Indian banks not liable for service tax on foreign bank charges under Reverse Charge Mechanism in export deals

Bank of Baroda Versus Commissioner of Service Tax - I

1. ISSUES PRESENTED and CONSIDERED

• Whether Indian banks acting on behalf of exporters are recipients of services provided by foreign banks in export transactions involving transfer/exchange of documents and transfer of money.
• Whether Indian banks are liable to pay service tax under the Reverse Charge Mechanism (RCM) on foreign bank charges deducted by foreign correspondent or intermediary banks.
• Whether the value of foreign bank charges deducted at source forms part of the taxable value for service tax purposes under the Finance Act, 1994.
• The applicability and interpretation of relevant provisions of the Finance Act, 1994, including Sections 66B, 67, 68, 73, 76, and 77, in the context of banking and financial services related to export transactions.
• The legal effect and binding nature of departmental Trade Notices and interim Tribunal orders relied upon by the Revenue.
• The interpretation of 'consideration' and its nexus with taxable services in determining service tax liability.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 and 2: Whether Indian banks are recipients of services provided by foreign banks in export transactions and liable to pay service tax under RCM on foreign bank charges

Relevant legal framework and precedents:

The Finance Act, 1994, defines taxable services including 'Banking and Other Financial Services' under Chapter V. Section 66B mandates service tax on specified services. Section 68 and 73 relate to demand and recovery of service tax, while Sections 76 and 77 provide for penalty provisions. Section 67 governs the valuation of taxable services, requiring that service tax be levied on the gross amount charged for the taxable service provided for a consideration. The Reverse Charge Mechanism (RCM) imposes tax liability on the service recipient in certain cases.

Key precedents include:

• State Bank of Bikaner & Jaipur v. Commissioner of Central Excise & Service Tax (Tribunal decision): Held Indian banks are not recipients of services provided by foreign banks in export transactions and thus not liable under RCM.
• Madras High Court in BGR Energy Systems Ltd. v. Addl. Commissioner of GST & C. Ex.: Affirmed that Indian banks act as agents for exporters and are not recipients of foreign bank services; the exporter is the service recipient liable for service tax.
• Supreme Court decisions in Union of India v. Intercontinental Consultants and Technocrats and Commissioner of Service Tax v. Bhayana Builders: Clarified that 'consideration' must flow from the service recipient to the service provider and must relate directly to the taxable service provided.

Court's interpretation and reasoning:

The Tribunal examined the nature of export transactions involving Indian banks facilitating remittances and exchange of documents. It was noted that foreign banks deduct charges at source before remitting net amounts to Indian banks. The Indian banks act as agents for exporters and do not receive or pay consideration to foreign banks for any service.

The Tribunal relied on the protocols URC 522 and UCP 600 governing international trade banking transactions, which establish the roles and obligations of exporters, importers, and their banks.

The Tribunal held that the Indian banks do not receive any service from foreign banks; rather, they facilitate services on behalf of exporters. Consequently, Indian banks cannot be considered recipients of foreign bank services for RCM liability.

Key evidence and findings:

• Exporters instruct Indian banks to send documents and collect payments; Indian banks charge exporters commission and pay service tax on such services.
• Foreign banks deduct charges directly from export proceeds before remitting to Indian banks; Indian banks do not pay or reimburse these charges.
• No contractual relationship or agreement exists between Indian banks and foreign banks for these deducted charges.
• Trade Notice No. 20/2013-14-ST-I dated 10.02.2014, relied upon by Revenue, was found to be based on interim Tribunal orders and not binding.

Application of law to facts:

Applying Section 67's requirement that service tax be levied only on consideration paid for taxable services, the Tribunal concluded that since Indian banks do not pay consideration to foreign banks, no taxable service is received by them. The foreign bank charges deducted at source are not part of the taxable value for Indian banks.

The Tribunal also distinguished between 'conditions' to contracts and 'consideration' for taxable services, emphasizing that mere deductions or expenses not constituting consideration cannot form part of the taxable value.

Treatment of competing arguments:

The Revenue argued that Indian banks are recipients of foreign bank services and liable under RCM, relying on the Trade Notice and interim Tribunal orders. The Tribunal rejected this, noting the Trade Notice's non-binding nature and reliance on interim orders. The Tribunal also cited the Madras High Court decision, which held exporters liable, not Indian banks.

Conclusions:

Indian banks acting on behalf of exporters are not recipients of foreign bank services in export transactions. They are not liable to pay service tax under RCM on foreign bank charges deducted by foreign correspondent or intermediary banks. The service tax liability, if any, lies with the exporter who bears the expenditure.

Issue 3: Whether foreign bank charges deducted at source form part of taxable value under Section 67 of the Finance Act, 1994

Relevant legal framework and precedents:

Section 67(1) of the Finance Act requires valuation of taxable services to be based on the gross amount charged for such service provided for consideration. The Explanation to Section 67(1) defines 'consideration' as any amount payable for taxable services or reimbursable expenditure.

Supreme Court rulings in Commissioner of Service Tax v. Bhayana Builders and Union of India v. Intercontinental Consultants and Technocrats clarified that only amounts paid as consideration for taxable services are includible in valuation, and that conditions to a contract are distinct from consideration.

Court's interpretation and reasoning:

The Tribunal emphasized that the foreign bank charges deducted at source do not constitute consideration paid by the Indian banks for any taxable service. The Indian banks do not receive or pay these charges; rather, they are borne by the exporters.

Therefore, such deductions cannot be included in the taxable value of services provided by Indian banks or foreign banks to Indian banks.

Key evidence and findings:

• Indian banks do not remit or reimburse foreign bank charges; these are deducted before remittance.
• There is no flow of consideration from Indian banks to foreign banks.
• Exporters bear the cost of foreign bank charges as part of their export proceeds realization.

Application of law to facts:

Since no consideration flows from Indian banks to foreign banks, and the charges are borne by exporters, the foreign bank charges deducted at source are not includible in the taxable value of services for Indian banks under Section 67.

Treatment of competing arguments:

Revenue's reliance on Trade Notice and interim orders to treat Indian banks as service recipients and include foreign bank charges in taxable value was rejected based on binding precedents and statutory interpretation.

Conclusions:

Foreign bank charges deducted at source do not form part of the taxable value of services for Indian banks under Section 67 of the Finance Act, 1994.

Issue 4: Applicability and binding nature of departmental Trade Notices and interim Tribunal orders

Relevant legal framework and precedents:

Departmental Trade Notices are administrative instructions and do not have the force of law. Courts and Tribunals are not bound by such circulars or notices. Interim orders passed by Tribunals are not final and may be subject to review or reversal.

Supreme Court in Commissioner of Central Excise, Bhopal v. Minwool Rock Fibres Ltd. held departmental circulars are not binding on assessees or quasi-judicial authorities.

Court's interpretation and reasoning:

The Tribunal observed that the Trade Notice dated 10.02.2014 relied upon by Revenue is based on interim orders and prima facie views, not final decisions. It is not binding on the appellants or the Tribunal.

Key evidence and findings:

• Trade Notice relied on interim orders from other Benches.
• Subsequent final orders and High Court decisions contradicted the views expressed in the Trade Notice.

Application of law to facts:

The Tribunal declined to give effect to the Trade Notice for determining liability, relying instead on binding judicial precedents and final Tribunal decisions.

Treatment of competing arguments:

Revenue's reliance on the Trade Notice and interim orders was rejected as not legally sustainable.

Conclusions:

Departmental Trade Notices and interim Tribunal orders do not bind the Tribunal or the assessees and cannot be relied upon to impose service tax liability contrary to settled law.

Issue 5: Interpretation of 'consideration' and nexus with taxable services for service tax valuation

Relevant legal framework and precedents:

Section 67 and its Explanation define 'consideration' as amount payable for taxable services. Supreme Court rulings clarified that consideration must flow from service recipient to provider and relate directly to the taxable service.

Court's interpretation and reasoning:

The Tribunal reiterated that consideration must have a direct nexus with the taxable service provided. Mere contractual conditions or deductions not constituting consideration cannot be included in taxable value.

Key evidence and findings:

• No consideration flows from Indian banks to foreign banks for foreign bank charges.
• Indian banks act as agents for exporters and do not receive services for which they pay consideration.

Application of law to facts:

Foreign bank charges deducted at source do not constitute consideration for taxable services by Indian banks and hence are not includible in valuation.

Treatment of competing arguments:

Revenue's argument that foreign bank charges form part of taxable value was rejected based on statutory interpretation and judicial precedents.

Conclusions:

Only amounts paid as consideration for taxable services form part of taxable value under Section 67; foreign bank charges deducted at source do not qualify.

Overall Conclusion:

Indian banks providing banking and financial services in export transactions are not recipients of services from foreign banks and are not liable to pay service tax under RCM on foreign bank charges deducted at source. The foreign bank charges are borne by exporters and do not form part of taxable value for Indian banks. Departmental Trade Notices and interim orders relied upon by Revenue do not override settled judicial precedents. The impugned demand, interest, and penalties imposed on Indian banks are set aside as legally unsustainable.