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

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

A proprietorship firm Artifacts India is engaged in the manufacturing of various paper products, including paper boxes, bags, and gift sets, as well as handicraft items. The Appellant is registered as a 100% Export Oriented Unit. During the period 01.04.2007 to 31.03.2012, the Appellant had exported goods manufactured by him and had received consideration in foreign currency from buyers. As the Appellant was exclusively engaged in the export of goods, therefore the appellant had not sought registration under service tax.

During the audit of the appellant‟s records, the Department observed that the appellant had paid certain expenses in foreign currency, on which tax had not been paid under the Reverse Charge Mechanism (RCM). The Department alleged the following:

• Bank charges paid to foreign banks are subject to service tax under RCM, classifiable under ‘Banking and Other Financial Services’ (BOFS).
• Commission paid to agents is liable to service tax under RCM, taxable under ‘Business Auxiliary Services’ (BAS), as the Appellant had promoted the agents’ business.
• Design charges paid to professionals are subject to service tax under RCM, categorizable as ‘Design Services’.

A show cause notice dated October 17, 2012, was issued to the appellant proposing a service tax demand of Rs. 10,09,952/-, which was subsequently adjudicated by the Additional Commissioner vide Order-in-Original dated August 30, 2013. Vide the said order, the demand for Rs.1,67,895/- was dropped on account of computational errors and the balance demand for Rs.8,42,057/- was confirmed along with interest under section 75 and penalties under section 77 and 78 of the Act.

Aggrieved by the order-in-original, the appellant filed an appeal before the Commissioner (Appeals) who decided the appeal vide Order-in-Appeal dated 29.05.2014 and upheld the adjudication order. Hence, the present appeal has been filed by the appellant before the Tribunal.

The Tribunal said 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.”

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