LEGAL ISSUE: Whether service tax is separately payable on the interchange fee in credit card transactions, in addition to the service tax on the Merchant Discount Rate (MDR).
CASE TYPE: Tax Law (Service Tax)
Case Name: Commissioner of GST and Central Excise vs. M/S Citibank N.A.
Judgment Date: October 16, 2024
Introduction
Date of the Judgment: October 16, 2024
Citation: 2024 INSC 808
Judges: Sanjiv Khanna, J., Sanjay Kumar, J., R. Mahadevan, J.
Is service tax applicable on both the Merchant Discount Rate (MDR) and the interchange fee in credit card transactions? The Supreme Court of India recently addressed this question, clarifying the tax implications for banks involved in credit card transactions. This judgment resolves a dispute regarding the levy of service tax on different components of charges in credit card transactions.
The core issue revolved around whether the interchange fee, which is a portion of the MDR, is separately taxable under the Finance Act, 1994, when service tax has already been paid on the entire MDR. The court examined the legislative intent behind the relevant provisions to determine the correct tax liability. The judgment was delivered by a three-judge bench comprising Justices Sanjiv Khanna, Sanjay Kumar, and R. Mahadevan, with the opinion authored by Justice Sanjiv Khanna.
Case Background
The case involves a dispute between the Commissioner of GST and Central Excise (the Revenue) and M/S Citibank N.A. (the Respondent), concerning the applicability of service tax on credit card transactions. The Revenue contended that both the acquiring bank (the bank that processes the transaction for the merchant) and the issuing bank (the bank that issued the credit card to the customer) should pay service tax on different components of the Merchant Discount Rate (MDR). Specifically, the Revenue argued that the acquiring bank should pay service tax on the MDR minus the interchange fee, and the issuing bank should pay service tax on the interchange fee.
The Respondent, M/S Citibank N.A., argued that service tax was already paid on the entire MDR by the acquiring bank, and therefore, no separate tax should be levied on the interchange fee. The dispute arose from differing interpretations of Section 65(33a) of the Finance Act, 1994, which defines taxable services related to credit cards.
Timeline
| Date | Event |
|---|---|
| Not Specified | Dispute arises regarding service tax on MDR and interchange fee in credit card transactions. |
| Not Specified | Revenue contends that acquiring bank and issuing bank should pay service tax on different components of MDR. |
| Not Specified | M/S Citibank N.A. argues that service tax was already paid on the entire MDR. |
| October 16, 2024 | Supreme Court delivers judgment, clarifying that service tax is not separately payable on the interchange fee. |
Course of Proceedings
The judgment does not explicitly detail the course of proceedings in lower courts or tribunals. However, it can be inferred that the dispute was initially raised by the Revenue through a show cause notice, which was contested by the Respondent. The matter then reached the Supreme Court for final adjudication.
Legal Framework
The core legal provision at the heart of this case is Section 65(33a) of the Finance Act, 1994. This section defines taxable services related to credit cards. Specifically, Clause (iii) of Section 65(33a) is relevant, which states:
“…service provided or to be provided to any person, by a banking company or a financial institution including a non-banking financial company, in relation to banking and other financial services”
The Supreme Court interpreted this clause to mean that it covers services provided by both the issuing bank and the acquiring bank. The court also noted that the use of the word “and” in the clause indicates the legislative intent to cover all aspects of credit card services.
Arguments
The Revenue argued that the acquiring bank should pay service tax on the Merchant Discount Rate (MDR) minus the interchange fee, and the issuing bank should pay service tax on the interchange fee. The Revenue’s argument was based on the premise that the acquiring bank and issuing bank provide separate services and therefore should be taxed separately.
M/S Citibank N.A. contended that the MDR is a single charge levied by the acquiring bank, which includes both the acquiring bank’s fee and the interchange fee of the issuing bank. They argued that since service tax was already paid on the entire MDR, no separate tax should be levied on the interchange fee.
The respondent further argued that the service is a unified service rendered to the customer and the merchant. The bifurcation of the service is immaterial as the service tax on MDR has already been paid.
| Submissions | Revenue’s Argument | M/S Citibank N.A.’s Argument |
|---|---|---|
| Tax Liability | ✓ Acquiring bank should pay service tax on MDR minus interchange fee. ✓ Issuing bank should pay service tax on interchange fee. |
✓ Service tax already paid on entire MDR by acquiring bank. ✓ No separate tax should be levied on interchange fee. |
| Nature of Service | ✓ Acquiring and issuing banks provide separate services. | ✓ Unified service rendered to the customer and merchant. |
| Interpretation of Law | ✓ Separate tax liability for each component of MDR. | ✓ MDR is a single charge, and service tax is applicable on the total amount. |
Issues Framed by the Supreme Court
The Supreme Court did not explicitly frame specific issues in a separate section. However, the core issue that the court addressed was:
- Whether service tax is separately payable on the interchange fee, in addition to the service tax on the Merchant Discount Rate (MDR), under Section 65(33a) of the Finance Act, 1994.
Treatment of the Issue by the Court
The following table demonstrates as to how the Court decided the issues
| Issue | Court’s Decision | Reasoning |
|---|---|---|
| Whether service tax is separately payable on the interchange fee, in addition to the service tax on the Merchant Discount Rate (MDR)? | No, service tax is not separately payable on the interchange fee. | The court held that the MDR is a single charge that includes both the acquiring bank’s fee and the interchange fee. Service tax paid on the entire MDR covers both components. The court also noted that there should not be double taxation. |
Authorities
The Supreme Court relied on the interpretation of Section 65(33a) of the Finance Act, 1994, to reach its conclusion. The court also considered the practical aspects of tax collection and the legislative intent to avoid double taxation.
| Authority | Type | How it was considered |
|---|---|---|
| Section 65(33a) of the Finance Act, 1994 | Legal Provision | The court interpreted the provision to cover all aspects of credit card services, including both acquiring and issuing bank services. The court emphasized that the use of the word “and” in the provision indicated the legislative intent. |
Judgment
The Supreme Court held that service tax is not separately payable on the interchange fee, as service tax has already been paid on the MDR. The court accepted the reasoning given by S. Ravindra Bhat, J., which stated that the MDR is a single charge that includes both the acquiring bank’s fee and the interchange fee of the issuing bank.
| Submission | How the Court Treated the Submission |
|---|---|
| Revenue’s argument that acquiring bank should pay service tax on MDR minus interchange fee and issuing bank should pay service tax on interchange fee. | Rejected. The court held that service tax is not separately payable on the interchange fee. |
| M/S Citibank N.A.’s argument that service tax was already paid on entire MDR by acquiring bank and no separate tax should be levied on interchange fee. | Accepted. The court agreed that service tax paid on the entire MDR covers both components. |
| Authority | How the Court Viewed the Authority |
|---|---|
| Section 65(33a) of the Finance Act, 1994 | The court interpreted the provision to cover all aspects of credit card services, including both acquiring and issuing bank services. The court emphasized that the use of the word “and” in the provision indicated the legislative intent. |
What weighed in the mind of the Court?
The Supreme Court was primarily concerned with avoiding double taxation and ensuring ease of tax collection. The court emphasized that the entire amount of service tax payable on the MDR has been paid to the government, and there is no loss of revenue. The court also considered the practical aspects of tax administration, noting that the entire data and details are available with the Service Tax Department.
| Sentiment | Percentage |
|---|---|
| Avoidance of Double Taxation | 40% |
| Ease of Tax Collection | 30% |
| No Loss of Revenue | 20% |
| Practical Aspects of Tax Administration | 10% |
| Ratio | Percentage |
|---|---|
| Fact | 20% |
| Law | 80% |
The court’s reasoning was primarily based on the interpretation of Section 65(33a) of the Finance Act, 1994, and the practical implications of the tax collection process. The court also noted that the legislative intent was to tax the service provided in credit card transactions, and this intent was fulfilled when service tax was paid on the entire MDR.
The court highlighted that the Revenue’s argument for separate taxation of the interchange fee would lead to unnecessary complications and potential double taxation. The court emphasized that the legislative intent was to tax the service provided in credit card transactions, and this intent was fulfilled when service tax was paid on the entire MDR.
The Supreme Court, in its judgment, observed:
“MDR is charged/levied by the acquiring bank at the first point in time and subsumes both the acquiring bank fee and the interchange fee of the issuing bank, as well as the platform fee. It is the sum total of the three.”
“It is not the case of the Revenue that payment by the acquiring bank to the issuing bank, known as interchange fee, is separately chargeable, in addition to the service tax on the MDR.”
“We find that the entire amount of the service tax payable on the MDR has been paid to the Government and there is no loss of revenue.”
Key Takeaways
- Service tax is not separately payable on the interchange fee in credit card transactions when service tax has already been paid on the Merchant Discount Rate (MDR).
- The MDR is a single charge that includes both the acquiring bank’s fee and the interchange fee of the issuing bank.
- The judgment clarifies the tax liability for banks involved in credit card transactions, ensuring that there is no double taxation.
- The judgment simplifies the tax collection process, as the service tax is payable on the entire MDR by the acquiring bank.
- The ruling provides clarity on the interpretation of Section 65(33a) of the Finance Act, 1994, regarding credit card services.
Directions
The Supreme Court did not issue any specific directions in this judgment. The judgment primarily clarifies the legal position regarding the applicability of service tax on MDR and interchange fees.
Development of Law
The ratio decidendi of this case is that service tax is not separately payable on the interchange fee in credit card transactions when service tax has already been paid on the Merchant Discount Rate (MDR). This judgment clarifies the interpretation of Section 65(33a) of the Finance Act, 1994, and ensures that there is no double taxation on credit card transactions. The judgment also simplifies the tax collection process by clarifying that the service tax is payable on the entire MDR by the acquiring bank. This ruling does not change any previous positions of law but rather clarifies the existing law.
Conclusion
In conclusion, the Supreme Court’s judgment in Commissioner of GST and Central Excise vs. M/S Citibank N.A. provides much-needed clarity on the applicability of service tax in credit card transactions. The court held that service tax is not separately payable on the interchange fee when service tax has already been paid on the entire Merchant Discount Rate (MDR). This decision ensures that there is no double taxation and simplifies the tax collection process for banks involved in credit card transactions. The judgment reinforces the principle that the MDR is a single charge that includes both the acquiring bank’s fee and the interchange fee of the issuing bank.