Case Law Details
Commissioner of GST And Central Excise Vs Citibank N.A. (Supreme Court of India)
In a significant ruling, the Supreme Court of India addressed the service tax obligations concerning the Merchant Discount Rate (MDR) and interchange fees in the case of Commissioner of GST and Central Excise vs. Citibank N.A. The court upheld the position that service tax is only payable on the MDR and not separately on the interchange fee charged between the acquiring and issuing banks.
The case originated from the contention of the Revenue that both the acquiring bank and issuing bank had distinct service tax obligations: the acquiring bank was expected to pay service tax on the MDR after deducting the interchange fee, while the issuing bank should pay service tax on the interchange fee it receives. This assertion was challenged by Citibank, leading to the present appeal.
Justice S. Ravindra Bhat, who delivered the judgment, highlighted that the interpretation of Section 65(33a) of the Finance Act, 1994, was essential for understanding the tax implications. This section encompasses various services rendered by both acquiring and issuing banks in the context of credit card transactions. The court noted that the MDR encompasses fees charged by both banks, implying that service tax should only be levied once on this total amount.
Justice Bhat emphasized that the charge made by the acquiring bank—MDR—subsumes all components, including both its fee and the interchange fee. The judgment indicates that this approach not only aligns with legislative intent but also benefits the Revenue by simplifying tax collection. He stated, “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.”
Moreover, the court pointed out that there was no evidence from the Revenue to suggest that the interchange fee should be taxed separately. The judge also referenced the principle that tax legislation should facilitate ease of collection and payment. This is particularly relevant when there is no actual loss of revenue, which was the case here as the full service tax on MDR had already been remitted to the government.
The court further considered opinions from other judges regarding the need to avoid double taxation. While Justice K.M. Joseph expressed a different interpretation of the same section, he concurred with the need to prevent duplicate taxation. He noted that if the service tax had been paid on the entire MDR, the onus would be on the issuing bank to prove this payment.
The judgment concluded that the claims made by the Revenue lacked basis, as the acquiring bank had fulfilled its obligations by paying service tax on the full MDR amount. The court determined that there was no revenue shortfall, thus ruling out any additional service tax liability for Citibank concerning the interchange fee.
In summary, the Supreme Court disposed of the appeals and clarified that the interchange fee does not attract separate service tax liability, as the service tax on the MDR had already been duly paid. This ruling reinforces the principle that tax regulations should avoid imposing unnecessary burdens on financial institutions while ensuring compliance with statutory requirements.
The implications of this ruling may have a significant impact on how banks structure their fee arrangements and their respective tax liabilities, providing clarity and potentially reducing the administrative burden in such transactions.
Pending applications in this matter have been disposed of in light of the ruling, providing a definitive interpretation of the tax obligations for banks involved in credit card transactions.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
We have heard the learned counsel appearing for the parties at some length.
2. The contention of the Revenue is that the acquiring bank should have paid service tax on the Merchant Discount Rate1 minus the interchange fee, and the issuing bank should have paid service tax on the interchange fee.
3. We are of the view that the judgment and reasoning given by S. Ravindra Bhat, J. is acceptable and it is in accordance with the provisions of Clause (iii) of Section 65 (33a) of the Finance Act, 19942.
4. Ravindra Bhat, J. rightly observes that as per Section 65(33a) of the Act, 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. 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. The aforesaid charge occurs first in point of time and deduction and payment of service tax at this stage is beneficial to the Revenue. 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.
5. To support the conclusion, S. Ravindra Bhat, J. has said that, in reality, there is one unified service which is rendered to the consumer, that is, the credit card holder, and the merchant. The subsequent bifurcation in the context and the nature of the transaction, read with Sections 66 and 68 of the Act and Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, is immaterial as MDR is taxable and service fee is to be taxed. MDR, as a service, has been taxed and also paid.
6. We wonder whether the Revenue would have accepted the bifurcation as argued by them in case the acquiring bank and the issuing bank had taken the stand which is now taken by them. While interpreting a tax provision, one must keep in mind that the legislature ennobles the ease of collection of tax and payment of tax. These principles, especially when there is no loss of revenue, can be taken into consideration for interpreting a provision in case of doubt or debate.
7. It is pertinent to note that even the opinion expressed by K.M. Joseph, J., while adopting a different interpretation of Section 65 (33a) of the Act, goes on to hold, vide paragraphs 86 onwards of the judgment, that there should not be double taxation. However, it has been observed thereafter 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 N.A.
8. We would, on the last aspect, observe that the entire data and details are available with the Service Tax Department and could have been easily ascertained before issuance of the show cause notice. Interestingly, the show cause notice proceeds on the basis that, regardless of the service tax paid by the acquiring bank on the full MDR, the issuing bank would be liable to pay service tax on the proportion of its share in the MDR, which is the interchange fee.
9. 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.
10. Recording the aforesaid, the Reference and appeals are disposed of, holding that service tax is not separately payable on the interchange fee, as service tax has been paid on the MDR.
11. Pending application(s), if any, shall stand disposed of.
Notes:
1 For short, “MDR”.
2 For short, “The Act.”
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