Banking charges deducted by foreign banks not taxable under Section 65(105)(zm) as no services received in India

CESTAT Chennai ruled that banking charges deducted by foreign banks do not constitute taxable services under Section 65(105)(zm) of Finance Act, 1994. Following precedent in M/s. Kadri Mills case, the Tribunal held that for services to be taxable under Rule 3(iii) of Taxation of Services Rules, 2006, they must be received in India. Since no services were received in India in this case, service tax demand was invalid. The impugned order was set aside and appeal was allowed.

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Issues involved:
The judgment involves the demand of Service Tax under "banking and other financial services" under Section 65(12) read with Section 65(105)(zm) of the Finance Act, 1994 under reverse charge mechanism.

Main Issue: Taxability of Deducted Amount by Foreign Banks

The main issue for consideration was whether the amount deducted by foreign banks towards banking charges was taxable under the category of "banking and other financial services."

Facts and Adjudication:
During scrutiny, it was found that the appellant had paid bank charges to foreign banks for financial services but failed to pay Service Tax, obtain Registration Certificate, and file statutory returns from October 2007 to March 2012. A Show Cause Notice was issued proposing a demand of Service Tax, interest, and penalties under the Finance Act, 1994. The Order-in-Original confirmed the demand, invoking the extended period of limitation, with interest and penalties. The first appellate authority upheld the order, with modifications in penalties under the Act.

Arguments and Decision:
The appellant argued that Indian banks should be considered service recipients, not the Indian exporter, for the purpose of Service Tax payment. The Revenue contended that the services by foreign banks fell under banking and financial services, making the assessee liable for Service Tax. The Tribunal referred to a previous decision and held that the issue was whether the deducted amount was taxable under banking services.

Precedent and Decision:
The Tribunal cited a previous case where a similar issue was decided, stating that the foreign banks deducted charges while remitting export sale proceeds to Indian banks, making the appellant not liable for Service Tax. As the issue was resolved on merits, the Tribunal set aside the impugned order demanding Service Tax under banking services and allowed the appeal.

Conclusion:
Based on the precedent and discussions, the Tribunal set aside the impugned order and allowed the appeal, finding no merit in the demand raised. The judgment was pronounced in open court on 24.01.2024.

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