Service Tax under RCM not Leviable on Bank Charges Paid to Foreign Banks: CESTAT [Read Order]

The New Delhi Bench of Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that bank charges paid to foreign banks are not liable to service tax under the reverse charge mechanism.

The assessee/appellant, Artifacts India, is a sole proprietorship organization that produces a range of paper goods and handicrafts. The assessee received payment from buyers in foreign currency for exporting goods that he had created. The assessee had not applied for service tax registration since they were solely involved in exporting commodities.

The Department found during the audit of the assessee's records that the assessee had paid foreign currency for some expenses for which the Reverse Charge Mechanism (RCM) had not yet been used to pay taxes. The assessee was sent a show-cause notice with a service tax demand of Rs. 10,09,952/-, which the Additional Commissioner later decided upon. The assessee, who was upset by the decision, appealed it to the Commissioner (Appeals), who upheld the adjudication judgment.

Since there is no contractual tie (privity of contract) between the assessee and the foreign service providers, the assessee argued that the Department had misunderstood. The demand for service tax is baseless in the absence of a relationship between a service provider and a recipient. According to the government, the demand was validated because the assessee had incurred costs that were taxable under Section 66A of the Finance Act of 1994 under the heading "Foreign Bank Charges" on their balance sheet.

According to the Tribunal, "there is no relationship between the assessee and any foreign-based service provider, even though some service provider is involved, because the assessee does not directly transact with the commission agent." Additionally, it is a reality that the assessee and the foreign-based service provider do not have a contract. The commission agency in the foreign nation and the buyer of the items made the payment agreement. This makes it impossible to uphold the service tax demand on the commission that is displayed on the invoice that was presented to the buyer.

The buyer received the artwork charges overseas, and he charges the assessee the specified amount. The assessee paid this in accordance with the terms and conditions of the transaction, and there is no proof that he was the one who received the design charges. Accordingly, the Tribunal declared that the assessee is not required to pay any service tax on such artwork charges or design and development payments.

The two-member bench of Dr. Rachna Gupta (Judicial Member) and Hemambika R. Priya (Technical Member) has decided that "there is direct nexus of the buyer with the Foreign Bank, and it is held that when the service provider, 'the Foreign Bank,' and the recipient, 'the Buyer,' are both located outside India, there is no question of taxing such service in India as the said service has been provided outside the taxable territory and outside the purview of Section 66B, the charging section for levy of service tax."

The bench noted that the assessee would be entitled to receive CENVAT credit for the amount of service tax paid and use it to offset duty payments for final product clearances, even if the assessee is legally required to pay the amount of service tax under the reverse charge mechanism. The appeal was granted by the Tribunal.

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