Carona Knitwear Vs Commissioner of GST and Central Excise (CESTAT Chennai)
Summary: The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) allowed the appeal filed by M/s. Carona Knitwear, an exporter of knitted garments, against Order-in-Original No. 37/2014 dated 26 December 2014. The dispute concerned whether a 3% deduction from export invoice values, arising from a trade payment arrangement involving the overseas buyer M/s. C&A Buying, Germany, and M/s. Amsco Finance Ltd., Hong Kong (AFL), constituted consideration for banking and financial services received by the Indian exporter. The Department alleged that the exporter had agreed to avail payment processing services from AFL and was consequently liable to pay service tax under the reverse charge mechanism. For financial years 2008-09 to 2012-13, the show cause notice proposed demands of ₹34,05,950 relating to AFL and ₹37,72,344 relating to foreign bank charges, together with interest and penalties.
The adjudicating authority confirmed the service tax demand of ₹34,05,950 concerning AFL, imposed an equal penalty under Section 78 of the Finance Act, 1994, and imposed additional penalties under Sections 77(1) and 77(2). Regarding foreign bank charges, the authority recorded that the appellant had opted for the Voluntary Compliance Encouragement Scheme (VCES) and confirmed ₹4,03,765, appropriating service tax and applicable interest already paid. Before the Tribunal, the appellant argued that the 3% deduction represented a trade discount agreed with the overseas buyer and reflected in the purchase orders, export invoices and shipping bills. It maintained that no contract or service-provider relationship existed between the appellant and AFL because the foreign buyer had engaged AFL to arrange payment. The appellant also contested the extended limitation period and penalties, emphasizing disclosure of the relevant transactions and absence of any intention to evade tax.
The Tribunal observed that the foreign bank payment issue had already been settled under VCES and confined the live dispute to the alleged payment processing services provided by AFL. Examining the commercial arrangement, it found that the overseas buyer’s purchase orders specified payment on a “TT minus 3%” basis and that the exporter received the discounted invoice value. The 3% deduction was therefore a trade discount rather than consideration paid by the exporter for services rendered by AFL. The Tribunal further held that any contractual relationship existed between C&A and AFL, both located outside India. The exporter had no binding contract with AFL, no independent right of enforcement against it, and no control over the buyer’s chosen payment mechanism. An email from AFL acknowledging the payment arrangement did not establish a contractual service relationship with the exporter.
Following AKR Textiles and Others and Eastman Exports Global Clothing Pvt. Ltd., the Tribunal held that the disputed service tax demand was legally unsustainable. It also observed that the appellant had disclosed the deductions in its shipping bills, claimed drawback only on the net export value, and would have been eligible for rebate of service tax, if otherwise payable, making the transaction revenue-neutral. Accordingly, the Tribunal found no evidence of mala fide intention or suppression justifying extended limitation or penalties. By Final Order No. 40666/2024 dated 14 June 2024, the Tribunal set aside the impugned order and allowed the appeal with consequential relief, if any, in accordance with law.
List of Cases Discussed
- AKR Textiles and Others Vs Commissioner, 2020 (10) TMI 479 (CESTAT Chennai) — Followed as a principal precedent holding that payment intermediary fees and foreign bank deductions connected with export proceeds did not establish service tax liability on Indian exporters.
- Eastman Exports Global Clothing Pvt. Ltd., 2024 (5) TMI 417 (CESTAT Chennai) — Directly followed on identical facts involving Amsco Finance Ltd., a 3% invoice deduction and foreign bank remittance charges.
- Rogini Garments and Others Vs Commissioner of Customs, Central Excise & Service Tax, Coimbatore; Final Order Nos. 41819–41832/2017; 29/08/2017 (CESTAT) — Discussed within the quoted AKR Textiles precedent regarding service tax on foreign bank charges deducted from export proceeds.
- Gracure Pharmaceuticals Ltd. Vs Commissioner of Central Excise, Jaipur-I, 2013 (32) S.T.R. 249 (Tri.-Del.) — Relied upon concerning the absence of a direct service-provider relationship between overseas banks and Indian exporters.
- Gujarat Ambuja Exports Ltd. Vs Commissioner of Service Tax, Ahmedabad, 2013 (30) S.T.R. 667 (Tri.-Ahmd.) — Referred to on the treatment of foreign bank charges and the identification of the actual service recipient.
- Greenply Industries Ltd. (CESTAT) — Quoted in the AKR Textiles precedent for the proposition that foreign bank charges paid through an Indian bank did not make the exporter the recipient of the foreign banking service.
- Lupin Ltd. (CESTAT) — Distinguished in the quoted precedent because it preceded subsequent clarification and the Greenply Industries decision.
- Sabre Travel Network India Pvt. Ltd. Vs Commissioner of CGST & Central Excise, Mumbai Central; Final Order Nos. A/85779–85783/2020; 11/09/2020 (CESTAT Mumbai) — Referred to in AKR Textiles concerning the definition of service, consideration and the person for whom an activity is performed.
- SKM Egg Products Export (CESTAT Chennai) — Relied upon in Eastman Exports concerning the taxability of foreign bank remittance charges.
- Theme Exports Pvt. Ltd. Vs Commissioner of Service Tax, Delhi (CESTAT) — Discussed in the quoted Eastman Exports ruling concerning foreign bank collection charges.
- Dileep Industries Pvt. Ltd. Vs Commissioner of Central Excise, Jaipur, 2017 (10) TMI 1231 (CESTAT New Delhi) — Relied upon for holding that foreign bank collection charges deducted during remittance did not create service tax liability on the exporter.
- Modern Petrofils Vs Commissioner of Central Excise, Vadodara, 2010 (20) S.T.R. 627 (Tri.-Ahmd.) — Cited by the appellant concerning extended limitation and absence of suppression.
- Commissioner of Central Excise, Jaipur-I Vs Pushp Enterprises, 2011 (22) S.T.R. 299 (Tri.-Del.) — Cited on extended limitation.
- Commissioner of Central Excise, Indore Vs Medicaps Ltd., 2011 (24) S.T.R. 572 (Tri.-Del.) — Cited concerning the conditions for invoking extended limitation.
- Parekh Plast (India) Pvt. Ltd. Vs Commissioner of Central Excise, Vapi, 2012 (25) S.T.R. 46 (Tri.-Ahmd.) — Cited on extended limitation.
- Commissioner of Central Excise, Kolkata VI Vs ITC Ltd., 2013 (291) E.L.T. 377 (Tri.-Kolkata) — Cited concerning limitation and penalties.
- Union of India Vs Rajasthan Spinning & Weaving Mills, 2009 (238) E.L.T. 3 (Supreme Court) — Relied upon by the appellant concerning statutory penalty requirements.
- Chemphar Drugs and Liniments, 1989 (40) E.L.T. 276 (Supreme Court) — Cited concerning suppression and extended limitation.
- Cosmic Dye Chemical Vs Commissioner of Central Excise, Bombay, 1995 (75) E.L.T. 721 (Supreme Court) — Cited concerning wilful suppression and intention to evade duty.
- Commissioner of Central Excise, Aurangabad Vs Bajaj Auto Ltd., 2010 (260) E.L.T. 17 (Supreme Court) — Cited concerning limitation and penalties.
- Uniworth Textiles Ltd. Vs Commissioner of Central Excise, Raipur, 2013-TIOL-13-SC-CUS — Cited on the distinction between non-payment and deliberate suppression for invoking extended limitation.
FULL TEXT OF THE ORIGINAL ORDER OF CESTAT CHENNAI
The brief facts leading to the institution of appeal is that the Appellant, engaged in manufacture and export of knitted garments, had been paying a service fee to (i) M/s. Amsco Finance Ltd., Hongkong, (AFL) an intermediary, for receipt of payments relating to exports made to M/s. C&A Buying, Germany and (ii) to the foreign banks remitting the export sale proceeds in the Appellants bank account.
1.2 Verification of shipping documents of the Appellant by the department indicated deductions of 3% from the price agreed in the Purchase orders under ‘other deductions’ while relevant bank documents specified the importer name as AFL and the amount realised by the Appellant specified the amount deducted from the invoice value at the importer end and also by the foreign bank while transferring the proceeds to India. Further verification by department revealed that the buyer, M/s C& A is effecting payment through their agent AFL on the basis of a Trade Payment Arrangement (TPA) with service fee of 3% from 01.05.2008 and that AFL had sent an e- mail to the Appellant seeking confirmation of the deduction of 3% from the invoice value of exports which was accepted by the Appellant under due acknowledgement. Therefore, it appeared to the department that the Appellant have contractually agreed to avail the services of AFL for realisation of export proceeds on payment of service fee of 3% of invoice value which was deductible from the payments due for their invoice when presented for payment.
1.3 Investigation also revealed that M/s. Deusche Bank, Singapore and other banks abroad have deducted their charges from the supplier invoice value towards their service charges like Telegraphic Transfer of export proceeds to the Appellant in respect of various exports effected by the Appellant.
1.4 The Department was of the view that AFL and the foreign banks located in a non-taxable territory were providing service under banking and other Financial Services to the Appellant who paid for the services and is located in the taxable territory. As the Appellant were not maintaining any account either with AFL or such foreign banks, it appeared that the service provided by the aforesaid institutions does not qualify as a service provided to an account holder and hence Rule 3 of the Place of Provision of Services Rules, 2012 appeared to be operative in this case, as the place of provision of service would be the place of the Appellant and the service was deemed as provided in the taxable territory and in terms of Rule 2(1)(d)(g) of Service Tax Rules,1994, the Appellant were liable for payment of Service Tax, in terms of clause 65(105)(zm) and Rule 3 of the Place of Provision of Services (Provided from India and Received in India) Rules,2012, on the banking and other financial services received by them, under reverse charge mechanism in terms of Section 66A(1)(b) and Section 68 of Finance Act, 1994 (ACT).
1.5 A Show Cause Notice dated 24.10.2013 was issued to the Appellant seeking to assess the service received by them from AFL and other foreign banks, to Tax under Section 65(105)(zm) the ACT ibid and proposing to demand Service Tax of Rs.34,05,950/- towards payment to AFL and Rs.37,72,344/- to various banks abroad, during the period 2008-09 to 2012-13, under Section 73 of the ACT ibid, besides proposal to levy interest under Section 75 and to impose penalties under Sections 76, 77(1), 77(2) and 78) of the Act ibid.
1.6 After due process of law, the Adjudicating Authority vide Order-in-Original No. 37/2014 dated 26.12.2014 confirmed the demand of Service Tax of Rs.34,05,950/- towards payment made to AFL, imposed equal penalty under Section 78 and imposed penalties of Rs.10,000/- under Section 77(2) and Rs.200/- per day under Section 77(1), besides levy of interest under Section 75 of the Act ibid. Regarding services provided to banks abroad, the impugned order observed that the Appellant had opted to pay service tax under Voluntary Compliance Encouragement Scheme (VCES) and disputed that the amount to be paid was only Rs.4,03,765/- instead of Rs.37,72,344/- since the charges related to AFL was also included in the computation. Hence the OIO confirmed demand only to the extent of Rs.4,03,765/- in respect of services provided to banks abroad, appropriating the Service Tax and applicable interest already paid by the Appellant.
1.7 Aggrieved, the present appeal filed by the Appellant before this forum.
2. The main grounds of appeal filed by the appellant are as specified below:-
i. It was submitted that the “other deduction” shown in the export invoice is nothing but trade discount allowed to the buyer in invoice itself for arranging prompt payment and in this regard It was pointed out that the valuation provisions under the Central Excise Act, 1944 and the Customs Act, 1962 have been strictly adhered to in as much as only the transaction value i.e, the sale consideration net of discounts is recorded in the books of accounts. Hence it was contended that the other deductions given by the Appellants to overseas customers cannot be construed as “consideration” payable to AFL for rendering any service to the Appellant.
ii. It was contended that there is no contract between AFL and the Appellant as the deduction in the invoice was made as agreed to between the Appellant and the buyer and the Appellant did not approach AFL for early payment.
iii. It was pointed out that there is no nexus between the Appellant and AFL as the service engagement was made between the foreign buyer and AFL and the consideration flows from the buyer to AFL and therefore the Appellant cannot be construed as a service receiver and activities considered as import of service under Section 66 A of the ACT ibid. Further it was submitted that the Appellants have no legal recourse against AFL and will have to seek export proceeds from the buyer in case of default. Hence the mail exchange between Appellant and AFL as per instructions of the buyer was not to be construed as a contractual agreement which is only between AFL and the buyer.
iv. It was contended that the engagement of the banker was at the instance of the buyer and it is in their agreement terms, AFL agreed to transfer the sale proceeds through the designated banks. It was averred that the appellants have not remitted any amount payable in foreign currency to the banks abroad or AFL and have received sale proceeds after deduction of 3% by the buyer through their authorised bank. Moreover, the deductions of 3% from invoice value would only point to deductions allowed only to the buyer. It was pointed out that, if the service receiver and Service provider are in the foreign territory, the payment of Service Tax does not arise as per Board Circular No.163/14/2012-ST dated 10.07.2012. In the instant case, as the services were provided by AFL to the buyer overseas, it was contended that payment of service tax does not arise as per the Circular ibid.
v. It was submitted that the impugned order has ignored the ratio of the cases in M/s. Gracure Pharmaceuticals Ltd. and M/ Gujarat Ambuja Exports Ltd. in which the Hon’ble CESTAT held that the amount charged by the foreign banks cannot be considered as service received by the Appellant.
vi. It was submitted that as there was no Service Tax liability, interest payable under Section 75 of the ACT ibid will not sustain.
vii. It was averred that invocation of extended period will not sustain as they were not importing or receiving the services of the foreign banks as the transactions were done between the overseas buyers and their banks and “the other deductions” shown in the invoice related only to the discount extended to the buyer. It was stressed that the Appellant has not suppressed anything with a malafide intention of evading tax and reliance was placed on the ratio of the following decisions in:-
a. Modern Petrofils Vs. Commissioner of Central Excise, Vadodara [2010 (20) STR 627 (Tri.-Ahmd.)]
b. Commissioner of Central Excise, Jaipur-I Vs. Pushp Enterprises – 2011(22) STR 299(Tri-Del.)
c. Commissioner of Central Excise, Indore Vs. Medicaps Ltd.- 2011(24) STR 572(Tri-Del.)
d. Parekh Plast (India) Pvt. Ltd. Vs. Commissioner of Central Excise, Vapi- 2012(25) STR 46 (Tri.-Ahmd.)
e. Commissioner of Central Excise, Kolkata VI Vs. ITC Ltd. [013(291) ELT 377 (Tri.-Kolkata)]
f. UOI Vs. Rajasthan Spinning & Weavings Mills [2009 (238) ELT 3 SC]
g. Chemphar Drugs and Liniments [1989 (40) ELT 276 SC]
h. Cosmic Dye Chemical Vs. Commissioner of Central Excise, Bombay [1995 (75) ELT 721 (SC)]
i. Commissioner of Central Excise, Aurangabad Vs. Bajaj Auto Ltd. [2010 (260) ELT 17 (SC)]
j. M/s. Uniworth textiles Limited Vs. Commissioner of Central Excise, Raipur [2013-TIOL-13-SC-Cus]
3. The Ld. Counsel Shri M. Karthikeyan appearing for the Appellant submitted that the issue is no more res integra, as on identical facts, where the Department sought to levy service tax on the exporter for the service provided by M/s. Amsco to M/s. C&A in the case of M/s AKR Textile and Others [2020 (10) TMI 479 CESTAT CHENNAI] and M/s. Eastman Exports Global Clothing P Ltd. [2024 (5) TMI 417-CESTAT CHENNAI] this Hon’ble Tribunal has held that no service tax was liable to be paid by the exporter. It is submitted that the ratio of the decisions were squarely applicable to the present case, because the facts are identical.
4. The Ld. Authorised Representative Shri Harendra Singh Pal appeared for the Department. He has reiterated the findings in the impugned order and submitted that the Appellants were liable for payment of Service Tax under reverse charge mechanism under Section 66A of the Finance Act, 1994 in respect of services rendered by AFL to the Appellant, up to 01.07.2012,as the service was liable to be taxed under Banking and Financial Service and therefore Prayed for dismissal of the appeal filed by the Appellant by upholding the impugned order.
5. Heard both sides and carefully considered the rival submissions and evidences on record.
6. We find that the issue relating to the payment made to foreign banks by the Appellant is already settled under VCES as recorded in the impugned order. Therefore, the only issue which arise for consideration in this appeal is Whether the appellant has received payment processing services from AFL engaged by M/s. C&A, the foreign buyer to process payments to the appellant and if so, whether the demand of Service tax under Reverse Charge Mechanism sustainable?
7. We find that the payment mechanism in respect of export proceeds by the Appellant has been detailed below:-
a. The overseas customer raises PO on the exporter in which payments are indicated as “TT minus 3%”
b. The exporter raises invoice on customer in which a provision for discounting (of the Invoice Value in certain percentage say 3%) is made on the understanding that the bills will be paid on sight.
c. The overseas customer pays the invoice value, less other discounts shown in the invoice, to the exporter’s bank account through FA (Finance Agent). The actual payment is made by way of e-transfer by an overseas bank on the instructions of the FA. The overseas bank deducts certain banking charges from the payment made to the exporter’s bank. The exporter does not hold an account in such overseas bank.
d. The shipping bill reflects discounted invoice value (i.e Total value minus discount) and the exporter’s books of account reflect discounted value billed as export.
8. We find that there is no service provider-recipient relationship between the appellant and M/s. Amsco and if there is any contract, the same is between M/s. C&A (buyer) and M/s. Amsco, both of whom are out of India and the appellant does not have any contract with M/s. Amsco whatsoever. We also find that the appellant is only a recipient of the funds for the goods sold to M/s. C&A and the amount received is the net amount as per the invoice. Further, we find that the deduction of 3% from the invoice price was already indicated in the Purchase Order for the goods issued by M/s. C&A and therefore it was nothing but a trade discount for the appellant. Further, we find that the deductions are clearly disclosed in the invoice and also in the shipping bills. The deduction from the invoice is also allowed for in terms of the master circular on exports of goods and services issued by the Reserve Bank of India under the Foreign Exchange Management Act, 1999. Further, we find that the appellant does not have any legal recourse or any binding contract with M/s. Amsco to enforce any of its rights. Further, the email from M/s. Amsco is only an information and does not bind M/s. Amsco to any contract with the appellant.
9. As regards the invocation of extended period of limitation and levy of penalties, we find that in the present case, there was no intent to evade tax as the appellant had no contractual relation with AFL; and all the transactions such as payment, transmission of funds are the liability of M/s C&A and it is up to them to decide the mode of the transfer and payment; and the appellant had no role in this regard. Further, the deduction in respect of AFL was clearly shown in the shipping bills for export; drawback was also claimed only on the net amount; and further, being an exporter the service tax payable, if any, would anyway be allowable as a rebate to the appellant; and the entire situation would have been revenue neutral. Therefore, we find that there is no question of lack of bonafides on the part of the appellant in the present case.
