Recovery Of LC Charges By Non-Banking Entity Not Taxable As Banking Services: CESTAT Delhi

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi has held that the issuance of a Letter of Credit (LC) by a person or body corporate not engaged in banking, financial, or similar activities is not covered under the taxable category of "Banking and Other Financial Services."

It ruled that the recovery of LC charges by the State Trading Corporation of India Ltd. (STC) from buyers in High Seas Sale (HSS) transactions is therefore not liable to service tax.

A bench of Judicial Member Binu Tamta and Technical Member P.V. Subba Rao observed, "In other words, since the issue of LC by a person or body corporate, not engaged in banking, financial or similar activities is not covered in the list of services of clause (ix), the recovery of LC charges by the appellant from their HSS buyers is not liable to service tax."

The bench set aside service tax demands of over ₹7.16 crore, along with interest and penalties, for the period from 2007-08 to 2016-17.

STC imports goods from foreign suppliers and sells them to domestic buyers on a High Seas Sale basis before the goods enter India.

It arranges the opening of Letters of Credit through banks and recovers the corresponding LC charges, along with its trading margin, from buyers.

The department argued that the LC charges were consideration for providing "Banking and Other Financial Services."

According to it, STC arranged the LC facility for its customers and recovered separate charges for doing so.

STC contended that Letters of Credit are issued only by banks. It argued that the LC charges merely reimbursed the cost of opening the LC and formed part of the sale price under the High Seas Sale agreement.

After examining the agreement, the tribunal found that it was essentially a contract for the sale of goods. It noted that the buyer's consideration expressly included LC charges and all costs incurred by STC.

The bench observed, "The agreement being for sale of goods, the relationship between the parties, i.e., the appellant and the HSS buyer is that of seller and buyer and not as service provider and service recipient. Consequently, the basic requisites for classifying it as 'service' are absent."

The tribunal also held that STC, being a trading organisation, could not be treated as a provider of banking or financial services merely because it arranged for the issuance of Letters of Credit through banks.

Relying on Indian Oil Corporation Ltd. and the Supreme Court's ruling in Union of India v. Mohit Minerals Pvt. Ltd., the tribunal held that the High Seas Sale transaction was a composite supply centred on the sale of goods.

It ruled that the LC charges could not be separated from the transaction and subjected to service tax.

For Appellant: Advocate N.D. Dubey and Mr. S.C. Kamra,

For Revenue: D.S. Garbyal, Authorized Representative