2013 (9) TMI 630 - AT - Service Tax

Demand - Evasion of tax - Credit card facilitates - Whether the introduction of the new, comprehensive definition of credit card, debit card, charge card or other payment card 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 the case of ABN Amro 2011 (7) TMI 312 - CESTAT, NEW DELHI decision in so far as credit card services are concerned - Held that - Matter referred to larger bench. Whether the sub-clause (iii) in the definition of taxable service viz. credit card, debit card, charge card or other payment card service in section 65 (33a) can be said to be applicable retrospectively, i.e. from 16 July 2001 when section 65 (72) (zm) became effective - Held that - Matter referred to larger bench. Can merchants / merchant establishments be considered as customer as envisaged in Section 65 (72)(zm) of the Finance Act, 1994 as it stood prior to 1-5-2006 - Held that - Matter referred to larger bench. 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 - Held that - Matter referred to larger bench.

Issues Involved:
1. Liability of service tax on Merchant Establishment Discounts (ME Discount) received by acquiring banks from merchants prior to 1 May 2006.
2. Taxability of transactions between merchant establishments and acquiring banks.
3. Interpretation of "customer" under Section 65(105)(zm) read with Section 65(12) of the Finance Act, 1994.
4. Applicability of sub-clause (iii) in the definition of taxable service under Section 65(33a) retrospectively.
5. Whether merchants can be considered as "customers" under Section 65(72)(zm) before 1 May 2006.
6. Taxability of ATM usage fees received by banks.
7. Invocation of extended period of limitation and imposition of penalties.
8. Applicability of cum-tax benefit.

Detailed Analysis:

1. Liability of Service Tax on ME Discount:
The core issue is whether acquiring banks were liable to pay service tax on ME Discounts received from merchants prior to 1 May 2006 under "Banking and other Financial Services." The banks argued that the taxable service as defined under Section 65(105)(zm) read with Section 65(12) only covered services provided by the bank to its "customer," which was interpreted as the credit card holder, not the merchant establishments. The Revenue, however, contended that the term "customer" should include merchant establishments as they regularly dealt with the banks.

2. Taxability of Transactions Between Merchant Establishments and Acquiring Banks:
The banks maintained that ME Discounts earned by acquiring banks were not taxable before 1 May 2006 since the statutory definitions at that time did not encompass services provided to merchant establishments. They argued that the services to merchants were introduced under the taxable service category only with the amendment effective from 1 May 2006. The Revenue countered that acquiring banks provided services in relation to credit cards to the merchant establishments and thus should be liable for service tax.

3. Interpretation of "Customer" Under Section 65(105)(zm) Read with Section 65(12):
The banks argued that the term "customer" referred exclusively to the credit card holder, based on the TRU Circular dated 9 July 2001, which clarified that the customer was the cardholder who enjoyed the credit limit and paid fees to the issuing bank. The Revenue argued for a broader interpretation, suggesting that merchant establishments were also customers of the acquiring banks as they received payment processing services.

4. Applicability of Sub-Clause (iii) in Section 65(33a) Retrospectively:
The banks argued that the comprehensive definition introduced in 2006 could not be applied retrospectively to transactions that occurred before 1 May 2006. They cited legal precedents and circulars indicating that new services brought under the tax net should be taxed prospectively. The Revenue, referencing the ABN Amro case, argued that the service tax on credit card services, including those provided to merchants, was always intended to be covered under the earlier provisions.

5. Whether Merchants Can Be Considered as "Customers":
The banks contended that merchants could not be considered customers under the pre-2006 definition, as the taxable service was limited to the relationship between the issuing bank and the cardholder. The Revenue argued that the term "customer" should not be restricted to cardholders alone and should include merchant establishments that engaged in regular transactions with the banks.

6. Taxability of ATM Usage Fees:
The banks argued that the share of ATM usage fees received from other banks was not taxable in their hands as the service was not provided to their customers. They maintained that such revenue became taxable only with the introduction of specific provisions in 2006.

7. Invocation of Extended Period of Limitation and Imposition of Penalties:
The banks contended that the demands were time-barred as the issue involved interpretation of law and there was no suppression of facts. They also argued for cum-tax benefit if the demands were upheld. The Revenue maintained that the extended period was applicable due to the nature of the transactions and the banks' failure to pay the appropriate service tax.

8. Applicability of Cum-Tax Benefit:
The banks argued that if the service tax demands were upheld, they should be granted cum-tax benefit, which means the tax amount should be considered inclusive of the service tax.

Conclusion:
The Tribunal, after considering the submissions, noted that the issue of whether ME Discounts were taxable before 1 May 2006 required a detailed examination. Given the conflicting views, especially in light of the ABN Amro case, the Tribunal decided to refer the matter to a Larger Bench for a definitive ruling on the following points of law:
1. The substantive nature of the new definition introduced in 2006 and its continuity from earlier provisions.
2. Retrospective applicability of sub-clause (iii) in Section 65(33a).
3. Whether merchants can be considered as customers under the pre-2006 provisions.
4. The relationship between ME Discounts and credit card services.

The matter was directed to be placed before the Hon'ble President, CESTAT, for constitution of the Larger Bench. The Tribunal deferred the other questions related to the invocation of the extended period, penalties, and cum-tax benefit until the Larger Bench provided its decision.

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