Service tax on processing charges in respect of ECB availed from foreign banks.

[Kadayam Ganapathy Subramanian]

Dear Sirs,

A company 'x' situated in India is the account holder of Bank situated outside India has availed the External commercial borrowing from the said bank and paid the processing charges to them in foreign currency for availing the said facility.

Our question is whether service tax is not to be paid on processing charges collected by the said bank since this bank rendering the above service is situated outside India which is the place of provision of service as per Rule 9(a) of PPS Rules 2012 issued under Section 66C(1) 

                                                                 OR

Whether the service tax is liable to be paid by Company 'x' on processing charges under reverse charge mechanism as per Notification No.30/2012-ST dt 20.06.2012 issued under Section 68(2).

Kindly provide your expert opinion in this regard.

Regards,

K.G Subramanian

e.mail ID: subramaniankg at the rate of microlabs.in

[YAGAY andSUN]

Dear Subramanian,According to us you are required to pay service tax under reverse charge mechanism in both the regime i.e. positive list regime and negative list regime.RegardsTeam YAGAY & SUN(Indirect Tax Consultants)

[Kadayam Ganapathy Subramanian]

Dear Sir,

Thanks for your opinion. But the taxability of a service will be determined based on place of its provision as per Place of provision of Service Rules, 2012 introduced under negative list regime and the Section 68(2) only discuss about the person liable for paying service tax on certain specified services. Since taxability of a service has to be decided first based on place of its provisions and the service provider rendering banking & financial service is situated outside India which is the place of provision as per Rule 9(a) of Place of provision of Service Rules, 2012, why another view as mentioned in my query is not possible?

Kindly clarify the same.

Regards,

K.G Subramanian

e.mail ID: subramaniankg at the rate of microlabs.in 

[phaniraju konidena]

Dear Sir,

In the provisions of Service Rules, 2012, there are twelve rules starting from Rule 3 to Rule 14 which are guiding the determination of place of provision of service. The last Rule i.e. Rule 14 provides that where the provision of service is determinable in terms of more than one rule, it shall be determined in accordance with the rule that occurs later among the rule that merits equal consideration.

Rule 3: Place of provision generally

This rule is general rule and as per this rule, the place of provision of a service shall be the location of the service receiver. This rule is clearly based on the principle that service tax is consumption based destination tax. Therefore, where the service receiver is located the service is said to have been provided there.

This rule is applicable if none of the other rules from rule 4 to rule 13 are applicable. When this rule applies, the person liable to pay service tax would be determined based on the following grounds;

If the person providing service is in taxable territory, the liability to charge service tax would be on service provider;

If the person is providing the services from a non taxable territory, liability to pay service tax would be on the service receiver under reverse charge.  

In case of certain specified services as covered by Notn.No.30/2012-ST, liability to pay service tax is partially or wholly on the service receiver. In that situation service receiver would be liable to pay service tax to the extent of percentage specified in the said notification even though the service provider is situated in the taxable territory.

No service tax liability would arise if service receiver is located in the non taxable territory.

As seen from the above, it is my opinion that if the person is providing the services from a non taxable territory, the service receiver is liable to pay the service Tax.

Courtesy: The book of Madhukar N Hiregange

[Kadayam Ganapathy Subramanian]

Dear Sir,

Thanks for your opinion. As per your version, in terms of Rule 14 of Place of Provision of Service Rules, 2012 where the provision of service is prima facie determinable in terms of more than one rule, it shall be determined in accordance with the rule that occurs later among the rules that merit equal consideration.

Since Rule 9(a) of Place of Provision of Service Rules, 2012 is a specific rule for the services provided by the Banking Company, or a financial institution, or a non-banking financial company to account holders which occurs later among the rules and also merits equal consideration, why another view of not paying the service tax is not possible when the banking company providing the service is situated outside India. 

Kindly provide more clarity by also taking into consideration of above rule.

Regards,

K.G Subramanian

e.mail ID : subramaniankg at the rate of microlabs.in

[phaniraju konidena]

Dear Sir,

If the Banks, FIs and NBFCs are providing services to their 'account holders', the place of provision is where the Banks, FIs or NBFC is located [Rule 9(a)]. "Account" means an account bearing an interest to the depositor and includes a non-resident external account and a non-resident ordinary account [NRE and NRO accounts] [Rule 2(b) of the Place of Provision of Service Rules].

For example, if Bank in India is providing service to an NRI having interest bearing account with the Bank, the place of provision of service will be 'taxable territory' and service tax will be payable. On the other hand, if Bank outside India provides some service to person in India who is holding interest bearing account with that Bank, place of provision of service will be outside India and no service tax is payable. Hence, reverse charge also will not apply.

This will cover services like issuing of cheques, money transfers, safe deposit lockers, account opening charges etc.

In case of other services, Rule 3 applies and location of service receiver will be the place of provision of service.

Services are normally provided to account holders like financial leasing, merchant banking, sale of purchase of foreign exchange, asset management, advisory services are covered under Rule 3 (i.e. location of service receiver) and not under Rule 9(a).

[Madhukar N Hiregange]

The POPS are applicable backwards- i.e. Rule 12 if not applicable rule 11.. Further the principles of classification are that specific would prevail over the general. In this case X is an account holder of a bank situated outside India and has paid processing charges to them. Rule 9 provides that such transaction would deemed to be where the service is provided in this case Outside India.

This transaction therefore would not be liable to RC.

However if X is not the account holder then maybe Rule 3 would apply and receiver would be liable under RC.

[YAGAY andSUN]

We do agree with Mr. Hiregange's reply.

AI Summary

Place of provision determines taxability: banking services to account holders provided where the bank is located, so no service tax. Banking services to an account holder are treated as provided at the location of the bank; if the bank is located outside India, the place of provision is outside India and service tax does not arise, so reverse charge does not apply. If the recipient is not an account holder, the general place-of-provision rule may make the service taxable in India and attract reverse charge liability for the Indian recipient.