Foreign bank payments ruled as trade discount, not taxable service under FEMA regulations

CESTAT Chennai allowed the appeal, setting aside service tax demand on payments to foreign banks. The tribunal held no service provider-recipient relationship existed between appellant and foreign entity, as contract was between foreign buyer and service provider, both outside India. The 3% deduction from invoice price constituted trade discount as indicated in purchase order and permitted under RBI's FEMA regulations. No extended limitation period or penalties applied since appellant lacked contractual relation with service provider, had no intent to evade tax, clearly showed deductions in shipping bills, claimed drawback only on net amount, and situation remained revenue neutral for exporter entitled to service tax rebate.

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Issues Involved:
1. 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.
2. Whether the demand of Service Tax under Reverse Charge Mechanism is sustainable.
3. Whether the invocation of extended period of limitation and levy of penalties is justified.

Summary of the Judgment:

Issue 1: Payment Processing Services from AFL
The Tribunal found that there is no service provider-recipient relationship between the appellant and AFL. The contract, if any, exists between M/s. C&A (buyer) and AFL, both located outside India. The appellant is only a recipient of funds for goods sold to M/s. C&A, and the amount received is net of the invoice value. The deduction of 3% from the invoice price was indicated in the Purchase Order and is considered a trade discount. The email from AFL is merely informational and does not constitute a binding contract with the appellant. Therefore, the appellant did not receive any payment processing services from AFL.

Issue 2: Demand of Service Tax under Reverse Charge Mechanism
The Tribunal held that the appellant is not liable to pay Service Tax under the reverse charge mechanism for services rendered by AFL. The payment mechanism detailed that the overseas customer pays the invoice value minus discounts through a Finance Agent (FA), and the appellant does not hold an account in the overseas bank. The Tribunal referenced previous decisions, including M/s. Eastman Exports Global Clothing P Ltd. [2024 (5) TMI 417-CESTAT CHENNAI], which held that no service tax was liable to be paid by the exporter under similar circumstances. The Tribunal concluded that the demand for Service Tax under the reverse charge mechanism is not sustainable.

Issue 3: Invocation of Extended Period of Limitation and Levy of Penalties
The Tribunal found no intent to evade tax by the appellant, as there was no contractual relation with AFL, and all transactions were the liability of M/s. C&A. The deductions were clearly shown in the shipping bills, and the appellant had no role in the payment transfer process. The Tribunal referenced several decisions, including Modern Petrofils Vs. Commissioner of Central Excise, Vadodara [2010 (20) STR 627 (Tri.-Ahmd.)], and concluded that there was no suppression of facts with a malafide intention. Therefore, the invocation of the extended period of limitation and the levy of penalties are not justified.

Conclusion:
The Tribunal set aside the impugned order, allowing the appeal with consequential relief as per law, and held that the appellant is not liable for Service Tax under the reverse charge mechanism for services rendered by AFL. The Tribunal also found no justification for the invocation of the extended period of limitation and the levy of penalties.

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