2021 (12) TMI 483 - SC - Service Tax

Levy of Service tax alongwith interest and penalty - interchange fee - notices covered periods prior to 01.07.2012 and also thereafter - double taxation - evidence to show that the acquiring bank had paid tax on the amount which was earned as interchange fee by the Respondent or not - case of interchange fee being interest and a transaction in money was rejected - inter se provision of service between the parties or not - deliberate intention on the part of the assessee to not disclose correct information or not - time limitation. Split Judgement Justice K.M. JOSEPH allowed the revenue appeal based on detailed discussion. Justice S. RAVINDRA BHAT Dismissed the revenue appeal based on detailed discussion.

Summary

Issues Involved:
1. Liability of the issuing bank to pay service tax on interchange fee.
2. Double taxation and whether service tax on interchange fee has already been paid by the acquiring bank.
3. Interpretation of Section 65(33a) of the Finance Act, 1994.
4. Applicability of extended period of limitation under Section 73 of the Finance Act, 1994.
5. Whether interchange fee constitutes interest and is thus not taxable.
6. Whether credit card transactions constitute a transaction in money and are therefore excluded from the definition of service.
7. Impact of not challenging the decision in ABN Amro Bank NV v. Commissioner of Central Excise, Customs and Service Tax, Noida.
8. Alleged deviation from the Show Cause Notice by the Commissioner.
9. Whether the service provided by the issuing bank and acquiring bank should be considered as a single unified service.
10. Whether the issuing bank should file separate returns for the interchange fee.

Detailed Analysis:

1. Liability of the issuing bank to pay service tax on interchange fee:
The Supreme Court found that the issuing bank (respondent) is liable to pay service tax on the interchange fee earned as part of the credit card transaction. The Court held that the issuing bank performs services in relation to the settlement of amounts transacted through the credit card, which falls under Section 65(33a)(iii) of the Finance Act, 1994. The interchange fee is the consideration for this service, and thus, it is subject to service tax.

2. Double taxation and whether service tax on interchange fee has already been paid by the acquiring bank:
The Court noted that if the acquiring bank has already paid service tax on the entire Merchant Discount Rate (MDR), which includes the interchange fee, then requiring the issuing bank to pay service tax on the interchange fee again would amount to double taxation. The Court remanded the matter to the Tribunal to provide an opportunity to the respondent to establish that the acquiring bank had indeed discharged the tax liability on the interchange fee.

3. Interpretation of Section 65(33a) of the Finance Act, 1994:
The Court interpreted Section 65(33a) to include services provided by any person, including issuing and acquiring banks, in relation to the settlement of any amount transacted through the card. The issuing bank's role in approving transactions and maintaining funds for settlement constitutes a service under this provision. The Court rejected the argument that the interchange fee is akin to interest and thus not taxable.

4. Applicability of extended period of limitation under Section 73 of the Finance Act, 1994:
The Court remanded the matter to the Tribunal to determine whether the extended period of limitation under Section 73 was applicable. The Commissioner had found suppression of facts by the respondent, but the Tribunal had not addressed this issue. The Tribunal was directed to consider whether there was wilful suppression by the respondent for the period covered by the Show Cause Notice dated 24.04.2013.

5. Whether interchange fee constitutes interest and is thus not taxable:
The Court rejected the argument that the interchange fee is in the nature of interest. It held that the interchange fee is consideration for the service provided by the issuing bank in relation to the settlement of credit card transactions, and not interest on a loan.

6. Whether credit card transactions constitute a transaction in money and are therefore excluded from the definition of service:
The Court held that credit card transactions do not constitute a mere transaction in money. The services provided by the issuing bank in approving transactions and maintaining funds for settlement are activities in relation to the use of money, which are not excluded from the definition of service under Section 65B(44) of the Finance Act, 1994.

7. Impact of not challenging the decision in ABN Amro Bank NV v. Commissioner of Central Excise, Customs and Service Tax, Noida:
The Court declined to dismiss the appeal solely on the ground that no appeal was carried against the decision in ABN Amro Bank NV. It found that the view taken in ABN Amro Bank NV was incompatible with the statutory scheme under the Finance Act, 1994.

8. Alleged deviation from the Show Cause Notice by the Commissioner:
The Court found that the respondent had defended the Show Cause Notices on the basis that it did not render any service to the acquiring bank. However, the Commissioner had found that the service was provided to the card association. The Court held that this deviation did not prejudice the respondent as the facts were not in dispute and the service provided by the issuing bank was clear.

9. Whether the service provided by the issuing bank and acquiring bank should be considered as a single unified service:
The Court held that the services provided by the issuing bank and acquiring bank are distinct and separate. The issuing bank provides a service in relation to the settlement of amounts transacted through the credit card, which is different from the service provided by the acquiring bank.

10. Whether the issuing bank should file separate returns for the interchange fee:
The Court held that the issuing bank, being liable to pay service tax on the interchange fee, should file returns including the amount of interchange fee and pay the tax on the same.

Conclusion:
The Supreme Court allowed the appeals and remanded the matter to the Tribunal to consider whether there was suppression by the respondent and to provide an opportunity to the respondent to establish that the acquiring bank had discharged the tax liability on the interchange fee. The Court held that the issuing bank is liable to pay service tax on the interchange fee, but if the acquiring bank has already paid the tax on the entire MDR, including the interchange fee, then requiring the issuing bank to pay the tax again would amount to double taxation.