While quashing service tax demand of around Rs. 249 Crores on Citi Bank, the Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that interest earned on ‘Loan on Phone’, ‘Dial-an-EMI’ and ‘Balance Conversion’ facilities retains the character of interest on loans and advances, and cannot be re-characterised as consideration for credit card services or for ‘tolerating an act’ under Section 66E(e) of the Finance Act, 1994. The Tribunal held that the true nature of the transaction must be determined by its substance, and not by the medium through which it is administered. The fact that EMI-based loan facilities are routed through credit card accounts does not convert interest on loans into consideration for credit card services.
The CESTAT clarified that Rule 6(2)(iv) of the Service Tax (Determination of Value) Rules, 2006 for the pre-2012 period and Section 66D(n)(i) of the Finance Act, 1994 for the post-2012 period both expressly exclude interest on loans and advances from the levy of service tax. This exclusion cannot be defeated by re-characterising the receipt. Additional or penal interest charged on delayed payment of EMIs is compensatory in nature and represents consideration for the continued use of money. It cannot be artificially re-characterised as consideration for ‘tolerating an act’ under Section 66E(e), following the GST Circular No. 102/21/2019-GST.
Where the dispute is essentially interpretational, the transactions are duly recorded in the assessee’s books, and the Department’s own audits and earlier proceedings show that the income streams were within its knowledge, neither the extended period under the proviso to Section 73(1) nor penalty under Section 78 can be sustained, added the Tribunal.
The CESTAT also pointed out that the RBI Master Circular on Credit Card Operations and subsequent directions treat conversion of credit card dues into EMIs as lending arrangements governed by the norms applicable to loans and advances, and the RBI’s accounting framework separately recognises interest income on loans as distinct from fee or commission income from credit card services.
The Division Bench comprising Ajayan T.V. (Judicial Member) and Vasa Seshagiri Rao (Technical Member) observed that he transactions essentially involve loans and advances extended by the appellant-bank to its existing credit-card holders, against which the bank earns interest. The fact that the facility is made available through, or administered by means of, the credit-card account does not, by itself, alter the essential character of the underlying transaction. The credit card, in such circumstances, operates as a mechanism or channel for disbursal, accounting and recovery of the loan amount.
The Tribunal noted that the interest arising from these transactions is accounted for by the appellant under the broader head of ‘interest income’ in its financial records and, within the said head, under the sub-heading ‘cards EMI interest a/c’. The manner in which the receipts are accounted for constitutes a relevant contemporaneous indication of the appellant’s treatment of the receipts as interest arising from lending transactions.
The Tribunal further observed that the impugned order itself, at various places records that the transactions involve loans and that interest is earned thereon. Thus, the factual character of the transactions as involving lending of money and recovery thereof with interest is not substantially in dispute. The controversy is essentially as to the legal consequence flowing from such transactions.
The Tribunal placed reliance on the judgment of the Calcutta High Court in Ramesh Kumar Patodia v. Citi Bank N.A. [2023 (7) TMI 1102], wherein the High Court examined the substance of a loan facility extended to a credit-card holder and held that the mere fact that the loan transaction was reflected in the monthly statement of the credit card did not alter its essential character as a separate loan transaction. The High Court observed that where the loan was independently sanctioned and advanced by the bank, the transaction could not, merely by reason of its reflection in the credit-card statement, be treated as a credit-card service.
The Tribunal also observed that the EMI loan facilities are bilateral arrangements between the appellant and the cardholder, and no merchant establishment, acquiring bank or card association is involved in the lending transaction. The essential features of a conventional credit-card transaction are thus absent.
The Tribunal further observed that the RBI guidelines, including the Master Circular on Credit Card Operations dated July 09, 2010, and subsequent directions, recognise facilities such as conversion of outstanding credit-card dues into equated monthly instalments (EMIs) as lending arrangements governed by the norms applicable to loans and advances. The regulatory treatment reinforces that the relationship between the appellant and the cardholder is essentially that of creditor and debtor.
The Tribunal also noted that the CBEC Education Guide, 2012 and Circulars dated Sep 17, 2004, and Feb 28, 2006, clarify that interest on loans, advances and deposits, including additional or penal interest, is not chargeable to Service Tax and does not form part of the value of taxable services. These departmental clarifications are binding upon the Department, as held by the Supreme Court in Commissioner of Central Excise v. Ratan Melting & Wire Industries [2008 (231) E.L.T. 22 (S.C.)].
Briefly, the dispute covers the period from October 2010 to March 2015 and arises from a Show Cause Notice alleging non-payment of service tax on interest earned on Equated Monthly Instalment (EMI)-based loans extended through credit card accounts, as well as on additional interest collected for delayed payment of EMIs.
The appellant is a banking company providing banking and financial services, including credit card services. It is not disputed that the bank extends loan facilities such as ‘Loan on Phone’, ‘Balance Conversion’, ‘Dial-an-EMI’ and merchant EMI schemes to its existing credit card holders, where loan amounts are disbursed and recovered through equated monthly instalments reflected in the monthly credit card statements.
The Department’s case is that these transactions are not independent loan transactions but are integrally connected with credit card services and are therefore taxable. The Revenue alleged that the interest component embedded in the EMIs constitutes consideration for provision of service and is liable to service tax under both the pre-negative-list and post-negative-list regimes, and that the additional interest charged for delayed payment of EMIs is liable to tax as consideration for tolerating an act under Section 66E(e) of the Finance Act, 1994.
