The Supreme Court, in the matter of Citibank NA, clarified that service tax is not separately payable on the interchange fee when tax has already been paid on the Merchant Discount Rate ( MDR ).
The bench of Justices Sanjveev Khanna, Sanjay Kumar and R. Mahadevan observed that:
“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.”
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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”.
The core issue with the matter is whether service tax should be separately payable on interchange fee when tax is already paid on the MDR.
The Revenue, as the appellant in the present matter, argued that the acquiring bank should pay service tax on the MDR minus the interchange fee, while the issuing bank should pay service tax on the interchange fee alone.
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However, the apex court found merit in the analysis of Justice S. Ravindra Bhat made in the same case’s judgment in 2021, which held that MDR represents a unified service covering all fees — acquiring bank fees, interchange fees, and platform fees — making it the primary point at which service tax applies.
Justice Bhat’s interpretation relied heavily on the legislative wording in Section 65(33a), which aimed to bring several credit card services under a unified taxation umbrella. He argued that the provision’s structure suggests that service tax on MDR inherently covers the entire transaction.
MDR is imposed first, encompassing the interchange fee as part of a single financial service to both credit cardholders and merchants. This interpretation simplifies tax collection and protects Revenue interests without necessitating further subdivision. Justice Bhat also observed that if this division were permitted, it would likely result in redundancy in tax assessment and collection processes, potentially complicating revenue administration.
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Along with Justice Bhat, the Justice K.M. Joseph, who partially differed on the interpretation of Section 65(33a), concurred that double taxation on the same transaction should be avoided. He noted that if tax has been paid on the MDR by the acquiring bank, no additional tax should apply to the interchange fee, which is a portion of MDR.
The Supreme Court, supporting this view, commented that the Revenue’s interpretation could not justify separate taxation. Moreover, the Court, in the last aspect highlighted that:
“the 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.”
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Consequently, the Court concluded that taxing the interchange fee separately is unwarranted when the MDR has already been taxed, avoiding redundancy in taxation. It noted 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.
Therefore, the bench ruled in favour of Citibank, affirming that service tax already paid on the full MDR suffices, dismissing the Revenue’s contentions, and disposing the matter for pending appeals and applications.
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