2020 (8) TMI 80 - AT - Service Tax

Bank not liable for service tax under reverse charge mechanism; Commissioner's order set aside.

The Tribunal held that the Appellant Bank was not liable to pay service tax under the reverse charge mechanism as it was not considered the recipient of ... Banking & other financial services - reverse charge mechanism - recipient of service - consideration - valuation of taxable service under Section 67 - service tax on import of services - departmental trade notice non binding in lawRecipient of service - reverse charge mechanism - Whether the Appellant Bank was the recipient of services allegedly provided by foreign banks and liable to pay service tax under the reverse charge mechanism. - HELD THAT: - The Tribunal examined the operational flow of export collections and the contractual/operational relationships between exporter, Indian bank (Appellant) and foreign/ intermediary banks. It found that the Appellant merely facilitated remittances on behalf of the exporter, routed documents through banking channels, and did not receive any service from the foreign banks. The Appellant neither contracted with nor paid consideration to the foreign banks; foreign bank charges were deducted at source from export proceeds and borne by the exporter/importer as per contractual allocation. On these facts the Appellant cannot be treated as the service recipient for the foreign banks' activities; accordingly the reverse charge could not be fastened on the Appellant. The Tribunal rejected reliance on the Trade Notice and certain interim tribunal orders as determinative in the present factual matrix. [Paras 34, 41, 50]Appellant Bank was not the recipient of services of the foreign banks and therefore not liable to pay service tax under the reverse charge mechanism.Consideration - valuation of taxable service under Section 67 - Whether the foreign bank charges constituted 'consideration' attributable to the Appellant Bank for valuation and levy of service tax. - HELD THAT: - The Tribunal applied the statutory test under Section 67 and the settled jurisprudence that only amounts which are consideration for the taxable service and flow to the service provider can form part of the value. Reliance was placed on precedents explaining that a nexus is required between the amount charged and the taxable service, and that obligations or conditions under a contract do not ipso facto become consideration. On the facts, no consideration flowed from the Appellant to the foreign banks and the foreign bank charges were not payable by the Appellant; hence they could not be included in the Appellant's taxable value or taxed under reverse charge. [Paras 36, 37, 38, 41]Foreign bank charges did not constitute consideration from the Appellant Bank to the foreign banks and thus could not be valued for service tax under Section 67 as part of the Appellant's liability.Departmental trade notice non binding in law - banking & other financial services - Whether the Trade Notice dated February 10, 2014 and the decisions relying on it justified sustaining the demand against the Appellant. - HELD THAT: - The Tribunal observed that the Trade Notice was founded on prima facie/interim views of certain benches and cannot override statutory tests of service, consideration and recipient status. The Madras High Court's scrutiny of the same Trade Notice demonstrated that departmental circulars are not binding and must yield to the statutory scheme and factual matrix. The Tribunal held that the Trade Notice and the cited decisions did not assist the Department in light of the factual finding that the Appellant did not receive the service or pay consideration. [Paras 44, 45, 46]The Trade Notice and the decisions founded on it did not sustain the demand against the Appellant in the facts of this case.Final Conclusion: The impugned order confirming service tax, interest and penalty was set aside: the Appellant Bank was neither the recipient of services rendered by the foreign banks nor did any consideration flow from it to those banks, and therefore no liability to pay service tax under the reverse charge mechanism arose for the period October, 2010 to March, 2015; the appeal is allowed. Issues Involved:1. Whether the Foreign Banks provided any service to the Appellant Bank.2. Whether the Appellant Bank is liable to pay service tax under the reverse charge mechanism.3. Whether the extended period for the issue of a show cause notice was valid.4. Whether the Appellant Bank was the recipient of the service provided by the Foreign Bank.Issue-Wise Detailed Analysis:1. Whether the Foreign Banks provided any service to the Appellant Bank:The Appellant Bank facilitates the settlement of payments related to the export of goods by sending export documents to the importer's bank abroad and collecting payments. The Appellant Bank charges a commission/fee for these services and pays service tax on such services provided to the exporter. The dispute is regarding the charges collected by the Foreign Bank or the Foreign Intermediary Bank. The Appellant Bank contended that it did not receive any service from the Foreign Bank and merely acted on behalf of the Indian exporter to facilitate the service. The Commissioner, however, held that the services provided by the Foreign Banks were received by the Appellant Bank and thus, service tax was payable under the reverse charge mechanism.2. Whether the Appellant Bank is liable to pay service tax under the reverse charge mechanism:The Commissioner confirmed the demand of service tax on the Appellant Bank under the reverse charge mechanism for services provided by Foreign Banks. However, the Tribunal found that the Appellant Bank did not receive any service from the Foreign Bank. The Appellant Bank only facilitated the service as a mediator between the Indian exporter and the Foreign Bank. Therefore, the Appellant Bank was not liable to pay service tax under the reverse charge mechanism.3. Whether the extended period for the issue of a show cause notice was valid:The Appellant Bank argued that the show cause notice issued on February 08, 2016, for the period from October 01, 2010, to March 31, 2015, was time-barred as there was no evidence of willful suppression on its part. The Commissioner invoked the extended period under the proviso to section 73(1) of the Finance Act. The Tribunal did not specifically address the validity of the extended period, but since the primary demand was set aside, the issue of the extended period became moot.4. Whether the Appellant Bank was the recipient of the service provided by the Foreign Bank:The Tribunal held that the Appellant Bank was not the recipient of the service provided by the Foreign Bank. The Foreign Bank provided services to the importers/exporters, and the charges were deducted from the export proceeds. The Appellant Bank merely facilitated the transaction and did not pay any consideration to the Foreign Bank. Therefore, the Appellant Bank could not be considered the recipient of the service, and no service tax was payable under the reverse charge mechanism.Conclusion:The Tribunal concluded that the Appellant Bank was not liable to pay service tax under the reverse charge mechanism as it was not the recipient of the service provided by the Foreign Bank. The order dated March 30, 2017, passed by the Commissioner was set aside, and the appeal was allowed.