Fees paid to foreign institutions having permanent establishment in India is not covered under RCM

Commissioner of GST & Central Excise Vs Vedanta Limited (CESTAT Chennai)

CESTAT Chennai held that tax under Reverse Charge Mechanism (RCM) doesn’t apply to fees paid to foreign institutions for External Commercial borrowing as such financial institutions have permanent establishment in India.

Facts- The issue is whether appellant is liable to pay service tax under ‘Banking and Other Financial Services’ on the fees paid to foreign banks for the External Commercial borrowings under the Reverse Charge mechanism.

Conclusion- Held that such financial institutions have a permanent establishment in India. Some amounts relate to the period prior to 18.04.2006 which is before the introduction of Section 66A of the Finance Act, 1994 and therefore not taxable under reverse charge mechanism. From the details furnished by the Ld. Counsel in the synopsis we are able to find that department has failed to adduce any evidence that the figures of Rs.51,75, 733/- is subject to service tax and these banks and financial institutions do not have permanent establishment in India. In the result, we do not find any grounds to interfere with the impugned order passed by the original authority. Impugned order is sustained. Appeal filed by department is dismissed.

FULL TEXT OF THE CESTAT CHENNAI ORDER

1. The issue is whether appellant is liable to pay service tax under ‘Banking and Other Financial Services’ on the fees paid to foreign banks for the External Commercial borrowings under the Reverse Charge mechanism.

2. Brief facts are that the appellants hold Service Tax Registration and are also manufacturers of Copper Anode, Sulphuric Acid and Phosphoric They were availing the credit of duty paid on inputs, service tax paid on input services and also duty paid on capital goods. They were providing taxable services under Construction Engineering Services, GTA service etc. During scrutiny of financial statements it was noticed by the audit team that the appellant had paid a sum of Rs.4,84,15,401/- during the year 2008-09 to foreign financial institutions towards External Commercial borrowings (ECB). There was no evidence for payment of service tax on the above said amount. The details for the period from 2005-06, 2009-10 revealed that the assessee had paid an amount of Rs.33,11,33,680/- as expenses / fees paid to foreign institutions / banks for ECB.

3. Under Section 65 (72) (a) (ix) of the Finance Act, 1944, “Banking and Other Financial Services” means services provided by a banking company or a financial institution including a non-banking financial company or any other body corporate or any other person, viz., lending, issue of pay order, demand draft, cheque, letter of credit and bill of exchange etc. Vide Notification No. 12/2002 dated 18.02.2002, Rule 2 (1) (d) (iv) was amended to the effect that in relation to a taxable service provided by a person who is a non-resident or a person outside India, who do not have offices in India, the person receiving the taxable service in India shall be liable to pay service tax. With effect from 18.04.2006, under the said rule, ‘person liable for paying service tax’ means, in relation to any taxable service provided or to be provided by any person from a country other than India and received by any person in India under Section 66 A of the Act, ‘the recipient of such service’.

4. The Department was of the view that the respondent who is the recipient of service, has incurred expenses as fees paid to the foreign institutions and banks for ECB which is a taxable service and are liable to pay service tax under reverse charge mechanism as the service provider (bank) is a non-resident of India and does not have any permanent establishment in India. As these details were unearthed only by audit conducted by the department, the respondents have suppressed facts. Thus Show cause notice was issued invoking the extended period proposing to recover the service tax along with interest and for imposing After due process of law, the original authority dropped all the proceedings observing that service provider has fixed establishment in India and therefore the amounts are not taxable under reverse charge mechanism. Against such order, the department is now before the Tribunal.

5. Ld. A.R Ms. Sridevi Taritla appeared and argued for the department. It is submitted that though the demand raised in the show cause notice was for Rs.3,97,30,969/- the appeal is filed by the department only for an amount of Rs.51,75,233/-. The Commissioner has dropped the entire demand by observing in para-15 that majority of the banks/financial institutions do not have permanent establishment in India. It is submitted by the Ld. AR that with regard to certain transaction amounts, the respondents have not been able to adduce evidence that the said financial institutions have a permanent establishment in India. The details furnished in the grounds of appeal with regard to amounts of service tax of Rs.51,75,233/- are as below :

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6. It is argued by the Ld. A.R that the Commissioner ought not to have dropped the entire demand and should have confirmed the demand of 51,75,233/- as the respondents had not furnished evidence with regard to these payments as to whether the foreign service provider had office in India. She prayed that the appeal may be allowed.

7. Advocate Shri Ramnath Prabhu appeared for the respondents. The detailed break up in respect of the figures shown in the table in the Revenue’s grounds of appeal was provided by the Ld. Counsel. The break up details as to why such figures are not subject to levy of service tax is explained as under :

2005-06

8. Ld. Counsel submitted that the onus is on the department to prove as to whether there is short levy and the same cannot be shifted on the respondent. It is the burden of the department to establish that the banks with regard to the amount of Rs.51,75,233/- does not have permanent establishment in India. The Commissioner has examined all the transactions and dropped the entire demand. The impugned order was adverted by the Ld. Counsel to argue that the Commissioner has gone through the details furnished by the respondent. The details furnished would demonstrate that all the banks and financial institutions have permanent establishment in India and accordingly they had discharged service tax on such amounts.

9. The larger period of 5 years has been invoked in the present case alleging suppression of facts. The entire situation is revenue-neutral in as much as after payment of service tax under the reverse charge mechanism by the respondent, they would be eligible for credit. Further, there is no positive evidence adduced by the department to prove that the appellant has suppressed facts. The respondent had not paid service tax only on the bona fide belief that the disputed amount is not subject to levy of service tax. The decision in the case of Vedanta Ltd. Vs CCE Tirunelveli – 2019 (28) G.S.T.L 258 (Tri.-Chennai) and Universal Dredging & Reclamation Corpn. Ltd. Vs CGST & CE Madurai – 2021 (44) G.S.T.L 401 (Tri.-Chennai) was relied.

10. Heard both sides.

11. From the facts narrated above, it is seen that department has demanded service tax under the category of “Banking & Other Financial Services” on the fees paid by the respondents to foreign banks and financial institutions on the ECB. In the show cause notice, it is alleged that such banks and financial institutions do not have an office or permanent establishment in India. The respondent has given detailed break up of the demand raised in SCN as well as the table in the grounds of appeal. The table which is reproduced in para 7 above will demonstrate that such financial institutions have a permanent establishment in India. Some amounts relate to the period prior to 18.04.2006 which is before the introduction of Section 66A of the Finance Act, 1994 and therefore not taxable under reverse charge mechanism. From the details furnished by the Ld. Counsel in the synopsis we are able to find that department has failed to adduce any evidence that the figures of Rs.51,75, 733/- is subject to service tax and these banks and financial institutions do not have permanent establishment in India. In the result, we do not find any grounds to interfere with the impugned order passed by the original authority. Impugned order is sustained. Appeal filed by department is dismissed.

12. The MA filed by the Respondent for change of cause title is allowed. Registry is directed to amend the cause title accordingly.

(Pronounced in open court on 26.05.2023)