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Foreign Bank Charges - Who is the recipient of service in India?

JULY 19, 2021

By J P Singh, Principal Commissioner AR & Vivek Pandey, Additional Commissioner AR

IN an export transaction from India, there are at least two banks, namely the Indian bank and the foreign bank, involved in processing of export documents and remittance of money as per RBI guidelines. When the foreign importer transfers money to the Indian exporter, the foreign and Indian banks deduct their charges separately from such remittances. While the Indian bank is paying Service Tax / GST on its own charges, the foreign bank charges, even though passed on by the Indian bank and recorded in the books of accounts of the Indian exporter, has been going untaxed. 

2. This issue was initially noticed by the Department during the audit of the Indian exporters. Foreign bank charges were found booked in their accounts. Show cause notices were issued  to the Indian exporters demanding Service Tax under 'banking and other financial services' category [s.65(12) of the Finance Act, 1994] on foreign bank charges under reverse charge. But Department's effort to tax this area was thwarted by the Hon'ble Tribunal's Order dated  3rd January, 2014  in the case of Greenply Industries Ltd Versus Commissioner of Central Excise, Jaipur - 1 as reported in 2015(38)STR 605 (Tribunal Delhi). In this case, M/s. Greenply Industries Ltd had received their export proceeds through ING Vyasa Bank. The Hon'ble Tribunal held that since no documents have been produced showing that foreign bank has charged any amount from the appellant directly and it is the ING Vyasa Bank who had paid the charges to the foreign bank, no Service Tax can be charged from the appellants (Indian exporter).

3. Subsequently, the Commissioner of Service Tax-I, Mumbai issued a Trade Notice No. 20/2013-14-ST-I on 10th February, 2014, in which a view was taken that the Indian importers and exporters are not liable to pay Service Tax as they are not aware of the identity of the foreign banks and they do not have any contact or agreement with them. In fact, as per the URC522/UCP600 norms (Uniform Rules for Collection of Commercial Paper, International Chamber of Commerce), there is an implied contract between a bank in India and a foreign bank whereby the foreign bank recognises only the bank in India for providing their services and for collection of the charges. It was,  therefore, clarified that in cases where the foreign banks are recovering certain charges for processing of import/export documents regarding remittance of foreign currency, the banks in India would be treated as recipient of service and, therefore, required to pay Service Tax. Thereafter, it seems that many Commissionerates started following this Trade Notice and  issued Show Cause Notices to the Indian banks demanding Service Tax on foreign bank charges under reverse charge basis. 

4. Board clarified the issue of Service Tax on remittances  vide Service Tax Circular No. 163/14/2012-ST dated 10.07.2012 by stating that any fee or conversion charges which are levied for sending such remittance from abroad are not liable to Service Tax as a person sending the money and  the company conducting the remittance are located outside India. In terms of the Place of Provision of Service Rules 2012, such services are deemed to be provided outside India and are not liable to Service Tax. However, in our view, the applicable Rule 9(a) [Place of Provision Of Specified Services] apply only to account holders of the foreign bank and, therefore, they are not applicable to the present issue involving the Indian bank and the Indian exporter, who is not necessarily an account holder of the foreign bank.  Moreover, this circular stands superseded by  another Service Tax Circular No. 180/06/2014-ST issued on 14.10.2014. This later circular has also not dealt with the issue of foreign bank charges.

5. However, in a recent case of M/s. SBBJ Vs. CCE & ST-Alwar reported as - 2020-TIOL-1175-CESTAT-DEL, Hon'ble CESTAT, New Delhi has ruled that the Indian Bank is not the recipient of any service rendered by the foreign bank, and has, accordingly, dropped a Service Tax demand of Rs. 110 Crore pertaining to the  period October, 2010 to March, 2015.  In this case, Department had demanded Service Tax from M/s. State Bank of Bikaner and Jaipur on foreign bank charges under reverse charge,  based on the said Trade Notice dated 10.02.2014 issued by the Commissioner of  Service Tax-I, Mumbai. 

6. In this  SBBJ case,  Hon'ble  Tribunal observed that  this Trade Notice and other contrary Tribunal Judgements have been superseded by Hon'ble Madras High Court's Order dated 22.11.2019 in BGR Energy Systems Ltd - 2019-TIOL-2663-HC-MAD-ST.  In this BGR Energy case, Department had demanded Service Tax from the petitioner (an Indian contractor)  on the foreign bank charges in relation to bank guarantee provided by the foreign bank in Iraq for enabling the petitioner  to enter into contract with an Oil Company situated in Iraq. The petitioner  was in appeal in Madras  High court against confirmation of demand by the Additional Commissioner of GST and Central Excise, Chennai. The Hon'ble Madras High Court upheld the Service Tax demand by holding that the petitioner cannot claim that they are not the recipient of the service.

The High Court inter alia observed -

"…Though  the petitioner had not made any remittance to the foreign intermediary banks directly, there cannot be any dispute that the expenses made out towards rendering of that service by the Indian banks were borne by the petitioner. In other words, at no stretch of imagination, it can be said that the petitioners bank at Chennai, namely, Indian Bank Adyar, is the recipient of the service provided by the intermediary bank or the foreign bank situated in Iraq. Needless to say that the Indian bank, Adyar, namely the banker of the petitioner has facilitated the service to be rendered  by the intermediary banks and the foreign bank in Iraq only for the purpose of providing bank guarantee on behalf of the petitioner. Therefore, the petitioner is not justified in shirking its liability to pay Service Tax relatable to the bank guarantee commission and realisation charges involved in this case." [para 18 refers] 

7.     The Indian exporters are also not paying Service Tax on foreign bank charges based on Hon'ble CESTAT Order in Green Ply Industries Limited 2015 (38) STR 605 (Tribunal Delhi). There is no appeal against Greenply Order and  the judgement has been followed subsequently by the Hon'ble Tribunal in several cases from 2014 to 2020, as   listed below :

i. Dileep Industries - Final Order dated. 3.01.2014 - CESTAT Delhi, 2017(10) TMI 1231 -CESTAT Del

ii. Cylwin Knit Fashion- Final Order dated. 29.08.2017 -CESTAT, Chennai, 2017(9) TMI 96 _CESTAT Chennai

iii. Theme Exports Pvt. Ltd. - Final Order dated. 09.04.2018 - CESTAT Delhi, 2019(26) GSTL 104 (Tri-Del)

iv. Raj Petro Specialities Pvt. Ltd. - Final Order dated. 17.08.2018 - CESTAT Ahmedabad, MANU/CS/0078/2018 - 2019-TIOL-442-CESTAT-AHM

v. Aurobindo Pharma Ltd Vs. Commissioner of Central Excise Hyderabad-3,  Final Order No. 30919/2020 dated 09.09.2020

8.     The above judgements given by the Hon'ble Courts has left the  question - who is the recipient of the service rendered by the foreign bank, unanswered. Thus, a situation has emerged in which  both the Indian exporter and the Indian banks  have been held to be not liable for payment of Service Tax on the foreign bank charges for the period  till 2017. A similar situation appears to be prevailing in the GST regime w.e.f. 01.07.2017.

9. The taxability of foreign bank charges in the GST  regime is governed by sl. no. (1) of  Notification No 10/2017-IGST(Rate), which specifies that for any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient, the whole of Integrated Tax leviable under section 5 of the said Integrated Goods and Services Tax Act, shall be paid on reverse charge basis by the recipient of the such services.

10. Section 13 of the IGST Act deals with place of supply of services where location of supplier or location of recipient is outside India. Its sub - clause (8)(a) specifies that the place of supply of services supplied by a banking company, or a financial institution, or a non-banking financial company, to account holders shall be the location of the supplier of services. This sub-section applies only to the account holders of the foreign bank, and therefore will not apply to the present issue involving  Indian exporters or the Indian bank. 

11. The gamut of the issue is not limited to import /export but to a host of other transactions where Indian entities are receiving services from foreign banks like filing of bank guarantees for  contracts abroad, external commercial borrowings, etc.  Further, many similar appeals of both Indian exporters and banks are still pending at some regional benches of CESTAT. Departmental Authorised Representatives and Reviewing Authorities may face a difficult task in justifying demand on either parties in view of judgements being on both sides. Hence, there is a need to ensure uniformity in Department's stand at different fora. It is hoped that future judgements of the Courts on this issue would be more comprehensive and would answer the question that if it is not the Indian bank or the exporter, who is the recipient of service provided by the foreign bank. To conclude, we can say that in all these cases the appeals may have been decided, but the legal clarity has not yet been attained.

[The authors belong to IRS (Customs & Indirect Taxes). The views expressed in the article above are personal views of the authors made in personal capacity and not those of the Government.)

(DISCLAIMER : The views expressed are strictly of the author and doesn't necessarily subscribe to the same. Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the site)

Sub: RCM in case of foreign ban charges

very good points raised by the learned authors.

There cannot be a situation without RCM liabilty on the banking commission deducted under Section 68(2) of the FA,1994 read with RCM notification and Rule 2(d) of ST Rules in pre-GST era either on the exporter or on his bank(authorised dealer).

Will there be any difference in liabilty on RCM basis if correspndent banks/intermediary banks are also discussed!.

Posted by rrkothapally rrkothapally
Sub: Recipient of service

For Service Tax Negative List regime, this question has been answered at Para 5.3.3 of CBEC’s Education Guide as follows:

“5.3.3 Who is the service receiver?

Normally, the person who is legally entitled to receive a service and, therefore, obliged to make payment, is the receiver of a service, whether or not he actually makes the payment or someone else makes the payment on his behalf.”

In GST regime, the term “recipient” of supply has been defined at Section 2(93) of the CGST Act, prescribing inter alia that “(a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration;”

Foreign bank is hired by foreign customer for sending payment to India. So, prima facie, foreign customer (importer) is recipient of service provided by foreign bank, irrespective of the fact whether he pays separately for such service or foreign bank deducts their charges from the amount of remittance.

There is no privity of contract between the foreign bank and Indian exporter. So, the Indian exporter cannot be treated as ‘recipient’ of service provided by foreign bank.

Trade Notice No. 20/2013-14-ST-I dated 10.2.2014 issued by Mumbai-I Service Tax Commissionerate talks about 'implied contract' between a bank in India and foreign bank as they have subscribed to URC 522 / UCP 600 norms issued by International Chamber of Commerce, which provide Articles containing terms and conditions which are binding on all parties subscribing to them. Thus, the said Trade Notice treats Indian bank as a recipient of service provided by foreign bank. However, this interpretation may be debatable in as much as merely by subscribing to such Articles, the relationship between the two banks may not considered as of the relationship between service provider and service recipient.

Following clarification given in Circular No. 163/14/2012-ST dated 10.7.2012 seems to be applicable:
“3. In case any fee or conversion charges are levied for sending such money, they are also not liable to service tax as the person sending the money and the company conducting the remittance are located outside India.”

In GST regime, Sr.No.1 of Notification No. 10/2017-IT(R) prescribing RCM is applicable to RECIPIENT of service LOCATED IN TAXABLE TERRITORY. If foreign customer (remitter) is treated as recipient of service of foreign bank, then RCM is not applicable.

Thinking from another angle, suppose, a foreign customer wishes to send USD 1000 to Indian exporter. If the foreign bank deducts their charges of USD 10 from the remittance and sends USD 990 to Indian bank, there may be dispute as to whether the Indian bank would be treated as recipient of service valued at USD 10 provided by foreign bank or not. But, suppose foreign bank charges USD 10 SEPARATELY to its customer (foreign customer), and send the full amount of USD 1000 to Indian Bank, there would be no question of charging Service Tax or GST on the amount paid by the foreign customer to his bank (foreign bank).

In view of the above, it is felt that foreign customer (remitter) is the recipient of service provided by foreign bank; and neither Indian bank nor Indian exporter should be treated as the recipient of service provided by foreign bank in absence of PRIVITY OF CONTRACT.

Personal views.

Posted by Shvetal Parikh