Pranav B Prem

The Mumbai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), comprising S.K. Mohanty (Judicial Member) and M.M. Parthiban (Technical Member), has ruled that Indian banks are not liable to pay service tax under the reverse charge mechanism (RCM) on charges deducted by foreign banks while processing export remittances. The bench clarified that such charges are not consideration for a service provided to the Indian bank, and therefore, no liability arises under the Finance Act, 1994.

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Background of the Dispute
The appeal arose from a September 25, 2016 order of the Commissioner of Service Tax-I, Mumbai, which confirmed a service tax demand of ₹17.06 crore, along with interest and penalties, against Bank of Baroda. The department had alleged that foreign correspondent banks, engaged in transmitting export documents and remittances, rendered services to the Indian bank. Under Notification No. 30/2012-ST, the Indian bank was treated as the recipient, liable to pay service tax under Section 66B read with Section 68(2) of the Finance Act, 1994.

Bank of Baroda facilitates exporters in collecting payments from overseas buyers through three arrangements:

1. Do Not Send – Exporter sends documents directly to the foreign buyer.

2. Bank to Customer – Exporter’s bank sends documents to the importer through courier.

3. Bank to Bank – Exporter’s bank sends documents to the importer’s bank abroad.

In “bank to bank” transactions, the foreign bank deducts its processing charges from the remittance amount before transferring the balance to the Indian bank. The department argued that these deductions amounted to “banking and other financial services” provided to the Indian bank, attracting service tax on an RCM basis.

Arguments Before the Tribunal
The appellant contended that the actual service recipients were the exporters, who bore the cost of the foreign bank’s charges. The Indian bank acted only as an intermediary, facilitating the collection of export proceeds. No consideration flowed from the Indian bank to the foreign bank, and there was no contractual arrangement for the provision of services to the bank.  It was further argued that the demand was contrary to the Supreme Court’s rulings in Bhayana Builders (P) Ltd. and Intercontinental Consultants & Technocrats (P) Ltd., which held that only amounts constituting consideration for taxable services can be included in the value of such services.

The department relied on a 2014 trade notice issued by the Mumbai Commissionerate, which had interpreted foreign bank charges in export transactions as taxable under the reverse charge mechanism. It maintained that the charges deducted abroad were for services rendered to the Indian bank in facilitating remittance clearance.

Findings of the Tribunal
The bench noted that the foreign bank’s role was to act as the collecting bank for the exporter’s overseas buyer and to remit the net amount after deducting its charges. This activity was undertaken on behalf of the exporter, not the Indian bank. Since the exporter agreed to bear the cost, the Indian bank was not the service recipient.

The Tribunal emphasised that under Section 65B(44) of the Finance Act, 1994, a “service” is taxable only when consideration moves from the recipient to the provider. In the present case, the foreign bank deducted its charges directly from the remittance before it reached India, with no payment obligation on the Indian bank.

On the department’s reliance on the 2014 trade notice, the bench observed that the notice was based on interim judicial orders and could not override statutory provisions or final judicial pronouncements. Moreover, the department failed to establish any legal nexus between the Indian bank and the foreign bank in terms of contractual service provision.

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Holding that the confirmation of service tax liability on Indian banks in such export transactions “does not stand legal scrutiny,” CESTAT set aside the Commissioner’s order in its entirety. The demand of ₹17.06 crore, along with interest and penalties under Sections 76 and 77, was quashed. The appeal was allowed in favour of Bank of Baroda, reinforcing the principle that RCM liability cannot be imposed without establishing that the Indian bank was the actual service recipient.

Appearance

Counsel For Appellant: CA Mehul Jivani

Counsel For Respondent: AR S.K. Yadav

Cause Title: Bank of Baroda V. Commissioner of Service Tax

Case No: Service Tax Misc. Application No. 86201 of 2024

Coram: S.K. Mohanty [Judicial Member], M.M. Parthiban [Technical Member]