2025 (2) TMI 75 - AT - Service Tax

Foreign banks' payment processing charges during remittance don't create service tax liability under reverse charge mechanism

CESTAT Chennai held that appellant was not liable for service tax under reverse charge mechanism on payment processing services allegedly received from ... Levy of service tax - service received from AFL and other foreign bank - service provided to an account holder or not - applicability of Rule 3 of the Place of Provision of Services Rules, 2012 - reverse charge mechanism. Whether the appellant has received payment processing services from AFL engaged by M/s. C&A Buying, Germany-the foreign buyer to process payments to the appellant and if so, whether the demand of Service tax under Reverse Charge Mechanism is sustainable? - HELD THAT:- The identical issues as involved in the present case, were also involved in the case of M/S. AKR TEXTILE AND OTHERS VERSUS COMMISSIONER OF CENTRAL EXCISE & SERVICE TAX COIMBATORE [2020 (10) TMI 479 - CESTAT CHENNAI] wherein Chennai Tribunal has allowed 22 appeals of the exporters by setting aside the impugned orders. It is pertinent to reproduce the relevant findings of the Tribunal where it was held that 'If at all, the Hong Kong entity is an “intermediary‟ within the meaning assigned in Place of Provision of Service Rules, 2012 to render the service, it has been performed in Hong Kong and, thus, not in the taxable territory. The demand for the period after 1st July 2012 also fails. Consequently, the liability for allegedly having received services provided by M/s Amsco Finance Ltd also does not sustain.' The service of remittance by a foreign bank to Indian bank of the exporter is not liable to service tax at the hands of the exporter. In this regard, reference is drawn to the decision of Chennai Bench of the Tribunal in the case of M/S. SKM EGG PRODUCTS EXPORT (I) LTD. VERSUS THE COMMISSIONER OF CENTRAL EXCISE (APPEALS) , ANNAI MEDU SALEM. [2023 (3) TMI 1384 - CESTAT CHENNAI] wherein the Tribunal after relying upon the decision of M/S DILEEP INDUSTRIES PVT. LTD. VERSUS CCE, JAIPUR [2017 (10) TMI 1231 - CESTAT NEW DELHI] has observed 'it appears that while exporting their goods, they lodged their bills for collection to the Indian Bankers who in turn send the same to the foreign banks. The foreign banks while remitting the money to the Indian Bank, deduct their charges for collection of bills which in turn are charged by the Indian Banks from the appellants. When it is so, then the appellant are not entitled to pay the service tax. Conclusion - For a service tax liability to arise under the Reverse Charge Mechanism, there must be a direct service provider and service recipient relationship. The deduction of charges by foreign entities as part of a trade arrangement does not constitute a taxable service to the appellant. The appellant was not liable for service tax on the services allegedly received from AFL and foreign banks. Appeal allowed. Issues Presented and ConsideredThe primary issues considered in this appeal were:(i) Whether the appellant received payment processing services from Amsco Finance Ltd. (AFL), engaged by the foreign buyer M/s. C&A Buying, Germany, and if such services are subject to service tax under the Reverse Charge Mechanism.(ii) Whether the service tax demand under reverse charge pertaining to services rendered by foreign banks is sustainable.Issue-wise Detailed AnalysisIssue (i): Payment Processing Services from Amsco Finance Ltd.Relevant Legal Framework and Precedents: The demand for service tax was based on the interpretation of Section 66A and Section 68 of the Finance Act, 1994, under the Reverse Charge Mechanism. The Tribunal referred to previous decisions, including M/s. AKR Textile and Others, which had addressed similar issues.Court's Interpretation and Reasoning: The Tribunal found that the relationship between the appellant and AFL did not constitute a service provider and service recipient relationship. The service fee deducted by AFL was part of an arrangement between the foreign buyer and AFL, not between the appellant and AFL. The Tribunal noted that the appellant did not have a contractual agreement with AFL to receive services.Key Evidence and Findings: The Tribunal relied on documentation showing that the service fee was deducted by AFL as part of a trade payment arrangement with the foreign buyer. The appellant did not engage AFL directly for services, and the deduction was made from the sale proceeds by the buyer.Application of Law to Facts: The Tribunal applied the legal framework to conclude that the appellant was not liable for service tax under the Reverse Charge Mechanism, as there was no direct service relationship with AFL.Treatment of Competing Arguments: The Tribunal dismissed the department's argument that the appellant was the service recipient, citing the absence of a direct contractual relationship and the nature of the deduction as a trade arrangement.Conclusions: The Tribunal concluded that the appellant was not liable for service tax on the services allegedly received from AFL under the Reverse Charge Mechanism.Issue (ii): Services Rendered by Foreign BanksRelevant Legal Framework and Precedents: The demand was based on the interpretation of the Banking and Other Financial Services under Section 66A of the Finance Act, 1994. The Tribunal referred to previous rulings, including Rogini Garments and others, which clarified the non-liability of exporters for charges deducted by foreign banks.Court's Interpretation and Reasoning: The Tribunal found that the charges deducted by foreign banks were not for services rendered to the appellant. The foreign banks were engaged by the foreign buyer, and the appellant had no direct interaction or agreement with these banks.Key Evidence and Findings: The Tribunal noted that the charges were deducted by foreign banks as part of the remittance process initiated by the buyer, not by the appellant. The appellant did not have any agreement or knowledge of the foreign banks' services.Application of Law to Facts: The Tribunal applied the legal framework to determine that the appellant was not liable for service tax on the charges deducted by foreign banks, as the service was not rendered to the appellant.Treatment of Competing Arguments: The Tribunal rejected the department's argument that the appellant was the service recipient, emphasizing the lack of a direct relationship and the nature of the transaction as a bank-to-bank service.Conclusions: The Tribunal concluded that the appellant was not liable for service tax on the services allegedly received from foreign banks under the Reverse Charge Mechanism.Significant HoldingsCore Principles Established: The Tribunal established that for a service tax liability to arise under the Reverse Charge Mechanism, there must be a direct service provider and service recipient relationship. The deduction of charges by foreign entities as part of a trade arrangement does not constitute a taxable service to the appellant.Final Determinations on Each Issue: The Tribunal set aside the impugned order, concluding that the appellant was not liable for service tax on the services allegedly received from AFL and foreign banks. The Tribunal allowed the appeal with consequential relief.