Bank Charges Paid to Foreign Banks Not Taxable Under Reverse Charge Mechanism: CESTAT [Read Order]
The tribunal relied on the precedent set in Greenply Industries Ltd. v. CCE and allowed the appeal, holding that such foreign bank charges fall outside the taxable territory under Section 66B of the Finance Act
Bank Charges – Reverse Charge Mechanism – CESTAT -Taxscan
Bank Charges – Reverse Charge Mechanism – CESTAT -Taxscan
The Delhi Bench of Customs, Excise and Service Tax Appellate Tribunal ( CESTAT ) ruled that bank charges paid to foreign banks are not taxable under the Reverse Charge Mechanism ( RCM ) as the service is provided outside India and there is no direct service relationship between the foreign bank and the Indian exporter.
Artifacts India, appellant-assessee, was a proprietorship firm engaged in the manufacturing and export of paper products and handicrafts. It operated as a 100% Export Oriented Unit and received payments in foreign currency for the goods exported during the period from 01.04.2007 to 31.03.2012. Since the business was entirely export-based, the appellant-assessee did not obtain service tax registration.
During an audit, the Department observed that certain payments made in foreign currency had not been subjected to service tax under the Reverse Charge Mechanism (RCM). These included bank charges paid to foreign banks (classified under Banking and Other Financial Services), commission paid to agents (classified under Business Auxiliary Services), and design charges paid to professionals (classified under Design Services).
A show cause notice dated 17.10.2012 was issued proposing a service tax demand of ₹10,09,952. The matter was adjudicated by the Additional Commissioner through an order dated 30.08.2013, wherein ₹1,67,895 was dropped due to computational errors, and the balance amount of ₹8,42,057 was confirmed along with interest and penalties under the Finance Act.
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The assessee filed an appeal before the Commissioner (Appeals), who upheld the demand vide order dated 29.05.2014. Aggrieved by this, the assessee filed the present appeal before the tribunal.
The two member bench comprising Dr.Rachna Gupta (Judicial Member) and Hemambika R.Priya (Technical Member) heard both sides and examined the records.It noted that the assessee received export payments in foreign currency through foreign banks used by overseas buyers. There was no direct agreement between the assessee and the foreign banks.
However, based on the understanding with the buyers, the appellant bore the foreign bank charges. The Department treated these charges as taxable under Section 66A of the Finance Act, classifying them as "Banking and Other Financial Services."
The appellate tribunal observed that the foreign bank provided services to the overseas buyer, not the assessee. The bank deducted its charges and remitted the balance through the Indian bank, which was the actual service provider to the assessee in India. The assessee only accounted for the deductions in its books and did not receive any direct service from the foreign bank.
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Since both the foreign bank and the buyer were located outside India, the tribunal held that the service was provided outside the taxable territory. Therefore, no service tax was payable under Section 66B.
The CESTAT also relied on the decision in Greenply Industries Ltd. v. CCE, where it was held that no tax is applicable if there is no direct link between the foreign bank and the Indian exporter. Accordingly, the tribunal ruled that service tax was not applicable on the foreign bank charges paid by the assessee.
In short,the appeal was allowed.
To Read the full text of the Order CLICK HERE
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