Thursday, 20 August 2015

Delhi Tribunal (Larger Bench) rules that interchange fees and merchant establishment discounts earned in respect of credit card transactions not subject to Service tax prior to May 2006

We are pleased to release a Tax Alert summarizing the decision of the Larger Bench of the Delhi Tribunal wherein it addresses the dispute regarding the taxability of interchange fee and merchant establishment discount earned during settlement of amounts in respect of credit card transactions.

In this case the Larger Bench held that a customary relationship exists between issuing bank, acquiring bank and merchant establishments in context of credit card services as mentioned under Banking and other Financial Services (BOFS).

It was also held that credit card services enumerated in BOFS cover only those services that are provided by an issuing bank to a card holder. Consequently services in relation to settlement of amounts transacted through credit / debit / charge cards are not covered within the scope of credit card services under BOFS prior to 1 May 2006.

This decision would provide respite to the banking industry in respect of pending litigation on identical matters for the period prior to May 2006. However, the verdict of the Supreme Court is awaited in the case of ABN Amro Bank v. Union of India, which would ultimately resolve the dispute regarding the taxability of interchange fees and merchant establishment discounts earned in respect of credit card transactions prior to May 2006.

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