CESTAT Mumbai Says No Separate Tax On Interchange Fee If Tax Paid On Entire MDR, Grants HDFC Bank Relief

The Mumbai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held on 17 August that service tax cannot be separately demanded on the interchange fee earned by a credit card issuing bank when the bank has already paid service tax on the entire Merchant Discount Rate (MDR).

A Bench comprising Judicial Member S.K. Mohanty and Technical Member M.M. Parthiban set aside the service tax demands raised against HDFC Bank Ltd., along with interest and penalties, relying on the Supreme Court's ruling in Commissioner of GST and Central Excise v. Citibank N.A. The Tribunal observed:

“In view of the foregoing and on the basis of the order passed by the Hon'ble Supreme Court in the case of Citi Bank N.S., (supra), by holding that service tax is not separately payable on the interchange fee, as service tax has been paid on the entire MDR, we find that the issue under dispute in the present case is no more res integra.”

The Department had raised service tax demands against HDFC Bank for interchange fees earned from credit card transactions for different periods between September 2006 and March 2016. It contended that the fees attracted service tax as consideration for services connected with credit cards. The Tribunal noted that the interchange fee represents the portion of the fee that goes to the bank that issued the credit card. In a card transaction, the acquiring bank collects the MDR and pays a portion of it to the issuing bank as interchange fee.

HDFC Bank argued that the Supreme Court had already settled the issue in the Citibank case. It had held that banks need not pay service tax separately on interchange fees when they have already paid service tax on the entire MDR.

The Tribunal Bench followed the top court's ruling and held that the Department could not sustain the service tax demands. It consequently set aside the demands along with interest and penalties.

Accordingly, the CESTAT allowed all five appeals filed by HDFC Bank with consequential relief as per law.

Appearances: Shri V. Raghuraman along with Shri Abhishek A. Rastogi, Ms. Diksha Pandey and Ms. Meenal Songire, Advocates for HDFC Bank; Shri C.S. Pavan, Authorised Representative for the Revenue.