Service tax was first introduced in India in 1994 and was only levied on 3 services. Gradually, this net kept on widening and more and more services were added to the list of taxable services. In 2012, India moved from charging Service tax on specified services i.e. positive list regime to all services except for the specified ones i.e. negative list regime. Now, of course, the taxation of services is governed by GST. Effectively, the service sector has seen a major overhauling of taxation system thrice in the last 25 years. This quick transition from positive regime to negative regime to GST has left many questions unanswered and many disputes unresolved. One such issue which has been answered recently by the Principal bench CESTAT, Delhi in case of State Bank of Bikaner and Jaipur Vs. Commissioner of Central Excise and Service Tax is whether exporter’s bank (Indian Bank) is service recipient for charges deducted by Importer’s Bank (Foreign Bank) in case of export transaction where documents & Bill of exchange are submitted by Exporter to Bank which are routed to importer’s bank and payment is made by importer’s bank after deduction of charges.
Facts of the Case
In an export transaction from India, the exporter submits the export documents to the Appellant Bank and informs the name and address of buyer’s bank for sending the export documents against acceptance and payment of Bill of Exchange – The Appellant Bank forwards these documents to the Foreign Bank or the Foreign Intermediary Bank for collection of payment from the importer. Appellant Bank charges commission/fees for the provision of such services to the exporters and pays service tax on such services. If the exporter decides to bear all the bank charges, then the foreign bank charges its fees from the exporter for handling of export documents and collection of export proceeds. The foreign bank charges are then recovered from the exporter by deducting the foreign bank charges from the amount collected from the importer.
Audit team of the Department raised an objection that the Appellant Bank had not paid service tax on foreign bank charges under the reverse charge mechanism. Notice was issued for the period October 2010 to March 2015 on the foreign bank charges and demand of Rs. 110,84,38,781/- along with interest & penalty was imposed and confirmed by Commissioner.
Contention of Appelant
- For 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”.
- The foreign bank charges cannot be considered as ‘consideration’ received by the Appellant Bank and included in the value of services.
- For the period post July 01, 2012, it was contended that the Appellant Bank is not required to pay any amount of service tax on a reverse charge mechanism because both the Appellant Bank and the Foreign Bank are acting as intermediary/agent while providing service to their respective customers.
- The Appellant Bank cannot be considered as the recipient of the service provided by the Foreign Bank
Contentions of Department
- In ‘Greenply Industries Ltd. vs CCE, Jaipur- I 2015 (38) STR 605 (Tri-Del)’, it was held in an identical case that an exporter cannot be the recipient of service from the Foreign Bank and it is the Indian Bank which receives the service from the Foreign Bank
- 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;
- The Appellant Bank acted as guarantor for the Indian exporter in the financing of international trade, and, therefore, it cannot be a pure agent of the Indian exporter
Decision by Tribunal
Tribunal held that 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 on following grounds:
- 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. It is clear from the aforesaid definition of “consideration” that only an amount that is payable for the taxable service will be considered as “consideration.
- Any consideration whether monetary or otherwise, should have flown or should flow from the service recipient to the service provider and should accrue to the benefit of the latter. (Bhayana Builders (P) Ltd. vs Commissioner of Service Tax 2013 (32) S.T.R. 49 (Tri.-LB))
- “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. The Appellant Bank has not paid any consideration to the Foreign Bank
Position in Post GST era
Introduction of GST was one of the major tax reform in India. It is built up on decades of different Indirect Tax Laws and judicial precedents. One of the objective of GST, among others, was to reduce litigation.
Issue discussed earlier seems to be fairly settled in GST considering definition of ‘Supply’, ‘Supplier’, ‘Recipient of service’ & ‘Consideration’
Sec 2(105) “Supplier” in relation to any goods or services or both, shall mean the person supplying the said goods or services or both and shall include an agent acting as such on behalf of such supplier in relation to the goods or services or both supplied
Sec 2(93) “Recipient” of supply of goods or services or both, means—
(a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration;
Sec 2(31) “consideration” in relation to the supply of goods or services or both includes––
(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
Considering above provisions of GST, supply of service is provided by foreign bank (Supplier of Service) to Exporter (Recipient of service) wherein consideration is charged in form of bank charges by deducting such charges from export proceeds.
Further, supply of service discussed supra will fall under Sec 13(2) of IGST Act, 2017 and thus Place of supply of such service will be ‘Location of recipient of service’ who is Exporter in our case. Also, as per Sl. no. 1 of Notification No. 10/2017- Integrated Tax (Rate) dated 28/June/2017, IGST under RCM is applicable wherein service is supplied by person located in non-taxable territory to any person located in taxable territory.
Therefore, IGST is to be paid by Exporter under reverse charge on bank charges deducted by foreign bank.
Author Bio
I feel it is wrong to say Exporter is the recipient of service by foreign bank. The Importer has to make payment for the purchase he has made. He chose to pay less by making his bank to collect his charges from the customer, which some good buyers (mostly in Japan) do not do. Thus the foreign bank which has to collect the charges from his customer, chose to collect from the Exporter, as he has no say on these. So, Exporters really do not get any service, but got less amount than what he is due to get.