SBI Associate Banks win service tax dispute over ATM interchange fees and notional consideration demands

CESTAT NEW DELHI held that service tax demand on ATM interchange fees received by Associate Banks from SBI for ATM deployment in shared network was unsustainable. The tribunal found SBI had implied authority to discharge service tax liability as agent of Associate Banks, preventing double taxation on same transaction. Service tax demand on notional consideration for free ATM services between SBG Banks was also set aside, as no-fee arrangement was contractual condition, not taxable consideration. However, extended limitation period invocation was upheld, finding no willful suppression with intent to evade tax. Appeals by SBI were allowed.

---

---

Issues Involved:

1. Demand of service tax on ATM interchange fee received by Associate Banks from SBI.
2. Demand of service tax on notional consideration for free ATM services provided among SBG Banks.
3. Invocation of the extended period of limitation under the proviso to section 73(1) of the Finance Act.
4. Imposition of penalties under sections 75, 76, and 78 of the Finance Act.

Issue-Wise Detailed Analysis:

1. Demand of Service Tax on ATM Interchange Fee:

The primary issue was whether the adjudicating authority was justified in confirming the demand of service tax on the ATM interchange fee received by the Associate Banks from SBI for deployment of ATMs in the shared network. The Associate Banks contended that SBI was acting as their agent in discharging the service tax liability on interchange fees. Although there was no formal written agreement, the conduct of the parties indicated an implied authority for SBI to act as an agent. The adjudicating authority partially accepted this contention, acknowledging that SBI was acting as an agent concerning the settlement of amounts, but not for the payment of service tax. The Tribunal found that the discharge of service tax liability by SBI as an agent should be considered sufficient, and service tax cannot be demanded again from the Associate Banks. The Supreme Court's decision in Commissioner of GST and Central Excise vs. M/s. City Bank N.A. was cited, emphasizing that if the acquiring bank has discharged service tax on the entire amount, the issuing bank should not be required to pay service tax again.

2. Demand of Service Tax on Notional Consideration for Free ATM Services:

The second issue concerned the demand of service tax on a notional basis for free ATM services provided among SBG Banks. The adjudicating authority assumed a barter or reciprocal arrangement among the banks, which was not supported by evidence. The Tribunal noted that the arrangement could not be strictly called reciprocal or barter, as the ownership of ATMs was disproportionately skewed towards SBI, which owned 84% of the ATMs. There was no direct or indirect consideration flowing to the Associate Banks for these services. The Tribunal referred to the decision in State Bank of Bikaner & Jaipur vs. Commr. of C. Ex. & S. T., Alwar, emphasizing that service tax is chargeable on the transaction value, which must involve consideration. The Tribunal concluded that the demand for service tax on notional consideration was unfounded.

3. Invocation of the Extended Period of Limitation:

The department's appeal challenged the adjudicating authority's decision to drop the demand for the extended period of limitation. The adjudicating authority found that the Associate Banks had regularly filed service tax returns and that their records had been audited without objection from the department. The Tribunal upheld this decision, citing the Supreme Court's judgments in Pushpam Pharmaceuticals Co. vs. Collector of Central Excise and Anand Nishikawa Co. Ltd. vs. Commissioner of Central Excise, which require deliberate suppression of facts with intent to evade duty for the extended period to apply. The Tribunal found no evidence of such intent, noting that the Associate Banks acted under a bona fide belief that SBI was discharging their service tax liability as an agent.

4. Imposition of Penalties:

The adjudicating authority imposed penalties under sections 75 and 76 of the Finance Act but dropped penalties under section 78. The department appealed against the dropping of penalties under section 78. The Tribunal found that there was no willful suppression or intent to evade service tax, and thus, the imposition of penalties under section 78 was not justified. The Tribunal upheld the adjudicating authority's decision to drop these penalties.

Conclusion:

The Tribunal allowed the appeals filed by State Bank of India, dismissing the department's appeals and cross-objections. The Tribunal found that the service tax demands were not sustainable on both the ATM interchange fee and the notional consideration for free services. It also upheld the adjudicating authority's decision to not invoke the extended period of limitation and to drop penalties under section 78 of the Finance Act.

---