Facts of the Case:

In this case, the appellant a banking company providing banking and financial services including credit-card facilities, offered various EMI-based loan products such as “Loan on Phone”, “Balance Conversion”, “Dial-an-EMI” and merchant EMI schemes to its existing credit-card holders. Under these schemes, specified loan amounts were advanced to customers and recovered through equated monthly instalments reflected in their credit-card statements. The Department treated these transactions as being intrinsically connected with credit-card services and alleged that the interest component embedded in the EMIs represented consideration for taxable services.

A demand of ₹249.35 crore, along with applicable interest and penalty under Section 78 of the Finance Act, 1994, was confirmed for the period October 2010 to March 2015. The Department also sought to levy Service Tax on additional/penal interest charged for delayed payment of EMIs, treating the same as consideration for “tolerating an act” under Section 66E(e). Citibank challenged the demand before CESTAT.

Issue:

Whether interest earned on EMI-based loan facilities extended to credit-card holders, including additional/penal interest for delayed payment, is liable to Service Tax merely because the loan transactions were routed through credit-card accounts? Whether the extended period of limitation and penalty under Section 78 of the Finance Act, 1994 could be invoked in respect of such transactions?

Held That:

The CESTAT, Chennai allowed the appeal and set aside the entire demand. It held that the EMI-based facilities offered by Citibank were, in substance, loans and advances, notwithstanding the fact that they were made available to existing credit-card holders and were administered, accounted for and recovered through the credit-card platform. The Tribunal observed that the essential attributes of a loan disbursement of a specified principal amount, an obligation to repay the principal and payment of interest for the use of money were present in the transactions.

The Tribunal placed emphasis on the substance of the transaction rather than the medium through which it was operated. The credit-card statement merely constituted a mechanism for accounting and recovery of the loan and could not determine the legal character of the underlying transaction. The call transcripts, welcome letters, statements and system records disclosed the loan amount, interest rate, tenure, EMI and repayment obligations. Further, the appellant’s books classified the receipts as interest income under “cards EMI interest”, supporting their treatment as interest arising from lending transactions.

The Tribunal noted that the statutory scheme consistently excluded interest on loans and advances from Service Tax. For the pre-negative-list period, Rule 6(2)(iv) of the Service Tax (Determination of Value) Rules, 2006 excluded interest from the taxable value, while from 01.07.2012, Section 66D(n)(i) specifically excluded services by way of extending loans or advances insofar as the consideration was represented by interest or discount. Further, Section 65B(44) excluded a “transaction in money” from the definition of “service”. Accordingly, interest representing the return for the use/time value of money could not be transformed into consideration for credit-card services merely because the loan was routed through a credit-card account.

The Tribunal also relied upon the Calcutta High Court’s decision in Ramesh Kumar Patodia v. Citi Bank N.A., which had held, in the GST context, that a loan independently granted to a credit-card holder does not become a credit-card service merely because the loan amount and EMIs are reflected in the monthly credit-card statement. The Tribunal further relied upon Karur Vysya Bank, Mahindra Holidays, Association of Leasing & Financial Services Companies, Shriram Transport Finance and other precedents to reiterate that interest represents consideration for the use of money and is distinct from consideration for a taxable service.

Importantly, the Tribunal rejected the Department’s attempt to treat additional/penal interest on delayed EMI payments as consideration for “tolerating an act” under Section 66E(e). It held that such additional interest arises directly from the underlying lending transaction and is compensatory in nature. Merely describing the amount as “additional” or “penal” does not change its essential character as interest. Relying upon, inter alia, Bajaj Finance Ltd., Ashiana Housing Ltd. and Balajee Loha Pvt. Ltd., the Tribunal held that penal/additional interest cannot be artificially re-characterised as consideration for tolerating an act. The clarification contained in GST Circular No. 102/21/2019-GST dated 28.06.2019 was also found consistent with this principle.

The Tribunal further held that the extended period of limitation was not invocable. The dispute was essentially interpretational, and the appellant had consistently treated the receipts as interest on loans on the basis of the statutory provisions and judicial precedents. The relevant transactions were recorded in the books and financial statements and had been subjected to departmental scrutiny and audits. In particular, an earlier Show Cause Notice and EA-2000 audit had examined the appellant’s financial statements, agreements, income heads and Service Tax records. A contemporaneous Chartered Accountant’s opinion dated 08.08.2014 also supported the appellant’s bona fide understanding that the EMI facilities constituted loans.

Following the principles laid down by the Supreme Court in Uniworth Textiles, Continental Foundation, Chamundi Die Cast, Larson & Toubro, Krishnaraj Shipping and Citibank N.A., the Tribunal held that mere non-payment of tax does not constitute suppression. There must be evidence of wilful suppression, misstatement or intent to evade tax. Since the Department was already aware of the relevant activities and no concealment or wilful misstatement was established, the extended limitation under Section 73(1) could not be invoked. Consequently, the penalty under Section 78 was also held unsustainable.

Accordingly, CESTAT held that interest earned on the EMI-based loan facilities, including additional/penal interest on delayed payments, was not liable to Service Tax, set aside the Order-in-Original dated 30.11.2016 in toto, and allowed the appeal with consequential relief, if any, in accordance with law.

Case Name: M/s. Citi Bank N.A. vs. Commissioner of GST and Central Excise dated 07.09.2026

Citation No. 2026 Taxo.online 2700