Axis Bank Limited v. The State of Karnataka

What happened

Axis Bank, registered under the KVAT Act and CST Act from 20 June 2006, provided payment-processing services to merchant establishments under Merchant Establishment Agreements and installed electronic data capture terminals, called swiping machines, at their premises. It collected the merchant discount rate or swiping commission and separate monthly terminal rental, installation and maintenance charges, treating the whole as banking and financial services on which service tax was paid. After an enforcement-wing check on 2 August 2010, reassessment orders of 22 April 2014 for 2006-07 and 2007-08 and 31 January 2015 for 2008-09 and 2009-10 treated the rentals as a deemed sale and levied VAT of Rs.7,00,198, interest of Rs.5,77,808 and penalty of Rs.70,700. The First Appellate Authority dismissed the appeals on 30 November 2015 and the Tribunal on 12 December 2017. In the revision under section 65(1) the bank argued that the machines were only instruments of a composite service, that it retained ownership and control, and that service tax and VAT are mutually exclusive.

Questions before the court

• Do the rentals collected for swiping machines amount to a transfer of the right to use goods taxable as a deemed sale under the KVAT Act, and does service tax payment bar VAT?

Why the court ruled this way

The test under article 366(29A)(d) and BSNL v. Union of India is whether the customer was conferred a right to use identified goods for the agreed purpose, not whether ownership passed, so retained ownership, supervision, maintenance duties and repossession rights do not negate a transfer of the right to use (paragraphs 31 to 34). The machines were identifiable tangible equipment installed at merchant premises, separate rental was charged and the merchants used them to accept payments (paragraphs 35 to 37, 40). The agreement clauses against altering, moving or subleasing the machines and requiring return only protect the owner (paragraphs 38 and 39), and the bank's power to suspend terminals through the network is supervisory control (paragraph 41). The Division Bench in Atria Convergence Technologies v. Deputy Commissioner (18 February 2025) held that retained ownership is not conclusive (paragraphs 42 to 45). Different elements of one transaction can be taxed under different statutes, and Imagic Creative did not say that service tax payment bars VAT on a discernible sale (paragraphs 46 to 49). Idea Mobile (SIM cards), Rashtriya Ispat Nigam and Indus Towers (access to passive infrastructure) were distinguished (paragraphs 50 to 56). Penalty and interest follow the tax absent perversity (paragraphs 57 to 59).

Controlling point

The rental charges for the machines were consideration for a deemed sale by transfer of the right to use goods and were taxable under the KVAT Act.

Order and next steps

The revision petition was dismissed, the Tribunal's order of 12 December 2017 was affirmed, both substantial questions of law were answered in the affirmative against the bank, there was no order as to costs and pending applications were disposed of.

Practical implications

Banks and others that rent card-swiping or similar equipment to customers for a separate fee should expect state VAT on the rentals as a transfer of the right to use goods, in addition to any service tax paid on the services.

Limits of this ruling

• The Court relied on concurrent findings that the machines were identified goods supplied for rent and use by merchants under these agreements; it did not hold that the bank's commission for payment processing is subject to VAT, and the position under later laws was not considered.