2024 (10) TMI 1549 - SC - Service Tax

Service tax on Merchant Discount Rate (MDR) and interchange fee - As per revenue Acquiring bank should have paid service tax on the Merchant Discount Rate MDR minus the interchange fee, and the issuing bank should have paid service tax on the interchange fee - use of the word and in conjuncture - HELD THAT - We are of the view that the judgment and reasoning given by S. Ravindra Bhat, J. is acceptable and it is in accordance with the provisions of Clause (iii) of Section 65 (33a) of the Finance Act, 1994 S. Ravindra Bhat, J. rightly observes that as per Section 65 (33a) of the Act, seven distinct heads of credit card services were sought to be taxed, the idea being to broaden the coverage of the species of services into taxation net. Clause (iii) thereof applies to service by any person, which includes service by the issuing bank and the acquiring bank. The use of the word and in conjuncture is indicative of the legislative intent. MDR is charged/levied by the acquiring bank at the first point in time and subsumes both the acquiring bank fee and the interchange fee of the issuing bank, as well as the platform fee. It is the sum total of the three. The aforesaid charge occurs first in point of time and deduction and payment of service tax at this stage is beneficial to the Revenue. It is not the case of the Revenue that payment by the acquiring bank to the issuing bank, known as interchange fee, is separately chargeable, in addition to the service tax on the MDR. We wonder whether the Revenue would have accepted the bifurcation as argued by them in case the acquiring bank and the issuing bank had taken the stand which is now taken by them. While interpreting a tax provision, one must keep in mind that the legislature ennobles the ease of collection of tax and payment of tax. These principles, especially when there is no loss of revenue, can be taken into consideration for interpreting a provision in case of doubt or debate. Entire data and details are available with the Service Tax Department and could have been easily ascertained before issuance of the show cause notice. Interestingly, the show cause notice proceeds on the basis that, regardless of the service tax paid by the acquiring bank on the full MDR, the issuing bank would be liable to pay service tax on the proportion of its share in the MDR, which is the interchange fee. We find that the entire amount of the service tax payable on the MDR has been paid to the Government and there is no loss of revenue. Recording the aforesaid, the Reference and appeals are disposed of, holding that service tax is not separately payable on the interchange fee, as service tax has been paid on the MDR.

Summary

Issues:
Interpretation of tax provisions regarding service tax on Merchant Discount Rate (MDR) and interchange fee.

Analysis:
The main issue in this case was the interpretation of tax provisions related to the payment of service tax on the Merchant Discount Rate (MDR) and interchange fee by acquiring and issuing banks. The Revenue contended that the acquiring bank should pay service tax on MDR minus the interchange fee, while the issuing bank should pay service tax on the interchange fee. The Court, after hearing arguments, referred to the provisions of Clause (iii) of Section 65 (33a) of the Finance Act, 1994. The judgment and reasoning given by S. Ravindra Bhat, J. were deemed acceptable and in accordance with the Act.

The Court agreed with S. Ravindra Bhat, J.'s observation that MDR represents a unified service to the consumer and merchant, encompassing acquiring bank fee, interchange fee, and platform fee. The Court noted that MDR is charged by the acquiring bank first and includes all relevant fees. The Court emphasized that the legislative intent, as indicated by the use of the word 'and,' supports the view that MDR is a composite charge that includes all relevant components. The Court also highlighted that the payment of service tax at the MDR stage is beneficial to the Revenue, and there is no separate service tax payable on the interchange fee.

Regarding a different interpretation by K.M. Joseph, J., the Court noted the concern about double taxation but ultimately held that service tax on the interchange fee is not separately payable as long as service tax has been paid on the MDR. The Court also emphasized that the burden of proving the payment of service tax on the entire MDR lies with the issuing bank. The Court further highlighted that all necessary data and details are available with the Service Tax Department and should have been considered before issuing any show cause notice.

In conclusion, the Court disposed of the reference and appeals, holding that service tax is not separately payable on the interchange fee since service tax has been paid on the MDR. The Court noted that the entire amount of service tax on the MDR has been paid to the Government, ensuring no loss of revenue. Any pending applications were also disposed of as part of the judgment.