No Service Tax Liability on Bank Charges Paid to Foreign Banks Under Reverse Charge Mechanism: CESTAT
Pranav B Prem
The New Delhi Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), consisting of Dr. Rachna Gupta (Judicial Member) and Hemambika R. Priya (Technical Member), has held that bank charges paid to foreign banks are not liable to service tax under the reverse charge mechanism. The Tribunal observed that when both the service provider (the foreign bank) and the service recipient (the foreign buyer) are situated outside India, such services fall outside the scope of Section 66B of the Finance Act, 1994, which is the charging section for levying service tax.
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The appellant, M/s Artifacts India, is a proprietorship concern engaged in the manufacture and export of paper products, gift sets, and handicraft items. It operates as a 100% Export Oriented Unit (EOU) and had exported goods manufactured by it, receiving payment in foreign currency from its buyers. As the appellant was exclusively engaged in export activities, it had not obtained service tax registration.
During the audit of the appellant’s records for the period from 01.04.2007 to 31.03.2012, the Department alleged that the appellant had incurred certain expenses in foreign currency, on which service tax was not paid under the reverse charge mechanism. Based on these findings, a show cause notice dated 17.10.2012 was issued, demanding service tax of Rs. 10,09,952. Upon adjudication, a part of the demand was dropped due to computational errors, but the remaining demand of Rs. 8,42,057 was confirmed, along with interest and penalties under Sections 75, 77, and 78 of the Finance Act, 1994.
Challenging this order, the appellant contended before the Tribunal that there was no privity of contract between itself and the foreign banks that facilitated payment remittance. It was argued that the foreign buyers, not the appellant, availed the services of foreign banks and that the appellant merely bore these bank charges as per the terms of its sales agreements with foreign buyers. Therefore, no direct service relationship existed between the appellant and the foreign banks, and the appellant could not be deemed a service recipient under the reverse charge provisions.
The Tribunal concurred with this argument, holding that the foreign bank provided services to the foreign buyer, not to the appellant. It was clarified that the mere bearing of charges by the appellant did not amount to receiving a taxable service within India’s taxable territory. The Tribunal further cited decisions such as Greenply Industries Ltd. v. CCE and others to support this view. Consequently, the demand for service tax on foreign bank charges under the reverse charge mechanism was set aside.
Regarding the commission payments made to foreign agents, the Tribunal noted that the agents had been engaged by the foreign buyers to locate suppliers in India, and that the appellant had merely reimbursed the commission amounts as per the terms of sale agreements. There was no direct relationship or contract between the appellant and the foreign agents. Therefore, the Tribunal held that the demand of service tax on these commission payments could not be sustained, as the appellant was not the recipient of these services.
On the issue of design and development charges paid abroad, the Tribunal found that these services were also availed by the foreign buyers, with the appellant merely bearing the cost as per mutually agreed terms. As such, there was no service provider-recipient relationship between the appellant and the foreign designers. The Tribunal held that service tax liability on these charges could not be fastened on the appellant.
Additionally, the Tribunal emphasized that even if the appellant were liable to pay service tax under reverse charge, the amount paid would have been available as CENVAT credit, leading to a revenue-neutral situation. In such circumstances, the invocation of the extended period of limitation under Section 73 of the Finance Act, 1994, was not justified. In view of the above findings, the Tribunal allowed the appeal filed by the appellant, set aside the impugned order, and quashed the demand for service tax, interest, and penalties.
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 V. Commissioner of Central Excise (Appeals), Delhi- II
Case No: Service Tax Appeal No.55777 OF 2014
Coram: Hon’ble Dr. Rachna Gupta [Member (Judicial)], Hon’ble Ms. Hemambika R. Priya [Member (Technical)]
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