CESTAT: No Service Tax Payable On Artwork Charges
Pranav B Prem
The Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that service tax is not payable on artwork charges borne by exporters, particularly when such charges are incurred in accordance with contractual terms with foreign buyers. The bench comprising Dr. Rachna Gupta (Judicial Member) and Ms. Hemambika R. Priya (Technical Member) allowed the appeal filed by M/s Artifacts India, observing that the appellant was not the recipient of the service and thus not liable under the reverse charge mechanism.
M/s Artifacts India, a proprietorship concern located at Mayapuri Industrial Area, New Delhi, is engaged in the manufacture of paper products including boxes, bags, gift sets, and handicraft items. The appellant is a 100% Export Oriented Unit (EOU) and during the period from 01.04.2007 to 31.03.2012, it exported goods and received payment in foreign currency. Since it was exclusively engaged in export activities, the appellant had not taken registration under the service tax regime.
During an audit of its records, the department raised objections and issued a show cause notice dated 17.10.2012. The notice alleged that the appellant had paid for certain services—namely foreign bank charges, agent commissions, and artwork/design charges—without discharging service tax under the Reverse Charge Mechanism (RCM). The demand raised amounted to ₹10,09,952, of which ₹1,67,895 was dropped due to calculation errors, and the remaining ₹8,42,057 was confirmed through the Order-in-Original dated 30.08.2013. This was upheld by the Commissioner (Appeals) on 10.07.2014, leading to the present appeal before CESTAT.
The Tribunal noted that one of the central issues was whether design and artwork charges paid in foreign currency by the appellant were subject to service tax under RCM. The revenue’s case was that these charges constituted taxable services received from foreign designers and hence, fell within the scope of “design services” under Section 66A of the Finance Act, 1994. However, the appellant contended that the artwork and design professionals were engaged by foreign buyers, and the appellant had only reimbursed the charges as per mutually agreed commercial terms.
The Tribunal examined the purchase orders from clients, specifically M/s TESCO, and found that the contractual terms explicitly provided that the appellant was to bear artwork charges, bank charges, and agent commissions. These were not services arranged or contracted by the appellant directly. The Tribunal held, “It is clear from these terms that the artwork charges were received by the buyer abroad and he charges the said amount to the appellant. This was paid by the appellant as per the terms and conditions of sale and there is no evidence that he was the recipient of the services of the design charges.”
Given the absence of a direct service provider-recipient relationship, the Tribunal concluded that no service tax liability could be fastened on the appellant under the reverse charge mechanism. It also clarified that merely bearing the cost of a service as part of a commercial arrangement does not make the appellant a recipient of that service under tax law.
Addressing the other components of the demand, the Tribunal also examined the issue of commission payments to foreign agents and foreign bank charges. The Tribunal found that such commissions were deducted from invoice values raised by the appellant and were not direct payments made to agents. Accordingly, there was no evidence of a contractual relationship between the appellant and any foreign agent. Similarly, for bank charges deducted by foreign banks during remittance, the Tribunal held that the services were rendered by foreign banks to their own clients—the overseas buyers—not to the appellant. As such, these did not attract service tax under the Banking and Financial Services category either.
The Tribunal further emphasized the principle of revenue neutrality. Since the appellant was a 100% EOU, even if any service tax was payable under RCM, the appellant would be entitled to avail CENVAT credit for such payment. The Tribunal observed, “This would clearly render the situation to be revenue neutral and hence extended period cannot be upheld.”
Relying on earlier decisions including Jet Airways (India) Ltd. v. CST, Mumbai, and The Indure Private Limited v. CCE, New Delhi, the Tribunal held that extended limitation under Section 73 of the Finance Act, 1994, was not invocable in a revenue-neutral scenario where there is no intention to evade tax. It also noted that the appellant had remained unregistered during the period in question and there was no willful suppression.
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The CESTAT allowed the appeal filed by M/s Artifacts India and set aside the demand of service tax on artwork and design charges. It held that the artwork services were availed by foreign buyers and reimbursed by the appellant under sale agreements, without establishing a taxable service relationship. The Tribunal also held that service tax was not payable on foreign bank charges and commissions in the absence of direct contractual relationships. It concluded that even if tax was otherwise payable, the entire situation was revenue neutral and hence, extended limitation and penalty provisions were not applicable.
Appearance
Present for the Appellant: Shri A.K.Batra, Chartered Accountant
Present for the Respondent: Shri Anand Narayan, Authorised Representative
Cause Title: M/s. Artifacts India Versus Commissioner of Central Excise (Appeals), Delhi- II
Case No: Service Tax Appeal No. 55777 OF 2014
Coram: Rachna Gupta [Judicial Member], Hemambika R. Priya [Technical Member]
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