There should be no double taxation upon issuing bank, once service tax liability stood discharged by acquiring bank on interchange fee: SC

Read Judgment: Commissioner of GST & Central Excise vs. M/s Citi Bank

Pankaj Bajpai

New Delhi, December 13, 2021: The Supreme Court has ruled that the concept of value added tax does not mean that if tax is already paid by acquiring bank, on the amount of interchange fee, for the service provided by the issuing bank, then issuing bank should be called upon to pay service tax all over again.

A Division Bench of Justice K.M. Joseph and Justice S.Ravindra Bhat observed that there should be no double taxation upon issuing bank, once service tax liability stood discharged by acquiring bank on interchange fee.  

Going by the background of the case, a credit card transaction involves five parties, namely the issuing bank, the credit card holders, the acquiring bank, the merchant establishment & the card network. Now, the Revenue Department was of the view that these would fall within the ambit of Credit Card Services and hence service tax is payable. 

Accordingly, four show cause notices were issued to Citi Bank (Respondent-Issuing bank) covering the period from October 2007 to March 2015 alleging that service tax liability is required to be discharged on these fees under taxing entry for “Credit Card Services” amounting to Rs.1,64,28,86,059/- with interest thereon as also proposing imposition of penalties under various provisions of law. All these notices/ statements of demand came to be adjudicated by a common order, wherein the proposed tax liabilities were confirmed with interest thereon, and penalties were also imposed. 

On appeal, the CESTAT noted that in the case of ABN Amro Bank v. Collector of Central Excise ABN Amro dated September 23, 2018, it was categorically held that the amount received by the appellant does not qualify as credit card services that when acquiring bank has discharged service tax liability on the entire amount, no service tax is payable by the appellant and that the amount offered by the appellant does not qualify as credit. Hence, present appeal. 

After considering the arguments, the Apex Court noted that the Respondent, as issuing bank, was providing service, as found by the Commissioner and for the period prior to July 1, 2012, the service of the respondent, as issuing bank, squarely fell within Section 65(33a)(iii) of the Finance Act, 1994. 

The respondent, as issuing bank, was liable to pay service tax, u/s 68(1), being the service provider. Being liable to pay the tax u/s 68(1), it was also liable to file the Return including the amount of interchange fee, added the Court. 

Speaking for the Bench, Justice Joseph observed that the acquiring bank was obliged to value the service, which it provided or agreed to provide. The measure of tax, which is found in Section 67(1)(i), is entirely related to the service that the acquiring bank provided and agreed to provide. 

Likewise, the value of the service provided by the issuing bank and which would be the value of the service, for the purpose of Section 67(1), is relatable to the services it provided. Therefore, the respondent bank was liable to include the interchange fee and file Return and pay the tax on the same, added the Bench.

Justice Joseph said that while the service tax may be a value added tax, all that it can mean is that, for separate services, tax is payable on each separate service.

The Top Court therefore concluded that CESTAT has not considered whether there was suppression within the meaning of Section 73 of the Act by the respondent in relation to part of the period covered by Show Cause Notice, and hence, remanded the matter clarifying that the respondent should be provided an opportunity to establish that the acquiring bank had discharged the tax liability in regard to interchange fee.

However, there was a difference of opinion by Justice Ravindra Bhat, whereby it was opined that service provided by Citibank was a part of a single unified service of settling transactions which is provided by both the acquiring and issuing bank (which in some circumstances may well be the same bank).

Justice Bhat was also of the opinion that the case that credit card transaction, being a transaction in money, is excluded from the definition of “service” in Section 65B (44), is unacceptable.

Moreover, Justice Bhat opined that wherein service tax, by way of business convenience, is collected from/remitted by the acquiring bank on the value (whole Merchant Discount Rate (MDR) which includes the interchange fee that is retained by the issuing bank) taxable for the single service rendered by both the acquiring and issuing bank, Citibank cannot be called upon to pay the service tax again as this would result in double taxation.