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of <h1>VOSTRO forex transaction charges ruled export of services and non-taxable; SWIFT fees held taxable as banking services, s.80 penalty waived</h1> <h3>M/s. Indian Overseas Bank, Chennai Versus Commissioner of GST and Central Excise, Chennai</h3> CESTAT held that VOSTRO transaction charges received in convertible foreign exchange for 01.04.2012-30.06.2012 qualify as export of services and are not ... Levy of service tax - Banking and Other Financial Services - VOSTRO transactions for the Pre Negative tax regime 1.4.2012 to 30.6.2012 and also for the Post Negative Tax regime - SWIFT Charges for the Pre Negative tax regime 1.4.2012 to 30.6.2012 and also for the Post Negative Tax regime - revenue neutrality - demand based on vague and cryptic SCN - non-application of mind - violation of principles of natural justice - levy of penalty. VOSTRO transactions - For the period 01.04.2012 to 30.06.2012 - HELD THAT:- If a service is provided to a recipient located outside India and payment for the same is received in convertible foreign exchange, then it amounts to export of service. In the present case, the recipients of service are located outside India. The commission for such services was received through the Vostro accounts which are funded by convertible foreign currency. Therefore, during the period 01.04.2012 to 30.06.2012 the services qualify to be export of service. Hence, no, service tax is payable by the Appellant on charges received towards Vostro transactions as they qualify to be export of Service - the Appellant is liable to pay service tax on the said service which is undisputedly covered under Banking & Other Financial Services. VOSTRO transactions - For the Period after 01.07.2012 (Negative Service Tax Regime) - HELD THAT:- In all the three types of arrangements the Vostro rupee accounts have to be funded through the Nostro account which is maintained in convertible foreign currency - Therefore, the condition of Export is satisfied through our above findings and hence VOSTRO Transactions not liable to Tax for the period 01.04.2012 to 30.06.2012. In the present case; the service receivers are the exchange houses which are situated abroad. They do not have any registration in India for the purpose of service tax. Hence the 'location of such service receiver' will be the location of its business establishment. The exchange houses in the present case do not have any business establishment in India. They have business establishments only in West / Asian Countries, which is not in India. Hence, the location of those service receivers is outside India in a non-taxable territory - Therefore the services rendered by the Appellant are not liable to service tax and the order demanding service Tax on the Vostro transactions for the period 01.07.2012 to 31.3.2013 is also liable to be set aside. Taxability of SWIFT Charges - HELD THAT:- On transaction charges paid to SWIFT, it is clear that the services have been rendered in India and not abroad. It is nothing but import of services. The main contention of the appellant is that the transactions with SWIFT will not fall within the classification of Banking and other Financial Services as SWIFT does not hold accounts for its members and does not perform any banking activity. It is found that even if it is considered that SWIFT is used only for data exchange/ information, the said activity rendered by SWIFT would very well get covered under Clause (vii) of Banking and the Financial Services, which include activity of 'provision and transfer of information and data processing'. The service provided by [SWIFT (located in Non-Taxable territory] is value-added financial messaging (interface, reconciliation, reporting, encryption) and was contracted by the appellant. Such services fall within ‘banking and other financial services’ as contained in Section 65(12) of the Finance Act, 1994. Therefore, the entire demand of the Service Tax on SWIFT Charges as upheld in the Impugned Order is sustainable. Levy of penalty - HELD THAT:- The issue was contentious for a long time and litigations were pending before the Tribunal as well as various High Courts. Taking note of the fact that the issue is interpretational, we are of the considered opinion that the appellant has shown a reasonable cause for not paying service tax on SWIFT transactions. Therefore, it is a fit case for invoking Section 80 of the Finance Act, 1994 and also to set aside the penalties imposed with respect to SWIFT transactions. The appeal is partly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether services rendered by a domestic bank in respect of Vostro account transactions are liable to service tax for (a) the pre-negative list period 01.04.2012-30.06.2012 under the Export of Services Rules, 2005 and (b) the post-negative list/place of provision regime 01.07.2012-31.03.2013 under the Place of Provision of Services Rules, 2012 (POPS Rules). 2. Whether payments made to SWIFT (a foreign financial messaging service) - including user registration, connectivity, interface licence, RMA and traffic charges - constitute taxable 'Banking and Other Financial Services' under Section 65(12) and whether all such components form part of the value of taxable service under Section 67 and the Valuation Rules. 3. Whether penalty is imposable for non-payment of service tax on SWIFT charges and, if so, whether it is fit to be waived under Section 80 of the Finance Act, 1994 given the interpretational nature of the controversy. ISSUE-WISE DETAILED ANALYSIS - VOSTRO TRANSACTIONS (01.04.2012-30.06.2012) Legal framework: Export of Services Rules, 2005 require as a basic condition that 'payment for such service is received by the service provider in convertible foreign exchange' for classification as export of service; Banking & Other Financial Services are covered under Section 65(12). Precedent treatment: Coordinate tribunal decisions dealing with identical facts have held Vostro transactions not taxable for identical periods; the Tribunal follows these coordinate bench decisions unless distinguishable. Interpretation and reasoning: Vostro mechanism involves correspondent bank funding via convertible foreign currency (Nostro) which is reflected as balances/credits in the Vostro rupee account; Section 2(n) of FEMA treats deposits, credits and balances payable in any foreign currency and specified instruments (including those payable in Indian currency but drawn outside India) as 'foreign exchange', thus payments made via Vostro accounts qualify as receipt in convertible foreign exchange notwithstanding conversion for local disbursement. Ratio vs. Obiter: Ratio - where consideration is funded through Vostro mechanisms from convertible foreign exchange, the condition of receipt in convertible foreign exchange under Export of Services Rules is satisfied; thus services to non-resident banks via Vostro accounts qualify as export of service for the pre-negative list period. (This is the binding reasoning applied.) Conclusion: Vostro transactions for 01.04.2012-30.06.2012 are not liable to service tax as they qualify as export of service under Export of Services Rules, 2005. ISSUE-WISE DETAILED ANALYSIS - VOSTRO TRANSACTIONS (01.07.2012-31.03.2013, POST-NEGATIVE LIST) Legal framework: Place of Provision of Services Rules, 2012 (Rule 3 and Rule 2(1)) determine place of provision by reference to location of the service receiver; in negative-list/post-negative regime, services provided to recipients located outside India are not taxable in India. Precedent treatment: Circular issued by the Department of Revenue (clarifying remittance services) and tribunal decisions have treated inward remittance reception and fees where recipient is located outside India as outside the taxable territory. Interpretation and reasoning: Service receivers (foreign exchange houses/banks) lacked any business establishment in India; under Rule 2(1) the location of the service receiver is outside India. The departmental circular (10-07-2012) clarifies that remittance and related conversion/fee activities are not services taxable in India where the recipient is situated abroad; accordingly, the place of provision is outside India. Ratio vs. Obiter: Ratio - where the recipient of services via Vostro accounts is situated outside India and has no Indian business establishment, the place of provision is outside India under POPS Rules, and the service is not taxable in India for the post-negative period. Conclusion: Vostro transactions for 01.07.2012-31.03.2013 are not liable to service tax; the demand for that period is set aside. ISSUE-WISE DETAILED ANALYSIS - SWIFT CHARGES (01.04.2012-31.03.2013) Legal framework: Section 65(12) (Banking and Other Financial Services) includes activities such as 'provision and transfer of information and data processing'; valuation provisions (Section 67 and Service Tax (Determination of Value) Rules, including Rules 5 & 7) include expenditure or costs incurred by service provider in the value of taxable services. Precedent treatment: Earlier tribunal orders have upheld levy of service tax on SWIFT charges while often allowing penalty relief due to interpretational difficulty; the present Tribunal follows coordinate decisions when facts are identical. Interpretation and reasoning: SWIFT supplies value-added financial messaging (interface, reconciliation, reporting, encryption) that facilitates banking financial activities; even if SWIFT does not hold customer accounts, the data/information services fall within clause (vii) of Banking and Other Financial Services. Registration, connectivity, interface licence, RMA and traffic charges are shown to be integrally connected with provision of the messaging service; under valuation rules, such related expenses/fees incurred in course of providing taxable service constitute part of the consideration and thus the taxable value. Ratio vs. Obiter: Ratio - services provided by SWIFT to Indian banks constitute 'Banking and Other Financial Services' and the aggregate fees related to delivery of that messaging service (registration, connectivity, licence, RMA, traffic) form part of the value for service tax purposes under Section 67 and applicable valuation rules. (This forms the operative holding on taxability and valuation.) Conclusion: Demand of service tax on SWIFT charges is sustainable and upheld; interest on tax is maintainable. ISSUE-WISE DETAILED ANALYSIS - PENALTY AND WAIVER UNDER SECTION 80 Legal framework: Penalty provisions (Section 76 and related) impose consequences for non-payment; Section 80 permits waiver of penalty where a reasonable cause is shown. Precedent treatment: Tribunal and appellate authorities in several decisions have set aside penalties on SWIFT/Vostro issues where the controversy was interpretational and litigation across forums was ongoing. Interpretation and reasoning: The taxability of SWIFT charges involved a genuine interpretational question with divergent judicial outcomes; given long-running litigation and bona fide arguability, the appellant demonstrated reasonable cause for non-payment. Consistent with precedent and the discretion under Section 80, imposition of penalty is inappropriate in these circumstances. Ratio vs. Obiter: Ratio - where non-compliance arises from an arguable interpretation and sustained litigation, penalties under the Act may be remitted under Section 80; this remedial conclusion is applied to the SWIFT-related penalty component. Conclusion: Penalties levied in respect of SWIFT transactions are set aside by exercise of discretion under Section 80; interest, however, remains payable. COORDINATION WITH PREVIOUS DECISIONS AND FINAL DISPOSITION Precedent adherence: The Tribunal applies coordinate-bench decisions on identical facts and follows judicial discipline to adopt those conclusions unless distinguishable; past decisions held Vostro transactions non-taxable and SWIFT taxable with penalty relief - the present decision follows that pattern. Final conclusions: Vostro transaction demand (entire period April 2012-March 2013 split by regimes) is set aside; SWIFT charge demand is upheld (tax and interest) but penalties relating to SWIFT are remitted under Section 80. The appeal is therefore partly allowed to effect these modifications.
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