Court Upholds Service Tax on Foreign Currency Conversion, Clarifies Valuation Method

The court upheld the imposition of service tax on the conversion of foreign currency by a respondent-Bank, dismissing the petitioner's claim for exemption and clarifying the valuation method based on the difference between selling and RBI reference rates. The court emphasized that service tax is levied on each transaction, rejecting the petitioner's plea for a compounded tax liability option for the entire year. The writ petition was dismissed, affirming the legality of the tax collection by the respondent-Bank.

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Issues Involved:
1. Liability of the petitioner to pay service tax on foreign currency remittances.
2. Scope of "banking and other financial services" under Section 65(12) of the Finance Act, 1994.
3. Exemption of transactions in money from service tax under Section 65B(44) of the Finance Act, 1994.
4. Valuation of taxable services under Section 67 of the Finance Act, 1994.
5. Application of Rule 6(7B) of the Service Tax Rules, 1994 for compounding service tax liability.

Issue-wise Detailed Analysis:

1. Liability of the petitioner to pay service tax on foreign currency remittances:
The petitioner, a private limited company engaged in manufacturing and exporting coir, jute, and other allied products, contested the service tax levied on foreign currency remittances made by foreign buyers to the respondent-Bank. The petitioner argued that they should not be liable to pay service tax on these remittances and, if applicable, it should only be on the gross charges levied by the Bank for the service rendered. The court dismissed the petition, stating that the service tax was correctly levied on the conversion of foreign currency to Indian rupees, which is a taxable event under the Finance Act, 1994.

2. Scope of "banking and other financial services" under Section 65(12) of the Finance Act, 1994:
The court rejected the petitioner's argument that the term "banking and other financial services" under Section 65(12) applies only to private money changers. The provision covers services rendered by any banking company, financial institution, or non-banking financial company, including nationalized banks. The emphasis is on the service provided, not the type of establishment providing it. Therefore, the respondent-Bank's service of converting foreign currency falls within the scope of this provision.

3. Exemption of transactions in money from service tax under Section 65B(44) of the Finance Act, 1994:
The petitioner contended that the transaction in money should be exempt from service tax. However, the court clarified that Explanation 2 of Section 65B(44) excludes conversion of currency from the exemption. The service tax is levied on the conversion of foreign currency to Indian rupees, not on the remittance itself. The court noted that the Central Board of Excise and Customs Circular (Exhibit P1) did not apply to the conversion service, thus, the petitioner could not claim exemption based on it.

4. Valuation of taxable services under Section 67 of the Finance Act, 1994:
The court discussed the valuation of taxable services under Section 67. It stated that the gross amount charged by the service provider for the service provided is the basis for service tax. The court explained that the rules prescribed under Section 67(4) for determining the value of taxable services are subject to the provisions of subsections (1), (2), and (3). The court upheld the rule that the taxable value for currency conversion is the difference between the selling rate and the RBI reference rate, multiplied by the total units of currency exchanged.

5. Application of Rule 6(7B) of the Service Tax Rules, 1994 for compounding service tax liability:
The petitioner argued for the application of Rule 6(7B) of the Service Tax Rules, 1994, which allows for an option to pay service tax based on a specified rate for the entire year. The court rejected this argument, stating that the taxable event is the service provided, and the valuation must be made for each transaction. The option under Rule 6(7B) applies to each taxable event in a year, not cumulatively for all transactions in a year. The court emphasized that the rule provides different rates for the gross amount of currency exchanged, underscoring that the levy is on each transaction.

Conclusion:
The court found no illegality in the service tax levied and collected by the respondent-Bank on the conversion of foreign currency. The tax was correctly imposed on the conversion service, and the valuation method prescribed by the rules was in consonance with the statutory provisions. The writ petition was dismissed with no costs.

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