1. Dispute over service tax liability on interchange fees received by an issuing bank in credit card transactions under the Finance Act, 1994. (Para 2 , 3 , 27 )
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2021 Supreme(SC) 810
SUPREME COURT OF INDIA
(From the Customs Excise and Service Tax Apellate Tribunal, South Zonal Bench, Chennai)
S. RAVINDRA BHAT, K.M. JOSEPH, JJ.
Commissioner of GST And Central Excise - Appellant
Versus
M/s Citi Bank N.A. - Respondent
Civil Appeal No(S). 8228 of 2019, Civil Appeal No.89 of 2021
Decided on : 09-12-2021
Important Points
The Court held that while issuing banks provide taxable services under the Finance Act, 1994, taxing interchange fees separately when the acquiring bank has already paid service tax on the gross Merchant Discount Rate (MDR) would constitute impermissible double taxation.
Subject
Tax Law - Service Tax
Act Referred
CENTRAL EXCISE ACT: S.11(a), S.35(l)(1)(b)
CENTRAL EXCISE RULES: R.56(a)
COMMONS REGISTRATION ACT: S.22(1)
CONSTITUTION OF INDIA: Art.268(a), Art.366(29)(a)
FINANCE ACT: S.65(105)(z)(z)(z)(u), S.73, S.66, S.67, S.83
INCOME TAX ACT: S.142(2)(a)
SERVICE TAX RULES: R.4, R.7
CENTRAL EXCISE RULES: R.56(a)
COMMONS REGISTRATION ACT: S.22(1)
CONSTITUTION OF INDIA: Art.268(a), Art.366(29)(a)
FINANCE ACT: S.65(105)(z)(z)(z)(u), S.73, S.66, S.67, S.83
INCOME TAX ACT: S.142(2)(a)
SERVICE TAX RULES: R.4, R.7
Headnote
Constitution of India, 1950 – Article 366 – Central Excise Act, 1944 – Section 35L(1)(b) – Finance Act, 1994 – Section 83, 65(10), 65(12), 69, 70, 73, 65B(44), 65(33a), 67 – Agricultural income means agricultural income – Payment of service tax – Charge of service tax – Compensation – Taxable service – Registration – Furnishing of returns – Payment of Service Tax – Valuation of taxable services for charging Service Tax – Acquiring bank – Business auxiliary services – Appeals are maintained under Section 35L(1)(b) of Central Excise Act, 1944, read with Section 83 of Chapter V of Finance Act, 1994 – They are directed against Orders, passed by Customs, Excise and Service Tax Appellate Tribunal, South Zonal Bench, Chennai – By impugned Orders, Tribunal set aside Final Orders, by which Principal Commissioner Service Tax, Chennai, found Respondent/Bank, liable to pay service tax, penalty and interest on amount of “interchange fee” received by it – Held, Conclusion that mere nonpayment of duties is equivalent to collusion or willful misstatement or suppression of facts is, in our opinion, untenable If that were to be true, court fail to understand which form of nonpayment would amount to ordinary default? Construing mere nonpayment as any of three categories contemplated by proviso would leave no situation for which, a limitation period of six months may apply – In our opinion, main body of Section, in fact, contemplates ordinary default in payment of duties and leaves cases of collusion or willful misstatement or suppression of facts, a smaller, specific and more serious niche, to proviso – Therefore, with regards to revenue’s allegation of wilful suppression, Court find no merit given that this was not allegation or scope of Show-Cause Notices issued – Moreover, representations sent by Indian Bank Association to Joint Secretary, TRU, Central Board of Excise and Customs confirm that there was a lack of clarity with regards to method of payment of this tax, for which there was an ongoing dialogue between banking institutions and Central Government, negating any claims of “wilful suppression”. One cannot also be oblivious of fact that position of law, was in a state of flux, at relevant period – Hence, and in view of reasons given above, present case does not warrant remand to Tribunal, and this dispute should, in my opinion, stand finally concluded at this stage – Appeals dismissed.
Legal Category Hierarchy
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taxation
-
indirect tax
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service tax
- banking and financial services
- valuation and payment
- limitation and procedure
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service tax
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indirect tax
Advocates appeared:
For the Appellant(s) :Mukesh Kumar Maroria, B. V. Balaram Das, Advocates
For the Respondent(s):Mahfooz Ahsan Nazki, Advocates
For the Appellant(s) :Mukesh Kumar Maroria, B. V. Balaram Das, Advocates
For the Respondent(s):Mahfooz Ahsan Nazki, Advocates
Table of Contents
2. Revenue claims interchange fees are taxable consideration for services; Respondent argues they are interest, a transaction in money, or already taxed via MDR. (Para 3 , 29 , 39 , 41 )
3. The court found interchange fees are not interest or mere money transactions but consideration for distinct services provided by the issuing bank. (Para 54 , 55 , 57 , 65 , 69 , 73 )
4. Interchange fees are taxable services, but taxing them separately if already included in the MDR paid by the acquiring bank constitutes impermissible double taxation. (Para 92 , 109 )
5. Appeals allowed; matter remanded to the Tribunal to determine wilful suppression and verify if the acquiring bank discharged the tax liability. (Para 111 )
6. Is interchange fee considered interest or a transaction in money exempt from service tax?
No. It is not interest as no debtor-creditor relationship exists. It is not a mere transaction in money because the issuing bank performs indispensable activities, including transaction approval and risk-taking, making the fee consideration for a service. (Para 65 , 69 , 73 )
7. Does the payment of service tax by an acquiring bank on the Merchant Discount Rate (MDR) exempt the issuing bank from tax on interchange fees?
Yes, if the acquiring bank has already discharged the tax liability on the gross MDR, which includes the interchange fee, taxing the issuing bank again on that same amount would constitute impermissible double taxation. (Para 92 , 109 )
8. Are the services provided by an issuing bank and an acquiring bank in a credit card transaction distinct or unified?
The majority held they are separate services with different natures and values. The dissent argued they form a single unified service where the issuing bank's role is subsumed into the acquiring bank's service. (Para 54 , 55 , 27 )
9. When can the extended period of limitation be invoked for service tax demands?
The extended period under Section 73 is invocable only upon proof of wilful suppression, fraud, collusion, or wilful misstatement with intent to evade tax, not mere inaction or failure to declare. (Para 102 , 109 )
JUDGMENT :
K.M. JOSEPH, J.
1. These Appeals are maintained under Section 35L(1)(b) of the Central Excise Act, 1944, read with Section 83 of Chapter V of the Finance Act, 1994. They are directed against the Orders dated 16.11.2018 and 20.11.2019, passed by the Customs, Excise and Service Tax Appellate Tribunal, South Zonal Bench, Chennai (hereinafter referred to as ‘the Tribunal’, for short).
2. By the impugned Orders, the Tribunal set aside the Final Orders, by which the Principal Commissioner Service Tax, Chennai, found the Respondent/Bank, liable to pay service tax, penalty and interest on the amount of the “interchange fee” received by it.
3. The Respondent is a Bank. It is registered with the Service Tax Commissionerate Chennai, under the category “Banking and other financial services, business auxiliary services, charge card and other card payment services, manpower recruitment or supply services, among other services”. An internal audit of group of the Service Tax Commissionerate, Chennai found that it was receiving interchange fee, which formed part of the gross amount billed to the customer. Show Cause Notices were issued to the Respondent, calling upon it to show why it should not be visited with service tax on the interchange fee, besides penalty and interest. The notices covered periods prior to 01.07.2012 and also thereafter. The Respondent filed its explanation to which we shall refer to hereinafter. In short, its case is that the Respondent is not performing any service so as to render it exigible to service tax on the interchange service. The interchange fee is in the nature of interest it has earned in the credit card transaction with the customer. It is also contended that, in fact, the interchange fee has already been subjected to service tax in the hands of the acquiring bank. Therefore, it was pointed out that if the Respondent is again visited with service tax, it would be plainly impermissible as it would amount to double taxation. It was rejecting the contentions of the Respondent that the Principal Commissioner found that the Respondent did perform services and it, therefore, earned the interchange fee. It is further found that there is no evidence to show that the acquiring bank had paid tax on the amount which was earned as interchange fee by the Respondent. The case of interchange fee being interest and a ‘transaction in money’ was rejected.
4. The Tribunal, on the other hand, by the impugned Order, has essentially purported to place reliance on the Order passed by the Tribunal in M/s ABN Amro Bank v. Commissioner of Central Excise and Customs dated 23.07.2018 and found that the Respondent is not liable, resulting in the Order of the Principal Commissioner being set aside.
5. Heard Shri Balbir Singh, learned Additional Solicitor General, on behalf of the Appellant and Shri Arvind P. Datar, learned Senior Counsel, appearing on behalf of the Respondent.
6. Service Tax had its humble beginnings with the passing of the Finance Act, 1994 with only three taxable services. Over the years, a large number of taxable services came to be added by various Finance Acts. Before I refer to the taxable service in question, I must note the statutory framework.
THE STATUTORY FRAMEWORK FOR SERVICE TAX
7. The statutory framework of the service tax in India is traceable to the Chapter V and Chapter VA of the Finance Act, 1994 (hereinafter referred to as ‘the Act’, for short). Section 64(3) provides that the Chapter V, shall apply to taxable services provided on or after the commencement of the Chapter. The appointed day is 01.07.1994. Section 65 is the definition clause. Section 65, after being substituted by Finance Act, 2003 w.e.f. 14.05.2003, inter alia, provides for the following definitions, which I may notice. Section 65(7) defines “assessee” as meaning a person liable to pay the service tax and includes his agent.
8. Section 65(105) defines “taxable service”. Credit Card services was taxed as a part of banking and fin
