629/15-Mum. is rejected.
47.
CONCLUSIONS:
We answer the reference dated 16.08.2013 as under:
(a) On point No. (i) in the order of reference, we hold that introduction of a
comprehensive definition of “credit card, debit card, charge card or
other payment service” in Section 65(33a) read with Section 65(105)
(zzzw), by the Finance Act, 2006 is a substantive legislative exertion
which enacts levy on the several transactions enumerated in subclauses (i) to (vii) specified in the definition set out in Section 65(33a);
and all these transactions are neither impliedly covered nor inherently
subsumed within the purview of credit card services defined in Section
65(10) or (12) as part of the BOFS;
(b) On point No. (ii) we hold that sub-clause (iii) in Section 65(33a) is
neither intended nor expressed to have a retroactive reach i.e. w.e.f.
16.07.2001. Services enumerated in these sub-clauses are not implicit
in the scope of credit card services;
(c) On point No. (iii) of the reference, we hold that a Merchant/ Merchant
Establishment is “a customer” in the context of credit card services
68
(1992) 5 SCC 733
74
enumerated in Section 65(72)(zm), subsequently Section 65(105)(zm)
and a fortiori an acquiring bank is “a customer” of an issuing bank.
(d) On point No (iv), we hold that ME discount, by whatever name called,
representing amounts retained by an acquiring bank from out of
amounts recovered by such bank for settlement of payments to the ME
does not amount to consideration received “in relation to” credit card
services.
48.
We express our appreciation to ld. Counsel, Consultants, and DRs who
prepared their briefs and presented their respective positions with
commitment and incisive clarity, to assist in resolution of a complex
classification issue involving interpretation of facially ambiguous statutory
text.
49.
The reference is disposed of in terms indicated above.
(Justice G. Raghuram)
President
(Ashok Jindal)
Member (Judicial)
(R. K. Singh)
Member (Technical)
Pant