Service tax on Merchant Discount Rate and interchange fee clarified: tax on MDR covers interchange, no separate levy.

Clarification that service tax levied on the Merchant Discount Rate (MDR) subsumes the interchange fee and platform fee, grounded on legislative intent to tax credit card services broadly and to facilitate ease of tax collection; consequence: where service tax has been paid on full MDR there is no separate liability on the issuing bank for the interchange fee and no additional tax is payable, as revenue suffers no loss. The view relies on clause construction treating services by acquiring and issuing banks jointly and on the fact that MDR is the first point of charge and payment.

---

---

Issues:
Interpretation of tax provisions regarding service tax on Merchant Discount Rate (MDR) and interchange fee.

Analysis:
The main issue in this case was the interpretation of tax provisions related to the payment of service tax on the Merchant Discount Rate (MDR) and interchange fee by acquiring and issuing banks. The Revenue contended that the acquiring bank should pay service tax on MDR minus the interchange fee, while the issuing bank should pay service tax on the interchange fee. The Court, after hearing arguments, referred to the provisions of Clause (iii) of Section 65 (33a) of the Finance Act, 1994. The judgment and reasoning given by S. Ravindra Bhat, J. were deemed acceptable and in accordance with the Act.

The Court agreed with S. Ravindra Bhat, J.'s observation that MDR represents a unified service to the consumer and merchant, encompassing acquiring bank fee, interchange fee, and platform fee. The Court noted that MDR is charged by the acquiring bank first and includes all relevant fees. The Court emphasized that the legislative intent, as indicated by the use of the word 'and,' supports the view that MDR is a composite charge that includes all relevant components. The Court also highlighted that the payment of service tax at the MDR stage is beneficial to the Revenue, and there is no separate service tax payable on the interchange fee.

Regarding a different interpretation by K.M. Joseph, J., the Court noted the concern about double taxation but ultimately held that service tax on the interchange fee is not separately payable as long as service tax has been paid on the MDR. The Court also emphasized that the burden of proving the payment of service tax on the entire MDR lies with the issuing bank. The Court further highlighted that all necessary data and details are available with the Service Tax Department and should have been considered before issuing any show cause notice.

In conclusion, the Court disposed of the reference and appeals, holding that service tax is not separately payable on the interchange fee since service tax has been paid on the MDR. The Court noted that the entire amount of service tax on the MDR has been paid to the Government, ensuring no loss of revenue. Any pending applications were also disposed of as part of the judgment.

---