The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Mumbai Regional Bench, has set aside service-tax demands concerning interchange fees earned from credit-card transactions, holding that no separate service tax could be demanded on the interchange fee when service tax had already been discharged on the entire Merchant Discount Rate (MDR).
The Bench of S.K. Mohanty (Judicial Member) and M.M. Parthiban (Technical Member) has observed that the acquiring bank had already discharged service-tax liability on the relevant amount. It further examined the statutory definition of credit-card services and concluded that the issuing bank, which was not acting as the settlement agency, could not be treated as providing the relevant taxable service merely because it received the disputed amount.
The decision covers five connected service-tax appeals filed by appellant/assessee against three adjudication orders passed by the Service Tax/CGST authorities for different periods between September 2006 and March 2016. The common dispute was whether the bank was separately liable to pay service tax on the interchange fee received in connection with credit-card transactions.
Buy Now: 70+ Judgements Indirect Tax – July 2026 | E-Magazine
The bank was engaged, among other activities, in providing Banking and Other Financial Services and was registered under the service-tax regime. During an EA-2000 audit, the department noticed that the bank had earned interchange fees in connection with credit cards issued by it.
In a typical credit-card transaction, the issuing bank issues the credit card to the customer, while the acquiring bank provides the merchant establishment with the infrastructure, including the Electronic Data Capture (EDC) machine, to accept card payments. Once a customer uses the card at a merchant establishment, the transaction is routed through the relevant card network, such as Visa or MasterCard, and the transaction is subsequently settled between the participating banks.
The acquiring bank makes payment to the merchant after deducting the agreed merchant-related fee. The issuing bank, meanwhile, receives a portion of the fee retained in the transaction, described as the interchange fee. The Tribunal’s order explains that this fee generally represents the issuing bank’s share arising from the credit-card transaction.
The department took the view that the interchange fee constituted consideration for credit-card services taxable under the relevant provisions of the Finance Act, 1994, particularly Sections 65(33a) and 65(105)(zzzw). According to the Revenue, the bank was therefore liable to pay service tax on the amount, apart from interest and penalties.
The dispute arose from several show cause notices covering different periods. The notices proposed service-tax demands under Section 73(1), read with Section 68 of the Finance Act, 1994, along with interest and penalties under Sections 76, 77 and 78.
The first notice covered the period from September 2006 to March 2011. Another proceeding covered April 2013 to March 2014, while the remaining proceedings covered July 2012 to March 2013, April 2014 to March 2015 and April 2015 to March 2016. The respective adjudicating authorities confirmed the demands through orders dated November 29, 2013, December 14, 2015 and December 14, 2017.
Aggrieved by the orders, the bank approached the CESTAT. Since all five appeals raised the same fundamental legal issue, the Tribunal decided to hear and dispose of them together.
Before the Tribunal, the bank argued that the issue had already been considered in a number of cases, particularly the decision involving Citibank N.A.
The bank relied on the CESTAT’s decision in Citibank N.A. v. Commissioner of GST and Central Excise, which had been rendered in 2020. The Tribunal noted that the decision had subsequently been considered by the Supreme Court, which finally decided the dispute on October 16, 2024. The bank also relied on the earlier CESTAT decision in ABN Amro Bank NV v. Commissioner of Central Excise & Service Tax, Noida.
The department on the other hand, defended the findings recorded in the adjudication orders and maintained its position on the taxability of the interchange fee.
The CESTAT identified two principal questions for determination: Whether the issuing banks were liable to pay service tax on the interchange fee; and Whether the service-tax demands, interest and penalties imposed upon the bank were legally sustainable under the Finance Act, 1994.
The department’s case was essentially that the interchange fee represented consideration for a service supplied by the issuing bank to its cardholder. The adjudicating authority had reasoned that the issuing bank performed functions such as authenticating the cardholder and enabling the transaction and that the interchange fee represented consideration for those activities.
The Tribunal’s analysis drew extensively from the earlier Citibank decision, which had explained the roles of the participants in a credit-card transaction.
The participants include the issuing bank, which provides the credit card and extends credit to the cardholder; the cardholder, who uses the credit facility; the acquiring bank, which connects merchants to the card network and provides the point-of-sale infrastructure; the merchant establishment, which supplies goods or services; and the card network, such as Visa or MasterCard, which facilitates communication, authorisation and settlement between the issuing and acquiring banks.
The Tribunal also referred to the transaction flow reproduced in the earlier order. The diagram on page 8 of the CESTAT order illustrates the movement of transaction information and funds among the cardholder, merchant, acquiring bank, card network and issuing bank. Significantly, for a transaction of ₹100, the diagram identifies ₹2 as the interchange fee forming the subject matter of the dispute.
The bank had advanced several arguments against the levy. These included the contention that there was no separate service being provided in respect of the interchange fee, that there was no corresponding service-provider and service-recipient relationship, and that there was no consideration payable by a service recipient to the issuing bank in the manner contemplated by the service-tax law.
The bank also argued that the interchange fee had characteristics associated with financing or lending activity, that taxing the fee separately could result in double taxation, and that transactions in money were outside the service-tax net.
The Revenue’s position was that the interchange fee was linked to the issuing bank’s role in validating and facilitating the credit-card transaction and therefore constituted consideration for taxable credit-card services.
An important aspect of the Tribunal’s reasoning concerned the earlier Larger Bench decision in Standard Chartered Bank.
The Tribunal observed that the earlier decision dealt with a different issue concerning services between the issuing bank, acquiring bank and merchant establishment and was concerned with a different taxing entry. In contrast, the present dispute concerned the specific taxing entry relating to Credit Card Services.
The Bench therefore found that the Standard Chartered Bank ruling did not support the Revenue’s case. Instead, according to the Tribunal, the reasoning in that decision reinforced the bank’s position in the present dispute.
The CESTAT placed particular reliance on the earlier ABN Amro Bank decision.
The earlier Tribunal had consequently held that the amount received by the issuing bank did not qualify as consideration for credit-card services and that the demand was unsustainable.
The Mumbai Bench found that the issue before it had already been conclusively addressed in ABN Amro. It saw no reason to depart from that legal position and observed that the impugned orders were therefore liable to be set aside on that legal ground itself.
A crucial development during the pendency of the HDFC Bank appeals was the Supreme Court’s final determination of the identical dispute in the Citibank matter.
The CESTAT had earlier kept the present proceedings pending because the issue was before the Supreme Court. During the hearing on April 28, 2026, the bank brought to the Tribunal’s attention the Supreme Court judgment dated October 16, 2024, by which the identical issue had attained finality.
The Supreme Court’s judgment, reproduced in the CESTAT’s order, considered whether the acquiring bank’s payment of service tax on the Merchant Discount Rate and the issuing bank’s receipt of interchange fee could result in a separate service-tax liability on the interchange component.
The Supreme Court accepted the reasoning that the legislative scheme treated the transaction as a unified service and that the MDR had already been subjected to service tax. The judgment also addressed the concern of double taxation and noted the importance of considering the fact that the entire MDR had already suffered service tax.
The decisive finding for the present appeals was that the entire amount of service tax payable on the MDR had already been paid to the Government.
The Supreme Court’s ruling, as recorded by the CESTAT, established that service tax was not separately payable on the interchange fee when service tax had already been discharged on the entire MDR. The Supreme Court also recorded that there was no loss of revenue in such circumstances.
Applying that principle, the CESTAT held that the dispute before it was no longer res integra. In other words, the legal issue had already been settled by the binding Supreme Court ruling.
The Mumbai Bench concluded that the three impugned adjudication orders did not withstand legal scrutiny.
The Tribunal specifically held that the adjudged service-tax demands, along with the associated interest and penalties, were not legally sustainable. It accordingly set aside the orders dated November 29, 2013, December 14, 2015 and December 14, 2017.
Membership Required to Access Case Details & Order Copy
To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.
