Revenue cannot compel Assessee to Take One of Available Options: CESTAT quashes Service Tax Demand on Transaction w/o Flow of Consideration in Terms of Money [Read Order]

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has partly allowed the appeal of M/s VKC Credit and Forex Services Pvt. Ltd. (now known as Essel Finance VKC Forex Ltd.), holding that the assessee could not be denied its statutory option to pay Service Tax under Sections 66 and 67 of the Finance Act, 1994 instead of under Rule 6(7B) of the Service Tax Rules.

The appellant, an RBI-authorized foreign exchange dealer registered under the category of “Banking and Other Financial Services,” carried on the business of buying and selling foreign currency, traveller’s cheques, and prepaid travel cards. The dispute pertained to the tax periods between April 2008 and March 2012.

However, the Tribunal confirmed the Commissioner’s finding that the benefit of Notification No. 27/2011-ST dated March 31, 2011, expanding exemption under Notification No. 19/2009-ST, would operate prospectively and not retrospectively.

The decision, rendered by the Division Bench comprising P. Dinesha (Judicial Member) and M. Ajit Kumar (Technical Member), was delivered on January 17, 2025.

Advocate Ms. Radhika Chandrasekar, representing the appellant, contended that Notification No. 27/2011-ST, which expanded the scope of exemption to include transactions between banks and money changers, was merely clarificatory and should apply retrospectively. She further argued that under Rule 6(7B) of the Service Tax Rules, the assessee had an option- not an obligation to pay tax at a rate of 0.25% of the gross value of currency exchanged. Since VKC had paid tax on a fixed service charge of Rs. 25 per transaction as declared in its invoices, the Revenue could not compel it to adopt a different valuation method.

On the other hand, Shri Sanjay Kakkar, Authorized Representative for the Revenue, maintained that the amending Notification of 2011 expressly came into force from April 1, 2011, making it applicable only prospectively. He also argued that the assessee’s declared Rs. 25 charge per transaction was not reflective of the true consideration since it earned additional amounts through variations in exchange rates, which should have been subjected to tax.

On the question of exemption, the Tribunal held that the 2011 amendment to Notification No. 19/2009-ST was not merely clarificatory but an expansion of scope to cover a wider class of service providers and recipients, including money changers and foreign banks. As such, it could not operate retrospectively. The Bench observed that the clear and unambiguous language of the Notification made it effective only from April 1, 2011.

However, the Tribunal agreed with the appellant’s contention regarding the optional nature of Rule 6(7B). It held that the Revenue could not compel the assessee to adopt a valuation method it did not choose. The Bench noted that although some transactions reflected minor discrepancies between applied and prevailing market rates, these did not establish a deliberate undervaluation scheme.

On the issue of profits from the sale of foreign exchange to EEFC account holders, the Tribunal ruled that such transactions did not involve actual conversion and hence did not attract Service Tax. Similarly, the minor demand on profits from the settlement of travellers’ cheques was found unsustainable.

The appeal was partly allowed. The Tribunal upheld the Commissioner’s findings regarding the prospective nature of Notification No. 27/2011-ST but set aside the Service Tax demands relating to valuation under Rule 6(7B) and on EEFC transactions.

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