Service Tax Demand on Card Personalization : CESTAT Declares Activities as Manufacturing, Quashes Penalties [Read Order]

The Mumbai Bench of Customs,Excise and Service Tax Appellate Tribunal(CESTAT)declared that the card personalization activities carried out by the assessee for banks, involving data processing, embossing, and printing on plastic cards, were akin to manufacturing rather than services.

CMS Computers Ltd..appellant-assessee, filed an appeal against the order dated 31.12.2018, which confirmed a service tax demand of Rs. 24.51 crore and imposed penalties.The assessee had agreements with banks to personalize credit/debit cards. The banks provided blank or pre-printed cards with a magnetic strip and data for personalization. The personalization process included encoding the strip, printing signatures and photos, lamination, embossing, and packing.

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The appellant supplied the required infrastructure, software, and manpower at the banks' locations. The banks' staff prepared the data and sent it to the assessee. According to a show cause notice in 2006, the service was considered a support service for the banks, and the assessee should have paid service tax under "Business Auxiliary Service."

However, in a 2011 notice, the service was reclassified as "Business Support Service," and the appellant was again asked to pay service tax.

The assessee argued that it had agreements with banks to personalize credit/debit cards by processing data, embossing, and printing details like signatures and photos on blank or pre-printed cards provided by the banks.

In the 2006 show cause notice, these activities were classified under "Business Auxiliary Service" (BAS), while in the 2011 notice, they were reclassified under "Business Support Service" (BSS). The assessee claimed that card personalization was a manufacturing process, not subject to service tax, and that from 01.01.2007, personalized smart cards were exempt from excise duty under a specific notification.

The assessee pointed out the inconsistency in the revenue’s classification of the same activities in both notices, showing confusion within the revenue.

On 31.12.2018, the Commissioner issued a common order, confirming a service tax demand of Rs. 24.5 crore along with interest and penalties of Rs. 20.18 crore. The Commissioner ruled that card personalization was not manufacturing, so it could not be taxed under excise duty.

The Commissioner classified the assessee’s activities, including printing, encoding, and embossing, as BAS under Section 65(19), as they involved transforming plastic cards into credit/debit cards. The Commissioner also stated that the service didn’t fall under "works contract service" because there was no transfer of property in goods.

The Commissioner rejected the assessee’s claim of inconsistency, stating that the first notice raised demands for Bill generation and Card Personalisation under BAS, while later notices dealt with E-governance under BSS.

The two member bench comprising Ajay Sharma(Judicial Member) and Anil.G.Shakkarwar(Technical Member) heard both the assessee’s Chartered Accountant and the Revenue's Special Counsel, reviewing the case records and submissions. It addressed three services separately, followed by common issues of extended limitation periods and penalties.

The main issue was the “Card Personalization Service” in Show Cause Notices dated 31.08.2006 and 06.04.2011. The 31.08.2006 notice classified it under "Business Auxiliary Service" (Section 65(19)), while the 06.04.2011 notice classified it under "Support Service of Business or Commerce" (Section 65(104c)). The assessee pointed out the conflict, but the adjudicating authority dismissed this objection. The authority found that the first notice raised demands for Bill generation, Despatch, and Card Personalization services, but not for E-governance, while the second notice only focused on E-governance.

The appellate tribunal disagreed with the authority’s findings, noting the revenue’s conflicting positions. It set aside the order related to the 06.04.2011 notice as it was beyond its scope.

Next, the CESTAT examined the 31.08.2006 notice. The assessee had agreements with banks to personalize debit/credit cards, involving data processing and embossing. The adjudicating authority classified these as Business Auxiliary Services. However, the tribunal concluded that these activities were closer to manufacturing, as they transformed plastic cards into debit/credit cards, which fell under the "manufacture" definition in the Central Excise Act.

The bench also referred to a Supreme Court case and found that the assessee’s processes were considered manufacturing, not services. Additionally, from 01.01.2007, personalized smart cards were exempt from excise duty. As a result, the tribunal set aside the service tax demand on "Card Personalization Service".

To Read the full text of the Order CLICK HERE

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