2025 (6) TMI 1167 - AT - Service Tax

Taxability - banking and financial services - upfront fee charged by an international financial institution specifically the Asian Development Bank (ADB) on an external commercial borrowing (ECB) loan availed by the appellant - HELD THAT - The decision of Tribunal in re Coastal Gujarat Power Ltd 2016 (12) TMI 229 - CESTAT MUMBAI concurring a dispute caused by like charges incurred in availing external commercial borrowing (ECB) from the International Finance Corporation (IFC) and the Asian Development Bank (ADB) held that section 66A of Finance Act 1994 was enacted to substitute for provider of service by deeming the recipient of the service as surrogate owing to amorphousness of supplier of service arising from provider and recipient having to be in the territory of India to conform to taxable service leviable to tax under section 66 of Finance Act 1994. It was further held that such contingency did not arise when such person is legislatively acknowledged in much the same way as any other artificial person by operation of law and consequently immunity from tax conferred on these entities would operate to extinguish tax liability under section 66 of Finance Act 1994. Conclusion - The services provided by ADB are exempt from service tax by virtue of their immunity under international agreements and domestic legislation and that the recipient cannot be taxed under section 66A. The impugned order is set aside and appeal allowed.

Summary

The core legal questions considered in this judgment revolve around the taxability of an 'upfront fee' charged by an international financial institution, specifically the Asian Development Bank (ADB), on an external commercial borrowing (ECB) loan availed by the appellant. The principal issues include:

1. Whether the 'upfront fee' charged by ADB constitutes consideration for 'banking and financial services' taxable under the Finance Act, 1994.

2. The applicability of section 66A of the Finance Act, 1994, which deems the recipient of service as the provider for tax purposes when the actual provider is outside India.

3. The question of immunity from service tax conferred on international organizations such as ADB and International Finance Corporation (IFC) by virtue of international agreements and domestic legislation incorporating those agreements.

4. The validity and scope of taxing the recipient of services under section 66A when the service provider is an international organization enjoying statutory immunities.

5. The implications of prior Tribunal decisions, particularly in Coastal Gujarat Power Ltd, and subsequent government circulars clarifying the tax exemption status of services rendered by ADB and IFC.

Issue-wise Detailed Analysis

1. Taxability of the 'upfront fee' as consideration for banking and financial services

The appellant was charged service tax on an upfront fee of Rs. 2.05 crores deducted by ADB on a loan of Rs. 205 crores, contending that this fee was consideration for banking and financial services under section 65(105)(zm) of the Finance Act, 1994. The service tax authorities sought recovery under section 73, interest under section 75, and penalties under sections 77 and 78.

The original authority held the fee taxable, invoking section 66A to treat the recipient as the provider due to the absence of the actual service provider within India. The Commissioner (Appeals) upheld this view, relying on the admitted fact of deduction and the deemed provider concept.

However, the appellant argued that ADB, as an international organization, enjoys immunity from tax under special legislative provisions, thus exempting the fee from service tax.

2. Applicability and interpretation of section 66A of the Finance Act, 1994

Section 66A was enacted to address the lacuna where the service provider is located outside India and thus beyond the jurisdiction of Indian tax authorities. It deems the recipient of such services as the provider, making them liable to pay service tax.

The Tribunal in Coastal Gujarat Power Ltd had earlier examined this provision in the context of similar fees charged by IFC and ADB. It was held that the fiction created by section 66A applies only when the provider has no legislative recognition or presence in India. The section was designed to extend tax net where the provider is amorphous or non-existent in India.

The Court reasoned that since ADB and IFC are recognized by domestic legislation incorporating international agreements, they have a legislative existence in India, albeit not corporeal. Therefore, the deemed provider fiction of section 66A does not apply to them.

3. Immunity conferred on ADB and IFC by international agreements and domestic legislation

The judgment extensively analyzed the nature and effect of international agreements establishing ADB and IFC, highlighting that India, as a member state, enacted legislation under Article 253 of the Constitution to give these agreements the force of law domestically.

The Agreements and corresponding statutes explicitly confer immunities, exemptions, and privileges on these organizations, including immunity from liability to pay or collect any duty or tax. The Court emphasized that such immunities prevail over conflicting provisions in the Finance Act, 1994.

The Court distinguished these immunities from those applicable to the United Nations and its bodies, noting that the latter's immunities are governed by a different legislative framework and were not under dispute.

4. Interaction between section 66A and the immunities of international organizations

The adjudicating authority's inference that tax exemption was conditional upon the provider having an establishment in India was rejected. The Court held that the service rendered by ADB and IFC is not outside the scope of section 66 but rather exempt under the statutes governing these organizations.

The Court found that the fiction of section 66A cannot override the immunity conferred by international agreements and their enabling legislation. Therefore, the recipient cannot be taxed on services from providers who are immune, as the provider is absolved from any tax liability or obligation to collect tax.

5. Precedent and government clarifications

The Tribunal relied heavily on its prior decision in Coastal Gujarat Power Ltd, where the same issue was settled in favor of immunity and exemption from tax for services rendered by ADB and IFC.

Subsequent government circulars clarified that services provided by IFC and ADB are exempt from Goods and Services Tax (GST) under their respective Acts and that this exemption applies mutatis mutandis to service tax as well. The government also withdrew its appeal to the Supreme Court against the Tribunal's decision in Coastal Gujarat Power Ltd, underscoring acceptance of the legal position.

The Court found that the facts in the present case were identical to those in Coastal Gujarat Power Ltd and thus followed the settled principle, setting aside the impugned order.

6. Constitutional and international law considerations

The Court invoked constitutional provisions, especially Article 253 and Article 51(c), to emphasize the obligation of the State to enact laws giving effect to international agreements and to interpret domestic law harmoniously with international obligations.

Judicial precedents were cited to demonstrate the evolving approach towards respecting international treaties and agreements, especially when enacted into domestic law, which must prevail over conflicting statutory provisions.

Conclusions on Issues:

- The upfront fee charged by ADB is not taxable as service tax under the Finance Act, 1994.

- The immunity conferred on ADB and IFC by international agreements and domestic legislation overrides the deeming fiction of section 66A.

- The recipient of such services cannot be held liable to pay service tax on the fees charged by these international organizations.

- The decision in Coastal Gujarat Power Ltd is authoritative and binding, supported by government circulars and withdrawal of appeals.

- The impugned demand of service tax, interest, and penalties is without authority of law and is set aside.

Significant Holdings

"Section 66A of Finance Act, 1994 was enacted to substitute for 'provider of service' by deeming the 'recipient of the service' as surrogate owing to amorphousness of supplier of service arising from 'provider' and 'recipient' having to be in the territory of India to conform to 'taxable service' leviable to tax under section 66 of Finance Act, 1994."

"Such contingency did not arise when such person is legislatively acknowledged in much the same way as any other artificial person, by operation of law, and, consequently, immunity from tax conferred on these entities would operate to extinguish tax liability under section 66 of Finance Act, 1994."

"The Bank shall also be immune from liability for the collection or payment of any duty or tax."

"With the provider being not only immune from taxation but also absolved of any obligation to collect and deposit any tax, there is no scope for subjecting the recipient to tax in the absence of inclusion in the definition of 'person liable to pay tax' in rule 2 of Service Tax Rules, 1994."

"When the enactments that honour international agreements specifically immunize the operations of the service provider from taxability, a law contrary to that in the form of Section 66A which legislates such operations into tax net will not prevail."

"Our place in the comity of nations is determined by our respect for commitments made at the International negotiation tables."

"In the situation of Agreements having been enacted to have force of law, there can be no doubt that the intent of those Agreements must prevail over an interpretation that begins and ends within the framework of a taxing statute."

"Confirmation of demands of tax, interest thereon and imposition of penalties are without authority of law."

The Court's final determination was to allow the appeal, set aside the impugned order, and hold that the services provided by ADB are exempt from service tax by virtue of their immunity under international agreements and domestic legislation, and that the recipient cannot be taxed under section 66A.