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TMI Blog2020 (8) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank also provides banking services to the importers/exporters by facilitating the settlement of payment between them in connection with the import and export of goods/services. The Foreign Exchange Management Regulations require all foreign trade transactions to be necessarily routed through normal banking channels. For settlement of payment between the importer and exporter, banks of importer and exporter have to play their role in making and collecting the payments. If the banks of the importer and exporter are different, then the settlement transactions are governed by the URC 522 and UCP 600 protocols issued by International Chamber of Commerce. The protocols define the obligations of each party (i.e exporter, importer and their respective 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted that it did not maintain such data and despite its best effort could also not collect the details of foreign bank charges, as it was not recorded in its system. The Appellant Bank, however, provided the aggregate of the amount short realized on behalf of customers, which could be due to various reasons, like discrepancy charges, short shipment, discount allowed, early pay in, as agreed between exporter and importer. The said data was provided by the Appellant Bank for the Financial Year 2014-15. 9. However, a show cause notice dated February 08, 2016 was issued to the Appellant Bank stating that the Appellant Bank appeared to have not paid service tax amounting to Rs. 110,84,38,781/- during 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 mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -) on the foreign bank charges amounting to Rs. 9,49,54,77,855/- paid by them during the period from October, 2010 to March, 2015 as per details given in Annexure-'A' to this show cause notice. However, the assessee appears to have not paid the said amount of service tax in contravention of the provisions of Section 67, 68 and 72 of the Finance Act, 1994 read with Rule 6 of the Service Tax Rules, 1994 and the amount of service tax appears to be recoverable from them in terms of Section 73(1) of the Finance Act, 1994 along with interest under section 75 of the Finance Act, 1994." [emphasis supplied] 10. The extended period for issue of show 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 ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of the exporter to provide to them all the documents; that the charges recovered by the foreign banker on account of any deficiency are directly on account of the exporter who bears the same. Thus, I find that the Exporter cannot make the correspondence directly to the Foreign Bank. Since all the documents are routed through the assessee (M/s SBBJ) and no document is routed directly by the exporter to the foreign bank and furthermore, the exporter not aware about the services taken by the assessee (M/s SBBJ), therefore, I find that the services of foreign bank are received by M/s SBBJ." [emphasis supplied] 13. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10,84,38,781/- (Service Tax- Rs. 1,07,61,54,157 + Ed. Cess- Rs. 2,15,23,083/- + S. & H.E. Cess- Rs. 1,07,61,541/-) under the proviso to Section 73 against M/s State Bank of Bikaner & Jaipur (SBBJ Head Office), Tilak Marg, C-Scheme, Jaipur and order to recover the same from them; (iii) I order to recover the interest on the confirm demand of Service Tax of Rs. 1,10,84,38,781/- (as mentioned at (ii) above) at applicable rate from M/s State Bank of Bikaner & Jaipur (SBBJ Head Office), Tilak Marg, C-Scheme, Jaipur under provisions of Section 75 of the Finance Act, 1994; (iv) I impose a penalty of Rs. 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) Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional trade, and, therefore, it cannot be a pure agent of the Indian exporter; (iv) As per section 66A of the Finance Act, for levy of service tax on import of service under the reverse charge mechanism, the service recipient is deemed to be the service provider and all the restrictions/conditions of definition of taxable service apply only to the service recipient; (v) The judgment dated November 22, 2019 of the Madras High Court in BGR Energy Systems Limited vs Additional Commissioner 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that are required to be presented along with the Bill of Exchange to X Bank. There are three possible situations about the bank charges to be borne by M/s EXPORTER and M/s IMPORTER and they can be as follows : i. M/s EXPORTER shall bear all the bank charges for this transaction or ii. M/s IMPORTER shall bear all bank charges for this transaction or iii. M/s EXPORTER shall bear its bank charges and M/s IMPORTER shall bear 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 Rs. 2,000 plus service tax of Rs. 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 B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s IMPORTER, out of which $48 is retained by Banks located outside India, the same does not suffer any service tax, though the Appellant Bank makes a payment of service tax of Rs. 105 on $10 (USD equivalent of Rs. 700), as it treats this payment to have been received from M/s EXPORTER 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 = Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce Act. Thus, the only dispute in the present appeal, according to the Department, is as to whether the Appellant Bank or the Indian exporter is the service recipient of the service 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services; 31. Section 65B(44) of the Finance Act defines 'service' and section 65B(51) imposes 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case where 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,- (a) "consideration" inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 amount charged and the service provided. Therefore, any amount charged whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 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 necessarily mean that this value would form part of the value of taxable services that are provided. 41. The Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Excise, Mumbai-Zone-I." [emphasis supplied] 44. The aforesaid Trade Notice dated February 10, 2014 places reliance upon two interim orders pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 an irrebuttable conclusion that all those three events were aimed only to provide the service to the petitioner, namely furnishing of bank guarantee to its foreign supplier. As right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evoid 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 Larger Bench observed that in the scheme of service tax, the concept of CENVAT Credit enables every service provider in a supply chain to take input credit on the tax paid by him which can be utilized for the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 export documents through banking channel to ensure safe remittance and also to comply with the RBI guidelines and the FEMA provisions and that the Foreign based bankers usually deduct certain charges for one or other reason from the remitta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 liability to pay service tax on a reverse charge mechanism. 51. Thus, for all the reasons stated above, it is not possible to sustain the order dated March 30, 2017 passed by the Commissioner. It is, accordingly, set aside and the Appeal is allowed. (Pronounced in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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