Interchange fee cannot be treated as interest as argued by the Citi Bank: SC

Appeal filed before the Supreme Court under Section 35L(1)(b) of the Central Excise Act, 1944, with Section 83 of Chapter V of the Finance Act, 1994 against the order dated passed by the Customs, Excise and Service Tax Appellate Tribunal, Chennai for setting aside the Final Orders, by which the Principal Commissioner Service Tax, Chennai, in which the Respondent/Bank found, liable to pay service tax, penalty and interest on the amount of the “interchange fee” received by it. 

Facts  

• An internal audit of group of the Service Tax Commissionerate, Chennai found that the respondent Bank was receiving interchange fee, which formed part of the gross amount billed to the customer. 
• For which, show cause notices were issued to the Respondent, calling upon to show why service tax should not be visited with the interchange fee, besides penalty and interest. The notices covered periods prior to 01.07.2012. 
• Respondent did not perform any service so as to render it eligible 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. According to the bank the interchange fee has already been subjected to service tax.  
• The Tribunal by the impugned order stated that the Respondent is not liable, resulting in setting aside the Order of the Principal Commissioner. 

Findings           

The service provided by the acquiring bank is similar to the composite service provided by GTA. The service element provided by an issuing bank is an integral part which gets subsumed in the single unified service provided by the acquiring bank to a merchant establishment. The principle enunciated by CBEC (in the circular) that even if a composite   service, consists of more than one service, should nevertheless be treated as a single service based on the main or principal service and accordingly classified, is also applicable in the case of service provided by the acquiring bank and issuing bank.   

Section 67 and Rule 5 establishes that the value of the entire service to the recipient is the basis of the service tax. Such being the case, if one accepts that the “gross amount” is the entire MDR – inclusive of the interchange fee, there is no mechanism, whereby the latter, i.e. the interchange fee can be brought into the tax net once again.  

Judgement   

The Hon’ble Supreme Court held that the respondent Citibank, as issuing bank was providing service, as found by the Commissioner. However, this service was a part of a single unified service – of settling transactions – which is provided by both  the  acquiring and issuing bank. 

Also, Interchange fee cannot be treated as interest, as argued by Citibank; and lastly the case that credit card transaction, being a transaction in money and therefore excluded from the definition of “service” in Section 65B (44) is unacceptable. 

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