Whether Service Tax To Be Levied On Card-Issuing Bank For Interchange Fees : Supreme Court Delivers Split Verdict

Justice Bhat noted -

"If it is the aggregate amount (of which the interchange fee, is one part, and the acquiring bank's amount, another part), the levy is satisfied. In such circumstances, the segregation of the whole MDR (which includes the interchange fee) by slicing it into two portions, i.e. the interchange fee and the acquiring bank's charge, solely for the purpose of obliging all parties to reflect these in separate returns, only complicates issues."

Justice KM Joseph allowed the appeals filed by the Revenue Department and remanded the matter back to the Customs, Excise and Service Tax Appellate Tribunal, South Zonal Bench, Chennai for consideration of certain issues, whereas Justice S. Ravindra Bhat rejected the appeals and found no reason to remand the matter back.

Factual Background

Citibank, registered with the Service Tax Commissionerate, Chennai (STC) was found to be receiving interchange fees without paying service tax for the same. Over a span of time, four show cause notices were issued to it for periods prior to 01.07.2012 and also thereafter. The Citibank responded stating that it was not performing any service so as to make it liable to pay service tax on the interchange fees. It was merely the interest that was earned by the Bank in the credit card transaction of the customer. Moreover, it was argued that the interchange fee has been subjected to service tax in the hands of the acquiring bank, and if the card-issuing bank is to pay service tax again then it would amount to double taxation. The Principal Commissioner, Service Tax, found the Citibank to be rendering service and there was no evidence to show that the acquiring bank was paying tax for the amount earned by Citibank. The Tribunal, relying on its judgement titled M/s. ABN Amro Bank v. Commissioner of Central Excise and Customs set aside the order of the Principal Commissioner.

Credit card transaction mechanism

The transaction data is transmitted for the merchant establishment through the acquiring bank and the card network to the issuing bank. The issuing bank approves the purchase and it goes back through the card network to the acquiring bank and from there it is forwarded to the merchant establishment. The transaction goes through and the receipt is signed.

For example, in a transaction of Rs 100, the card association (Visa, MasterCard etc.) debits the account of Rs. 98 from the issuing bank and remit it to the acquiring bank. Rs 2 which remains un-debited in the account of the issuing bank is the interchange fee. The acquiring bank remits Rs. 94.30 to the merchant. The acquiring bank retains Rs 3, which is for its service. And 70 paisa is paid as service tax on the total MDR (Merchant Discount Rate) of Rs. 5. A credit card holder remits the gross consideration (Rs 100) to the issuing bank on receipt of credit card statement and in case of debit card transaction, it is directly debited from the customer's account at the issuing bank.

View taken by Justice Joseph

The service rendered by the issuing bank falls under the ambit of Section 65(33a)

Service tax in banking and other financial services was made available from 2001, which included credit card services. On 01.05.2006, the entry with respect to credit card services was removed and a new taxable service of credit card was introduced. Section 65(33a) was inserted by the Finance Act, 2006 and came into effect on 01.05.2006.

"Credit card, debit card, charge card or other payment card service" includes any service provided,-

.…

(iii) by any person, including an issuing bank and an acquiring bank,to any other person in relation to settlement of any amount transacted through such card.

Explanation: Explanation.—For the purposes of this sub- clause, "acquiring bank" means any banking company, financial institution including non-banking financial company or any other person, who makes the payment to any person who accepts such card;"

J. Joseph observed that the significance of the provision is that it uses the word "included" and deals with services provided, among others, by banks. It is the provision which captures charge on service tax on the issuing bank for the services it renders to the card holders. Examining Section 65(33a)(iv) which contemplated service provided by any person including, issuing bank and acquiring bank, Justice Joseph opined -

"This means the service cannot be one rendered by an issuing bank to an acquiring bank. It must be service rendered by an issuing bank and an acquiring bank to any other person in relation to settlement of any amount transacted through such card."

The issuing bank renders service in the credit card transaction

J. Joseph observed that in the transaction process, the issuing bank earns an amount for the service rendered to the card holder, which does not seem to enter the measure of service tax. Relying on Section 65(33a)(iii), J. Joseph noted that the provision is such that any person including an acquiring bank and an issuing bank can render service in relation to the settlement of the amount transacted through credit card. Simply put -

"…where the issuing bank and the acquiring bank are different, as is the case in the present case, it would be a case where both the issuing bank and the acquiring bank are rendering separate services as part of the credit card transaction."

J. Joseph observed that in the whole credit card transaction mechanism the issuing bank indeed performs services in relation to the settlement of the amount transacted through the card. It is demonstrated by him as under -

"As already noticed, the issuing bank, as part of its agreement with the card association and the acquiring bank, which is also under agreement with the card association, is engaged in the unique activity of being on the electronic platform hosted by the card association, which, admittedly, fixes the interchange fee and the amount to be earned by the issuing bank and acquiring bank and, under the auspices of which, transaction data, in millions, is processed by the issuing bank and it is only with the approval of the issuing bank that the merchant bank permits the purchase using the card. This is on the clear understanding that the amount will be paid by appropriate debit and credit in the accounts maintained, both by the issuing bank and acquiring bank."

It was taken note of that, the credit card system is fundamentally based on the issuing bank, undertaking a risk. Essentially, the funds of the issuing bank are used to effect the payment. Though the cardholder pays the money to the bank, the issuing bank undertakes certain risk to settle the amount. Under such circumstances it cannot be said to not perform a service.

The issuing bank is liable to pay service tax

With respect to the submission of Citibank that the expression "service provider" in Section 67(1)(i) includes both the issuing bank and the acquiring bank and therefore the gross amount which is Rs. 5 [Rs 2 (issuing bank) + 3 (acquiring bank)] is liable to be taxed and not Rs 2 received as interchange fee by the issuing bank.

"67. Valuation of taxable services for charging Service Tax. -

(1) Subject to the provisions of this Chapter. Service Tax chargeable on any taxable service with reference to its value shall, -

(i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;"

J Joseph opined that in making this argument Citibank had accepted that it was rendering service and was liable to pay tax under Section 65(33a) (iii). It was further observed that because "service provider" includes both the issuing bank and the acquiring bank, then the gross amount to be charged would be on separate services provided by each.

"In law, therefore, there could not be a gross amount by adding the value of two distinct services by two different service providers. Expression "gross amount" is to be understood with reference to the service provided or to be provided by a particular service provider and the provision does not appear to me to embrace within its scope, adding of what would be different gross amounts for arriving at the gross amount of the service provided by a particular service provider. In this context, I may notice that the words "gross amount charged" have been defined as, including payment in the many forms, which are mentioned therein, which includes debit notes, book adjustment and any amount credited or debited in any account."

J. Joseph held that Citibank as an issuing bank provided service within the meaning of Section 65(33a)(iii) and for which it got paid a sum of Rs. 2 as interchange free. Therefore, the same is eligible for levy of service tax.

Interchange fee is not in the nature of interest

Citing Ferro Alloys Corpn. Ltd. v. A.P. State Electricity Board and Another 1993 Supp (4) SCC 136 J. Joseph stated that there was no creditor debtor relationship between Citibank (issuing bank) and the Card Associations or acquiring bank or merchant.

"In the context of the relationship of the respondent as issuing bank, interchange fee cannot be described as compensation fixed by the parties for use or forbearance of the borrowed money."

Post 2012 Regime

J. Joseph observed that under the new regime the ingredients to constitute service are i. an activity, ii. by the service provider, iii. to a service recipient and iv. there must be consideration.

He opined -

"I am of the clear view that all the ingredients in this case stand satisfied in the settlement of the amount transacted under the credit card apart from the service which is performed by the issuing bank qua the card holder which constitutes a separate service."

The issuing bank being an integral part of the process would be considered eligible for levying service tax.

Credit Card Transaction is not merely transaction in money

Citibank had raised a contention that credit card transactions being transaction in money is excluded from the definition of the word 'service'. The Bank earns the interchange fee as a consideration for service provided. The role of the issuing bank is indispensable in the credit card transaction. J. Joseph opined that the active role that it plays and the risk that it takes in settling the amount, constitutes rendering service and not merely transaction in money.

Service Tax is a value added tax

Citibank claimed that the service tax for interchange fee had already been paid by the acquiring bank. The view taken by J. Joseph was that value added would mean that for separate services, tax is payable for each separate service. However, it does not mean that the tax once paid by the acquiring bank on the amount of interchange fee for the service provided by Citibank, can be again demanded from the issuing bank, as it would amount to double taxation.

View taken by Justice S. Ravindra Bhat

From the facts and issues of the case, J. Bhat culled out the relevant point for consideration -

"...whether the service of settlement of an amount transacted on behalf of a cardholder is to be taxed as a whole or in addition to the taxation of the entire transaction, a separate part of that service is also to be subjected to levy."

J. Bhat opined that though Citibank was providing service, the services rendered by the issuing bank and the acquiring bank are non segregable and are to be treated as a single unified service.

"The role of the issuing bank in the service provided by the acquiring bank to the merchant establishment is part of a single unified service falling under clause (iii) of Section 65 (33a) and it cannot be broken up into its components and classified as separate services for classification. This is a well­ accepted principle of classification."

He agreed with J. Joseph that interchange fees cannot be treated as interest, and credit card transactions cannot be considered as transactions in money and be excluded from the definition of service.

J. Bhatt noted that since the concerned service was a single unified service, Citibank cannot be made liable to pay service tax again as the same would amount to double taxation -

"However, having characterised the service to be a single unified service – wherein service tax, by way of business convenience, is collected from/remitted by the acquiring bank on the value (whole MDR which includes the interchange fee that is retained by the issuing bank) taxable for the single service rendered by both the acquiring and issuing bank – Citibank cannot be called upon to pay the service tax again as this would result in double taxation."

[Case Title: Commissioner of GST and Central Excise v. M/s. Citi Bank N.A. Civil Appeal No(s) 8228 of 2019]

Citation : LL 2021 SC 727

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