2025 (6) TMI 15 - AT - Service Tax

Levy of service tax - bank charges paid to foreign bank - reverse charge mechanism (RCM) - Imposition of the penalty under section 77 section 78 of the Finance Act - 100% Export Oriented Unit - foreign currency from buyers - Commissioner payment to Agent - Payment for Artwork Charges - invocation of the extended period - HELD THAT - We hold that no service has been provided by the foreign Bank within the taxable territory to the appellant. Further it has to be appreciated that the Foreign Bank of the buyer had provided its services to its client i.e. the buyer who has the letter of credit facility with the Foreign bank. The said Bank retains its charges and commission and thereafter remits the net amount to appellant s bank in India where the appellant enjoys the said facility of letter of credit. The appellant received services from the bank in India with whom all the documents were negotiated. There is direct nexus of the buyer with the Foreign Bank and it is held that when the provider of service i.e. the Foreign Bank and recipient of service i.e. the Buyer are both located outside India there is no question of taxing such service in India as the said service has been provided outside the taxable territory and outside the purview of Section 66B the charging section for levy of service tax. We draw support from the Tribunal s decision in Greenply Industries Ltd. VS CCE- 2015 (12) TMI 80 - CESTAT NEW DELHI wherein it was held that there is no document showing foreign banker charging any amount directly from assessee and the assessee cannot to be treated service recipient and Service Tax not to be charged under Section 66A of Finance Act 1994 read with Rule 2(1)(2)(iv) of Service Tax we ort from Rules 1994. We note that services provided by a commission agent are included in the category of taxable service termed as business auxiliary service . In cases where this service is provided by a service provider who is based outside India to a service recipient who is based in India Section 66A inserted by the Finance Act 2006 read with the Service Tax Rules 1994 mandate that service tax liability is to be discharged by the service recipient. However a perusal of sample purchase order of the client M/s TESCO it is noted that the terms of the agreement is that the appellant will bear the artwork charges Foreign Bank charges Agent commission charges. It is clear from these terms that the services of the Commission agent was received by the buyer abroad and he charges the said commission amount to the appellant. This was paid by the appellant as per the terms and conditions of sale and there is no evidence that he was the recipient of the services of the foreign commission agent. We draw support from the Tribunal s decision in the case of SURYANARAYAN SYNTHETICS P LIMITED VERSUS COMMISSIONER OF CENTRAL EXCISE ST 2024 (8) TMI 908 - CESTAT AHMEDABAD wherein the coordinate bench of this Tribunal held that as per the documentary evidence such as invoice it is clear that appellant has not made any payment directly to any commission agent whereas deduction was provided from the total value of the bill raised to foreign buyer of the goods. In these facts it is nothing but discount extended by the appellant to the buyer of the goods. Even though some service provider is involved there is no relationship between the appellant and any foreign based service provider as there is no direct transaction made by the appellant with the commission agent. It is also a fact that there is no contract between the appellant and the foreign based service provider. The arrangement of payment was between the buyer of the goods and the commission agent in the foreign country. For this reason the demand of service tax on the commission shown in the invoice raised to the buyer cannot be upheld. It is clear from these terms that the Artwork charges was received by the buyer abroad and he charges the said amount to the appellant. This was paid by the appellant as per the terms and conditions of sale and there is no evidence that he was the recipient of the services of the design charges. Hence we hold that no service tax is liable to be paid by the appellant on such artwork charges and design and development charges. We also observe that even if appellant is legally required to pay the amount of service tax under reverse charge mechanism then the appellant would be entitled to avail CENVAT credit of the amount of service tax so paid and utilize it against payment of duties in respect of its clearances of final products. This would clearly render the situation to be revenue neutral and hence extended period cannot be upheld. Therefore the invocation of the extended period cannot be sustained. In view of the above discussions with respect to three of the issues framed above we set aside the impugned order. Consequently the appeal is allowed.

Summary

The Tribunal considered the following core legal questions:

(i) Whether bank charges paid to foreign banks are subject to service tax under the reverse charge mechanism (RCM)?

(ii) Whether commission paid to agents is liable to service tax under RCM?

(iii) Whether design charges paid to professionals are subject to service tax under RCM?

(iv) Whether the extended period of limitation was rightly invoked by the Department?

Issue-wise Detailed Analysis:

(i) Bank Charges Paid to Foreign Banks

Relevant Legal Framework and Precedents: The Department invoked Section 66A of the Finance Act, 1994, which deals with the levy of service tax on services provided by banking companies or financial institutions, including foreign banks, under the category of "Banking and Other Financial Services" (BOFS). The definition of BOFS encompasses a variety of financial services such as financial leasing, merchant banking, foreign exchange broking, advisory services, and other auxiliary financial services. The taxable service under Section 65(105)(zm) is defined as any service provided by a banking company or financial institution to any person in relation to banking and other financial services.

Precedents relied upon included Greenply Industries Ltd. and several other Tribunal decisions which held that service tax cannot be levied where there is no direct contractual relationship between the foreign bank and the Indian appellant and the service is provided outside taxable territory.

Court's Interpretation and Reasoning: The Tribunal noted that the foreign buyers (clients of the appellant) availed services of foreign banks to facilitate payments in foreign currency. The appellant bore the bank charges based on an understanding with the buyers but did not have any privity of contract with the foreign banks. The Tribunal emphasized that the foreign bank provided services to its client (the foreign buyer), not to the appellant. The appellant had only borne the expenses as per the commercial arrangement with the buyer.

The Tribunal held that since both service provider (foreign bank) and service recipient (foreign buyer) were located outside India, the service was rendered outside the taxable territory and thus outside the purview of Section 66B (charging section) of the Finance Act. The appellant's Indian bank provided banking services to the appellant, and service tax liability, if any, was on that Indian bank.

Key Evidence and Findings: The appellant's balance sheet reflected foreign bank charges paid in foreign currency. There was no documentary evidence of any direct transaction or contract between the appellant and the foreign bank. The foreign bank charges were deducted by the foreign bank from the buyer's account before remitting the net amount to the appellant's Indian bank.

Application of Law to Facts: The Tribunal applied the legal principle that service tax under RCM can only be levied if the appellant is the recipient of the service from the foreign service provider. Since the foreign bank did not provide any service to the appellant, no service tax liability arose.

Treatment of Competing Arguments: The Department argued that the appellant was liable under Section 66A for foreign bank charges. The appellant contended absence of contractual relationship and that the Indian bank had already discharged service tax liability. The Tribunal sided with the appellant, finding no taxable service provided to the appellant by the foreign bank.

Conclusion: The demand of service tax on foreign bank charges under RCM was unsustainable and set aside.

(ii) Commission Paid to Agents

Relevant Legal Framework and Precedents: Commission payments to agents fall under the category of "Business Auxiliary Services" (BAS), which is taxable under RCM when services are provided by foreign service providers to Indian recipients. The Department relied on Section 66A and the Service Tax Rules, 1994.

Precedents included several Tribunal decisions such as Suryanarayan Synthetics P Ltd. and Laxmi Exports, which held that commission payments are taxable only if there is a direct service provider-recipient relationship and a contract between the parties.

Court's Interpretation and Reasoning: The Tribunal examined the factual matrix and found that the foreign buyers had appointed agents to identify suppliers, and the appellant merely bore the commission charges as per the terms of sale. There was no agreement or contract between the appellant and the foreign agents. The commission was deducted from the invoice value and reflected as a discount or rebate to the foreign buyer rather than a payment for services received by the appellant.

Key Evidence and Findings: The Tribunal scrutinized export documents including purchase orders, invoices, shipping bills, and bank realization certificates. These documents showed commission as deductions from the sale price payable by the foreign buyer, not as payments made by the appellant to any third-party service provider. No evidence was produced to show direct payment or contract between appellant and foreign agents.

Application of Law to Facts: The Tribunal applied the principle that for service tax under RCM to be leviable, the appellant must be the recipient of the service. Here, the appellant was not the recipient of any commission agent services; rather, the commission was a trade discount extended to the buyer. The absence of a third-party service provider negated the applicability of BAS under RCM.

Treatment of Competing Arguments: The Department contended that the appellant was promoting the business of foreign buyers by paying commission and was thus liable for service tax. The appellant argued absence of service provider-recipient relationship and that the commission was a discount to the buyer. The Tribunal accepted the appellant's submissions based on documentary evidence and legal precedents.

Conclusion: The service tax demand on commission payments was rejected.

(iii) Design Charges Paid to Professionals

Relevant Legal Framework and Precedents: Design and artwork charges are taxable under RCM if the appellant receives design services from foreign professionals. The Department relied on Section 66A and the definition of taxable services.

Court's Interpretation and Reasoning: The Tribunal noted that the appellant bore design and artwork charges as per the terms of sale with the foreign buyers, who had engaged the designers. There was no privity of contract or direct receipt of services by the appellant from the foreign designers. The appellant merely reimbursed these charges as per contractual terms with the buyers.

Key Evidence and Findings: Sample purchase orders showed that the appellant agreed to bear artwork and design charges invoiced by the foreign buyers. No evidence was found that the appellant directly received or contracted for design services from foreign professionals.

Application of Law to Facts: The Tribunal held that since the appellant was not the recipient of design services, no service tax liability under RCM arose. Even if service tax was payable, the appellant would be entitled to CENVAT credit, rendering the transaction revenue neutral.

Treatment of Competing Arguments: The Department argued that design services were directly linked to the appellant's products and thus taxable. The appellant countered that the services were received by foreign buyers and only reimbursed by the appellant. The Tribunal accepted the latter view.

Conclusion: No service tax was payable on design and artwork charges under RCM.

(iv) Invocation of Extended Period of Limitation

Relevant Legal Framework and Precedents: Section 73(1) of the Finance Act, 1994, provides for extended period of limitation in cases of willful suppression or evasion of tax. However, case law including Jet Airways (both Tribunal and Supreme Court decisions), The Indure Pvt. Ltd., and Parker Markwel Industries established that extended period is not invocable in cases involving interpretational issues or where the situation is revenue neutral due to availability of CENVAT credit.

Court's Interpretation and Reasoning: The appellant was unregistered during the disputed period, and the relevant date for limitation computation was the due date for payment of tax under Section 73(6). The Tribunal found that the issues in dispute were purely of interpretation and that the appellant's payment of service tax under RCM (if any) would be eligible for CENVAT credit, making the situation revenue neutral. There was no evidence of willful evasion or suppression.

Key Evidence and Findings: The appellant's records showed no concealment or suppression of facts. The appellant had bona fide belief that no service tax was payable or that any tax paid would be creditable. The Department failed to prove malafide intention or evasion.

Application of Law to Facts: The Tribunal applied the principle that extended limitation period is not applicable in revenue neutral situations or cases involving genuine disputes on interpretation. The appellant's unregistered status further limited the Department's ability to invoke extended period.

Treatment of Competing Arguments: The Department contended that extended period was justified due to willful contravention. The appellant argued absence of evasion and revenue neutrality. The Tribunal sided with the appellant based on legal precedents and facts.

Conclusion: The invocation of extended period of limitation was held to be unsustainable.

Significant Holdings:

On the issue of foreign bank charges, the Tribunal held:

"The Foreign Bank of the customer located outside India has not provided any service to the appellant located in India. In the instant case, the buyer is the client for the Foreign Bank, and not the appellant...when the provider of service i.e. 'the Foreign Bank' and recipient of service i.e. 'the Buyer' are both located outside India, there is no question of taxing such service in India as the said service has been provided outside the taxable territory and outside the purview of Section 66B the charging section for levy of service tax."

Regarding commission payments, the Tribunal stated:

"There is no contract of commission agent service with any of the commission agent, there is no person to whom payment of commission was made therefore, it is clear that no service provider i.e. foreign commission agent exists in the present case and no service was provided by any person to the appellant. In the absence of any provision of service, no service tax can be demanded. The trade discount even though in the name of commission agent was given by the appellant to the foreign buyer, by any stretch of imagination cannot be considered as commission paid towards commission agent service, hence cannot be taxable."

On design charges, the Tribunal concluded:

"It is clear from these terms that the Artwork charges was received by the buyer abroad and he charges the said amount to the appellant. This was paid by the appellant as per the terms and conditions of sale and there is no evidence that he was the recipient of the services of the design charges. Hence, we hold that no service tax is liable to be paid by the appellant on such artwork charges and design and development charges."

On extended limitation, the Tribunal relied on the Jet Airways decision and held:

"Since in this case, intention to evade the tax is absent, the penalty under Section 78 of Finance Act, 1994 would not be attracted...the entire service tax paid would be immediately available to them as Cenvat Credit and collection of service tax from the Appellant would be a revenue neutral exercise."

The Tribunal ultimately set aside the impugned order and allowed the appeal, holding that no service tax liability arose on foreign bank charges, commission payments, or design charges under RCM and that the extended period of limitation was wrongly invoked.