COMMISSIONER OF GST AND CENTRAL EXCISE v. M/s CITI BANK N. A.

424 SUPREME COURT [2021]REPORTS 13 S.C.R. 424 [2021] 13 S.C.R.

(Civil Appeal No. 8228 of 2019)

COMMISSIONER OF GST AND CENTRAL EXCISE v. M/s CITI 425 BANK N. A.

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A merchant bank permits the purchase using the card. This is on the clear understanding that the amount will be paid by appropriate debit and credit in the accounts maintained, both by the issuing bank and acquiring bank. Rs.2/-, in the example given, is, however, retained by the issuing bank and it is Rs.98/- which alone gets credited in the account of the acquiring bank. The actual payment B is finally received by the merchant establishment on the agreed date on settling the account by the acquiring bank paying the amount, after deducting Rs. 5/- as amount of merchant discount. This amount of merchant discount is made up of Rs.2/- earned by the issuing bank. [Paras 54 & 55][485-E-H; 486-A-E]

C 2. It is inconceivable that without the role played by the issuing bank, which tantamounts to activity and, therefore, service, the very credit card transaction, would become possible. It is also clear that credit card system is fundamentally based on the issuing bank, undertaking the risk. Rs.98/-, in a transaction of D Rs.100/-, gets debited from the account, which the respondent bank, as issuing bank, maintained. It is the funds of the issuing bank, which is utilised, in other words, to effect the payment. It is, therefore, clear that there is service rendered by the bank, which is in connection with Clause (iii) of Section 65(33a). It is another matter that under the agreement between the issuing bank and the cardholder, the cardholder would be paying the sum of Rs.100/- to the issuing bank, within the stipulated period and, if he does not pay, he would incur the liability to pay interest, as stipulated, under the terms of the contract. The fact remains that there is the risk undertaken, in the first instance, of making available the funds to satisfy and settle the amount transacted through the card to the merchant establishment. [Paras 56 & 57][486-E-H; 487-A] SECTIONS 67 TO 70; WHO IS LIABLE TO PAY SERVICE TAX, OBTAINED REGULATION AND FILE G RETURN?

3. As far as payment of service tax is concerned which is governed by Section 68 of the Act, the liability to pay service tax is cast on every person providing the taxable service to any person. Sub- section (2) contemplates a departure from the H

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mandate of Section 68(1) in that, in regard to taxable services as may be notified by the Central Government in the gazette, the service tax is to be paid by such person in the manner prescribed at the rate specified in Section 66 and the provisions of the chapter (which is in fact “persons responsible for payment of service tax”) applies as if he is a person liable to pay service tax relating to such service. Section 68 must be read with Section 69, for it provides for the liability of a person to get registered. The liability is cast on the person liable to pay service tax under Chapter V. There is no case for the respondent that the case is governed by Section 68(2) for which the taxable service must be notified thereunder. That the person liable to pay tax under Section 68 C must get himself/itself registered in the manner prescribed is made clear from Rule 4 of the Rules as it clearly provides that every person liable to pay service tax shall apply to get himself/ itself registered and the entire provisions of rules is premised upon the liability to get registered being on the person made liable to pay service tax. No doubt, endorsement of an existing registration may be possible. Section 70 also cast the liability on the person liable to pay service tax, to assess the tax due and furnish return. [Para 59][487-F-H; 488-A-C]

4. The contention of the Respondent, however, in regard to Section 67(1)(i), in its written submission before this Court, is that the expression “service provider” will include both issuing bank and the acquiring bank and the gross amount will be Rs. 5/ -, which includes the consideration of Rs.2/- payable to the issuing bank and Rs.3/- which is payable to the acquiring bank. This contention is qualitatively distinct from the case, which has been set up before the Commissioner and the Tribunal, in the sense that the case of the Respondent appears to have been that under Section 67, the service provider was to pay tax on the gross amount, for which it provided the service and the attempt has been to contend that no service, as such, was being provided by the issuing bank. I take it that this is, in effect, an implied admission that the issuing bank does provide service in the matter of settling of the amount transacted through the credit card, for which it earns Rs.2/- as interchange fees. Now, that it is contended that the expression “service provider”, in Section 67(1)(i), will H

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A include, the issuing bank and the acquiring bank, I would feel more reassured in our finding that, all throughout, the respondent was, indeed, as issuing bank, liable to pay service tax on the service contemplated under Section 65(33a)(iii). Section 67(1)(i), as already decoded by me, after its substitution by the Finance Act, 2006, provides that the value of taxable service will be the gross amount charged by the service provider for such service provided or to be provided by him. The contention that the gross amount would be Rs.5/-, which is made of Rs.3/- for the service provided by the acquiring bank and Rs.2/- payable to the issuing bank (interchange fee), overlooks the fact that the gross amount is predicated with reference to the service actually provided or to be provided by the particular service provider. Proceeding on the basis that the words “service provider”, includes issuing bank and the acquiring bank, it is, therefore, clear that the gross amount to be charged by both the service providers, viz., the issuing bank and the acquiring bank, must be premised on the separate service provided or to be provided by them. The words “gross amount” cannot be the aggregate of the value of the services provided by the different service holders. The service, provided by the acquiring bank, is different from the service provided by the issuing bank. This is far too clear to require any further elucidation. The value of the service, which constitutes the measure of the tax, is dependant on the nature of the service. Apparently, the measure of the tax by way of value, has been fixed by the Card Association, with which, both the issuing bank and acquiring bank, have entered into separate agreements. The activity of the acquiring bank, and, therefore, the services rendered by the acquiring bank is distinct from the activity of the respondent bank and, therefore, the service is different and distinct. In law, therefore, there could not be a gross amount by adding the value of two distinct services by two different service providers. Expression “gross amount” is to be understood with reference to the service provided or to be provided by a particular service provider and the provision does not appear to me to embrace within its scope, adding of what would be different gross amounts for arriving at the gross amount of the service provided by a particular service provider. In this context, I may notice that H

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the words “gross amount charged” have been defined as, including payment in the many forms, which are mentioned therein, which includes debit notes, book adjustment and any amount credited or debited in any account. The interchange fee, in a transaction of Rs.100/-, is the amount of Rs.2/-, which remains to the credit of the respondent-issuing bank, when it suffers the debit of Rs.98/- only, in a transaction of Rs.100/-. In other words, the Respondent got paid Rs.2/-. It is only Rs.98/-, which makes its way into the account of the acquiring bank. The merchant establishment, no doubt, is paid Rs.94.30, in the example given by the Respondent, out of Rs.98/- received by the acquiring bank. From the above, it appears to be clear that the Respondent, as issuing bank, provides service within the meaning of Section 65(33a)(iii). It is towards the same that the Respondent is paid Rs.2/- as interchange fee. Interchange fee, therefore, is exigible to service tax. Admittedly, the respondent has not paid any service tax on the said amount. [Paras 61-63][488-E-H; D 489-A-H; 490-A-B] IS INTERCHANGE FEE INTEREST AND THEREFORE NOTCONSIDERATION FOR SERVICE?

5. The respondent is a Banking Institution. Undoubtedly, it falls to be regulated under the Banking Regulation Act. It is, in fact, a scheduled bank. Interestingly, the Interest Tax Act, 1978, provides for a charge in Section 4 on interest earned by a credit institution, which includes the respondent-bank. Undoubtedly, under Section 18, the tax paid on interest under the Interest Tax Act canbe deducted under the Income-Tax Act. If the interchange fee, has been regarded as interest, then, undoubtedly, it would have been brought to tax under the Interest Tax Act. The respondent has no case that tax has been paid on the interchange fee treating it as interest. It is inconceivable that there is a creditor and debtor relationship between the respondent as issuing bank and the Card Association or the acquiring bank or even the merchant establishment. The respondent cannot be described as a lender of money and the other three players, as just hereinbefore described, as borrowers. In the context of the relationship of the respondent as issuing bank, interchange fee cannot be described as compensation fixed by the parties for use H

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A or forbearance of the borrowed money. In fact, the concept of borrowed money, is predicated on the existence of creditor-debtor relationship which is absent. Interest, in the context of the definition, in Law Lexicon by Ramanathan Iyer, places a time value on the funds or money involved and further, it would also involve the rate, at which, the interest is calculated. Again, this definition is apposite in the context of the relationship between a lender and a borrower. The nature of the service, I have unravelled, performed by the issuing bank includes the act of approval of the credit card transactions. It is an integral and indispensable part of a credit card transactions. It was partly for this service that the interchange fee is earned by the respondent as issuing bank. There is no scope for an implied contract as the interchange fee is apparently paid in terms of the contract. Quite clearly, there is no scope for applying equity as the basis for the interchange fee as interchange fee is payable under the contract and towards service rendered by the respondent. I am, in the circumstances, of the view that the contention of the respondent is meritless. [Paras 66, 69][490-G-H; 491-A-B; 493-C-G] WHETHER CREDIT CARD TRANSACTION A TRANSACTIONIN MONEY?

E 6. The interchange fee is earned by the issuing bank as consideration for service which is provided by the issuing bank. The complex web of activities indulged in by the three main players namely the issuing bank, the card association and the acquiring bank culminates in the settling of the amount due to the merchant establishment which stood persuaded to make available goods and services initially on credit but on assurance that the credit card transaction will be taken to its logical culmination. It is clear that the active role which necessarily means the activity indulged in by the issuing bank is indispensable and at the heart of the transaction in the system under which though through machines available by the acquiring bank with the merchant establishment the Merchant gets paid. The issuing bank for each transaction must approve the transaction. The risk which is undertaken by the issuing bank which again makes available the funds and maintains the fund from time to time as per requirement and under

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the contractual obligations is part of the service performed by the issuing bank. What is sought to be taxed under the act is the interchange fee and not the amount which is made available. Therefore, the contention of the respondent that it constitutes merely transaction in money involves overlooking the service provided by the respondent as issuing bank. There is clearly activity in relation to the use of money within the Explanation. [Para 73][496-B-F] DEVIATION FROM SHOW CAUSE NOTICE [NUMBER ONE];

7. One of the contentions raised by the respondent is that in the Show Cause Notices issued by the Commissioner he proceeded on the basis of rejection of the version of the respondent that no service was being performed by the respondent bank as issuing bank towards the acquiring bank. However, it is pointed out that there is a deviation in the order and what is found is service is being performed by the issuing bank in terms of the agreement with the card association. A perusal of the order of the Commissioner does indicate that the respondent has defended the Show Cause Notices by contending that it was not performing any service to the acquiring bank. The Courts have not allowed an authority to go beyond the Show Cause E Notice on the basis of the prejudice which is occasioned to the noticee. In this regard, I must notice that while the Show Cause Notice does indicate that the Commissioner had proceeded in a manner rejecting the contention of the respondent that they are not rendering any service to the acquiring bank has been not correct, there is indeed reference to the basis for the final finding indicated in the notice in indicating that the respondent has earned service income, viz., interchange fee, which is taxable under Section 65(105)(zzzw) read with Section 65(33a). Moreover, being a question of applying the law to certain facts which are not in dispute namely the manner in which the credit card system operates about which there is no dispute and on our finding that service is indeed provided by the respondent in relation to the settlement of the amount transactions under the credit card, in the facts of this case, the respondent should not succeed on this point. [Para 84][499-D-H; 500-A-B] H

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A CERTAIN CIRCULARS; DOUBLE TAXATION

8. Circular No. ST-51/13/2002 dated 07.01.2003, which was, in fact, relied upon by the respondent before the Commissioner, came to be issued in the light of doubts raised regarding classification of certain services, which appeared to fall under two or more categories simultaneously. The above Circular contemplates that if the one service provider provides more than one taxable service, one registration is sufficient but is to be endorsed for all the taxable services. Further, tax liability will have to be discharged for each of the taxable services separately. In the context of the credit card transaction, as issuing bank for the cardholder, the respondent is providing taxable service to the card holder. That apart, if, under Section 65 (33a) of the Act, the respondent has been engaging in other services till 01.07.2012 and, thereafter, has been providing different services, it would have to discharge its tax liability of the taxable services separately. No doubt, the Circular, in paragraph-3, did go on to deal with the issue of correct classification of a particular service. But it is one thing to say that there is one service and the question is one of classification of that service and another to say that if there are more than one service provided by the same service provider, each of which is separately taxable, then, the service provider has to pay only one tax. It is clear that qua each of separate service provided, the service provider would be liable to pay tax separately. [Paras 86, 87][500-C, G-H; 501-A-C] EFFECT OF SERVICE TAX BEING A VALUE ADDED TAX F

9. As far as contention of the appellant that service tax is a value added tax, is concerned, there can be no quarrel. The service provided by each of the service provider in a chain of transactions where there is value addition, must bear the burden of service tax on the value of the service. The law also provides G for tax credit being availed. However, when it comes to the question relating to taxing a single service, it is clear that there cannot be taxation more than once. It is one thing to say, in other words, that when there are different services, provided under the taxing entry, each of the taxable services became taxable H

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under the previous regime, as also the framework after A 01.07.2012, for the same service, the law does not permit repetition of the same tax on the same measure of tax, with regard to the same service. In other words, if for the services rendered by the respondent as issuing bank, it has earned interchange fee, which should constitute the measure of the tax, the acquiring B bank, in terms of a practice followed, it has paid tax on the said amount, then, it would be illegal and unfair to tax the respondent all over again. It is another thing that, that the respondent is the person who was liable to pay the tax on the interchange fee, after filing return under Section 70 and treating the interchange fee as the value of the taxable service. These are all matters, which I C am in agreement with the learned Additional Solicitor General. However, it is difficult to agree with the learned Additional Solicitor General that even if the acquiring bank has discharged the liability qua the interchange fee also, treating it as part of MDR, then, the respondent is liable to pay tax. I am conscious D that the argument of the appellant involves the following reasoning. In law the respondent being found liable to pay tax on the interchange fee and, as admittedly, the tax has not been paid by it, it is not the lookout of the Department to consider, whether the payment of the tax by the acquiring bank, was effected, even assuming, it was on an amount including the interchange fee. E But this involves, in effect, double taxation. [Paras 92 & 93] [503-A-G] SHOW CAUSE NOTICE: DIVERGENCE FROM THE ORDEROF THE COMMISSIONER [NUMBER TWO];

10. Another aspect pointed out by the respondent is that in the Show Cause Notice, the Commissioner has proceeded on the basis that payment by the acquiring bank of service tax on the interchange fee, will not exonerate the liability of the respondent to pay the service tax. It is pointed out thereafter to go on to find that the respondent has not produced proof of payment, involves depriving the respondent of the opportunity to meet such a case and also to depart from the admitted position that acquiring bank has paid the tax. In other words, when the Commissioner proceeded on the basis in the Show Cause Notice that the payment, by the acquiring bank, will not detract from the H

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A liability of the respondent, it is impermissible to turn around and find that the respondent has not proved that the acquiring bank has paid the tax. It may be true that the Show Cause Notice contains the statement that the fact of payment of service tax on the interchange fee by the acquiring bank, does not exempt the assessee from payment of service tax, on the consideration received by them towards rendering of service as each person is liable to pay service tax for the service rendered by them. Essentially, it would appear that the Commissioner was referring to the case of the respondent that acquiring bank had paid the tax on the interchange fee. No doubt, it does create the impression that the Commissioner proceeds, as if, there was payment by the acquiring bank, which was the case of the respondent during audit. As noted, there is also the case for the appellant that being a value added tax, even if, payment is made by the acquiring bank, the respondent would remain liable. It is to be noted that when the Order of the Commissioner was challenged before the Tribunal, no material is produced in support of the claim that the acquiring bank had discharged the liability even on the amount of interchange fee. [Paras 94 & 95][503-G-H; 504-A-E]

11. In this regard, it is apposite to notice that in the Appeal E filed before the Tribunal, produced along with the Compilation No. 3, by the respondent, one of the grounds taken, no doubt, is that the impugned Order travelled beyond the scope of the SCNs. Thereunder, however, the complaint, which was sought to be made out was that in the SCN, the case set up by Commissioner was F that the service was to the acquiring bank, whereas, the Order passed by the Commissioner was to the effect that service was provided to the Card Association. There is no ground taken in the Appeal, as such, in relation to the SCNs proceeding on the basis of the payment made by the acquiring bank, being accepted, and thereby, a new case being found in the Order. In the Order G passed by the Tribunal, the Tribunal notices the complaint about the Commissioner departing from the SCN in terms of the ground in the Appeal, which have been set out. Last but not the least, it is relevant to notice the actual reasoning of the Tribunal, which led to the Order of the Commissioner being set aside. On the H

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basis of the said Order of the Tribunal, and finding no reason to differ from it, on this legal ground, the Order of the Commissioner was set aside. I may notice that in the said case, in paragraph-6, the Department, in fact did not dispute that service tax was being paid by the acquiring bank. In such circumstances, the argument of the respondent in this regard, does not appeal to me. I must notice that respondent has not produced any material to establish its case. [Paras 96, 97, 99 & 100][504-E-H; 505-D-E, G-H; 506-A] WHETHER THE EXTENDED PERIOD OF LIMITATION IS AVAILABLE IN REGARD TO THE DEMAND UNDER SHOW CAUSE NOTICE DATED 24.04.2013? C

12. The Commissioner has rejected the contention of the respondent that there is no positive act by it towards wilful suppression and there was only mere inaction by holding that the factum of receipt of interchange fee being not in dispute and the provisions being clear, the act of non-payment constituted a D positive act. In the milieu of self- assessment, it is for the respondent to assess and declare the full details and pay tax. The Commissioner also rejected the case that the department had knowledge based on audit. It is found by him that the banking industry is ever evolving and with new business models and the E Department cannot be faulted not knowing the implications. It was further found that the decisionsrelied upon by the respondent related to the period when classification lists, valuation lists and gate passes were to be approved. The assessment itself was done by the officers. It was further found that there was no effort made by the respondent at seeking clarification. I must notice that in the impugned order, that tribunal did not deal with the issue relating to the legality of the respondent availing the extended period. It instead has chosen to set aside the impugned order of the Commissioner on merits. [Paras 104-106][509-A-E]

13. Therefore, the upshot of the above discussion is as follows: I) It is found that the respondent, as issuing bank, was providing service, as found by the Commissioner;

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A II) For the period prior to 01.07.2012, the service of the respondent, as issuing bank, squarely fell within Section 65(33a)(iii) of the Act; III) The contention of the respondent that interchange fee is to be treated as interest and, therefore, not B taxable under the Act is rejected; IV) The case based on the credit card transaction, being a transaction in money and, therefore, excluded from the definition of “service” in Section 65B(44), is unacceptable; C V) The Order of the Tribunal in ABM Amro, dealing with the position of an issuing bank, under the framework of the Act, is patently unsustainable; VI) In the facts of this case, I decline to dismiss the Appeal only on the ground that no Appeal was carried against the Order in ABN Amro; VII) The respondent, as issuing bank, was liable to pay service tax, under Section 68(1), being the service provider. Being liable to pay the tax under Section 68(1), it was also liable to file the Return including the amount of interchange fee; VIII) The acquiring bank was obliged to value the service, which it provided or agreed to provide. The measure of tax, which is found in Section 67(1)(i), is entirely related to the service that the acquiring bank provided and agreed to provide. Likewise, the value of the service provided by the issuing bank, as found by me, and which would be the value of the service, for the purpose of Section67(1), is relatable to the services it provided. Therefore, the respondent bank was liable to include the interchange fee and file G Return and pay the tax on the same; IX) While the service tax may be a value added tax, all that it can mean, is that, for separate services, tax is payable on each separate service. The concept of H

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value added tax cannot mean that if the tax is already paid by the acquiring bank in this case, on the amount of interchange fee, for the service provided by the respondent as issuing bank, the respondent bank should be called upon to pay the service tax all over again. Such an exercise, would undoubtedly constitute double taxation; X) The Tribunal has not considered whether there was suppression within the meaning of Section 73 of the Act by the respondent in relation to part of the period covered by Show Cause Notice dated 24.04.2013. I am also of the view that the respondent should be provided an opportunity to establish that the acquiring bank has discharged the tax liability in regard to interchange fee. [Para 109][509-G-H; 510-A-H; 511-A-C] M/s ABN Amro Bank v. Commissioner of Central Excise D and Customs [2011] 2 SCR 874; Standard Chartered Bank And Ors. v. CST, Mumbai-i And Others 2015 [40] S.t.r. 104 (Tri. - Del) : [2010] 13 Scr 381; M/s ABN Amro Bank NV Presently Known As Royal Bank Of Scotland NV v. Commissioner Of Central Excise, Customs And E Sevice Tax, Noida [Decision Rendered On 23.7.2018] 2018-TIOL-2811-CESTAT / MANU/CN/0079/2018; Commissioner of Central Excise, Vishakhapatnam v. Mehta and Company (2011) 4 SCC 435 : [2011] 2 SCR 874; Association of Leasing & Financial Service Companies v. Union of India and others (2011) 2 SCC F 352 : [2010] 13 SCR 381; Commissioner of Central Excise Nagpur v. Ballarpur Industries Ltd. (2007) 8 SCC 89: [2007] 9 SCR 650 / [2007] 215 ELT 489 (SC); Larsen & Toubro Ltd. v. Commissioner of Central Excise, Pune II (2007) 9 SCC 617 : [2007] 5 SCR 1141 2007 / G [211] ELT 513 [SC]; U.S. Tax Court in Capital One Financial Corporation and Subsidiaries v. Commissioner, 133 TC No.8 (September 21, 2009); Ferro Alloys Corpn. Ltd. v. A.P. State Electricity Board

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A and another 1993 Supp (4) SCC 136; State of Karnataka and others v. Karnataka Pawn Brokers Association and others (2018) 6 SCC 363 : [2018] 10 SCR 409; Union of India and others v. Kaumudini Narayan Dalal and another (2001) 10 SCC 231 : 2001 (4) SCALE 227; Commissioner of Central Excise v. Tata B Engineering and Locomotives Co. Ltd. (2003) 11 SCC 193: 2003 (8 ) JT 557; Birla Corpn. Ltd. v. Commissioner of Central Excise (2005) 6 SCC 95 : [2005] 1 Suppl. SCR 821; Jayaswals NECO Ltd. v. Commissioner of Central Excise, Nagpur (2007) 13 SCC C 807; Sri Krishna Das v. Town Area Committee (1990) 3 SCC 645 : [1990] 2 SCR 13; Union of India (UOI) and others v. Tata Iron and Steel Company Limited, Jamshedpur (1976) 2 SCC 123 : [1976] 2 SCR 1044; Commissioner of Central Excise, Aurangabad v. Bajaj Auto Ltd., Waluj, Aurangabad Through Its Vice- D President (Materials) and others (2010) 13 SCC 117 : [2010] 14 SCR 184 - referred to. Case Law Reference [2011] 2 SCR 874 referred to Para 34 E [2010] 13 SCR 381 referred to Para 39 [2007] 9 SCR 650 referred to Para 41 [2007] 5 SCR 1141 referred to Para 42 [2018] 10 SCR 409 referred to Para 68 F [2005] 1 Suppl. SCR 821 referred to Para 79 [1990] 2 SCR 13 referred to Para 90 [1976] 2 SCR 1044 referred to Para 91 [2010] 14 SCR 184 referred to Para 107 G

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A concerned with - the service involved is by any person, [i.e., the issuing bank as defined in sub-clause (i)] and an acquiring bank, to any other person in relation to settlement of any amount transacted through “such card”. The emphasis here: apart from other related issues, is with the service of settlement of any “amount transacted” through the card. It is significant to notice that the reference to the service provider “by any person” is broad and comprehends all categories of persons and entities mentioned in sub-clause (i) (bank, financial institution, etc.) having regard to the definition of “person” [in Section 65B (37)]. Such being the case, the reference to issuing bank would fall within the broad description of “any person”. In any case, having defined “issuing bank” widely, per sub-clause (i), Parliament need not have referred to “any person, including issuing bank”; the meaning would have been the same if sub-clause (iii) had referred only to an “issuing bank” in place of “any person”. However, having regard to the essential nature of a credit card transaction, the inclusion is not directed as much to an issuing bank as to the specific reference to “an acquiring bank”. That term is not defined elsewhere except in this sub- clause, and by the explanation wherein the acquiring bank is defined as a bank, company, financial institution, etc. who makes the payment to any person, who accepts such cards. Crucially, then, only in Section 65(33a)(iii) does service by any person include service by the issuing bank and the acquiring bank. The use of the conjunctive “and” [in Section 65 (33a) (iii)] is to be contrasted with the other sub- clauses- Parliament used the disjunctive “or” in all other sub- clauses. The clear intention for this difference was that service providers could be business entities providing more than one service under one sub-clause [such as sub-clauses (ii), (iv), (vi) and (vii)]. The use of the conjunctive “and” in clause (iii) therefore, is telling and consequently, should receive literal interpretation. Therefore, there is disagreement with the judgment of K.M. Joseph, J on this aspect. [Paras 19-22] [543-G-H; 544-A-H; 545-A-E]

2. There can be no debate that indisputably, Parliament, has to be attributed with full knowledge of the nature of credit card business models, where the primary objective of the entities H

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that provide service, is to ensure payment for the underlying A transaction between the card holder and the provider of goods or services. Parliament would also know that there are three business entities whose joint or concurrent functioning is essential for settlement of each credit card transaction. The three business entities are the issuing bank, the acquiring bank and the network B [such as Visa, Mastercard, or RuPay, etc., which has been kept out of the definition under Section 65(33a)]. These are crucial factors and consequently I am of the opinion that the conjunctive “and” should be read literally and be given the meaning conjunctively rather than disjunctively. The result, therefore, is that when a person (i.e., the issuing bank), and an acquiring bank, provide service to another person, in relation to settlement of any credit card transaction, that service, by such person, and the acquiring bank, amounts to a “credit card service”- per Section 65 (33a). The unified nature of the service, to another (be it the card holder or the merchant, who are participants in the primary transaction and therefore beneficiaries) is the subject matter of sub-clause (iii) of Section 65(33a). I am fortified in this conclusion also in the use of the term “or” in sub-clauses (iv), (vi) and (vii) which define services capable of being provided to another business entity or service provider, and not a customer. [Para 23][545-F-H; 546-A-B] E

3. Justice Joseph in his judgment, relies on the contractual arrangements in question, to conclude that “legally they are separate services as the nature of service rendered by the issuing bank is different from the service rendered by acquiring bank”. In my opinion, the existence or otherwise of a contractual relationship is per se not determinative when a settlement of payment in relation to a credit card is involved. I say so because there is no contractual relationship between the acquiring bank and a card holder who might choose to use the device which is given to a merchant establishment by acquiring bank. Likewise, the merchant establishment need not have any pre-existing contractual relationship with the issuing bank. Neither the merchant establishment nor the card holder has any pre- existing relationship with the network provider whose role has been kept out of the definition clause. The network service provider (VISA, H

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A Master Card, RuPay, etc.) in fact provides the platform for the completion of the transaction. The nature of the network’s database, the software provided by it and the entire platform forms the entire basis of the credit card system, enabling smooth cashless settlement of the primary transaction – purchase of service or goods by the card holder from the merchant. The entire focus of the Section 65 (33a) – as well as Section 65 (105) (zzzw) which refers to taxable service in respect of credit card service – is settlement of any transaction. It cannot be construed as settlement of more than one transaction by one swipe. In other words, if Parliament had intended that the transaction for the purchase of goods or services permitted dissection of one whole transaction into two - one provided by the issuing bank and the other by the acquiring bank, it would have made that intention explicit appropriately, such as for instance, by using words, like “as the case may be”. The absence of such manifest intention in Section 65 (33a) on the one hand, and the use of the conjunctive D “and” in Section 65 (33a) (iii), clearly manifesting the intention that the issuing bank (a “person”) and an acquiring bank jointly provide the service, on the other - persuades me to hold that a dissection of one single transaction involving the purchase and sale of goods and services, is unwarranted. Therefore, with E respect, I do not agree with Joseph, J’s view that Parliament contemplated that apart from an acquiring bank, any other person including an issuing bank, may render a separate service. Equally, the reasoning that activities of a bank – which may be the same one that issues a card and is also an acquiring bank in a transaction – are legally separate services because the nature of service F (based on their respective contractual frameworks)rendered by the issuing bank is different from that of the service rendered by the acquiring bank, with respect, would not beaccurate. Similarly, I do not agree with the reasons given by Justice Joseph (i.e., that interchange fee does not fall within the service contemplated G (i) between issuing bank and card holder; and (ii) it is not a gift) as to why interchange fee is a separate service either. There are several problems with segregating the components of “service” by the issuing bank and service by the acquiring bank, under Section 65 (33a) (iii); they are elaborated as follows: H

COMMISSIONER OF GST AND CENTRAL EXCISE v. M/s CITI 443 BANK N. A.

(a) In the event of segregation of the issuing bank’s A component, the service element would no longer be a credit card service, but providing pure advance or credit of one kind, to the customer by the issuing bank which then falls within the broad description of banking and financial services [Section 65 (12)]. B (b) The segregation would ignore the reality of the business transaction which is the collection of a single MDR which includes two components i.e. the acquiring bank’s fee, and the issuing bank’s charge/ fee. The revenue admits that the MDR comprises both these fees. In these circumstances there is no warrant for discriminating the component which is retained by the issuing bank in the form of interchange fee, by saying that the issuing bank has to pay service tax on that as a separate element of its fee. The other anomaly would be that the data service provided by the card association (enabling use of software which facilitates instantaneous verification of the customer’s credentials, authentication of the transaction and the authorization of payment) is not required to undergo a separate treatment, as is now insisted upon in the case of the segregated transaction with the issuing bank. (c) There are predominantly only two contractual arrangements (as entered into by the card association) which involve interaction of simultaneous or sequential occurrence of four sub-transactions, i.e. F (i) the swiping of the card by the card holder at the merchant establishment (which does not include any pre-existing contractual agreement, but evidences the finalisation of a promise of a contract); (ii) followed by release by the acquiring bank to the merchant G establishment of the consideration (which is backed by a pre-existing contractual agreement by which the POS machine is kept with the merchant

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A establishment); (iii) the authentication of the customer’s credit by the issuing bank (which has no relationship with the acquiring bank or the merchant establishment, but does so only with the card holder); and (iv) the facilitation of the entire transaction by the card association (which has no contractual relationship with the card holder or the merchant establishment, but does so only with the acquiring bank and issuing bank). (d) If these are the different stages/ limbs/components of the transactions as may be variously described, wherein some are backed by pre-existing contractual agreements, while others are not – the singling out of one such service, i.e. the credit provided to the cardholder by the authentication of the transaction by the issuing bank, for separate treatment by insisting that it should once again be subjected to levy on a literal construction of sub-clauses (33a) and (105) (zzzw), would not be logical. If the revenue were to in fact insist this to be the correct interpretation, it should logically and in the same breath, also insist that the acquiring bank file separate returns for the amounts it receives and the amount it collects and transmits to the network, in the same manner separately, as is insisted upon in relation to the component of service rendered by the issuing bank, which forms a part of the whole service that is provided in this case. [Paras 25, 26][548-D-H; 549-A-H; 550-A-H; 551-A-B]

4. I agree with the reasoning of Justice Joseph, that the amount received by the issuing bank, as interchange income or fee, is not towards interest. However, as previously discussed, I G do not agree with the conclusion, that the issuing bank provides a separate service. The role of the issuing bank in the service provided by the acquiring bank to the merchant establishment is part of a single unified service falling under clause (iii) of Section 65 (33a) and it cannot be broken up into its components and classified as separate services for classification. This is a well- H

COMMISSIONER OF GST AND CENTRAL EXCISE v. M/s CITI 445 BANK N. A.

accepted principle of classification. There is, in reality, one unified A service provided by the acquiring bank to the merchant establishment for which gross value of consideration is the merchant discount rate (MDR). This single MDR includes the interchange fee. Therefore, the issuing bank’s service is subsumed into the service of the acquiring bank to make it a B unified service to the merchant establishment. Evidently a merchant establishment does not have any contractual liability to pay inter-change fee to the issuing bank. [Para 27][551-B-C, E-F]

5. The facts of the present case, in my opinion closely reflect the situation envisioned by the CBEC. The service provided by C the acquiring bank is similar to the composite service provided by a GTA. The service element provided by an issuing bank is an integral part which gets subsumed in the single unified service provided by the acquiring bank to a merchant establishment. The principle enunciated by CBEC (in the circular) that even if a D composite service, consists of more than one service, should nevertheless be treated as a single service based on the main or principal service and accordingly classified, is also applicable in the case of service provided by the acquiring bank and issuing bank. The latter’s role is subsumed into the service of the acquiring bank for which the gross consideration is received from the merchant establishment. The service element provided by the issuing bank in the credit card transaction at the merchant establishment is therefore not subject to service tax as it is incorporated in the service by the acquiring bank- as one service provided to the merchant establishment and the gross consideration (MDR) received by the acquiring bank includes the interchange fee shared with the issuing bank, by the acquiring bank. This is identical to the position in GTA service which was clarified by the Board in the above referred circular. This view is also supported by the newly enacted Section 66F(3) (b) which is effective from 1 July 2012, which states that naturally bundled services should be treated as provision of single service. The CBEC’s circulars are binding on the revenue. Therefore, interchange fee earned by the issuing bank which forms an integral part of service of the acquiring bank to the merchant H

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A establishment, cannot be subjected to service tax. A credit card transaction- towards settlement of payment of a transaction, in sum, is an indestructible integrated service, whose constituent parts are inseparable from each other. For the reasons outlined above, there is disagreement with Joseph, J’s reasoning that Citibank had to independently file returns, in respect of the transaction by which interchange fees were collected. [Paras 29, 30][554-D-H; 555-A-B]

6. As noted earlier, the charge (under Section 66) is on the “value of the taxable service referred….and collected in such manner as may be prescribed”. Valuation is in terms of the provision of Section 67, and Section 68 provides who has to pay service tax. Section 67 (1) enacts that the measure of tax levied, shall be on the consideration paid for the service, and provides for three contingencies. Section 67 (2) states that where the gross amount charged by a service provider, for the service provided includes service tax payable, the value of the taxable service shall be “such amount as with the addition of tax payable, is equal to the gross amount charged”. Section 67 (3) says that the “gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service.” Section 67 (4) – which is subject to the previous sub-sections enacts that “the value shall be determined in such manner as may be prescribed.” The Service Tax (Determination of Value) Rules, 2006 was framed by the revenue, to assist the task of determining the value of services, to be taxed. Rule 2 (d) (i) defines what is provider of service. A co-joint reading of Section F 67 and Rule 5 therefore establishes that the value of the entire service to the recipient is the basis of the service tax. Such being the case, if one accepts that the “gross amount” is the entire MDR – inclusive of the interchange fee, there is no mechanism, whereby the latter, i.e. the interchange fee can be brought into the tax net once again. Section 68, no doubt, enacts that a person G providing a taxable service shall pay service tax at the rate prescribed in Section 66B and in the manner prescribed by the rules, and in accordance with the returns filed as may be prescribed under the rules. However, that is not the

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COMMISSIONER OF GST AND CENTRAL EXCISE v. M/s CITI 447 BANK N. A.

determinative point – it is the charging provision, i.e. Section 65, A which speaks of the levy being upon the value of the service. Therefore, I respectfully disagree with Justice Joseph’s opinion that “every person providing taxable service to any person shall pay service tax at the rate...” which is based on the reasoning that because they are two different entities, they are each separately liable to pay service tax under Section 68 (despite settling the same transaction between the card holder and merchant establishment). [Paras 31-33][555-C-F; 558-E-H]

7. In the present case, the MDR is thus the “gross value”; it includes the interchange fee. In the circumstances, since the collection of service tax is by the acquiring bank, which remits it to the revenue, the insistence that both elements should be segregated and separate returns filed reflecting the interchange fee, with respect, serves no purpose other than increasing paperwork, and burdening both banks and revenue officials with more work. If it is the aggregate amount (of which the interchange fee, is one part, and the acquiring bank’s amount, another part), the levy is satisfied. In such circumstances, the segregation of the whole MDR (which includes the interchange fee) by slicing it into two portions, i.e. the interchange fee and the acquiring bank’s charge, solely for the purpose of obliging all parties to reflect these in separate returns, only complicates issues. The other interpretation, would lead to a different aggregate, whereby service tax is levied on the entire MDR and once again, on the interchange fee, the issuing bank separately collecting service tax, results in an amount exceeding 14% towards tax. Both interpretations, in my opinion, cannot support separate levies, which would be contrary to Section 65. I am also unable to agree with Joseph, J. about the true construction of the notification exempting transactions below 2000/- from payment of service tax. It reflects that legislative intent/understanding is also limited to only the acquiring bank paying service tax, on an aggregate amount. If it were otherwise, the object of granting exemption would be defeated because the acquiring bank would then be collecting (or, correspondingly, the issuing bank would be deducting) the proportion of tax leviable on the interchange fee,

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A thus resulting in a partial levy of service tax on the quantum of transactions ( 2000/- and below) which are clearly exempt. In my opinion, therefore, Joseph, J’s opinion that by the exemption, the issuing bank cannot claim exemption on the ground that acquiring bank is exempted, therefore, is not accurate. It is also important to remember that what is taxed, is the value of the B transaction and it is the transaction that is exempt, not the service provider. Therefore, the express use of only ‘acquiring bank’ is indicative that Parliament was well aware of how credit card transactions are conducted. [Paras 35, 36][561-E-H; 562-A-B, D-G]

C 8. Therefore, not in agreement with the reasoning of Joseph, J. that “service provider” under Section 67(1)(i) imply that both the acquiring bank and issuing bank are service providers, and the gross amount on which the tax is collected, is not the aggregate of the value of the services provided by the D different service holders. The judgement of Joseph, J. with respect, is mainly concerned by the fact that Citibank retains 2 before crediting the rest of the money towards settlement of the transaction; and therefore, in the absence of proof that acquiring bank has paid service tax on amount including the interchange fee, it is liable to pay for the specific service provided by it, as a E distinct service provider. As explained in the earlier portion of this judgment, the activity or part played by the issuing bank is undoubtedly a service. However, it is part of the service; by itself, and without the role of the acquiring bank, it becomes a pure advance or loan transaction. However, the provision of service F by the issuing bank and the acquiring bank together, triggers the levy. In other words, the component of service by the issuing bank is just that – a part of a single unified service, which for business convenience is structured in a manner, that the issuing bank retains 2, and tax is paid on the overall service, in the hands of the acquiring bank. There is no revenue leakage. The G manner in which the credit card transaction, particularly the inter se transaction between the issuing bank and the acquiring bank is fashioned is such that instead of releasing the entire amount, in the first instance, and claiming the interchange fee later, the issuing bank retains the component of interchange fee. H [Para 37][562-G-H; 563-A-D]

COMMISSIONER OF GST AND CENTRAL EXCISE v. M/s CITI 449 BANK N. A.

9. For the sake of clarity and completeness, I have briefly summarised my position in relation to each of the conclusions drawn by Joseph, J. in his judgment (paragraph 109): (A) On Conclusion I: I am in agreement that the respondent- Citibank, as issuing bank was providing service, as found by the Commissioner. However, this service was a part of a single unified service – of settling transactions – which is provided by both the acquiring and issuing bank (which in some circumstances may well be the same bank). (B) On Conclusions II, III, and IV: I am in agreement 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 lastly the case that credit card transaction, being a transaction in money and therefore excluded from the definition of “service” in Section 65B (44) is unacceptable. D (C) On Conclusion VI: I agree that the plea to dismiss the appeals solely on the ground that no appeal was carried against the Order in ABN Amro (supra) has no merit. (D) On Conclusion V, VII-X: Service tax is undoubtedly a value added tax. However, having characterised the service to be a single unified service – wherein service tax, by way of business convenience, is collected from/remitted by the acquiring bank on the value (whole MDR which includes the interchange fee that is retained by the issuing bank) taxable for the single service rendered by both the acquiring and issuing bank – Citibank cannot be called upon to pay the service tax again as this would result in double taxation. In view of my previous discussion, I do not agree with the reasoning in ABN Amro (supra). For the same reasons, I am of the opinion that the question of remand to the tribunal does not arise. The only point of contention seems to be whether they were reflecting the payment of service tax separately in their ledgers, as issuing and acquiring bank. However, as a result of the reasons already elaborated, this is rendered to be a purely academic question. A question of returns should not detain this Court, because the business reality H

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A is that every bank is both an issuing bank and an acquiring bank, and it is nobody’s case that the banks are not filing their returns on service tax. [Para 38][563-E-H; 564-A-D] Mafatlal Industries Ltd v. Union of India (1997) 5 SCC 536 : [1996] 10 Suppl. SCR 585 – followed. B Govind Saran Ganga Saran v. Commissioner of Sales Tax 1985 Supp SCC 205; Association of Leasing and Financial Service Companies v. Union of India (2011) 2 SCC 352 : [2010] 13 SCR 381; Standard Chartered Bank & Ors. v. CST, Mumbai I & Ors. 2015[40] C S.T.R.104 (Tri. Del); ABN Amro Bank v. Collector of Central Excise 2011 (187) ECR181 (Tri. Delhi); Royal Bank of Scotland) v. Commissioner of Central Excise 2018 TIOL 2018 CESTAT.; Hyderabad Asbestos Cement Products & Anr. v. Union of India (2000) 1 SCC 426 : [1999] 5 Suppl. SCR 155; Green v Premier D Glynrhonwy Slate Co. (1928) 1 KB 561; R v Oxfordshire County Council and Others, Ex Parte Sunningwell Parish Council 1999 (3) All ER 385; Sahara India (Firm), Lucknow v. Commissioner of Income Tax, Central & Ors (2008) 14 SCC 1519; Union of India v. Inter E Continental Consultants & Technocrats (2018) 4 SCC 669 : [2018] 10 SCR 309; Commissioner of Service Tax & Ors. v. Bhayana Builders Private Limited & Ors (2018) 3 SCC 782; Cosmic Dye Chemical v. Collector Of Central Excise (1995) 6 SCC 117; M/s Uniworth Textiles v. Commissioner of Central Excise (2013) 9 SCC F 753 : [2013] 3 SCR 27 referred to. Case Law Reference [1996] 10 Suppl. SCR 585 followed Para 7 [2010] 13 SCR 381 referred to Para 7 G [1999] 5 Suppl. SCR 155 referred to Para 24 [2018] 10 SCR 309 referred to Para 34 [2013] 3 SCR 27 referred to Para 38

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COMMISSIONER OF GST AND CENTRAL EXCISE v. M/s CITI 451 BANK N. A.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 8228 A of 2019. From the Judgment and Order dated 16.11.2018 of the Hon’ble Customs, Excise & Service Tax Appellate Tribunal, South Zonal Bench, Chennai in Appeal No.ST/40923 of 2017-DB. With B Civil Appeal No. 89 of 2021. Balbir Singh, ASG, Sree Kumar C. N., Sr. Adv., Zoheb Hossain, Rupesh Kumar, Anmol Chandan, Mukesh Kumar Maroria, B. V. Balaram Das, Advs. for the Appellant. C Arvind P. Datar, Sr. Adv., Kumar Visalaksh, Nishant Shah, Udit Jain, Ms. Sweta Rajan, Archit Gupta, Ms. Samyuktha Srinivasan, Mahfooz Ahsan Nazki, Advs. for the Respondent.