2016 (2) TMI 983 - AT - Service Tax

Demand - currency conversion charges - Credit Card Services - Debit Card Service - mark up considered as service - whether the mark up/currency conversion charges in case of foreign currency transactions which were done using either a credit or a debit card under the category of Banking and other Financial Services ? - Held that - the mark-up is essentially a part of the exchange rate that is to be applied for arriving at the cost of goods or services purchased by the cardholder and hence is a part of the cost of goods/services purchased which are recoverable from the user and is not a consideration for the services of providing credit to the user - mark up charges accruing to the issuing bank when cardholder uses credit card to pay in foreign exchange abroad is not liable to service tax under credit card services (under Banking & Other Financial Services) during the relevant period. The demand of Rs. 5, 12, 64, 532/- confirmed in the impugned order is liable to be set aside. Demand on the amount of mark up charges accruing to the issuing bank when cardholder uses debit card to pay in foreign exchange abroad - Held that - the adjudicating authority demanded service tax under operation of Bank a/c Section 65(12)(ix) under Banking and Other Financial Services. For the identical issue of mark up amount for credit card and debit card the department cannot demand service tax one under credit card services - Section 65(12)(ii) and the other under Operation of Bank a/c Section 65(12)(ix). - the mark up is essentially to meet the foreign exchange fluctuations for arriving the cost of the goods/services purchased by the cardholder. Since we have already held in respect of credit card services the markup charges is not liable to service tax under credit card services - Section 65(12)(ii) the same is applicable to the mark up charges accruing to the issuing bank in respect of debit card charges. The demand of Rs. 24, 51, 538/- confirmed by the adjudicating authority in the impugned order is liable to be set aside. As we have already held that service tax is not payable on mark up charges accruing on both credit card and debit card on merits we do not go into the other issues viz. limitation export of services place of provision etc - As regards the penalty imposed under Section 78 of the Act since the demand of service tax is set aside the question of penalty does not arise. Accordingly the penalty imposed under Section 78 is set aside. Appeal allowed.

Issues Involved:
1. Demand of service tax on currency conversion charges (markup) for credit card services.
2. Demand of service tax on currency conversion charges (markup) for debit card services.
3. Classification of services under different categories.
4. Applicability of service tax on services rendered outside India.
5. Limitation and suppression of facts.
6. Imposition of penalty under Section 78.

Issue-wise Detailed Analysis:

1. Demand of Service Tax on Currency Conversion Charges (Markup) for Credit Card Services:
The appellant, a bank, was issued a show-cause notice demanding service tax on currency conversion charges (markup) for credit card services for the period April 2002 to April 2006. The adjudicating authority confirmed the demand and imposed an equivalent penalty under Section 78 along with interest. The appellant argued that the markup is part of the cost of goods/services purchased in foreign currency and not for providing any service. They relied on the Tribunal's Larger Bench decision in Standard Chartered Bank and Others v. CST, which discussed the scope of "Credit Card Services" under Banking and Other Financial Services (BOFS) prior to 1-5-2006. The Tribunal held that the markup charges attributable to currency conversion do not fall under the category of "Credit Card Services" during the impugned period. The Tribunal also noted that the service is rendered and consumed outside India, making it non-taxable within the jurisdiction.

2. Demand of Service Tax on Currency Conversion Charges (Markup) for Debit Card Services:
For debit card services, the show-cause notice demanded service tax for the period from September 2004 to April 2006. The appellant argued that the nature of activity for both credit and debit cards is the same, and the department cannot classify the same activity under two different services. The Tribunal agreed with the appellant, stating that the markup is part of the foreign exchange rate applied for the cost of goods/services purchased and not a consideration for any service. The demand for service tax on debit card services was also set aside.

3. Classification of Services Under Different Categories:
The department classified the markup on credit card transactions under "Credit Card Services" and the markup on debit card transactions under "Operation of Bank Accounts" under BOFS. The Tribunal found this inconsistent and held that the markup is essentially part of the foreign exchange rate for both credit and debit card transactions. Therefore, the demand for service tax under different classifications was not justified.

4. Applicability of Service Tax on Services Rendered Outside India:
The appellant argued that the services were rendered and consumed outside India, making them non-taxable. The Tribunal agreed, citing that the service of using a card for payment in foreign exchange is rendered and consumed outside India. The Tribunal referenced the Supreme Court's decision in Ishikawa-Ima-Harima Heavy Industries Ltd., which emphasized the importance of the territorial nexus for taxability. The Tribunal concluded that the services rendered outside India are beyond the taxable territory as per the Finance Act, 1994.

5. Limitation and Suppression of Facts:
The appellant contended that the demand was time-barred and there was no suppression of facts. They had provided detailed information to the department in response to a clarification request in 2003. The Tribunal did not delve deeply into the limitation issue as it had already decided the case on merits, setting aside the demand for service tax.

6. Imposition of Penalty Under Section 78:
Since the demand for service tax was set aside, the Tribunal held that the question of penalty under Section 78 does not arise. Consequently, the penalty imposed was also set aside.

Conclusion:
The Tribunal set aside the impugned order and allowed the appeal with consequential benefits, concluding that the markup charges for currency conversion are not liable to service tax under credit card or debit card services during the relevant period. The Tribunal's decision was based on the merits of the case, the scope of "Credit Card Services" during the relevant period, and the jurisdictional limits of the tax authority.

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