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

A Division Bench of the Supreme Court took a divergent view on the issue, whether the card-issuing bank charging an interchange fee for credit card transaction is to be subjected to service tax for the same. Justice K.M. Joseph was of the opinion that the interchange fee is received for the service rendered by the card-issuing banks, hence liable to be subjected to service tax. Justice S. Ravindra Bhat agreed that the issuing bank was providing service, but unlike J. Joseph felt that the services rendered by the issuing bank and the acquiring bank cannot be segregated and has to be seen as a single unified service. In other words, he opined that not the interchange fee, but the gross consideration [interchange fee of issuing bank + the amount of the acquiring bank] is to be taxed. 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...

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

Sohini Chowdhury

Tags