TMI Blog2018 (6) TMI 385X X X X Extracts X X X X X X X X Extracts X X X X ..... er various heads. It is apparent that even the Indian Banks give loan to business entities on different interest rates under which the base rate remains same but the interest rate is varied by charging or not charging interest under some other head. In the instant case we find that the rate of interest from Commercial Banks and IIFC UK is based on two factors i.e 6 Months Libor rate plus fixed rate of interest in case of EXIM Bank, the two factors considered were fixed rate of interest @ 3.665 plus exposure fee @ 6.74%. Both the interest rates are much or less similar. The said position has not been considered by the revenue in its appeal. The revenue has relied upon the terminology of the agreement as well as policy handbook to canvass that “Exposure fee” is not interest. However we do not agree with the submission of the revenue for the reason that for deciding the nature and meaning of term “Exposure fee’ various facts and factors has to be taken into consideration. The nomenclature given by the party cannot determine the true character of an agreement. Further when the lender bank itself vide its three letters has clarified the position as to what is the intention and ratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for the purpose of raising finance for this project, they availed External Commercial Borrowings (ECBs for short) from several overseas lenders abroad of which the following four entities were also involved: Sr. No. Month Year, in which the ECBs in foreign currency has been availed by your company Name of the lender Amount of ECB Loans (in Million USD) 1 July, 2009 India Infrastructure Finance Company (UK) Limited, London 486 2 December, 2011 Export Import Bank of the United States 650 3 December, 2011 The Export-Import Bank of China, China Development Bank and Bank of China Limited, All of Shanghai 1109 4 March, 2012 Standard Chartered Bank, Mizuho Corporate Bank Ltd DBS Bank Ltd 150 Total 2395 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest of ₹ 3,64,97,050/- on all expenses and fees, except exposure fees charged by various overseas banks and institutions who had lent loan to the Respondent. However they were of the view that exposure fees of 6.747% i.e. USD 41,083,590 charged by the US Ex-Im Bank is an element of interest and they relied upon letters issued by the Bank confirming that no services had been rendered by the said US Ex-Im Bank to the Respondent in lieu of such exposure fee. 4. The Respondent were issued Show Cause Notice dated 18.10.2014 proposing to recover service tax of ₹ 30,66,06,734/- on fees and charges remitted or incurred by the Respondent during the period 01.04.2008 to 31.03.2014 for raising ECBs and also proposing to appropriate against the above referred demand, the amount of ₹ 13,53,35,469/- already deposited in the course of investigation. It was also proposed to recover interest and impose penalty for failure to discharge service tax liability by due dates under various provisions of the Finance Act, 1994. Another Show Cause Notice dated 04.04.2016 was issued demanding service tax of ₹ 5,17,22,752/- on the exposure fees liability of the Respondent for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it, or, in the case of a prepayment of the credit, on all amounts so prepaid, calculated at an interest rate per annum equal to 3.66%. If any payment default shall occur, the Borrower shall pay to the Ex-Im Facility Agent for the account of Ex-Im Bank and the Ex-Im Facility Agent, as the case may be, on demand, interest on such unpaid amount (to the extent permitted by the applicable law) for the period from (and including) the Payment Default Date (but excluding) the date such amount shall have been paid in full, at an interest rate per annum equal to the higher of: (i) the rate specified in Section 5.02(a) above plus one percent (1%) per annum; or (ii) the applicable rate of interest specified in the Federal Reserve Statistical Release 11.15 (519) as the average monthly rate for the month immediately preceding the date of the relevant Payment Default Date, available at http://www.federalreserve.gov/releases/H15/data.htm under the heading of U.S. government securities and the subheading of Treasury constant maturities, for a maturity closest to the duration of the payment Default plus one percent (1%) Section 6 - Condition precedent 6.02(g)- Exposure Fee, Oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... standing amount of loan, amount of disbursement of loan and period of loan are not known to both the parties. The interest can never be computed at the time of sanction of the loan. The Interest cannot be charged twice for the same period whereas in the present case the Exposure and interest were charged separately for the same period on same loan which means that both are different. He also draws parallel of charges of other bank who are charging risk premia in various nomenclatures in addition to fee and interest to state that the risk premia is similar to Exposure fee. The difference between both the cases i.e. US EXIM Bank the others is that in the first case, the insurance facility is provided by the same bank, which lend the loan amount to the borrower i.e. US Exim Bank, whereas in the other cases, the insurance facility is provided by the other insurance agencies, and the amount of fee (risk premia) collected by the lender Bank, is subsequently paid to the insurance company i.e. Sinosure, NEXI or Euler Hermes etc. It reveals that Exposure Fee is charged by the US Exim Bank as a risk premia for providing Insurance Service, and not as an interest for providing Banking Fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is categorically mentioned that an exposure fee is the percentage of the loan guarantee or the insurance policy that Exim bank Charges to cover the risk of non payment. The Exposure fee is required to be paid at stage of each disbursal and is not integrally linked to the period of the loan amount. In case the borrower decides to prepay the loan amount, or transfer the loan amount to other bank the exposure fee is still payable. Thus even in case of pre payment the exposure fee remain constant as it has been paid at the time of Disbursal of loan. Similarly the loan period is extended at a subsequent stage, payment of exposure fee is not mandatory, whereas the interest would continue to be charged for the extended period of loan. He submitted that what the exposure fee constitute is the loan guarantee element of the loan given, which ensures that the payment/ interest of seller of goods or services based in the US is safeguarded. This service is normally the function of EXIM bank is insuring the receivables of seller of goods or services and is equivalent to the functioning of Export Credit and Guarantee Corporation of India. That in medium and Loan Guarantee as EXIM bank as shown e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re fee is not described as interest, but either as fee or risk premium or compensation for repayment risk is not correct. It is settled law that the true nature and character of a particular payment is required to be determined not merely by the terminology or language used in a document, but by examining the totality of the circumstances and the intention of the contracting parties. He relies upon the judgment of Hon ble Supreme Court in case of CCE Vs. Connaught Plaza Restaurant Pvt Ltd 2012-TIOL-114-SC-CX and submits that the said judgment is equally applicable in the context of service tax law. He also relies upon the judgment in case of Faqir Chand Gulati Vs Uppal Agencies Pvt Ltd 2008-TIOL- 147-SC-MISC, the Hon ble Supreme Court to state that the title or caption or the nomenclature of the instrument/document is not determinative of the nature and character of the instrument/document, though the name may usually give some indication of the nature of the document and that the nature and true purpose of a document has to be determined with reference to the terms of the document. From the CBEC Clarification dated 21.10.2011 it is clear that the nomenclature given by the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibed as interest) and a variable one (described as exposure fees) does not imply that interest was being charged or paid twice. The Revenue has failed to appreciate that it was a practice of US Ex-Im Bank to recover interest by bifurcating the same into two components. This was being done with a view to comply with an OECD agreement which required US Ex-Im Bank to give a break-up of the interest that it was charging by bifurcating the same into two components i.e. Commercial Interest Reference Rates ( CIRR for short) and Minimum Premium Rate ( MPR for short). Only as a matter of convenience, CIRR was termed as interest, while MPR was termed as Exposure Fees . Both these components put together constitute interest. This practice followed by the US Ex-Im Bank has now been recognised by the RBI in its Circular RBI/2015-16/273 dated 17.12.2015 by which an MCLR system has been introduced in India which requires interest to be similarly bifurcated into two components i.e. MCLR, which is the base rate, and spread, which represents the credit risk premium. Both MCLR as well as spread are components of interest as per the RBI Circular and Directions dated 03.03.2016. The fact that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich corresponds to Exposure Fees charged by the US Ex-Im Bank. In the light of the above RBI Directions, it is now usual for Banks and institutions in India to recover interest from the borrowers separately towards MCLR and spread. This is exactly what US Ex-Im Bank was doing during the period relevant to the present dispute. It is evident that the RBI Directions dated 03.03.2016 has brought the Indian banking practices in line with the US practice of bifurcating interest into its two elements. It is thus clear Credit risk premium (described by US Ex-Im Bank as exposure fees ), is known in India as spread , and is recovered as interest in terms of the RBI Directions. The definition of interest in Section 65B (3) of the Finance Act, 1994 covers interest payable in any manner in respect of any moneys borrowed or debt incurred. Thus, going by the statutory definition of Interest , interest in respect of money borrowed can be paid in different manners. Such payments do not lose the character of interest merely because they are described as fees or charges . Likewise, a fees or charge will not cease to be a fee or a charge merely because it is described as interest . The com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iate that it is only if a third party chooses to insure the lender for the risk of default that the service rendered by such a third party acquire the character of insurance services. The contention that the respondent had voluntarily paid Service Tax on the risk premia charged by various other export agencies such as China Development Bank (CDB) and Japan Bank of International Corporation ( JBIC) is not only irrelevant as there is no estoppel in law but also factually incorrect as no such payment has been made by the Respondent. The Revenue s appeal also does not bring on record any evidence or basis for claiming that such voluntary payments were made by the Respondent. The reliance placed on the order of Hon ble Tribunal in case of Tata Steel Supra, is totally inappropriate as the said case pertained to an arrangement fee charged by the arranger of loan which was is in the nature of commission which is not the case in the present matter. Similarly, in the case of HUDCO Supra and Punjab National Bank Supra, the issue involved pertained to pre-payment charges and commitment charges, respectively, which were administrative charges and not in the nature of risk premia. The revenue s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able in the present case. 11.1 The Respondent respectfully submits that it had throughout believed that services availed from third parties in relation to borrowing were not liable to tax as taxable category Banking and other financial services covered only services in relation to lending and not services relating to borrowing. This view point was taken not only by the appellant but also by many other parties as is evident from the decision of the Hon ble Tribunal in the case of Tata Steel vs. Commissioner reported in 2015 TIOL 1202 CESTAT-MUM the Tribunal ruled that the scope of the taxable category Banking and Financial Services was wide enough to commercial services in relation to borrowings. 11.2 Prior to this decision of the Tribunal, there was no authoritative decision or clarification interpreting the taxable entry in the manner which the Tribunal had done. It is also persistent to note that the Respondent had disclosed in its balance sheet the entire amount of Exposure Fee paid to the US Ex-Im bank under head Expenditure incurred in foreign currency. This balance sheet was a public document available for anyone to examine and therefore the ground in the Revenue s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Finance Act, 1994 defined Interest as Interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim, similar rights or obligation) but does not include any service fee or other charges in respect of moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized . In view of above definition it is clear that any amount which is payable in respect of moneys borrowed or debt incurred in any manner is an interest. This brings us to the question as to whether the Exposure fees paid by the Respondent has to be considered as part of Interest or it is service fee or any other charge. The US Ex-Im Bank apart from the Exposure fee has also collected other charges viz. Commitment fees, Legal Consultancy Service charges from the Respondent. The other Banks i.e India Infrastructure Finance Co. (UK) Limited, London has collected commitment charges, LOC Commission charges, Legal Consultancy charges, LC Commission Charges, LC Charges, Upfront fees, Comfort fees etc. The Export Import Bank of China, China Development Bank and Bank of China Ld. All of Shanghai have collected Upfront fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22.03.2014 the EXIM Bank USA stated that: As mentioned in our previous correspondence, an Exposure Fee is a fee charged by Export Credit Agencies, under the OECD regulations, for the risk that a transaction will not be repaid. Ex-lm Bank determines Exposure Fees based on the following : ; Percentage of Cover Product (Guarantee/ Direct Loan) Repayment Period (Years) Drawdown Period (Months) Financed Payment of Exposure Fee (Upfront vs Drawdown) We invite you to visit our website www.exim.gov to access our exposure fee calculator. You can find it by following the steps listed below: Home Tools Exposure Fees Long Term Exposure Fee Advice. Long Term Fee Advice Calculator or http://wmv.exim.gov/tools/exposurefeesltongterm financing! By entering different variations for the aforementioned arguments you will derive different exposure fees. Kindly note that the actual Exposure Fee for a transaction is set at the time of Ex-lm Bank's board approval. We hope the above clarifies that an Exposure Fee is a fee charged based on the transaction risk assessment of Ex-lm Bank and is not charged for any se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount of ECB and the dates when the same were raised were set out in Para 4.1 to the SCN. It can be seen from the table set out in Para 4.1 that they had raised the ECBs from various lenders including the Export Import Bank of the United States (hereinafter referred to as EXIM Bank). The interest that the EXIM recovered in respect of the ECB that it lends was recovered under the nomenclature of 'interest' as also 'exposure fees'. If one compared the rate of interest which the other ECB lenders had charged them with the rate of interest vis-a-vis the interest that was charged by the EXIM Bank after factoring in the exposure fee, it would clearly come out that there was not much of difference between the interest charged by lenders other than EXIM bank and that charged by EXIM Bank. A comparative table of the interest charged by lenders other than EXIM Bank and the interest charged by EXIM Bank from them under the nomenclature of interest and that charged under the nomenclature of exposure fee are set out here in below for ease of reference: No Lender Availed Amount Applicable Interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that though the impugned Bank may be charging the amount as Exposure fee , but the said amount is towards interest only. The revenue has submitted that the Exposure fee is mainly to protect the safeguard the US foreign Sales businesses. That the EXIM Bank primary function is to provide Trade Finance Guarantees to empower exporters of US goods and Services. The exposure fee could not have been in the nature of interest as the same was charged independently for ensuring guarantee of payments to US Exporters even where the loan was not provided by the EXIM Bank. It has also been contended that even in case of increase in loan period the said Exposure fee would remain same and only interest would be liable to be paid on the extended period of loan. We are not in agreement with the above assertion made by the revenue for the reason as none of the clause of the agreement or any instance shows that the Exposure fee has been charged to safeguard the payments of sales made by US Exporters. There is no such clause under the agreement produced before us. Also the contention of the revenue that Exposure fee would remain constant irrespective of loan tenure is not correct for the reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly the communication of the Bank vide various letters supra and comparison of the interest rates shows between the US Exim Bank and other lenders clearly shows that the Exposure fee is interest, but even the Reserve Bank of India in its Master Circular Interest rate of Advance with RBI/2012-13/70; DBOD No. Dir. BC.5/13.03.000/2012-13 dt. 2.07.2012 supports the contention of the Respondents. The said Circular states as under : 'based on the recommendations of the Working Group on Benchmark Prime Lending Rate which submitted its report in October 2009, banks were advised to switch over to the system of Base Rate with effect from July 1, 2010. The Base Rate system is aimed at enhancing transparency in lending rates of banks and enabling better assessment of transmission of monetary policy 16. It also provided broad guidelines for charging of Interest Rate. It stated that: a. An appropriate prior-approval process should be prescribed for sanctioning such loans, which should take into account, among others, the cash flows of the prospective borrower. b. Interest rates charged by banks, inter-alia, should incorporate risk premium as considered reasonable and j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIRR) and Minimum Premium Rate (MPR). It is only for the convenience that CIRR was considered as interest and MPR was considered as Exposure fee . The relevant portion of OECD agreement with reference to MPR and CIRR are as under : 19. MINIMUM FIXED INTEREST RATES UNDER OFFICIAL FINANCING SUPPORT a) The participants providing official financing support for fixed rate loans shall apply the relevant CIRR as minimum interest rates. CIRRs are interest rates established according to the following principles : 1) CIRRs should represent financial commercial lending interest rates in domestic market of the currency concerned ; 2) CIRRs should closely correspond to the rate for first class domestic borrowers ; 3) CIRRs should be based on the funding cost of fixed interest rate finance; 4) CIRRs should not distort domestic competitive conditions; and 5) CIRRs should closely correspond to a rate available to first class foreign borrowers. b) The provision of official financing support shall not offset or compensate, in part or in full, for the appropriate risk premium to be charged for the risk of non payment pursuant to the provisions of Articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e nature of a product in terms of how it is perceived by persons in the market, when the issue at hand is one of excise classification . The ratio of said judgment is equally applicable in the context of service tax. When the intention of the charging party is apparent in that case it has to be considered that the said amount is a loan pricing element and not towards any service. We also find that the various books, websites and other source of information relied upon by the Respondent support their claim. Coming back to definition of term Interest in terms of Section 65B (30), we find that the Interest is payable in any manner in respect of money s borrowed or debt incurred (including a deposit, claim, similar rights or obligation). In the present case based upon our above findings we have reached to the conclusion that the exposure fee is the manner of payment of interest of which the rate is arrived at on the basis of various factors associated with the borrowings. The amount of such Exposure fee is never fixed but is variable depending upon the factors as communicated by the US Exim Bank and clarified by the Bank. We thus after considering all the above factors and in view of o ..... 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