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2025 (5) TMI 1917 - AT - Service Tax100% EOU - levy of service tax - Banking and Financial Services - foreign bank charges deducted by foreign banks in relation to realization of export proceeds - reverse charge mechanism - main allegation against the Appellant is that the Appellant realizes export proceeds from foreign buyers and makes transactions with foreign customers through their bank in India and also foreign banks - HELD THAT - The issue involved in this appeal is no more res integra and on identical facts the Tribunal has already decided in favor of the Assessee. The relevant portion in the Appellant s own case in M/S. ANNUR COTTON MILLS VERSUS COMMISSIONER OF CENTRAL EXCISE SALEM 2024 (2) TMI 83 - CESTAT CHENNAI where it was held that From the record it appears that while exporting their goods they lodged their bills for collection to the Indian Bankers who in turn send the same to the foreign banks. The foreign banks while remitting the money to the Indian Bank deduct their charges for collection of bills which in turn are charged by the Indian Banks from the appellants. When it is so then the appellant are not entitled to pay the service tax. After appreciating the facts and in compliance to the judicial discipline as there is no service provider and service recipient relationship between the appellant and Foreign Banks it is opined that the demands raised cannot sustain and requires to be set aside. Conclusion - i) The demand for service tax on foreign bank charges under Banking and Financial Services category is unsustainable and set aside. ii) The provisions of Section 66A and the 2006 Rules were incorrectly applied for the period after 01.07.2012; the correct legal framework is the Place of Provision of Services Rules 2012. iii) No direct service provider-recipient relationship existed between the appellant and foreign banks; thus service tax liability does not arise. iv) Penalties interest and late fees imposed consequentially on the demand are set aside. The impugned order is set aside - appeal allowed.
The core legal questions considered in this judgment are:
1. Whether service tax is payable by the appellant on foreign bank charges deducted by foreign banks in relation to realization of export proceeds under the category of "Banking and Financial Services". 2. Whether the services rendered by foreign banks are taxable under the Reverse Charge Mechanism (RCM) when received from outside India. 3. The applicability and interpretation of the relevant statutory provisions, namely Section 66A of the Finance Act, 1994, the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, and the Place of Provision of Services Rules, 2012, for the periods in question. 4. Whether the demand for service tax on foreign bank charges raised by the department is sustainable in law, considering the absence of a direct service provider-recipient relationship between the appellant and the foreign banks. 5. The validity of penalties and interest imposed along with the service tax demand. Issue-wise Detailed Analysis 1. Taxability of Foreign Bank Charges under Service Tax Law Legal Framework and Precedents: The appellant was initially paying service tax under "Transport of Goods by Road". The department alleged that foreign bank charges paid on realization of export proceeds attract service tax under "Banking and Financial Services" category, payable under Reverse Charge Mechanism as per Section 66A of the Finance Act, 1994 and associated Rules. The Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 governed the period from 01.04.2012 to 30.06.2012, while the Place of Provision of Services Rules, 2012 applied from 01.07.2012 onwards. Several precedents were cited, including decisions by this Tribunal and other benches, notably:
Court's Interpretation and Reasoning: The Tribunal analyzed whether the foreign bank charges constituted taxable services rendered directly to the appellant. It was found that the foreign banks acted as intermediaries providing services to the Indian banks, not directly to the appellant. The appellant did not have any direct agreement or knowledge of the foreign banks providing services, nor did they deal with the foreign banks independently. The Tribunal emphasized that the service tax liability under Reverse Charge Mechanism arises only when the recipient of service receives taxable services from a provider outside India. Here, the services were not received by the appellant directly but by the Indian bank, which in turn paid the foreign bank charges. It was also noted that the Place of Provision of Services Rules, 2012, classify the foreign bank as an intermediary and the place of provision of service as the location of the foreign bank outside India, which is a non-taxable territory. Key Evidence and Findings: Documentary evidence showed that export proceeds were realized through the appellant's Indian bank, which used foreign banks for collection. The foreign banks deducted charges while remitting proceeds to the Indian bank. There was no direct payment or contract between the appellant and the foreign banks. Application of Law to Facts: Since the appellant did not receive services directly from the foreign banks, and the foreign banks acted as intermediaries providing services to the Indian banks, the service tax under the Reverse Charge Mechanism was not attracted. The demand was thus unsustainable. Treatment of Competing Arguments: The department argued that the foreign bank charges were taxable under the Reverse Charge Mechanism as services received from outside India. The appellant contended that no services were received in India from the foreign banks and that the applicable provisions for the period were not correctly invoked. The Tribunal sided with the appellant, relying on existing precedents and the factual matrix. Conclusions: The Tribunal held that the foreign bank charges are not taxable under service tax law as the appellant is not the recipient of services from the foreign banks. The demand and penalties based on such demand were set aside. 2. Applicability of Section 66A and Place of Provision of Services Rules Legal Framework and Precedents: Section 66A of the Finance Act, 1994 and the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 governed the taxability of services received from outside India during the period 01.04.2012 to 30.06.2012. From 01.07.2012 onwards, these were superseded by the Place of Provision of Services Rules, 2012 and Section 66C of the Finance Act. Court's Interpretation and Reasoning: The Tribunal observed that the Show Cause Notice and the impugned orders relied on Section 66A and the 2006 Rules even for the period after 01.07.2012, which was incorrect as these provisions were superseded. The demand was thus based on non-existent legal provisions for the relevant period. Key Evidence and Findings: The appellant pointed out that the impugned orders did not allege or establish that the services were received in India, a pre-condition under Section 66A and the 2006 Rules. Further, the Place of Provision of Services Rules, 2012 were not properly invoked. Application of Law to Facts: Since the demand did not rely on the correct legal provisions applicable for the respective periods, the demand was unsustainable. Treatment of Competing Arguments: The department maintained the demand based on Section 66A. The appellant relied on Tribunal decisions holding that the 2006 Rules were superseded and that proper provisions were not invoked. The Tribunal accepted the appellant's submissions. Conclusions: The Tribunal held that the demand raised under Section 66A and the 2006 Rules for the period post 01.07.2012 was not sustainable as these provisions were superseded by the Place of Provision of Services Rules, 2012. 3. Nature of Services and Service Provider-Recipient Relationship Legal Framework and Precedents: The definition of "intermediary" under Rule 2(f) and "location of service provider" under Rule 2(h) of the Place of Provision of Services Rules, 2012 was examined. The Tribunal referred to several decisions including M/s. Fashion Knits and M/s. Greenply Industries Ltd. Court's Interpretation and Reasoning: The Tribunal found that the foreign banks acted as intermediaries between the Indian banks and foreign buyers, facilitating realization of export proceeds. The appellant did not have a direct service provider-recipient relationship with the foreign banks. The foreign banks' place of provision of service was outside India, making the services non-taxable under Indian service tax law. Key Evidence and Findings: The appellant did not have any knowledge or agreement with foreign banks, and the charges were deducted in a bank-to-bank transaction. The appellant's Indian bank paid the foreign bank charges and recovered them from the appellant. Application of Law to Facts: The absence of a direct service provider-recipient relationship meant that the appellant was not liable to pay service tax on foreign bank charges. The services were not received in India by the appellant. Treatment of Competing Arguments: The department contended that the appellant was the recipient of services from foreign banks. The appellant rebutted by showing the intermediary nature of the foreign banks and lack of direct relationship. The Tribunal accepted the appellant's position. Conclusions: The Tribunal concluded that the foreign bank charges do not attract service tax as the appellant is not the recipient of services from the foreign banks. 4. Penalties, Interest, and Extended Period of Limitation Legal Framework and Precedents: Penalties under Sections 76, 77(1)(a), and 77(2) of the Finance Act, 1994, and late fees under Rule 7C of the Service Tax Rules, 1994 were imposed along with interest. Court's Interpretation and Reasoning: Since the main demand for service tax was found unsustainable, the penalties and interest imposed consequentially were also not maintainable. Key Evidence and Findings: The Tribunal noted that since the demand was set aside on merits, discussion on extended period and penalties was unnecessary. Application of Law to Facts: Penalties and interest flow from the tax demand; if the demand fails, these cannot stand. Treatment of Competing Arguments: The appellant challenged the penalties; the department supported them. The Tribunal ruled in favor of the appellant. Conclusions: Penalties, interest, and late fees were set aside along with the tax demand. Significant Holdings "The main issue involved in this case is whether the amount which was deducted by the foreign banks towards banking charges are taxable under the service 'Banking and Other Financial Services' during the period from 1.4.2007 to 31.5.2012... The appellants have submitted the documents for realization of export sale proceeds to their bank namely SBI, which in turn has used the services of the foreign bank for collection of export sale proceeds. Obviously, the foreign banks who have rendered their services, have deducted their charges while remitting the export sale proceeds to SBI. The appellant has never dealt with the foreign bank on his own and the Banking and Other Financial Service if at all was rendered only to SBI... In view of this, the appellant cannot be treated as service recipient and no service tax can be charged under Section 66A read with Rule 2 (1)(2)(iv) of the Service Tax Rules, 1994." "The foreign bank in which the overseas buyer deposits the sale proceeds is chosen by the foreign buyer and not by the appellant... By no stretch of imagination can such foreign bank be considered as a service provider for the appellant who in most cases would not even be aware of the identity of such foreign bank... The department by the Trade Notice dated 14.2.2014 has clarified the very same situation... Exporter or importer in India does not have any formal or informal agreement with the foreign bank... Therefore, in view of the above mentioned factual position and also in view of the various articles of URC 522/UCP 600, it is clear that services are provided by the foreign bank to the bank in India." Core principles established include:
Final determinations on each issue:
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