Commissioner of GST and Central Excise v Citibank NA (Supreme Court of India)

In an important decision, the Supreme Court of India has addressed service tax obligations regarding Merchant Discount Rate (MDR) and interchange fees in the case of Commissioner of GST and Central Excise v Citibank NA The court upheld the position that service tax is payable only on the MDR and not separately on the interchange fees charged between the acquiring and issuing banks.

The case arose from the Ministry of Finance’s assertion that the acquiring bank and the issuing bank had separate service tax obligations: the acquiring bank was supposed to pay service tax on the MDR after deduction interchange fees, while the issuing bank had to pay a service tax on the MDR. the interchange fees it charges. This assertion was disputed by Citibank, leading to this appeal.

Justice S. Ravindra Bhat, who delivered the judgment, pointed out that the interpretation of Section 65(33a) of the Finance Act for 1994 was essential to understand the tax implications. This section encompasses various services rendered by acquiring and issuing banks in connection with credit card transactions. The court noted that the MDR encompasses the fees charged by both banks, implying that service tax should be levied only once on this total amount.

Justice Bhat pointed out that the fees charged by the acquiring bank – MDR – encompass all elements, including its fees and interchange fees. The judgment indicates that this approach is not only consistent with the intention of the legislature, but also benefits the tax authorities by simplifying tax collection. He said: “The MDR is charged/levied by the acquiring bank at the first time and encompasses both the acquiring bank’s fees and the issuing bank’s interchange fees. »

Additionally, the court emphasized that there was no evidence from the Department of Finance to suggest that interchange fees should be imposed separately. The judge also referred to the principle that tax legislation should facilitate collection and payment. This is particularly relevant when there is no actual loss of revenue, which was the case here since the full service tax on the MDR had already been paid to the government.

The court also considered the opinions of other judges regarding the need to avoid double taxation. Even though Justice KM Joseph expressed a different interpretation of the same section, he agreed with the need to avoid double taxation. He pointed out that if service tax had been paid on the entire MDR, the onus would be on the issuing bank to prove such payment.

The judgment found that the claims of the Ministry of Finance were without merit, as the acquiring bank had fulfilled its obligations by paying service tax on the entire MDR amount. The court determined that there was no shortfall, thereby precluding any additional service tax payable to Citibank regarding interchange fees.

In summary, the Supreme Court ruled on the appeals and clarified that the the interchange fee does not attract a separate service tax as the service tax on the MDR had already been duly paid. This decision reinforces the principle that tax regulations should avoid imposing unnecessary burdens on financial institutions while ensuring compliance with legal requirements.

The implications of this ruling could have a significant impact on how banks structure their respective fee arrangements and tax obligations, providing clarity and potentially reducing the administrative burden associated with such transactions.

The pending applications in this case were processed in light of the decision, providing a definitive interpretation of the tax obligations of banks involved in credit card transactions.

FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER

We have heard at some length from the learned counsel appearing for the parties.

2. The argument of the Revenue is that the acquiring bank should have paid service tax on the merchant discount rate.¹ minus the interchange fee, and the issuing bank would have had to pay the service tax on the interchange fee.

3. We are of the opinion that the judgment and reasoning given by Justice S. Ravindra Bhat are acceptable and in accordance with the provisions of clause (iii) of section 65 (33a) of the Finance Act, 1994.².

4. Justice Ravindra Bhat rightly observes that as per Section 65(33a) of the Act, seven distinct categories of credit card services were to be taxed, the idea being to widen the coverage of these types net tax services. 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 the context indicates the intention of the legislator. The MDR is charged/collected by the acquiring bank from the first moment and includes both the acquiring bank’s fees and the issuing bank’s interchange fees, as well as the platform fees. It is the sum total of all three. The above-mentioned charges arise first in time and deduction and payment of service tax at this stage is revenue-beneficial. This is not the case with income where the payment by the acquiring bank to the issuing bank, known as interchange fee, is chargeable separately, in addition to the service tax on the MDR.

5. To support this conclusion, Justice S. Ravindra Bhat said that in reality, there is a unified service rendered to the consumer, i.e., the credit card holder and the merchant. The subsequent bifurcation in the context and nature of the transaction, read with sections 66 and 68 of the Act and Service Tax Rule 5(1) (determination of value), 2006, does not matter since the MDR is taxable and the service charge must be imposed. MDR, as a service, was taxed and also paid for.

6. We wonder whether the Ministry of Finance would have accepted the bifurcation it is proposing if the acquiring bank and the issuing bank had adopted the position they are adopting today. When interpreting a tax provision, it must be borne in mind that the legislator ennobles the ease of collection and payment of tax. These principles, particularly when there is no loss of income, can be taken into consideration to interpret a provision in the event of doubt or debate.

7. It is pertinent to note that even the view expressed by Justice KM Joseph, while adopting a different interpretation of Section 65(33a) of the Act, continues thus: see in paragraphs 86 et seq. of the judgment, that there should be no double taxation. However, it was subsequently observed that the onus of showing that payment of service tax on the entire MDR was made by the acquiring bank will be on the issuing bank i.e. the respondent , M/s. Citibank NA

8. We would like, on the last aspect, to observe that the entire data and details are available with the Tax Department and could have been easily verified before issuing the show cause notice. Interestingly, the show cause notice is based on the premise that irrespective of service tax paid by the acquiring bank on the entire MDR, the The issuing bank would be required to pay a service tax on the proportion of its share in the MDR, which is the interchange fee.