Supreme Court's split verdict on credit card's service tax

Supreme Court's split verdict on credit card's service tax

Justices K M Joseph and S Ravindra Bhat differ on interchange fee

A division bench of the Supreme Court has taken a divergent view on whether the card-issuing bank charging an interchange fee for credit card transactions, should be subjected to service tax for the same.

Justice K M Joseph felt that since the interchange fee was received for the service rendered by the card-issuing banks, it was liable to be subjected to service tax.

On the other hand, though Justice S. Ravindra Bhat agreed that the issuing bank was providing service, he said the services rendered by it and the acquiring bank could not be segregated and should be seen as a single unified service.

Justice Bhat noted, "If it is the aggregate amount (of which the interchange fee, is one part, and the acquiring bank's amount, another part), the levy is satisfied. In such circumstances, the segregation of the whole Merchant Discount Rate (MDR) (which includes the interchange fee) by slicing it into two - the interchange fee and the acquiring bank's charge, complicates the issue.

While Justice Joseph allowed the appeals filed by the Revenue Department and remanded the matter back to the Customs, Excise and Service Tax Appellate Tribunal, South Zonal Bench, Chennai, Justice Bhat rejected the appeals and found no reason to remand the matter back.

The matter pertained to Citibank, registered with the Service Tax Commissionerate (STC), Chennai. The bank was found to be receiving interchange fees without paying service tax for the same. Over time, four show-cause notices were issued to it for periods prior to 2012 and thereafter.

Citibank stated that it was not performing any service and hence was not liable to pay service tax on the interchange fees. It was merely the interest that was earned by the bank in the credit card transaction of the customer. It argued that the interchange fee had been subjected to service tax in the hands of the acquiring bank and if the card-issuing bank were to pay service tax again, it would amount to double taxation.

The Principal Commissioner, Service Tax, found that Citibank was rendering service, but no evidence showed that the acquiring bank was paying tax for the amount earned by Citibank.

Thus, relying on a previous judgment, the Tribunal set aside the order of the Commissioner.

The credit card transaction has a simple mechanism. The transaction data is transmitted for the merchant establishment through the acquiring bank and the card network to the issuing bank. The latter approves the purchase and it goes back through the card network to the acquiring bank. From there it is forwarded to the merchant establishment. The transaction goes through and the receipt is signed.

For instance, in a transaction of Rs.100, the card association (Visa, MasterCard, etc.) debits the account of Rs.98 from the issuing bank and remits it to the acquiring bank. Here, Rs.2, which remains un-debited in the account of the issuing bank, is the interchange fee. The acquiring bank remits Rs.94.30 to the merchant and retains Rs.3 for its service. Now, 70-paisa is paid as service tax on the total MDR of Rs.5.

In this way, the credit card holder remits the gross consideration (Rs.100) to the issuing bank on receipt of a credit card statement and in case of debit card transaction; it is directly debited from the customer's account at the issuing bank.