Interchange Fee Not Separately Taxable When Service Tax Paid on MDR: CESTAT Mumbai in HDFC Bank Case

1. Background and Case Overview

The Customs, Excise & Service Tax Appellate Tribunal, Mumbai Regional Bench, has disposed of five connected appeals filed by HDFC Bank Ltd. Vs Commissioner of CGST & Central Excise (CESTAT Mumbai). These appeals challenged three Orders‑in‑Original dated 29.11.2013, 14.12.2015 and 14.12.2017, all passed by different Commissioners having jurisdiction over the bank.

A common legal issue ran through all these orders:

  • Whether HDFC Bank was liable to pay service tax on the “interchange fee” it earned in relation to credit‑card transactions for various periods from September 2006 to March 2016.

HDFC Bank was registered for service tax and was providing, among other taxable services, “Banking and Other Financial Services” under Chapter V of the Finance Act, 1994. During an EA‑2000 audit, the Department noted that the bank had earned interchange fee in relation to credit cards issued by it and proceeded to treat this fee as taxable consideration under the entry for credit card services.

Based on this, a series of Show Cause Notices (SCNs) were issued proposing demands of service tax under Section 73(1) read with Section 68 of the Finance Act, 1994, together with interest and penalties under Section 76, Section 77 and Section 78. These SCNs culminated in three separate Orders‑in‑Original, all of which confirmed the proposals.

The Tribunal has now allowed all five appeals of HDFC Bank, primarily relying on the subsequent judgment of the Supreme Court of India in Commissioner of GST And Central Excise Vs Citibank N.A., Civil Appeal No. 8228 of 2019 with Civil Appeal No. 89 of 2021, dated 16.10.2024.

2. Chronology of SCNs and Adjudication

2.1 Show Cause Notices and Periods Covered

The dispute pertains solely to service tax on interchange fee across different time spans. The following SCNs were issued:

  • SCN dated 19.10.2012 (No. 623/COMMR./2012‑13)

    • Period: September 2006 to March 2011
    • Adjudicated by Order‑in‑Original dated 29.11.2013

  • SCN dated 14.10.2014 (No. V/ST‑I/Dn‑II/Gr./VIIA/HDFC/SCN/30/13)

    • Period: 01.04.2013 to 31.03.2014
    • Adjudicated by Order‑in‑Original dated 14.12.2015

  • SCNs clubbed in Order dated 14.12.2017:

    • SCN No. 1044/COMMR/2013‑14 dated 26.11.2013 (Period: July 2012 to March 2013)
    • SCN No. SCN/12/Pr. Commr./2016 dated 12.04.2016 (Period: April 2014 to March 2015)
    • SCN No. SCN/25/Pr. Commr./2017‑18 dated 16.06.2017 (Period: April 2015 to March 2016)
    • All adjudicated together by Order‑in‑Original dated 14.12.2017

Each order confirmed service‑tax demands, interest and penalties on the alleged non‑payment of service tax on interchange fee.

2.2 Nature of HDFC Bank’s Activities

HDFC Bank was:

  • Registered under the service tax law with registration No. AAACH2702HST001.
  • Providing taxable “Banking and Other Financial Services”.
  • Issuing credit cards to its customers (card holders).
  • Installing Electronic Data Capture (EDC) machines at Merchant Establishments (MEs) and also acting as an acquiring bank.

In the credit‑card ecosystem:

  • When a card holder swipes a credit card at the ME’s EDC machine, authorization and validation are routed through international card networks such as Visa/MasterCard.
  • The acquiring bank settles the ME’s claims after deducting a merchant discount or merchant service fee.
  • The issuing bank subsequently recovers the transaction amount from the card holder and remits funds to the acquiring bank.
  • A portion of the merchant discount flows to the issuing bank as interchange fee.

The Department’s case was that this interchange fee constituted consideration for services relating to credit cards as covered by Sections 65(33a) and 65(105)(zzzw) of the Finance Act, 1994.

3. Department’s Stand in the Impugned Orders

3.1 Findings of the Adjudicating Authority

In the first Order‑in‑Original dated 29.11.2013, the Commissioner reasoned as follows:

  • The acquiring bank provides services to the Merchant Establishment (ME) by:

    • Installing and maintaining EDC machines; and
    • Enabling the ME to accept credit‑card payments.
      The acquiring bank charges merchant service fee for these services.

  • The issuing bank (HDFC Bank) provides a distinct service to the card holder, namely:

    • Authenticating the card and validating the transaction when the card is swiped; and
    • Enabling the completion of the purchase by confirming the card holder’s credit line and identity to the network/ME.

  • According to the adjudicating authority, the interchange fee paid to the issuing bank is the consideration for this card‑holder‑facing service, separate from the merchant‑facing service of the acquiring bank.