TMI Blog2020 (8) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant Bank cannot be said to be the recipient of service for the activities undertaken by the Foreign Banks situated outside India, the charges for which are deducted at source on the export bill. The Appellant Bank merely acts on behalf of the Indian exporter and facilitates the service. The Appellant Bank, therefore, would not be liable to pay service tax under the reverse charge mechanism. It is, thus, clear that where service tax is chargeable on any taxable service with reference to its value, then such value shall be determined in the manner provided for in (i), (ii) or (iii) of sub-section (1) of section 67. What needs to be noted is that each of these refer to where the provision of service is for a consideration , whether it be in the form of money, or not wholly or partly consisting of money, or where it is not ascertainable. In either of the cases, there has to be a consideration for the provision of such service. Explanation to sub-section (1) of section 67 defines consideration to include any amount that is payable for the taxable services provided or to be provided, or any reimbursable expenditure, or any amount retained by the lottery distributor or sellin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pective banks) to International trade. In the absence of any specific agreement to the contrary, all contracts are governed by these protocols. 3. In the case of export trade, as per the specific instructions of Indian exporter, the Appellant Bank provides services like sending export documents to the exporter s buyers bank, collection for payment of bill of exchange. Similarly, in the case of import trade, at the specific request of the importer, the Appellant Bank provides services like issue of Letter of Credit, acceptance of Bill of Exchange, providing documents of title of the goods to the importer, making payment of Bill of Exchange on due date. The Appellant Bank charges commission/fees for the provision of such services to the exporters/importers and pays service tax on such services. The rendering of such service by the Appellant is not in dispute in this Appeal. 4. It needs to be noted that for completion of an export or import transaction, at least two banks are involved. One bank is based in the country of the exporter and the other bank is based in the country of the importer. The bank with whom the importer or exporter, as the case may be, holds a bank acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the period from October, 2010 to March, 2015 on foreign bank charges under the reverse charge mechanism in contravention of the provisions of sections 67 and 68 of the Finance Act read with rule 6 of the Service Tax Rules, 1994[the Rules ] . The relevant portion of the show cause notice is reproduced below: 6. And whereas from the facts narrated above, it appears that the foreign banks have provided services of transfer/exchange of documents and transfer of money relating to exports made by exporters in India, who have received moneys through the assessee bank against their exports. It thus appears that the foreign banks have provided Banking Other Financial Services as defined under clause (12) of Section 65 of the Finance Act, 1994 and taxable under sub-clause (zm) of clause (105) of Section 65 of the Finance Act, 1994 to the assessee . Clause 12(a)(ix) of Section 65 of the Finance Act, 1994, as it stood prior to 1.7.2012, included the following services under the taxable category of Banking Other Financial Services : (ix) other financial services, namely, lending, issue of pay order, demand draft, cheque, letter of credit and bill of exchange, transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w cause notice contemplated under the proviso to section 73(1) of the Finance Act was also invoked. 11. The Appellant Bank filed a detailed reply dated March 09, 2017 to the aforesaid show cause notice. It not only contended that the show cause notice issued on February 08, 2016 for recovery of service tax for the period October 01, 2010 to March 31, 2015 was time barred since the show cause notice did not contain any evidence to indicate that there was any willful suppression on the part of the Appellant Bank, but also contended that the service tax could not be levied either for the period prior to July 01, 2012 or for the subsequent period. In regard to the period prior to July 01, 2012, the Appellant Bank pointed out that the Foreign Bank did not transact business of banking in India and, therefore, would not fall within the definition of a banking company under section 65(11) of the Finance Act, which is a pre-requisite for any service to fall under the category of banking other financial services , as contemplated under section 65(12) of the Finance Act. It was also pointed out that the services rendered by the Foreign Bank are to the foreign buyers, on whose behal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The contention of the Appellant Bank that there was no agreement between the Appellant Bank and the Foreign Bank for providing banking services was also not accepted and the relevant observations are as follows : 20.2 I find that as per the provisions of Service Tax Law no where it has been mentioned that the written agreement is necessary for providing taxable service. As per the existing provisions of law both type of agreement i.e written as well as oral agreement is acceptable. Thus I find that the assessee (M/s SBBJ) is liable for payment of Service Tax under reverse charge mechanism under the provisions of in terms of the provisions of Section 66A of the Finance Act, 1994 and Notification No. 30/2012-ST, dated 20.06.2012 read with erstwhile Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 and Rule 2(1)(d)(i)(G) of the Service Tax Rules, 1994 under reverse charge mechanism. 14. In arriving at the aforesaid conclusion, the Commissioner relied upon a Trade Notice dated February 10, 2014 issued by the Commissioner of Service Tax-I, Mumbai. The Commissioner, therefore, held that the Appellant Bank availed the services of the Foreign Bank and was, therefore, liable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iv) I impose a penalty of ₹ 1,10,84,38,781/- (Rupee One Hundred and Ten Crore Eighty Four Lakh Thirty Eight Thousand Seven Hundred Eighty One only) on M/s State Bank of Bikaner Jaipur (SBBJ Head Office), Tilak Marg, C-Scheme, Jaipur under Section 78 of the Finance Act, 1994. 16. Shri Sanjay Khemani, learned Consultant appearing on behalf of the Appellant Bank, made the following submissions : (i) The services alleged to have been provided by the Foreign Bank to the Appellant Bank cannot fall under the heading banking other financial services , as defined under section 65(12) of the Finance Act; (ii) The foreign bank charges cannot be considered as consideration received by the Appellant Bank and included in the value of services; (iii) The Appellant Bank cannot be considered as the recipient of the service provided by the Foreign Bank; (iv) The nexus between consideration (i.e. foreign bank charges) and the services provided by the Foreign Bank is established between the Foreign Bank and the exporter/ importer and not between the Foreign Bank and the Appellant Bank; (v) The Foreign Bank and the Appellant Bank are co-service provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner of GST Central Excise, Chennai [ 2019-VIL-574-MAD-ST ] is not applicable to the facts of present case as the facts are entirely different and the relevant case laws have not been considered; and (vi) The present appeal is a case of import of service which is governed by section 66A of the Finance Act. 18. We have considered the submissions advanced by the learned Consultant for the Appellant and the learned Authorised Representatives of the Department. 19. As noticed above, the issue that needs to be decided is whether the Foreign Banks have provided any service of transfer/exchange of documents and transfer of money relating to exports made by the exporters in India, who receive money through the Appellant Bank against the said exports. According to the Department, the Foreign Bank provides banking and other financial services , as defined under section 65(12) of the Finance Act, which is taxable under section 65(105)(zm) of the Finance Act at the hands of the Appellants under a reverse charge mechanism. The contention of the Appellant Bank is that no service has been provided by the Foreign Bank or the Foreign Intermediary Bank to the Appellant Bank an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its foreign bank charges 22. Each of these three situations shall be dealt with separately : CONDITION (i) (a) In this example, M/s EXPORTER and M/s IMPORTER agree that all the charges of realisation of export proceeds shall be borne by M/s EXPORTER. (b) For realization of export proceeds, M/s EXPORTER draws a Bill of Exchange on X Bank . (c) M/s EXPORTER approaches the Appellant Bank for collection of the Bill of Exchange of $ 100,000. The Appellant Bank charges ₹ 2,000 plus service tax of ₹ 300 for providing the service, which includes reimbursement of courier charges. (d) The Appellant Bank forwards the Bill of Exchange with the requisite documents to X Bank with a direction to credit the proceeds to the Nostro account of the Appellant Bank with A Bank, after deducting bank charges of X Bank from the export proceeds. (e) Assume that the Appellant Bank does not have any direct banking relationship with X Bank and the Appellant Bank sends the Bill of Exchange with the requisite documents through a Foreign Intermediary Bank. On due date, X Bank collects $100,000 from M/s IMPORTER and after deducting $ 20 as its own c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... XPORTER and not from the Foreign Banks. In this case, $48 is neither accounted in the books of M/s EXPORTER nor in the books of Appellant Bank. CONDITION (iii) 24. If M/s EXPORTER and M/s IMPORTER decide to opt for this condition, namely, that the Appellant Bank charges shall be borne by M/s EXPORTER and foreign bank charges shall be borne by M/s IMPORTER, then in that case, X Bank shall remit to A Bank $100,000 for deposit in the Appellant Bank Nostro Account in the manner described above, which shall in turn credit to M/s EXPORTER s account with $100,000*70 = ₹ 70,00,000/-). In such a case, $48 will be recovered by the Foreign Bank from M/s IMPORTER, who will effectively make payment of $100,048. Since $48 is paid by M/s IMPORTER to banks located outside India, there is no question of any service tax thereon as Foreign Banks are not located in India. The Appellant Bank makes payment of service tax of ₹ 105 on $10 equivalent to ₹ 700 received from M/s EXPORTER. In this case also, $48 is neither accounted in the books of M/s EXPORTER or in the books of Appellant Bank. 25. According to the Appellant Bank, the following facts emerge from the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provided by the Foreign Bank. The Department contends that it is the Appellant Bank which is the service recipient and to support this contention, reliance has been placed on the decision of the Larger Bench of the Tribunal in Melange Developers Pvt. Ltd. Learned Authorised Representatives contended that the Larger Bench of the Tribunal upheld the principle that in a chain of services providers, the service flows from one to another and every link in that chain receives input service and provides output service. Each service provider in the chain has to pay service tax on its output service and take input credit as per the Cenvat Credit Scheme. If this principle is applied to the present case and the flow diagram is seen, it becomes evident, according to the Department, that the service provided by the Foreign Bank is first received by the Appellant Bank. In this connection, the learned Authorized Representatives of the Department have also placed reliance upon the decision of the Tribunal in Greenply Industries Ltd. and contended that in a similar situation relating to foreign trade and import, the Tribunal has held that Greenply Industries had neither received any service f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es tax on service . They are as follows : 65B(44) service means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include- (a) an activity which constitutes merely, (i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or (ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of Article 366 of the Constitution; or (iii) a transaction in money or actionable claim; (b) xxxxxxxx xxxxxxxx xxxxxxxx (c) xxxxxxxx xxxxxxxx xxxxxxxx Explanation 1. - xxxxxxxx xxxxxxxx xxxxxxxx Explanation 2.- xxxxxxxx xxxxxxxx xxxxxxxx Explanation 3. xxxxxxxx xxxxxxxx xxxxxxxx Explanation 4. - xxxxxxxx xxxxxxxx xxxxxxxx 32. The taxable service under section 65B(51) of the Finance Act is as under : 65B(51) taxable service means any service on which service tax is leviable under section 66B; 33. The period involved in this appeal is from October, 2010 to March, 2015. Thus, it covers the period prior to July 01, 2012 and the subsequent per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him; (ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money, with the addition of service tax charged, is equivalent to the consideration; (iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner. (2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged. (3) The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service. (4) Subject to the provisions of sub-sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed. Explanation. -For the purposes of this section,- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and consideration‟. It has been prescribed under the said GST Rules that certain conditions‟ contained in the contract cannot be seen in the light of consideration‟ for the contract and merely because the service recipient has to fulfil such conditions would not mean that this value would form part of the value of the taxable services that are provided. 38. The Supreme Court in Commissioner of Service Tax vs. M/s Bhayana Builders [ 10] , while deciding the appeal filed by the Department against the aforesaid decision of the Tribunal, also explained the scope of Section 67 of the Act, both before and after the amendment, in the following words : The amount charged should be for for such service provided : Section 67 clearly indicates that the gross amount charged by the service provider has to be for the service provided. Therefore, it is not any amount charged which can become the basis of value on which service tax becomes payable but the amount charged has to be necessarily a consideration for the service provided which is taxable under the Act. By using the words for such service provided the Act has provided for a nexus between the amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valuation of tax service cannot be anything more or less than the consideration paid as quid pro qua for rendering such a service. 25. This position did not change even in the amended Section 67 which was inserted on May 1, 2006. Sub-section (4) of Section 67 empowers the rule making authority to lay down the manner in which value of taxable service is to be determined. However, Section 67(4) is expressly made subject to the provisions of sub-section (1). Mandate of subsection (1) of Section 67 is manifest, as noted above, viz., the service tax is to be paid only on the services actually provided by the service provider. 40. What follows from the aforesaid decisions is that consideration must flow from the service recipient to the service provider and should accrue to the benefit of the service provider and that the amount charged has necessarily to be a consideration for the taxable service provided under the Act. It should also be remembered that there is marked distinction between conditions to a contract and considerations for the contract . A service recipient may be required to fulfil certain conditions contained in the contract but that would not necessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Importer or exporter in India does not even know the quantum of charges which the foreign bank would be recovering. 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. Further, Tribunals have also prima facie held that in such cases, services are provided by the foreign bank to the Indian bank and not to the Indian Exporter . [M/s Gracure Pharmaceuticals Ltd. vs Commissioner of Central Excise, Jaipur-I 2013 (32) STR 249 (Tri.-Del), M/s Gujarat Ambuja Exports Ltd. v. Commissioner of Service Tax, Ahmedabad 2013 (30) STR 667 (Tri.-Ahmd.)]. 6. It is therefore clarified that, in cases where the foreign banks are recovering certain charges for processing of import/export documents regarding remittance of foreign currency, the banks in India would be treated as recipient of service and therefore required to pay Service Tax. 7. All the banks are requested to follow the above mentioned clarifications and to also pay tax for the past period. 8. This Trade Notice is issued with the approval of Chief Commissioner, Central ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of service provided by the Intermediary Bank or the Foreign Bank situated in Iraq. In fact, the Indian Bank of the exporter had only facilitated the service to be rendered by the Foreign Bank for the purpose of providing Bank Guarantee on behalf of the exporter. Thus, the Indian exporter could not shirk from its liability of paying service tax relatable to the bank guarantee, commission and realization charges involved in the case. The relevant portion of the judgment of the Madras High Court is reproduced below : 18 . In this case, there is no dispute to the fact that the petitioner s bank in this country namely Indian Bank, Adyar has not furnished the bank guarantee to the foreign supplier of the petitioner. On the other hand, the Indian Bank approached the intermediary banks which are admittedly located outside this country, which in turn approached the bank situated in Iraq only for the purpose of furnishing bank guarantee on behalf of the petitioner to its foreign supplier at Iraq. Therefore, there is no doubt that though the event of furnishing the bank guarantee had taken place in three parts, the chain of events connecting those three parts will undoubtedly lead to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tition is based on the trade circular issued by the Mumbai Commissionerate and that the said issue is answered against the petitioner as discussed supra, I find that both the writ petitions are devoid of any merit. Accordingly, both the writ petitions are dismissed. No costs. Consequently, connected miscellaneous petitions are closed [emphasis supplied] 46. Thus also, neither the aforesaid Trade Notice dated February 10, 2014 nor the decisions relied upon by the learned Authorized Representatives based on the said Trade Notice can come to the aid of the Department. 47. Learned Authorised Representatives of the Department also placed reliance upon the Larger Bench decision of the Tribunal in Melange Developers Private Limited. The issue that arose in the said decision was as to whether a sub-contractor was liable to pay service tax, even if the main contractor had discharged the service liability on the gross amount. The Tribunal held that it is not open to a sub-contractor to contend that he should not be subjected to discharge of the service tax liability in respect of a taxable service when the main contractor has paid service tax on the gross amount. The L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Banking and financial services . In other words, the service provided by the foreign bank does not fall under the said service as alleged under banking and financial services in the notice. The definition of the person liable to pay service tax is applicable on the Service provider i.e the foreign bank which in this case does not fall within the definition of banking company and under this given situation, once the foreign bank is not a service provider within the definition of a banking company and thereby not rendering banking and financial services, the service receiver can not be fastened with the liability to pay tax. As such M/s SBBJ, the alleged service recipient in India is not liable to pay service tax under reverse charge mechanism under Section 66A of the Finance Act, 1994 read with Rule 2(1)(d)(iv) of the Rules ibid . 5.4 Though in the light of findings as above, the notice does not require any further deliberations on the issue raised therein, however for the sake of discussion, I examine the second issue as to whether M/s SBBJ was a recipient of service to be made liable to pay service tax. I find that it is general practice that the exporters route their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the Additional Commissioner that two reasons have been assigned for dropping the demand made in the show cause notice. The first is that the Foreign Bank does not transact business of banking in India and, therefore, would not fall within the definition of a banking company , which is a pre-requisite for a service to be covered under banking other financial services . The second reason assigned by the Additional Commissioner is that the Indian Bank does not pay any amount to the Foreign Bank and, in fact, the Indian Bank only plays a role of a mediator between the Indian exporter and the foreign banker representing the foreign importer. This is a general practice that the exporters are required to follow by routing the export documents through a banking channel. Thus, the Indian bank did not receive any service from the Foreign Bank. Learned Authorized Representatives of the Department have not stated that the aforesaid order of the Additional Commissioner has been set aside. 50. The inevitable conclusion that follows from the above discussion is that the Indian Bank is not the recipient of any service rendered by the Foreign Bank and, therefore, there is no liab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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