2025 (8) TMI 934 - AT - Service Tax

Banks not liable under reverse charge for foreign bank charges on export transactions where they transfer documents and funds

Bank of Baroda Versus Commissioner of Service Tax – IV, Mumbai

CESTAT MUMBAI held that Indian banks are not liable to pay service tax under the Reverse Charge Mechanism for foreign bank charges arising from export ... Liability of appellant to pay service tax - appellants banks in India are the recipient of service - export transaction involving transfer/exchange of documents and transfer of money on behalf of their client exporters - foreign bank charges paid to foreign correspondent banks or foreign intermediary banks, under Reverse Charge Mechanism. HELD THAT:- On the issue of liability to pay service tax on ‘foreign bank charges’, both during pre-negative list period and post 01.07.2012 have been examined in detail by the Co-ordinate Bench of this Tribunal in the case of State Bank of Bikaner & Jaipur [2020 (8) TMI 80 - CESTAT NEW DELHI], wherein it was held that the banks in India are not the recipient of any service rendered by foreign banks in the export transaction for settling the foreign remittances, and there is no liability of payment of service tax thereon on Reverse Charge Mechanism (RCM) basis. It is also found that Co-ordinate Bench of the Tribunal in the case of Central Bank of India [2025 (1) TMI 538 - CESTAT NEW DELHI] in dismissing the appeal filed by the department against the relief given in favour of the appellants have relied upon the case of State Bank of Bikaner & Jaipur and held that banks in India are not liable to pay service tax under RCM basis in respect of export transactions conducted on behalf of their client exporters. The confirmation of service tax liability on appellants banks in India, in an export transaction involving transfer/exchange of documents and transfer of money on behalf of their client exporters, on RCM basis, does not stand the legal scrutiny. Therefore, the adjudged demands along with interest and imposition of penalty on the appellants, in impugned order dated 28.02.2017, is not legally sustainable and thus it is liable to be set aside. The impugned order dated 28.02.2017 passed by the learned Commissioner of Service Tax-IV, Mumbai is set aside - Appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether an Indian bank acting on behalf of an exporter (facilitating transfer/exchange of export documents and remittance collection) is the recipient of services provided by foreign correspondent/intermediary banks for the purposes of service tax liability under the Reverse Charge Mechanism (RCM). 2. Whether service tax is payable by the Indian bank on foreign bank charges deducted/retained by foreign correspondent/intermediary banks in export-related remittance transactions, having regard to the definition and valuation principles of 'consideration' under the service tax regime. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Whether the Indian bank is the recipient of service provided by foreign correspondent/intermediary banks (liability under RCM) 2.1 Legal framework 2.1.1 The analysis proceeds under the service tax scheme where taxable services are defined and service tax liability can be imposed on the service recipient under RCM; valuation of taxable services depends on 'consideration' as defined in the statute and Section 67 (and its explanatory provisions) governs valuation. Administrative Trade Notices may express departmental views but are not binding on courts/tribunals. 2.2 Precedent treatment 2.2.1 Followed: Coordinate Bench decisions holding that Indian banks facilitating exporters are not recipients of services rendered by foreign banks in export remittance chains; Larger Bench and Supreme Court pronouncements on the need for a flow of consideration from recipient to provider for valuation were applied. A High Court decision (Madras) distinguishing the Trade Notice and holding exporter as recipient where exporter bore the expense was considered persuasive. 2.3 Interpretation and reasoning 2.3.1 Factual matrix: In international export remittance practices governed by URC 522/UCP 600, Indian banks provide services to exporters (sending documents, collecting payment) and charge exporters; foreign correspondent/intermediary banks deduct charges at source from remittances and remit net amounts to Indian banks. 2.3.2 Nexus and consideration: The Court examined whether the foreign bank's actions amount to provision of service to the Indian bank and whether any consideration flowed from the Indian bank to the foreign bank such that the Indian bank can be regarded as service recipient for RCM. The statutory concept of 'consideration' requires that the amount be payable for the taxable service and that the consideration flows to and benefits the service provider. 2.3.3 Agency/function: The Indian bank functions as agent/facilitator of the exporter; foreign charges are deducted from amounts payable to exporter and, on the factual matrix, consideration for services rendered by foreign/intermediary banks was borne by the exporter (directly or indirectly), not by the Indian bank. 2.3.4 Administrative circulars: The Trade Notice relied upon by Revenue (treating Indian banks as recipients) was evaluated and found to rest on interim/prima facie tribunal views and thus not determinative; judicial authorities have held departmental circulars not binding where contrary to legal/contractual facts. 2.4 Ratio vs. Obiter 2.4.1 Ratio: Where the Indian bank acts merely as facilitator/agent of the exporter and does not pay or agree to pay consideration to foreign/intermediary banks for their services, it is not the recipient of such foreign bank services for RCM liability. The requirement that consideration must flow from recipient to provider (and accrue to provider) is essential for imposing RCM liability. 2.4.2 Obiter: Observations on international protocols (URC 522/UCP 600) and commentary on trade practices serve as contextual reasoning but are ancillary to the legal ratio concerning consideration and recipient status. 2.5 Conclusion 2.5.1 The Indian bank, acting for the exporter and not providing consideration to foreign/intermediary banks, is not the service recipient and therefore not liable to pay service tax on foreign bank charges under RCM in the described export remittance transactions. Issue 2: Whether foreign bank charges deducted at source form part of the value of taxable services (valuation under Section 67) 3.1 Legal framework 3.1.1 Section 67 and its explanation define 'value' and 'consideration'; valuation of taxable service requires a nexus between the amount charged and the taxable service 'for such service provided.' Rules permitting inclusion of reimbursements are subject to the statutory requirement of consideration flowing to the service provider. 3.2 Precedent treatment 3.2.1 Followed: Supreme Court decisions clarifying that only amounts that are consideration for the taxable service (i.e., quid pro quo flowing to service provider) can be included; prior Larger Bench decisions emphasizing the flow and nexus of consideration were applied to exclude amounts lacking such nexus. The Intercontinental decision reaffirmed this restrictive construction of value/consideration. 3.3 Interpretation and reasoning 3.3.1 Application: Foreign bank charges deducted by foreign banks from remittances do not represent consideration paid by the Indian bank to the foreign bank; such deductions are either borne by the exporter or are conditions incidental to international banking protocols and lack the required nexus to a taxable service provided to the Indian bank. 3.3.2 Reimbursement vs. consideration: Even where amounts are characterized as reimbursable or deductible, unless they constitute an amount charged 'for such service provided' and flow to the provider, they do not form part of value under Section 67. The statutory and judicial emphasis on the necessity of a quid pro quo was determinative. 3.4 Ratio vs. Obiter 3.4.1 Ratio: Foreign bank charges deducted at source do not form part of the value of taxable services for the Indian bank where there is no consideration flowing from the Indian bank to the foreign bank; valuation cannot be extended to include amounts lacking nexus to the taxable service provided to the putative recipient. 3.4.2 Obiter: Discussion on contractual conditions and 'conditions to a contract' vs 'consideration' as conceptual background are illustrative and supportive of the ratio but not the dispositive legal rule beyond the valuation context. 3.5 Conclusion 3.5.1 The foreign bank charges deducted by foreign banks are not includible in the value of services for the purpose of assessing service tax against Indian banks absent a direct nexus and flow of consideration from the Indian bank to the foreign bank. Cross-references and Synthesis 4.1 The conclusions on both issues are interlinked: the absence of any flow of consideration from the Indian bank to foreign/intermediary banks (Issue 2) supports the finding that the Indian bank is not a service recipient under RCM (Issue 1). The statutory construction of 'consideration' and judicial precedents requiring a quid pro quo are central to both determinations. 4.2 Administrative Trade Notices or interim tribunal orders that suggest Indian banks are recipients were examined and found insufficient to override the statutory and judicial principles requiring factual nexus and flow of consideration; where exporters effectively bear foreign charges, liability lies on the exporter (if at all), not on the facilitating Indian bank. Final Conclusions 5.1 The adjudged demands for service tax on foreign bank charges, interest and penalties confirmed against the Indian banks in export remittance transactions involving transfer/exchange of documents and remittance collection do not survive legal scrutiny and are liable to be set aside. 5.2 The Indian banks (in the described factual matrix) are not liable to pay service tax under the Reverse Charge Mechanism in respect of foreign bank/intermediary bank charges deducted from export proceeds.