Card Issuing Bank Not Liable To Pay Service Tax On Interchange Fee When It Is Already Paid On MDR : Supreme Court

The Three Judge Bench of Justice Sanjiv Khanna, Justice Sanjay Kumar, and Justice R. Mahadevan observed 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”. (Para 9)

The Bench observed so, while answering in negative to the contention of the Revenue Department that the acquiring bank should have paid service tax on the Merchant Discount Rate minus the interchange fee, and the issuing bank should have paid service tax on the interchange fee.

The 3-judge bench was delivering its opinion on a reference arising from a split verdict delivered by a two-judge bench (Justices KM Joseph and S Ravindra Bharat) in 2021.

The 3-judge bench accepted the opinion of Justice Ravindra Bhat saying that it was in accordance with Sec 65(33a) of the Finance Act, 1994.

Justice Ravindra Bhat observed that as per Sec 65(33a) of the Finance Act, 1994, seven distinct heads of credit card services were sought to be taxed, the idea being to broaden the coverage of the species of services into taxation net.

“Clause (iii) thereof applies to service by any person, which includes service by the issuing bank and the acquiring bank. The use of the word 'and' in conjuncture is indicative of the legislative intent”, explained Justice Bhat.

Justice Bhat pointed out that 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 not the Department's case 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, added the Bench.

Thus, the Bench observed that there is one unified service which is rendered to the consumer, that is, the credit card holder, and the merchant, and the subsequent bifurcation in the context and the nature of the transaction, r/w/s 66 and 68 of the Act and Rule 5(1) of the Service Tax Rules, 2006, is immaterial.

“MDR is taxable and service fee is to be taxed. MDR, as a service, has been taxed and also paid”, added the Bench.

The Bench went on to explain that while interpreting a tax provision, one must keep in mind that the legislature ennobles the ease of collection of tax and payment of tax.

The Bench also referred to the opinion expressed by Justice K.M. Joseph, that there should not be double taxation.

However, the Bench observed that the onus to show that payment of service tax on the entire MDR was made by the acquiring bank will be on the issuing bank, that is, the respondent, M/s. Citibank.

“Entire data and details are available with the Service Tax Department and could have been easily ascertained before issuance of the show cause notice”, added the Bench.

Hence, the Supreme Court concluded that service tax is not separately payable on the interchange fee, as service tax has been paid on the MDR.

Counsel for Appellant/ Revenue: ASG N Venkataraman

Counsel for Respondent/ Assessee: Senior Advocates Arvind P. Datar and Tarun Gulati

Case Title: Commissioner of GST & Central Excise vs. CITIBANK

Case Number: Civil Appeal No. 8228 of 2019

Citation : 2024 LiveLaw (SC) 827