Unreported Decisions – ST – January 2022

By Vinay Kumar Jain & Sachin Mishra, Advocates

1. Whether Interchange Fee is consideration for credit card services provided by the issuing bank and consequently, whether service tax is payable on the same?

Facts and Pleading: CITI Bank (hereinafter referred to as “Bank”) is a bank engaged in issuing credit cards & is known as the Issuing Bank. When a customer holding a credit card, swipes it for a transaction with a Merchant Enterprise (“ME”), the transaction goes to an acquiring bank. This acquiring bank makes the payment to the ME and deducts certain amount from the merchant known as Merchant Discount Rate (“MDR”) for providing service to them. The acquiring bank discharges the service tax liability on this amount. The acquiring bank in turn receives the payment from the issuing bank, which retains a part of the MDR before remitting the amount. This amount is known as the Interchange Fee. For example, if a cardholder swipes his credit card for a purchase of ₹ 100 with an ME, then the acquiring bank pays the ME ₹ 94.30 after deducting a pre-determined amount of ₹ 5.70. Here, ₹ 5 is the MDR on which ₹ 0.70 is discharged as service tax to the authorities by the acquiring bank. The issuing bank remits ₹ 98 to the acquiring bank after deducting ₹ 2 as its interchange fee. Hence, the issuing bank gets ₹ 2 out of the MDR of ₹ 5 and the acquiring bank gets the balance of ₹ 3. The matter in dispute in the present case was whether the issuing bank is liable to pay service tax on Interchange Fee received by it.

The revenue argued that Bank was liable to pay service tax on the interchange fee as they were rendering services. They submitted that interchange fee was consideration for their service of verification and facilitation of the transaction as per their contract with the Card association and also for taking the risk of collection from card holder. Further, the revenue submitted that it is not a transaction in money as the interchange fee is for allowing the transaction and only the debited amount is a transaction in money. They also argued that there was no double taxation as there were two independent transactions and separate services were being provided by the issuing and acquiring banks. Further, the revenue pointed out that service tax was not discharged on interchange fee as the fee is paid to the issuing bank prior to the receipt of MDR.

The Bank submitted that it is not performing any service so as to render it exigible to service tax on the interchange service. The interchange fee is in the nature of interest it has earned in the credit card transaction with the customer. The Bank also stated that the service was being provided by both the issuing and the acquiring bank in the transaction and the MDR was the gross amount of consideration, part of which was payable to the issuing bank and another part to the acquiring bank. The Bank also submitted that the acquiring bank was paying service tax on the entire MDR, which included the amount of interchange fee. If the Bank also paid tax on it, then there would be double taxation.

Judgment: There was divergence of opinion among the Hon’ble Judges of the Division Bench and hence the Papers are to be placed before the Hon’ble Chief Justice of India for constituting an appropriate Bench in the matter.

As per Hon’ble Justice K. M. Joseph, the issuing bank as well as the acquiring bank both provide services in the transaction involving a credit card purchase and this service is clearly covered under Section 65(33a) (iii) of the Finance Act, 1994. Hon’ble Justice K. M. Joseph also observed that the interchange fee is the consideration that accrues to the issuing bank for verifying, facilitating and extending the purchase value in line with the contractual agreement the issuing bank; has with the card association and taking the risk for collection of amounts from the Card holder. Hon’ble Justice K. M. Joseph further observed that the activity performed by the issuing bank and the acquiring bank in this transaction is different and therefore, the service provided by the two banks is distinct, which means that both the banks are required to discharge service tax. Hon’ble Justice K. M. Joseph did not accept the argument that Interchange Fee was an interest and not consideration for service. Hon’ble Justice K. M. Joseph also rejected the argument that the credit card transaction was not chargeable to service tax as it was a “transaction in money”. Hon’ble Justice K. M. Joseph explained that the issuing bank not only approves the transaction but also undertakes the risk to recover the credit from the customer and earns Interchange Fee as consideration. The authority seeks to tax this fee and not the money amount made available to customer. Therefore, this cannot be said to be a “transaction in money”.

Whereas, Hon’ble Justice Bhat agreed with Hon’ble Justice Joseph on all matters except on the fact that the issuing and acquiring bank were providing distinct services. Hon’ble Justice Bhat observed that the credit card transaction, involving the settlement of payment, was one “indestructible integrated service”, whose constituent parts were inseparable. Therefore, the issuing bank was not subject to service tax as its service was already incorporated in the service provided by the acquiring bank. The gross consideration received in this case was the MDR, inclusive of the Interchange Fee, on which service tax was discharged by the acquiring bank. For this reason, Hon’ble Justice Bhat did not agree with Hon’ble Justice Joseph that the appeals should be allowed. Accordingly, matter was referred to Larger Bench due to difference of opinion.

Commissioner of GST and Central Excise vs M/s CITI Bank NA, Supreme Court of India, decided on 09.12.21, in Civil Appeal No 8228 of 2019 with Civil Appeal No 89 of 2021.

M/s CITI Bank NA, Supreme Court of India

2. Whether the notification No. 22/2014-15 dated 16.09.2014 to the extent of appointment of officers of Directorate General of Central Excise Intelligence (DGCEI) as ‘Central Excise Officers’ having all India jurisdiction is illegal and ultra vires being violative of the Constitution? Whether officers of DGCEI have jurisdiction to issue and adjudicate show cause notice?

Facts and Pleading:  M/s. Xylem Resources Management Pvt Ltd. (hereinafter “Petitioner”) was engaged in management consultancy services. Senior Intelligence Officer (SIO), DGCEI, Belagavi initiated investigations against the Petitioner for payment of service tax on the reimbursement of expenses. Pursuant to the aforesaid investigation by the SIO, DGCEI, a Show cause notice dated 13.12.2016 was issued by Principal Additional Director General, DGCEI based on the above investigation.

The Petitioner has challenged these proceedings on the ground that the summons were illegal and unconstitutional as the Petitioner is being forced to pay service tax on reimbursement of expenses without taking into consideration the normal assessment procedure. The Petitioner has also challenged the summons due to lack of jurisdiction. The Petitioner claimed that they were under the jurisdiction of Commissionerate of Bangalore, while the DGCEI Officers were located in Belagavi. This led to illegal and duplication of jurisdiction. The Petitioner also questioned the validity of the Notification No.22/2014- 15 dated 16.09.2014 conferring jurisdiction on the ground that it is contrary to the Act as certain officers were being given jurisdiction all over India, in addition to specific jurisdiction.

The Respondents contended that the Officers of DGCEI were conferred jurisdiction PAN India vide the notification dated 16.09.2014. Further, the summons were issued by the SIO to only record the statement of the Petitioner and to transfer the case to jurisdictional Commissionerate. The proceedings were conducted by competent authority in the Commissionerate of Service Tax.

Judgment: The Hon’ble High Court observed that the definition of Central Excise Officer as provided under Section 2(b) of the Central Excise Act, 1944 includes a Principal Commissioner of Central Excise (“PCCE”). Hence, as per Hon’ble High Court, when this definition is read in context with the impugned Notification No.22/2014-15 dated 16.09.2014, it can be concluded that powers of the PCCE can be exercised by the 5 officers specified in the notification, one of whom is the Principal Additional Director General, DGCEI. Therefore, the Principal Additional Director General, DGCEI before whom the Petitioner was directed to appear has jurisdiction to issue the show cause notice. As per Hon’ble High Court, the SIO only issued summons, recorded statements and transferred the matter and records to the proper office. It was also noted by Hon’ble High Court that the SIO did not issue the show cause notice. It was held by Hon’ble High Court that the show cause notice was issued by proper office and though the summons emanated from a different office, the file was transferred to the competent authority. Hence, it was held that the show cause notice cannot be said to be without jurisdiction. Further, the Hon’ble High Court also rejected applicability of Hon’ble Supreme Court decision in Cannon India Private Limited V. Commissioner Of Customs 2021 SCC Online SC 200, on the count that the said case was concerning confiscation of goods and in that context, the Apex Court held that it was not instituted by the proper officer.

M/s. Xylem Resources Management Pvt. Ltd. vs. The Deputy Directorate General of Central Excise Intelligence (DGCEI), Belagavi and Others, The High Court of Karnataka, dated 30.09.2021, in Writ Petition No. 59487 of 2016.

M/s. Xylem Resources Management Pvt. Ltd.

3. Whether derailment of work in a project i.e. taxable output service after payment of consideration along with service tax to vendors i.e. input service, an assessee is entitled to take Cenvat credit on the said input services?

Facts and Pleading:

L&T Hydrocarbon Engineering Ltd (hereinafter referred to as “Appellant”) had entered into an agreement for installation of MNWNF Bridge and Bridge Jacket and Plies. The Appellant hired services of various vendors for work of installation and commissioning of the bridges. During installation of Bridge Jacket and Plies, the tripod tilted and sunk and the project was derailed. However, the Appellant made payment to the vendors involved in installation of the bridges and also paid the applicable service tax. The Appellant availed Cenvat credit on the service tax paid.

Department alleged that due to derailment of the project, the input services utilized by the Appellant did not result in any output service and therefore Cenvat credit cannot be availed on the same. It was further alleged by the department that the Appellant also claimed insurance for the accident but did not pay any service tax on the insurance amount.

The Appellant submitted that as per Rule 2(l) of Cenvat Credit Rules, 2004, “input service” means any service used by a provider of taxable service for providing an output service. The Appellant submitted that though the project was derailed initially, the work was completed later by the Appellants and service tax was also paid on the same. So as per the Cenvat Credit Rules, the Appellants were provider of output services and were entitled to take Cenvat credit on all input services used by them.

Judgment: The Hon’ble CESTAT agreed with the submissions of the Appellant and held that any service received by the Appellant is an input service and they were entitled for Cenvat credit in terms of Rule 3 of Cenvat Credit Rules, 2004. It was clarified that derailment of the project did not mean that no service was provided. During the impugned period, i.e., from April 2009 to March 2010, the work was in progress and it cannot be held that no taxable service was provided as the project was completed later on and service tax was also paid on the same. Therefore, the appeal was allowed with consequential relief.

L&T Hydrocarbon Engineering Ltd vs Commissioner Of Central Excise And Service Tax, The Customs, Excise and Service Tax Appellate Tribunal, West Zonal Bench, Ahmedabad, dated 09.11.21, in Service Tax Appeal No. 11229 of 2015.

L&T Hydrocarbon Engineering Ltd.

4. Whether an assessee is entitled for adjustment of amount deposited under the heads of interest and penalty while quantifying the tax amount payable under the Sabka Vishwas – (Legacy Dispute Resolution) Scheme, 2019 (SVLDRS)?

Facts and Pleadings: Schlumberger Solutions Pvt Ltd (hereinafter “Petitioner”) had filed a declaration under SVLDRS in relation to a show cause notice issued against them with respect to the Petitioner availing cenvat credit on trading of goods. During the course of audit, the petitioner paid an amount of Rs.2,29,61,536/- towards service tax and amounts of Rs.1,16,51,272/- and Rs.24,44,227/- were paid as interest and penalty respectively. However, while filing the declaration the Petitioner had considered the amount paid as interest and penalty at the time of investigation as pre-deposit for the purposes of Section 124 of Finance (No. 2) Act, 2019 and adjusted the same against the amount payable under the scheme. However, the Designated Committee disagreed with the computation of amount payable made by the Petitioner and rejected the declaration on the count the amount paid towards interest and penalty should not be adjusted towards the amount payable towards tax. Simultaneously, the said show cause notice was adjudicated regardless of this SVLDRS declaration. Hence, the Petitioner approached the Punjab and Haryana High Court, challenging the rejection of its computation by the Designated Committee and the order in original.

The Assessee relied on Section 124 of the Finance (No. 2) Act, 2019 and submitted that the amount deposited by it prior to the issuance of the show cause notice falls within the ambit of ‘pre-deposit’ and the Assessee is entitled to get deduction of the deposits. However, the respondents submitted that the amount deposited by the Assessee prior to issuance of show cause notice includes interest and penalty. The respondents argued that interest and penalty are different terms under the indirect tax laws and payment made towards it cannot be adjusted against any other head. Hence, they submitted that only amount paid under the head tax can be adjusted during calculation of tax under the SVLDRS scheme.

Judgement: The Hon’ble High Court held that Section 124 (2) provides that any amount paid during proceedings, enquiry, investigation or audit has to be deducted while calculating the amount payable by the declarant. As per Hon’ble High Court, the use of words “any amount paid” indicate that there is no distinction between amounts paid under different heads. Therefore, amount paid under the heads interest and penalty can be used for deduction. Hon’ble High Court further observed that had the Petitioner remitted the entire amount paid by him towards tax, then they would have been allowed credit of the entire amount and their interest liability would also have been waived off. The Petitioner cannot be punished for depositing amount under different heads. Therefore, the Hon’ble High Court allowed the petition and directed the Designated Committee to reconsider the claim.

Schlumberger Solutions Pvt Ltd vs Commissioner Central GST and Others, High Court of Punjab and Haryana at Chandigarh, decided on 30.11.21, in Civil Writ Petition No. 6845 of 2020.