CESTAT Chennai Holds Foreign Bank Charges on Export Remittances Not Taxable Under Reverse Charge

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on 7 May held that foreign bank charges deducted during the remittance of export proceeds do not give rise to service tax liability under the reverse charge mechanism, as no service provider–recipient relationship exists between the exporter and the foreign banks.

Judicial Member Ajayan T.V. and Technical Member M. Ajit Kumar, allowed the appeal filed by Lingeswara Creation and set aside the orders passed by the lower authorities. The Bench observed:

“there is no privity of contract between the Appellant and the foreign remitting bank. Nothing has been brought on record to evidence that the foreign bank has acted on the Appellant's instructions so as to treat the Appellant as the recipient of service in India and consequently to attract the provisions of Section 66A read with read with the provisions of the erstwhile Taxation of Services (Provided from Outside and Received in India) Rules, 2006, so as to make the appellant liable to pay service tax under reverse charge mechanism.”

The dispute arose after the Department noticed that foreign banks, while remitting export proceeds to Lingeswara Creation's Indian bank account, deducted certain charges before transferring the balance amount. Treating these deductions as consideration for “Banking and Other Financial Services” received from foreign banks, the department invoked Section 66A of the Finance Act, 1994 and sought service tax under the reverse charge mechanism.

A show cause notice issued in April 2015 alleged non-payment of service tax along with failure to obtain registration and file ST-3 returns. The adjudicating authority confirmed the demand with interest and penalties, and the Commissioner (Appeals) upheld the order.

Before the Tribunal, Lingeswara Creation contended that it had no contractual relationship with the foreign banks, as those banks acted only on instructions of overseas buyers, and therefore no taxable service could be said to have been received.

Accepting the submissions, the Tribunal held that the department failed to establish any service provider–recipient nexus between Lingeswara Creation and the foreign banks. It noted the absence of agreements, invoices, or any documentary evidence showing that the foreign banks rendered services directly to the exporter for consideration.

Relying on its earlier ruling in M/s. SKM Egg Products Export (India) Ltd. v. Commissioner of GST & Central Excise, the Bench reiterated that where export proceeds are routed through Indian banks, any service by intermediary foreign banks is effectively rendered to the Indian bank and not the exporter. It also held that remittance of export proceeds constitutes a “transaction in money”, which falls outside the ambit of taxable service under the Finance Act, 1994.

Distinguishing the Madras High Court decision in BGR Energy Systems Ltd. v. Additional Commissioner of GST & C. Ex., relied upon by the department, the Bench observed that the ruling dealt with bank guarantee arrangements involving distinct contractual obligations and did not apply to routine export remittance transactions.

Accordingly, the CESTAT set aside the impugned order and granted consequential relief to Lingeswara Creation.

For Appellant: Mr. J.V. Niranjan and Ms. J. Aparna, Advocates

For Respondent: Ms. G. Krupa, Authorised Representative