Bank Charges Paid To Foreign Banks Are Not Liable To Service Tax Under Reverse Charge Mechanism: CESTAT

The Bench of Dr. Rachna Gupta (Judicial Member) and Hemambika R. Priya (Technical Member) has stated that “there is direct nexus of the buyer with the Foreign Bank, and it is held that when the provider of service i.e. 'the Foreign Bank' and recipient of service i.e. '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.”

In this case, the assessee/appellant is a proprietorship concern and is engaged in the manufacturing of various paper products as well as handicraft items.

The assessee had exported goods manufactured by him and had received consideration in foreign currency from buyers. As the assessee was exclusively engaged in the export of goods, therefore the assessee had not sought registration under service tax.

During the audit of the assessee's records, the Department observed that the assessee had paid certain expenses in foreign currency, on which tax had not been paid under the Reverse Charge Mechanism (RCM).

A show cause notice was issued to the assessee proposing a service tax demand of Rs. 10,09,952/-, which was subsequently adjudicated by the Additional Commissioner.

Aggrieved by the order, the assessee filed an appeal before the Commissioner (Appeals) which upheld the adjudication order.

The assessee submitted that Department had erred in its understanding, as there exists no contractual relationship (privity of contract) between the assessee and the foreign service providers. In the absence of a service provider-recipient relationship, the demand for service tax is unfounded.

The department submitted that the demand was confirmed on the grounds that the assessee had incurred expenses under the head 'Foreign Bank Charges' as shown in their Balance Sheet, which were taxable under Section 66A of the Finance Act, 1994.

The Tribunal opined that “even though some service provider is involved, there is no relationship between the assessee and any foreign based service provider as there is no direct transaction made by the assessee with the commission agent. It is also a fact that there is no contract between the assessee and the foreign based service provider. The arrangement of payment was between the buyer of the goods and the commission agent in the foreign country. For this reason, the demand of service tax on the commission shown in the invoice raised to the buyer cannot be upheld.”

The Artwork charges was received by the buyer abroad and he charges the said amount to the assessee. This was paid by the assessee as per the terms and conditions of sale and there is no evidence that he was the recipient of the services of the design charges. Hence, no service tax is liable to be paid by the assessee on such artwork charges and design and development charges, stated the Tribunal.

The bench observed that even if assessee is legally required to pay the amount of service tax under reverse charge mechanism, then the assessee would be entitled to avail CENVAT credit of the amount of service tax so paid and utilize it against payment of duties in respect of its clearances of final products.

In view of the above, the Tribunal allowed the appeal.

Case Title: M/s. Artifacts India v. Commissioner of Central Excise (Appeals), Delhi- II

Case Number: SERVICE TAX APPEAL NO.55777 OF 2014

Counsel for Appellant/ Assessee: A.K. Batra

Counsel for Respondent/ Department: Anand Narayan

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