Transmission and exchange of financial messages Service falls under the category of ‘Banking and Other Financial Services’ – CESTAT
Brief of the Case
In the case of Bank of Baroda VS Commissioner of Service Tax it was held that the service of transmission and exchange of financial messages falls under the category of “Banking and Other Financial Services” and service tax should be levied accordingly
Facts of the Case
The fact of the case is that the appellant Bank of Baroda (BOB) received certain services from M/s. Society for Worldwide Interbank Financial Telecommunication (SWIFT) which is a non-resident entity, not having an office in India; that BOB was utilizing the services of SWIFT network essentially to transmit, financial messages internationally which culminated in foreign exchange remittance transactions getting completed, between BOB and the intended recipient of the said foreign exchange, like banks, customers etc; that BOB was paying commercial considerations to SWIFT for hiring the said services periodically. A show cause notice was issued wherein it was contended that the said services rendered by SWIFT to BOB appeared to amount to a taxable service classifiable under the category of “Banking and Other Financial Services” under sub clause (vii) of Section 65(12) “provision and transfer of information and data processing” are liable to service tax from 16-7-2001. In the show cause notice, it was also contended that as per rule 2(1)(d)(iv) of Service Tax Rules, 1994, as it existed w.e.f. 16-8-2002 and the subsequent introduction of Section 66 A of the Finance Act, 1994, the person liable for paying ST means- “in relation to any taxable service provided by a person who is non- resident or is from outside India, the person receiving taxable service in India”. Therefore, the liability to discharge ST on the said taxable services appeared to lie on BOB. The show cause notice culminated into adjudicating order, wherein the Ld. Commissioner confirmed the charges proposed in the show cause notice. Being aggrieved by the said Adjudication order, the Appellant are before this Tribunal.
Contentions of the Assessee
The assessee contended that the demand of service tax was made under the category of “Banking and Other Financial Services” defined in erstwhile section 65(12) under sub clause (viii) i.e. “provision and transfer of information and data processing”. The clause (vii) of 65(12) requires that both activities of provision and transfer shall be carried out by the services provider. Such activity should be in respect of information and data processing. If only information is provided but there is no data processing in such case the service shall not be covered under the proposed entry i.e. “provision and transfer of information and data processing”. To bring a service under purview of said entry, both the activities i.e. information and data processing together should be provided and transferred. In the present case the service of SWIFT is confined to only transmission of messages and there is no provision of processing of any data. The activity of carrying messages through telecommunication is not classifiable under Banking and Other Financial Services as defined in Section 65(12). It is submitted that such service is more appropriately covered under telecommunication services defined in Section 65(109a) sub clause (vii) i.e. “services of data transmission”. However under the telecommunication services, no tax is payable by the appellant as it was essential that the service provider should have telegraph license under Indian Telegraph Act, 1885. Therefore the services of appellant being covered under telecommunication services not liable to service tax. As per definition of “Banking and Other Financial Services”, the service shall be rendered by Banking Company or Financial Institution including non-banking financial company or other body corporate or any other person. The assessee refers to Circular No. 83/1/2006-ST dtd 4-7-2006 clarifying that meaning of “body corporate” and ‘any other person” shall be read ejusdem generis with preceding words. Therefore, any other service provider, similar to banking or financial institution is only liable for payment of service tax. M/s SWIFT is not engaged in business similar to banking and other financial institution. SWIFT is basically providing telecommunication service of transfer of messages. Accordingly no tax is payable under reverse charge. The assessee further submitted that the service provider is located in Belgium which is outside India and tax has been demanded for the period 1-1-2005 to September 2008. In view of the judgment of Indian Ship Owners Association -2009 (13) STR 235 (Bom.), which was upheld by the Hon’ble Supreme Court, tax under reverse charge is not payable for import of services prior to 18-4-2006. Therefore, in any case, no tax is payable for period upto 18-4-2006. SWIFT is a society where all the commercial banks are member of the society and the services are provided only to members. Therefore, principle of mutuality applies and society and members cannot be considered as two different persons. In view of the following judgments, it is submitted that the services cannot be said to be rendered by SWIFT to Bank.
(a) Ranchi Club Ltd. – 2012 (26) STR 401 (Jhar)
(b) Sports Club of Gujarat Ltd. -2013 (31) STR 645 (Guj)
(c) Matunga Gymkhana – 2015 TMI 1146- CESTAT-MUM
(d) Indian Chambers of Commerce & Industry -2014-TIOL-701-CESTAT-DEL.
The assessee further submitted that in the present case the bank is a service tax assessee and discharging the service tax on various services and also availing the Cenvat Credit. If at all the service tax on the services of SWIFT is payable, the same will be available to the appellant in the form of Cenvat Credit and to the extent of Cenvat Credit on such service, the service tax liability of the bank shall stand reduced. Therefore, the whole exercise of payment of service tax and availing the Cenvat Credit shall amount to “revenue neutrality”. On this ground the recovery of service tax is not tenable. In support, the assessee places the reliance on the following judgments:
(a) Reclamation Welding Ltd. -2014 (308) ELT 542 (Tri. Ahmd.)
(b) Alembic Ltd. – 2014 (308) ELT 535 (Tri. Ahmd.)
(c) Coca Cola India Ltd. – 2007 (213) ELT 490 (SC)
(d) United Phosphorus Ltd. – 2007 (210) ELT 45 (Tri. Ahmd.)
(e) SRF Ltd. – 2007 (220) ELT 201 (Tri. Chennai)
Contention of the Revenue
The Revenue reiterates the findings of the impugned order and stated that service tax is liable to be paid on such transaction.
Held by Hon’ble CESTAT
The service under the definition of “Banking and Other Financial Services” will fall if the following ingredients exist:
(i) Service is provided by
(a) a banking company
(b) a financial institution
(c) a non banking financial company
(d) any other body corporate
(e) any other person.
(ii) Service is of “provision and transfer of information and data processing”
On further perusal of record, the Hon’ble CESTAT observed that the SCN contended that services provided by SWIFT relate to transmission and exchange of financial messages through SWIFT NETWORK between two users, with SWIFT acting as the carrier of such messages on a day to day basis. As per the information available on the SWIFT website, SWIFT provides the proprietary communications platform, products and services that allow their customers to connect and exchange financial information securely and reliably; SWIFT is solely a carrier of messages. It does not hold funds nor does it manage accounts on behalf of customers, nor does it store financial information on an on-going basis. As a data carrier, SWIFT transports messages between two financial institutions. This activity involves the secure exchange of proprietary data while ensuring its confidentiality and integrity. As per the history of SWIFT available in the said website, SWIFT started the mission of creating a shared worldwide data processing and communications link and a common language for international financial transactions. The services provided by SWIFT involves providing of information related to financial transactions viz. transfer of funds; transfer of information contained in the said message after processing the data contained therein. Data processing in any computer process that converts data into information. The data contained in the said financial message when presented for processing is raw data which when processed become useful information for the customers viz. banks, financial institutions etc., who then use the said processed information to debit and credit the customers accounts accordingly, i.e., funds settlement between the banks. The computer network operating systems i.e., SWIFT network, installed at BOB, SWIFT Network at Belgium and at the recipient’s end, for whom the message is intended, manipulate raw data into information and likewise information systems typically take raw data as input to produce information as output. In the context of data processing, data are defined as numbers or characters that represent measurements from the real world. Measured information is then algorithmically derived and/or logically deduced and/or statistically calculated from the multiple data available from the said messages transmitted from BOB. Information is defined as either a meaningful answer to a query or a meaningful stimulus that can cascade into further queries. More generally, the term data processing can apply to any process that converts data from one format to another. From this perspective, data processing becomes the process of converting information into data and also the converting of data back into information. The terms “information” and “data” are not synonyms. Data is defined as raw facts while information is processed data. Information is the things that one knows and data is the representation of the information. Information has meaning while data does not. Computers work with data and not information. Information is a subject of data. Data is unstructured, lacks context and may not be relevant to the recipient. When data is correctly organized, filtered and presented with context, it can become information because it then has “value” to the recipient. Data which is not information is often called raw data. The terms “data”, “computer network”, “information” which are defined under various provisions of the ACT read with the relevant definitions provided under the Information Technology Act, 2000. From the discussions above, it appeared that to facilitate transmission of financial messages, computer network systems known as SWIFT network are installed at BOB and at the receiver’s end i.e. between all intended sender’s and recipient’s end and SWIFT network based at Belgium, which acts as the transporter/ carrier of messages, receives, processes and transmits data between such intended users. Therefore, it appears that the entire activity of messaging of financial transactions with the intention to transfer funds, confirm receipt of such messages etc. is done exclusively with the objective to retrieve the information contained in the said financial message, process the same and then transfer the processed information to the respective customers, i.e. presenting and recipient banks, financial institutions etc., as the case may be. After the processing is complete in all respects, such processed data leads to settlement of funds between BOB and the recipient banks. It further appeared that messaging data through magnetic media or through communication backbone leads to data being transferred between two intended users related to the same financial transaction.
From the above detailed process involved, it is clear that the activities appear to amount to provision and transfer of information and data processing in relation to banking and other financial services, as defined under the Act and clearly covered under the entry provided in sub-clause (a)(vii) of Section 65(12) i.e. “provision and transfer of information and data processing”.
As regard the contention of the appellant that SWIFT does not fall under the category of “banking and other financial institution” as SWIFT is not engaged in the business of banking and other financial services. If any person provides the service which covered under the four corners of definition of “Banking and Other Financial Services”, it shall be taxable. Moreover there is no dispute that the SWIFT is a “body corporate” and covered under the definition of “Banking and Other Financial Services”. As per the plain reading of the definition, apart from “banking and other financial institution”, the category of a person such as “body corporate” and “any other person” are also covered. Therefore it is not the significant what is the nature of the person who is providing the service, but it is the service which covered under the definition, such service is liable to service tax, therefore, even if it is presumed that SWIFT is not involved in “Banking and Other Financial Services”. The services shall remain taxable as the service is clearly covered under the definition of “Banking and Other Financial Services” in clause (vii) of Section 65(12). Moreover the appellant being liable to pay the service tax is “deemed service provider”. Therefore, the status of the appellant is required to be considered and not the status of service provider who is located outside the India. For this reason the appellant is undisputedly the deemed banking and other financial institution.
As regard service tax liability prior to 18-4-2006, in view of Indian Ship Owners Association case (supra), the service tax is not payable prior to 18-4-2006, therefore the demand of the period prior to 18-4-2006 is not sustainable. Hence, the same is set aside.
On the issue of principle of mutuality, the Hon’ble CESTAT found that the relationship between the SWIFT and the Appellant is not like club or association and their members. In the judgments cited by the assessee it was held that the subscription charges are not taxable whereas in the present case the appellant is paying service charges on the actual quantum of services received by them from SWIFT. Even in the case of club or association, if the members are paying for a specific service, the said payment in not exempted from service tax. What is not taxable only subscription charges paid by the members of association. Moreover in the present case, SWIFT is acting as a business organization and charging their services charges from the bank on the basis of actual quantum of service provided to the banks. The banks are not paying some subscription to the SWIFT but they are paying towards the actual quantum of services received by them from SWIFT. In view of this fact, it is clear that the transaction between the Bank and the SWIFT is purely a business transaction; therefore the principle of mutuality does not exist in such transaction.
As regard the submission of the appellant that present case is of revenue neutrality as the tax payable of the subject service is cenvatable. The Hon’ble CESTAT is of the view that the bank is providing various services, some of the services are taxable and some are exempted. Therefore, it cannot be decided that the entire service tax payable on services of SWIFT can be allowed as Cenvat Credit and it is not a case of revenue neutrality. However, the appellant, if able to satisfy the concerned jurisdictional authority that the service is used for providing the taxable services, Cenvat Credit shall be allowed. On limitation, the appellant claim that the demand is time barred on the ground that Ld. Adjudicating Authority has refrained from imposing penalty by invoking Sec 80. The Hon’ble CESTAT do not agree with the appellant, as there are two separate provisions, one is for the invoking extended prior i.e. proviso to Section 73(1) and other is Section 80 under which if a reasonable cause is shown, penalty can be waived. Therefore, merely because Section 80 was invoked, it cannot be said that proviso to Sec 73(1) shall not apply. Both provisions have separate ingredients. In the present case the appellant have not disclosed the data related to service charges paid to SWIFT to the department. Therefore, there is a suppression of the fact on the part of the appellant, proviso to Section 73(1) get correctly invoked. However the issue involved interpretation of definition of “Banking and Other Financial Services”, there is a reasonable cause for not imposing the penalty by invoking Sec 80. Therefore, demand is not hit by time bar. In view of above discussion, the following order has been passed:
(a) The demand pertaining to the period prior to 18-04-2006 is here by set aside.
(b) The demand of service tax for the period from 18-04-2006 along with interest is maintained.
(c) The appeal is partly allowed in the above terms.