Split Verdict on Whether a Service Tax on Card-Issuing Bank Interchange Fees Should Be Imposed : SC

The Supreme Court of India issued a divided decision on the chargeability of Service Tax on Card-Issuing Bank Interchange Fees.

In his decision, Justice Joseph agreed with the Commissioner that the respondent­ Citibank, as issuing bank, was providing service. However, this function was part of a single unified service – transaction settlement – that was offered by both the acquiring and issuing banks (which in some circumstances may well be the same bank).

“I agree with J. Joseph that prior to 01.07.2012, the service of issuing bank fell within Section 65 (33a) (iii); interchange fee cannot be treated as interest, as argued by Citibank; and finally, the case that credit card transaction is a money transaction and thus excluded from the definition of “service” in Section 65B (44) is unacceptable,” Justice Ravindra Bhat said.

Furthermore, Justice Bhat stated that the issue of remand to the tribunal did not arise. The only bone of contention appears to be whether they were independently recording service tax payments in their ledgers as issuing and acquiring banks. However, due to the above stated arguments, this is reduced to a merely academic question. The issue of returns should not occupy this Court’s attention, because the business reality is that every bank is both an issuing and an acquiring bank, and it is no one’s fault that the banks are not filing their service tax reports.

However, Justice KM Joseph granted the Revenue Department’s appeals and referred the case to the Customs, Excise, and Service Tax Appellate Tribunal.

With respect, the judgement of Joseph, J. is primarily concerned with the fact that Citibank retains 2 before crediting the remainder of the money towards transaction settlement; and thus, in the absence of proof that the acquiring bank has paid service tax on the amount including the interchange fee, it is obligated to pay for the specific service provided by it, as a distinct service provider. As stated earlier in this judgement, the issuing bank’s activity or role is unquestionably one of service.

It is, nevertheless, part of the service; without the function of the acquiring bank, it becomes a straight advance or loan transaction. However, the fee is triggered by the supply of service by both the issuing and acquiring banks. In other words, the component of service provided by the issuing bank is just that – a component of a single unified service that is organised in such a way that the issuing bank retains 2, and tax is paid on the whole service in the hands of the purchasing bank. There is no income loss.

The credit card transaction, particularly the inter se transaction between the issuing bank and the acquiring bank, is structured in such a way that the issuing bank retains the component of interchange fee rather than releasing the entire amount in the first instance and claiming the interchange fee later.

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