Indian Exporter Not Liable To Pay Service Tax Under Reverse Charge On Foreign Bank Charges: CESTAT Delhi

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that an Indian exporter is not liable to pay service tax under the reverse charge mechanism on charges deducted by foreign banks from export proceeds.

The tribunal held that the services were received by the Indian bank, not the exporter, which had no contractual relationship with the foreign bank.

A coram comprising Judicial Member Somesh Arora and Technical Member Sanjiv Srivastava allowed Sarda Energy and Minerals Ltd.'s appeal and set aside the ₹1.88 lakh service tax demand and penalty.

“Appellant has no privity of contract with foreign bank- therefore the Indian bank is the recipient of service liable to pay tax under RCM and not the exporter.”, the tribunal ruled.

Sarda Energy and Minerals manufactures sponge iron, billets, wire rods and ferro alloys, among other products. During an audit, the department noticed expenses recorded in favour of overseas entities towards bank commission, international bank charges, stamping charges and correspondence charges.

The department demanded ₹1,88,022 in service tax for the period from April 2015 to March 2017. It treated the company as the recipient of services provided by overseas entities and invoked the reverse charge mechanism.

The company argued that it had no direct arrangement or privity of contract with the foreign banks. It relied on earlier tribunal decisions holding that where foreign banks deduct charges while remitting export proceeds to Indian banks, the Indian exporter is not the recipient of the service.

The Revenue argued that the exporter ultimately bore the charges and was therefore the recipient of the foreign banks' services. It contended that the Indian bank merely facilitated the service between the exporter and the foreign bank.

The tribunal rejected the Revenue's approach and found that the issue was covered by earlier decisions in favour of the exporter.

It relied on earlier decisions involving cases where export documents were submitted to Indian banks, which used foreign banks to collect export proceeds. In those cases, the foreign banks deducted their charges while remitting the export proceeds, while the exporters had no direct dealings with the foreign banks.

The tribunal also relied on Mumbai Trade Notice No. 20/2013-14. The notice provides that where foreign banks recover charges for processing import or export documents and remitting foreign currency, the Indian bank is to be treated as the recipient of the service.

The tribunal also found the Revenue's reliance on the Madras High court's decision in BGR Energy Systems misplaced. It noted that the case concerned bank guarantees issued for an overseas customer and involved a different factual setting.

The tribunal further noted that the single-judge decision in BGR Energy Systems had been followed by a Division Bench order directing the appellate authority to decide the matter in accordance with law, without being influenced by the observations of the single judge.

On limitation, the tribunal found no evidence that the company had failed to pay tax with mala fide intent. It noted that the show cause notice itself was based on an audit of the company's records.

The tribunal further held that the demand was revenue neutral because the company was eligible for input tax credit if the tax had been paid. It therefore held that the allegations of fraud, suppression, and related grounds were not sustainable and that the extended period of limitation could not be invoked.

The tribunal consequently found no merit in the service tax demand. It set aside the penalties and allowed the appeal

For Appellant: Pooja, Chartered Accountant and J.M. Sharma, Consultant

For Respondent: Jaya Kumari, Authorised Representative