No Service Tax Payable on Foreign Bank Charges as No Direct Service Rendered to Exporter: CESTAT [Read Order]

Cotton Blossom India (P) Ltd.,appellant-assessee,manufactured and exported knitted garments. One of its customers, C & A Buying GMBH & Co., Germany, placed orders through the appellant’s agent, Mondial Services. The customer outsourced export document verification and payment processing to Amsco Finance Limited (AFL), Hong Kong, which informed the assessee by email. AFL used Deutsche Bank, Singapore, to send export payments to the appellant.

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The assessee gave a 3% discount on the export value, which AFL kept as its fee. The assessee received 97% of the export amount in its Bank of Maharashtra account. Deutsche Bank also deducted processing fees. The tax authorities treated the 3% fee as a banking service charge and demanded service tax on it under the reverse charge mechanism.

A show cause notice was issued on 24 October 2013. The assessee replied, but the Original Authority confirmed the demand in an order dated 26 December 2014. The assessee appealed against this order.

The two member bench comprising P.Dinesha (Judicial Member) and M.Ajit Kumar ( Technical Member) heard both parties, reviewed the documents, and decided whether the service tax demand on the banking service was justified.

The appellate tribunal carefully considered a recent order from the Chennai Bench of CESTAT in a similar case involving export-related service tax issues. That order reviewed various judicial rulings and found that the demand for service tax on charges deducted by foreign banks was not valid because the conditions for banking and financial services were not met.

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The bench noted that foreign banks deducted charges when transferring export sale proceeds to Indian banks, but these foreign banks were chosen by the overseas buyers, not the exporters. Exporters usually did not have any agreement with these foreign banks and often did not know their identities or the amount charged. The foreign banks’ service was actually to the Indian banks, not directly to the exporters.

Previous tribunal decisions confirmed that such charges were bank-to-bank transactions and did not attract service tax from exporters. The CESTAT also highlighted that from July 1, 2012, exporters receiving banking and financial services through intermediaries were liable for service tax only if those services were received by them, not if the intermediary acted on behalf of the overseas buyer.

In view of these findings and similar past rulings, the appellate tribunal held that the service tax demand in the present case was not sustainable. Consequently, the impugned order was set aside, and the appeal was allowed with any consequential relief.

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