Interest On EMI Loans Through Credit Cards Not Taxable As Credit Card Service: CESTAT Chennai

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that interest earned on EMI-based loans routed through credit card accounts cannot be treated as consideration for credit card services.

This is so merely because the loans are administered and recovered through those accounts.

The ruling came while setting aside a ₹249.35 crore service tax demand against Citibank N.A. The bench comprised Judicial Member Ajayan T.V. and Technical Member Vasa Seshagiri Rao.

“We find merit in the appellant's contention that interest on loans is expressly excluded from the levy of Service Tax. For the period prior to 01.07.2012, Rule 6(2)(iv) of the Service Tax (Determination of Value) Rules, 2006 specifically excluded “interest on loans” from the value of taxable services. With effect from 01.07.2012, Section 66D(n)(i) of the Finance Act, 1994 similarly placed services by way of extending loans or advances, insofar as the consideration was represented by interest or discount, in the negative list. Thus, interest on loans remained outside the Service Tax levy. The specific statutory exclusion cannot be defeated by treating such interest as consideration for creditcard services under Section 65(33a). The character of the receipt must be determined by its substantive nature, and an express exclusion must be given effect. We, therefore, hold that interest arising from the loans and advances extended by the appellant cannot be subjected to Service Tax merely because the lending facility was routed through the creditcard platform,” the bench observed.

The dispute centred on loan products offered by the bank to existing credit card holders. These included “Loan on Phone”, “Balance Conversion”, “Dial-an-EMI” and merchant EMI schemes.

Under these facilities, customers received a specified amount from the bank. They repaid it in instalments over a fixed period, along with interest.

The Department argued that the loans were closely linked to the credit card accounts. The EMIs were reflected in the customers' monthly card statements, and the credit card account was used for recovery.

It therefore contended that the interest component should be taxed as consideration for credit card services.

The tribunal rejected this reasoning. It found that the transactions had the essential characteristics of loans.

Money was advanced to the customers. Repayment was required over an agreed tenure. Interest was also charged on the amount borrowed.

According to the bench, the credit card account merely functioned as a channel for disbursal, accounting and recovery. Using that mechanism did not alter the underlying nature of the transaction.

The bench also examined the service tax provisions applicable during the relevant period. Before July 1, 2012, the valuation rules excluded interest on loans from the taxable value of services.

From July 1, 2012, the negative-list regime was introduced. Section 66D(n) of the Finance Act, 1994 kept services involving the extension of loans or advances outside the service tax levy where the consideration was represented by interest or discount.

The tribunal held that an express exclusion for interest on loans could not be defeated simply because the lending facility was offered through a credit card platform. The character of the receipt had to be determined from the substance of the transaction.

The medium through which the loan was administered could not, by itself, change that character.

The bench also relied on a Calcutta High Court decision concerning a similar loan facility offered to a credit card holder. The High Court had held that a loan remained a separate loan transaction even when it was reflected in a credit card statement.

The tribunal further distinguished the EMI facilities from a conventional credit card transaction. Such a transaction generally involves multiple parties, including a merchant establishment, issuing bank, acquiring bank and card association.

The EMI facilities in question were different. They were bilateral arrangements between the bank and the borrower involving the sanction of a loan, repayment over a defined period and payment of interest.

The tribunal also rejected the Department's attempt to levy service tax on additional or penal interest charged for delayed EMI payments. It observed that such amounts were compensatory in nature and arose from the underlying loan transaction.

They could not be re-characterised as consideration for “tolerating an act” under Section 66E(e) of the Finance Act, 1994.

On limitation, the bench found that the extended period could not be invoked in the absence of suppression or wilful misstatement with intent to evade tax. The transactions were recorded in Citibank's books and financial statements.

The Department had also examined the bank's activities during earlier proceedings and audits. The tribunal therefore found no material showing concealment of facts or an intention to evade tax.

The extended limitation period was consequently held to be unavailable, and the penalty under Section 78 was also found unsustainable.

The tribunal ultimately set aside the impugned order in its entirety. It allowed Citibank's appeal with consequential relief.

For Citibank: Advocate Gopal Mundhra

For Revenue/Department: Anoop Singh