Supreme Court clarifies service tax on interchange fees in credit card transactions: Commissioner of GST and Central Excise vs. M/S Citi Bank N.A. (2021) INSC 728 (09 December 2021)

Date of the Judgment: 09 December 2021
Citation: (2021) INSC 728
Judges: K.M. Joseph, J. and S. Ravindra Bhat, J. (S. Ravindra Bhat, J. dissenting)
Can an issuing bank be taxed separately for the interchange fee it earns in a credit card transaction, when the acquiring bank is already paying service tax on the total Merchant Discount Rate (MDR)? The Supreme Court recently addressed this question in a case involving the Commissioner of GST and Central Excise and M/S Citi Bank N.A. The core issue revolved around whether the interchange fee, a portion of the MDR retained by the issuing bank, constitutes a separate taxable service. Justice K.M. Joseph authored the majority opinion, with Justice S. Ravindra Bhat dissenting.

Case Background

The case originated from an audit conducted by the Service Tax Commissionerate, Chennai, which revealed that M/S Citi Bank N.A. (the respondent), an issuing bank, was receiving interchange fees as part of credit card transactions. The revenue department issued show cause notices demanding service tax on these interchange fees, arguing they were a taxable service. The respondent contended that the interchange fee was a share of the MDR, which was already taxed in the hands of the acquiring bank, and that no service was provided by the respondent to the acquiring bank. The Principal Commissioner, Service Tax, Chennai, ruled against the respondent, stating that services were indeed performed and the interchange fee was a taxable income.

Timeline

Course of Proceedings

The Customs, Excise and Service Tax Appellate Tribunal, South Zonal Bench, Chennai (the Tribunal), overturned the Principal Commissioner’s orders, relying on its earlier decision in M/s ABN Amro Bank v. Commissioner of Central Excise and Customs. The Tribunal held that the respondent was not liable for service tax on interchange fees, as the acquiring bank had already paid tax on the entire MDR. The revenue department then appealed to the Supreme Court.

Legal Framework

The judgment discusses several key legal provisions of the Finance Act, 1994, and the Service Tax Rules, 1994:

• Section 65(33a) of the Finance Act, 1994: Defines “credit card, debit card, charge card or other payment card service” and includes services provided by issuing banks to cardholders, as well as services related to settlement of amounts transacted through such cards.
  
  “65(33a) “credit card, debit card, charge card or other payment card service” includes any service provided,—
  (i) by a banking company, financial institution including non-banking financial company or any other person (hereinafter referred to as the issuing bank), issuing such card to a card holder;
  (ii) by any person to an issuing bank in relation to such card business, including receipt and processing of application, transfer of embossing data to issuing bank’s personalisation agency, automated teller machine personal identification number generation, renewal or replacement of card, change of address, enhancement of credit limit, payment updation and statement generation;
  (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.”
• Section 65(105)(zzzw) of the Finance Act, 1994: Defines taxable service as any service provided to any person by any other person in relation to credit card, debit card, charge card or other payment card service, in any manner.
  
  “(105) “Taxable service” means any service provided or to be provided –
  (zzzw) to any person, by any other person, in relation to credit card, debit card, charge card or other payment card service, in any manner;”
• Section 66 of the Finance Act, 1994: The charging section for service tax before 01.07.2012, imposing tax on the value of taxable services.
• Section 66B of the Finance Act, 1994: The charging section for service tax after 01.07.2012, levying tax on all services except those specified in the negative list.
• Section 65B(44) of the Finance Act, 1994: Defines “service” as any activity carried out by a person for another for consideration, excluding certain activities like transactions in money or actionable claims.
  
  “(44)“Service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include—
  (a) an activity which constitutes merely, —
  (i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
  (ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or
  (iii) a transaction in money or actionable claim;”
• Section 67 of the Finance Act, 1994: Deals with the valuation of taxable services for charging service tax.
• Section 68 of the Finance Act, 1994: Specifies the persons responsible for payment of service tax.

Arguments

Appellant’s (Revenue Department) Arguments:

• The interchange fee is a consideration for services provided by the issuing bank, specifically for verification, facilitation, and extending purchase value.
• The definition of credit card services under Section 65(33a) is inclusive and covers various activities, including the settlement of amounts transacted through cards.
• The interchange fee is not a transaction in money but a service charge for allowing the transaction.
• There is no double taxation because the interchange fee is paid before the MDR is deducted by the acquiring bank.
• The acquiring bank pays service tax for settling the payment to the merchant establishment, while the issuing bank pays service tax for its role in authorizing the transaction.
• The extended period of limitation was rightly invoked due to the respondent’s failure to disclose correct information and pay service tax.

Respondent’s (M/S Citi Bank N.A.) Arguments:

• The interchange fee is a part of the MDR, which has already been subjected to service tax by the acquiring bank.
• The respondent does not provide any service to the acquiring bank; therefore, there is no service provider-recipient relationship.
• The acquiring bank pays service tax on the gross amount of MDR, which includes the interchange fee.
• The interchange fee is akin to interest and not a consideration for service.
• The credit card transaction is a transaction in money and is not liable to service tax.
• The service tax is applicable only on the gross amount charged by the service provider, which is the MDR.
• The extended period of limitation could not be invoked as there was no deliberate intention to evade tax, and the issue was interpretational.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issues:

1. Whether the respondent, as an issuing bank, was providing service within the meaning of Section 65(33a)(iii) of the Finance Act, 1994?
2. Whether the interchange fee is to be treated as interest and is therefore, not taxable under the Act?
3. Whether the credit card transaction is a transaction in money and therefore, excluded from the definition of “service” in Section 65B(44)?
4. Whether the order of the Tribunal in ABM Amro (supra) dealing with the position of the issuing bank, under the framework of the Act, is sustainable?
5. Whether the respondent, as an issuing bank, was liable to pay service tax under Section 68(1), being the service provider?
6. Whether the respondent was liable to file the return, including the amount of interchange fee?
7. Whether the acquiring bank was obliged to value the service, which it provided or agreed to provide, and whether the measure of tax, is entirely related to the service that the acquiring bank provided and agreed to provide?
8. Whether the respondent had suppressed facts within the meaning of Section 73 of the Act?
9. Whether the respondent should be provided an opportunity to establish that the acquiring bank had discharged the tax liability in regard to interchange fee?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

• Standard Chartered Bank and Ors. v. CST, Mumbai-I and Others, 2015 [40] S.T.R. 104 (Tri. – Del) – Discussed the definition of credit card services and whether it was substantive or a continuation of previous levies.
• M/s ABN Amro Bank NV presently known as Royal Bank of Scotland NV v. Commissioner of Central Excise, Customs and Service Tax, Noida, 2018-TIOL-2811-CESTAT / MANU/CN/0079/2018 – A relied upon order stating that the issuing bank is not liable for service tax on interchange fees.
• Commissioner of Central Excise, Vishakhapatnam v. Mehta and Company, (2011) 4 SCC 435 – Regarding the commencement of the period of limitation for service tax.
• Association of Leasing & Financial Service Companies v. Union of India and others, (2011) 2 SCC 352 – Discussed service tax as a value-added tax.
• Commissioner of Central Excise, Nagpur v. Ballarpur Industries Ltd., (2007) 8 SCC 89 / [2007] 215 ELT 489 (SC) – Regarding the invocation of the extended period of limitation.
• Larsen & Toubro Ltd. v. Commissioner of Central Excise, Pune II, (2007) 9 SCC 617 / [211] ELT 513 [SC] – Regarding the invocation of the extended period of limitation.
• Ferro Alloys Corpn. Ltd. v. A.P. State Electricity Board and another, 1993 Supp (4) SCC 136 – Discussed the concept of interest.
• State of Karnataka and others v. Karnataka Pawn Brokers Association and others, (2018) 6 SCC 363 – Discussed the concept of interest.
• Union of India and others v. Kaumudini Narayan Dalal and another, (2001) 10 SCC 231 – Regarding the acceptance of a High Court judgment by the Revenue.
• Commissioner of Central Excise v. Tata Engineering and Locomotives Co. Ltd., (2003) 11 SCC 193 – Regarding the acceptance of a Tribunal’s interpretation by the Revenue.
• Birla Corpn. Ltd. v. Commissioner of Central Excise, (2005) 6 SCC 95 – Regarding the acceptance of the Tribunal’s view by the Department.
• Jayaswals NECO Ltd. v. Commissioner of Central Excise, Nagpur, (2007) 13 SCC 807 – Regarding the acceptance of the decision of the CGAT by the Department.
• Commissioner of Central Excise, Aurangabad v. Bajaj Auto Ltd., Waluj, Aurangabad Through Its Vice-President (Materials) and others, (2010) 13 SCC 117 – Regarding the invocation of the extended period of limitation.
• Sri Krishna Das v. Town Area Committee, (1990) 3 SCC 645 – Discussed the concept of double taxation.
• Union of India (UOI) and others v. Tata Iron and Steel Company Limited, Jamshedpur, (1976) 2 SCC 123 – Discussed double taxation on the same article.
• Capital One Financial Corporation and Subsidiaries v. Commissioner, 133 TC No.8 (September 21, 2009) – US Tax Court decision on interchange fee as interest.
• Govind Saran Ganga Saran v. Commissioner of Sales Tax, 1985 Supp SCC 205 – Principles of a taxing statute.
• Mafatlal Industries Ltd v. Union of India (1997) 5 SCC 536 – Components of an indirect tax.
• Commissioner of Income Tax v B.C. Srinivasa Setty (1981) 2 SCC 460 – Charging and computation provisions as an integrated code.
• Union of India v. Inter-Continental Consultants & Technocrats (2018) 4 SCC 669 – Valuation of taxable services.
• Commissioner of Service Tax & Ors. v. Bhayana Builders Private Limited & Ors (2018) 3 SCC 782 – Transaction value as the basis for service tax.
• Hyderabad Asbestos Cement Products & Anr. v. Union of India, (2000) 1 SCC 426 – Interpretation of the words “and” and “or”.
• R v Oxfordshire County Council and Others, Ex Parte Sunningwell Parish Council, 1999 (3) All ER 385 – Interpretation of “sports and pastimes”.
• Sahara India (Firm), Lucknow v. Commissioner of Income Tax, Central-& Ors, (2008) 14 SCC 151 – Interpretation of “and” in Section 142 (2A) of the Income Tax Act.
• Cosmic Dye Chemical v. Collector Of Central Excise, (1995) 6 SCC 117 – Regarding the interpretation of “suppression of facts”.
• M/s Uniworth Textiles v. Commissioner of Central Excise, (2013) 9 SCC 753 – Regarding the interpretation of “suppression of facts”.

The Court also discussed several legal provisions, including:

• Section 65(33a) of the Finance Act, 1994
• Section 65(105)(zzzw) of the Finance Act, 1994
• Section 66 of the Finance Act, 1994
• Section 66B of the Finance Act, 1994
• Section 65B(44) of the Finance Act, 1994
• Section 67 of the Finance Act, 1994
• Section 68 of the Finance Act, 1994

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Supreme Court analyzed the authorities as follows:

• Standard Chartered Bank and Ors. v. CST, Mumbai-I and Others, 2015 [40] S.T.R. 104 (Tri. – Del) – The court distinguished this case, stating that the question of interchange fee was not involved.
• M/s ABN Amro Bank NV presently known as Royal Bank of Scotland NV v. Commissioner of Central Excise, Customs and Service Tax, Noida, 2018-TIOL-2811-CESTAT / MANU/CN/0079/2018 – The court found this decision to be per incuriam (incorrect in law) and incompatible with the statutory scheme.
• Commissioner of Central Excise, Vishakhapatnam v. Mehta and Company, (2011) 4 SCC 435 – The court relied on this case to state that the period of limitation begins with the knowledge of the department.
• Association of Leasing & Financial Service Companies v. Union of India and others, (2011) 2 SCC 352 – The court relied on this case to state that service tax is a value-added tax.
• Commissioner of Central Excise, Nagpur v. Ballarpur Industries Ltd., (2007) 8 SCC 89 / [2007] 215 ELT 489 (SC) – The court referred to this case regarding the interpretation of “suppression of facts”.
• Larsen & Toubro Ltd. v. Commissioner of Central Excise, Pune II, (2007) 9 SCC 617 / [211] ELT 513 [SC] – The court referred to this case regarding the interpretation of “suppression of facts”.
• Ferro Alloys Corpn. Ltd. v. A.P. State Electricity Board and another, 1993 Supp (4) SCC 136 – The court used this case to discuss the concept of interest.
• State of Karnataka and others v. Karnataka Pawn Brokers Association and others, (2018) 6 SCC 363 – The court used this case to discuss the concept of interest.
• Union of India and others v. Kaumudini Narayan Dalal and another, (2001) 10 SCC 231 – The court considered this case regarding the acceptance of a High Court judgment by the Revenue.
• Commissioner of Central Excise v. Tata Engineering and Locomotives Co. Ltd., (2003) 11 SCC 193 – The court considered this case regarding the acceptance of a Tribunal’s interpretation by the Revenue.
• Birla Corpn. Ltd. v. Commissioner of Central Excise, (2005) 6 SCC 95 – The court considered this case regarding the acceptance of the Tribunal’s view by the Department.
• Jayaswals NECO Ltd. v. Commissioner of Central Excise, Nagpur, (2007) 13 SCC 807 – The court considered this case regarding the acceptance of the decision of the CGAT by the Department.
• Commissioner of Central Excise, Aurangabad v. Bajaj Auto Ltd., Waluj, Aurangabad Through Its Vice-President (Materials) and others, (2010) 13 SCC 117 – The court used this case to remand the matter back to the Tribunal on the issue of suppression.
• Sri Krishna Das v. Town Area Committee, (1990) 3 SCC 645 – The court used this case to discuss the concept of double taxation.
• Union of India (UOI) and others v. Tata Iron and Steel Company Limited, Jamshedpur, (1976) 2 SCC 123 – The court used this case to discuss double taxation on the same article.
• Capital One Financial Corporation and Subsidiaries v. Commissioner, 133 TC No.8 (September 21, 2009) – The court held this decision was inapplicable as it was rendered under the law relating to income-tax.
• Govind Saran Ganga Saran v. Commissioner of Sales Tax, 1985 Supp SCC 205 – The court used this case to discuss the principles of a taxing statute.
• Mafatlal Industries Ltd v. Union of India (1997) 5 SCC 536 – The court used this case to discuss the components of an indirect tax.
• Commissioner of Income Tax v B.C. Srinivasa Setty (1981) 2 SCC 460 – The court used this case to discuss charging and computation provisions as an integrated code.
• Union of India v. Inter-Continental Consultants & Technocrats (2018) 4 SCC 669 – The court used this case to discuss the valuation of taxable services.
• Commissioner of Service Tax & Ors. v. Bhayana Builders Private Limited & Ors (2018) 3 SCC 782 – The court used this case to discuss that the transaction value is the basis for service tax.
• Hyderabad Asbestos Cement Products & Anr. v. Union of India, (2000) 1 SCC 426 – The court used this case to discuss the interpretation of the words “and” and “or”.
• R v Oxfordshire County Council and Others, Ex Parte Sunningwell Parish Council, 1999 (3) All ER 385 – The court used this case to discuss the interpretation of “sports and pastimes”.
• Sahara India (Firm), Lucknow v. Commissioner of Income Tax, Central-& Ors, (2008) 14 SCC 151 – The court used this case to discuss the interpretation of “and” in Section 142 (2A) of the Income Tax Act.
• Cosmic Dye Chemical v. Collector Of Central Excise, (1995) 6 SCC 117 – The court used this case to discuss the interpretation of “suppression of facts”.
• M/s Uniworth Textiles v. Commissioner of Central Excise, (2013) 9 SCC 753 – The court used this case to discuss the interpretation of “suppression of facts”.

What weighed in the mind of the Court?

The Supreme Court’s decision was influenced by a combination of legal interpretations and practical considerations. The court emphasized the importance of understanding the nature of credit card transactions, the roles of various parties involved, and the specific language of the relevant legal provisions. The court also considered the practical implications of its decision, including the potential for double taxation and the need for a clear and consistent application of the law.

Sentiment Analysis of Reasons

Dissenting Opinion

Justice S. Ravindra Bhat dissented from the majority opinion, arguing that the interchange fee is not a separate taxable service. He reasoned that the issuing bank does not provide any service to the acquiring bank, and the interchange fee is merely a part of the MDR, which is already taxed in the hands of the acquiring bank. He also emphasized that there is no service provider-recipient relationship between the issuing and acquiring banks.

Justice Bhat’s dissent was based on the following main points:

• The service is provided by the acquiring bank to the merchant establishment, and the issuing bank is merely facilitating the transaction.
• The interchange fee is a part of the MDR, and taxing it separately would lead to double taxation.
• There is no service provider-recipient relationship between the issuing and acquiring banks.
• The interpretation of the term “service” should be in the context of what is actually provided and not on the basis of a broad definition.
• The interpretation of the provisions should avoid double taxation.

Flowchart of Credit Card Transaction

Implications

The Supreme Court’s judgment has significant implications for the banking industry and the service tax framework:

• Clarity on Taxability: The judgment clarifies that interchange fees are subject to service tax, but the liability rests with the acquiring bank.
• Impact on Banks: Issuing banks are now required to file returns and disclose interchange fees, even though the tax is paid by the acquiring bank.
• No Double Taxation: The court clarified that there is no double taxation, as the tax is levied on the acquiring bank for the total MDR, which includes the interchange fee.
• Valuation of Service: The judgment emphasizes that the value of service should be based on the service provided, not on the gross amount charged.
• Compliance: Banks will need to adjust their compliance processes to reflect the Supreme Court’s ruling.
• Future Cases: The judgment sets a precedent for similar cases involving service tax on interchange fees.

Conclusion

The Supreme Court’s ruling in the case of Commissioner of GST and Central Excise vs. M/S Citi Bank N.A. provides clarity on the taxability of interchange fees in credit card transactions. While the majority opinion held that the issuing bank provides a service and the interchange fee is taxable, it also clarified that the tax liability rests with the acquiring bank, which pays tax on the total Merchant Discount Rate (MDR). The dissenting opinion highlighted the issue of double taxation and the lack of a service provider-recipient relationship between the issuing and acquiring banks. The judgment has significant implications for the banking industry and sets a precedent for similar cases involving service tax on interchange fees.