Currency Conversion Charges not liable to service tax – CESTAT

In the case of Citibank N.A. Versus Commissioner of Service Tax, Chennai, it was held that Currency Conversion Charges (mark up) in respect of credit/debit card transactions are not liable to service tax as the card transaction happened outside India.

Facts of the Case

The appellant is Citi Bank engaged in providing banking service registered with service tax for discharging service tax on their banking operations and also credit card/debit card services. The DGCEI issued SCN No.68/2007 dt. 18.10.2007 demanding service tax of Rs.5,12,64,532/- payable on the Currency Conversion Charges (mark up of 3%) in respect of under Credit Card Services for the period April 2002 to April 2006 and Rs.24,51,538/- towards service tax payable on currency conversion charges (mark up of 3%) for the period from September 2004 to April 2006 in respect of Debit Card Service. The adjudicating authority in his impugned order confirmed the demand, also imposed equivalent penalty of Rs.5.15 crores under Section 78 along with interest. Hence the present appeal.

Contentions of the Assessee

The assessee submitted the scheme of both credit card and debit card transactions. The assessee submitted that while rendering credit card services, they issue credits (Money Exchange). It is to be regulated by VISA or Master Card which is a transaction of overseas since the card holder transacts involving payment of foreign exchange. The assessee submitted that 3% mark up is in relation to exchange rate. It was further submitted that mark up is part of cost of the goods/services purchased in foreign currency and not for providing any service and submits that they have already discharged service tax credit including interest. He mainly relied on Tribunal’s LB decision in the case of Standard Chartered Bank and Others Vs CST – 2015-TIOL-1713-CESTAT-LB. The assessee further submitted that even if ‘mark-up’ is considered as service, it is nothing but purchase and sale of foreign exchange including money changing which is specifically brought under service tax w.e.f. 16.5.2008. Their case is prior to 16.5.2008. The assessee also referred to Board’s circular dt. 12.3.2007, 23.8.2007 and 29.2.2008 & relied on the decisions of Indian National Shipowners’ Association Vs UOI – 2009(14) STR 289 (Bom.)

The assessee further submitted that the nature of activity towards credit card or debit card is one and the same. In the case of credit card, the department demanded service tax under the category of Credit Card Services whereas in the case of debit card, for the same activity, the department is taking a different stand and demanding tax under “BOFS” under the category of operation of bank accounts. In both the cases, the mark up is essentially part of the foreign exchange that is to be applied for arriving at the cost of goods or services purchased by cardholder in Indian Rupee. The department cannot take two different stands to classify the same activity under two different services. Once the department is already demanding tax under credit card services, demand in respect of debit card services under BOFS services is not justified and the demand is not sustainable. Even if it is considered as service, the entire activity was rendered outside India, where card holder used credit card. The services were consumed abroad since cardholder enable to make a transaction in foreign currency abroad and services were rendered outside India and hence not taxable which is outside the scope of levy itself.

The appellant relied Board’s circular dt. 25.4.2003 & Tribunal’s decision in the case of SGS India Pvt. Ltd. Vs CST – 2011 (24) STR 60 (Tri.-Mumbai) which was by upheld by Hon’ble Bombay High Court – 2014 (34) STR 554 (Bom.) and also relied Hon’ble Supreme Court decision in the case of All India Federation of Tax Practitioners Vs UOI – 2007 (7) STR 625 (SC).

Contentions of the Revenue

The Revenue contended that the “mark-up” that it is not towards cost of the goods or service purchased by the customer. In the schedule of standard charges levied by appellant, “Mark-up” is mentioned as “charges” and included in the list of other charges like, joining and annual fees, cash advance fees, late payment charges etc. It was submitted that without the credit card all other activities including conversion of foreign exchange rates cannot be performed and the main activity is credit card service. It is not in relation to credit card used by card holder. W.e.f. 1.5.2006 credit card service is chargeable under BOFS under clause (ii) of the services. The Revenue submitted that levy on the credit card services is charged annually. Therefore nature of transaction is indirectly relatable to credit card service activity. Any mark up is foreign exchange consideration or integral part of the credit card service during the relevant period.

On the issue of services rendered abroad/export of services, in the present case, the point of sale is relevant. A card holder makes a purchase at an ME and swipes the card and only thereafter the transaction completes. The Revenue relied Board’s circular dt. 25.4.2003 (page 85) and submitted that even if appellant is collecting towards foreign exchange transaction, no charges can be collected as “reimbursement” from the card holder. All the amounts were included in the credit card services & relied on Tribunal’s LB decision in the case of Sri Bhagavathy Traders Vs CCE Cochin – 2011 (24) STR 290 (Tri.-LB).

Held by Hon’ble CESTAT

The Hon’ble CESTAT stated that the point for decision is tax liability of income accruing to appellant as mark-up when card is used for foreign exchange payment. “Credit Card Services” is one of the services taxed under Banking and Financial Services introduced with effect from 16.07.2001. The term ‘Credit Card Services’ was not defined during the impugned period. A new tax entry was introduced in 2006 under Section 65(12) as ‘Credit Card Services’ with much wider scope as defined under Section 65 (33a). The period relevant for the present appeal is prior to this new entry.

The relevant statutory provisions are as below:

“Section 65 (10) of Finance Act, 1994:

             “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)                    ………

(ii)        credit card services;

(iii)       ………..”

Later on amendments were carried out by Finance Act, 2002, 2003, 2004. Vide Finance Act, 2006 ‘Credit Card Services’ was omitted from BOFS and a new entry was introduced separately.

In the absence statutory definition of the meaning and scope of taxable entry ‘Credit Card Services’ during the relevant time, guidance may have to be taken from executive clarification and judicial interpretation.

It is an admitted fact that when card is issued with international credit facility, service charges collected at that time or on periodical basis are subjected to service tax under credit card service. When such card is used to pay in foreign exchange outside India there will necessarily be a charge for conversion of currency. The card holder is settling his dues with appellant only in rupees. The card is used for payment in foreign exchange. As such the mark up charge is directly attributable to the conversion of currency. This much is clear from the terms of usage and the card holder is also aware of the nature of mark up. The case of Revenue is that since card is an instrument which only enables such conversion of currency, hence any mark up collected on this account is leviable to tax as credit card service. As discussed above the mark up comes only when currency exchange is involved. If not using the card the card holder will be spending certain charges to convert the currency through any other means. As discussed in the larger Bench decision of this Tribunal (supra) the Finance Act, 1994 has not defined, even illustratively, the nature and variety of services which amount to credit card services. The larger Bench of Tribunal in agreement with clarification in para 2.2 of Board’s circular dated 09.07.2001 confirmed the restricted scope of levy prior to 01.05.2006. On examining the discussion in the said order and the nature of transaction now in dispute, that the mark up charges attributable to currency conversion will not fall under the category of ‘Credit Card Services’ during the impugned period.

Without prejudice to the above findings the Hon’ble CESTAT stated that admittedly the card transaction happened outside India. The service in respect of such transaction is rendered, received and consumed outside India. The card issuing appellant and card holder having normal residence in India is of no consequence for tax liability on service rendered and consumed outside India. The Tribunals decision in Cox & Kings India Ltd. (supra) is applicable to the present case. The essence of taxability of service is that it should be taxed in the jurisdiction of its consumption. Here, the service, namely facility of use of card for payment, is rendered outside India and duly consumed by the recipient-card holder outside India. The Hon’ble CESTAT that service tax liability on such service is not sustainable for want of jurisdiction. Even if it is considered, conceding the plea of revenue that the card is issued in India and the service availed abroad is in continuation of such card usage, it is clear that the identified service element has been wholly rendered and consumed abroad. As Hon’ble Supreme Court in the case of Ishikawa-Ima-Harima Heavy Industries Ltd. – 2007 (6) STR 3 (SC) held that in respect of offshore services, there should be sufficient nexus between the rendition of services and territorial limits of India. It was held that applying the principle of apportionment to composite transactions which have some operation in one territory and same in other, it is essential to determine taxability of the service operations. Applying this principle, the Hon’ble CESTAT stated that even if alternate argument of Revenue is considered, in the present case the whole of service rendered and consumed outside India is beyond the taxable territory as per Finance Act, 1994.

Considering the above discussion and findings the Hon’ble CESTAT hold that the mark up charges accruing to the appellant when card holder uses card to pay in foreign exchange abroad is not liable to service tax under ‘Credit Card Services’ during the impugned period. This conclusion is based both on merit of scope of ‘Credit Card Services’ during relevant period and lack of territorial jurisdiction of charge.

To conclude,

a) the appellant is not liable to service tax on ‘interchange charges’ in view of the findings of the larger Bench of the Tribunal in Standard Chartered Bank (supra)

b) the ‘mark up’ charges are also not liable to service tax as concluded above.

As regards the demand confirmed on the amount of “mark up” charges accruing to the issuing bank when card holder uses debit card to pay in foreign exchange abroad. The Hon’ble CESTAT stated 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 Hon’ble CESTAT stated that on both the cases, as already discussed in the preceding paras, the mark-up is essentially to meet the foreign exchange fluctuations for arriving the cost of the goods/services purchased by the card holder.

Since it has already been held in respect of credit card services, the mark-up 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.

In view of the foregoing discussions, the impugned order is set aside and the appeal is allowed with consequential benefits.