Foreign Bank Charges On Export Proceeds Not Taxable Without Service Relationship: CESTAT Chennai

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on 4 November held that exporters cannot be treated as recipients of banking services merely because foreign banks deduct charges while transmitting export proceeds, in the absence of a service-provider and service-recipient relationship.

A Bench comprising Judicial Member Ajayan T.V. and Technical Member Vasa Seshagiri Rao allowed three appeals filed by garment exporters AKR Textile, Poppys Knitwear Private Limited and N.S.P. Knitting Mills, and set aside the Service Tax demands, interest and penalties imposed on them. It said:

“...The Department has not established that the foreign banks were engaged by the appellants or that they rendered any taxable Banking and Other Financial Service to them. The appellants consequently cannot be treated as recipients of such service merely because charges were deducted from their export proceeds.”

The dispute arose when the Department treated charges deducted by foreign banks while transmitting export proceeds to Indian banks as consideration for taxable 'Banking and Other Financial Services' received by the exporters.

It consequently raised Service Tax demands under the reverse charge mechanism. The demands were confirmed against Poppys Knitwear, AKR Textile and N.S.P. Knitting Mills were Rs. 2,61,420, Rs. 51,227 and Rs. 19,89,043, respectively, along with applicable interest and penalties.

The exporters contended that they had neither engaged the foreign banks nor entered into any agreement with them or issued instructions to them. They submitted that the foreign banks were engaged through banking arrangements adopted by overseas buyers and that the banks had not raised any invoice or bill against them.

Accepting these submissions, the Tribunal observed that the mere deduction of charges from export proceeds could not establish that the exporters were recipients of banking services. The Department had failed to produce any material establishing a direct contractual or service relationship between the foreign banks and the exporters.

It relied on its earlier decisions in Rogini Garments v. Commissioner of Customs, Central Excise & Service Tax, SKM Egg Products Export (India) Ltd. v. Commissioner of GST & Central Excise and Annur Cotton Mills v. Commissioner of GST & Central Excise. These decisions held that charges deducted by foreign banks during the transmission of export proceeds could not be taxed in the hands of exporters in the absence of a service-provider and service-recipient relationship.

Further, the Bench observed that the economic incidence of a charge was distinct from the identity of the service recipient. Liability under the reverse charge mechanism could arise only if the Department established that the taxable service had actually been rendered to the person sought to be taxed.

Since the Department failed to establish that the foreign banks had rendered taxable banking services to the exporters, it held that the foundational requirement for imposing reverse charge liability was absent.

Accordingly, the CESTAT set aside the Service Tax demands, along with interest under Section 75 and penalties under Sections 76, 77 and 78 of the Finance Act, 1994. It also held that the exporters' alternative arguments concerning the extended period of limitation under Section 73(1) of the Act did not require examination, as the appeals were allowed on merits.

For Appellants: Advocates Nivithra S. and Ieswarya N.

For Respondent: O.M. Reena, Authorised Representative