2014 (12) TMI 121 - HC - Service Tax

Validity of levy of service tax on Money changing activity - Legality of valuation rules - conversion of foreign currency to Indian rupee - banking and other financial services - Export of service or not - amounts of foreign currency remitted to India - Held that - The argument that sub-clause (iv) of clause (a) of sub-section (12) of Section 65 applies only to private money changers is to be rejected at the outset. There is no warrant for such assumption from the words employed in sub-clause (iv). It takes in securities and foreign exchange broking and purchase or sale of foreign currency, including money changing, whether such service be rendered by a private company or one exclusively dealing in money changing operations or a Bank; nationalised or otherwise, who is authorised to carry on such activity. The emphasis is on the service provided and the taxing event is also the service rendered. The provision does not distinguish establishments; nor confine the levy to those establishments exclusively conducting money changing operations. The contention raised, hence, has absolutely no legs to stand and is rejected. The further contention is with respect to exemption provided to activities including transaction in money. Going by Explanation 2 of Section 66B(44), such exemption does not apply to conversion of currency from one form to another. Hence, no exemption can be claimed by the petitioner with respect to the service it receives, in so far as the respondent-Bank converts its foreign remittances to Indian currency. - This Court cannot confuse the remittance with the conversion, since both are distinct events and it is the latter that is the taxable event. Valuation - legal validity of taking entire transaction value into consideration - Held that - The petitioner is correct, in so far as accepting that the petitioner is liable to the tax on the charges commission and exchange levied by the respondent-Bank; which levy is made on the gross amount charged by the service provider by sub-clause (i) of Section 67(1) and that consideration is in terms of money. But such levy and collection, does not prevent the taxation authorities from looking into whether there is any other ostensible consideration for the service provided, which is not in terms of money or which is not ascertainable, in which event tax will have to be levied as prescribed in the rules. The petitioner s contention, hence, with respect to the tax being levied on the entire remittances has to be negatived. The entire remittance is taken, only for the purposes of valuation and that too the units of currency alone and the tax is levied only on that component, which the Bank stands to gain by purchasing the currency at a lower rate than the RBI reference rate. As per the illustration, 50 paise per US Dollar is the ostensible consideration received by the Bank for each dollar conversion and when 1000 Dollars are converted, the taxable value would be ₹ 500; 0.50 paise for each US Dollar. The petitioner s contention on that count fails, since the prescription of the measure in the rules as sanctioned by the statute, is perfectly in consonance with the statutory provisions. Legality of sub-rule (7B) of Rule 6 of the Rules of 1994, which provides for an option to pay service tax, in relation to the services provided on purchase or sale of foreign currency, including money changing - Held that - This Court does not find any illegality in the levy of service tax made and collected by the respondent-Bank on the services provided, of the conversion of foreign currency, to the petitioner. When the foreign currency is entitled to an exchange rate, in the market, as notified by the RBI, and a money changer including a Bank involved in such activity purchases that foreign currency at a lower rate, then that difference is the ostensible consideration the service provider derives, which is not in terms of money but still determinable on its money equivalent. Whether it is actually received or not in terms of money; the rules prescribe a value determination on that consideration, to be expressed in terms of money, for the purpose of levy of service tax. No challenge on such determination can be sustained and the levy made is perfectly in consonance with the statute and the rules. Writ petition dismissed - Decided against the assessee.

Summary

Issues Involved:
1. Liability of the petitioner to pay service tax on foreign currency remittances.
2. Scope of "banking and other financial services" under Section 65(12) of the Finance Act, 1994.
3. Exemption of transactions in money from service tax under Section 65B(44) of the Finance Act, 1994.
4. Valuation of taxable services under Section 67 of the Finance Act, 1994.
5. Application of Rule 6(7B) of the Service Tax Rules, 1994 for compounding service tax liability.

Issue-wise Detailed Analysis:

1. Liability of the petitioner to pay service tax on foreign currency remittances:
The petitioner, a private limited company engaged in manufacturing and exporting coir, jute, and other allied products, contested the service tax levied on foreign currency remittances made by foreign buyers to the respondent-Bank. The petitioner argued that they should not be liable to pay service tax on these remittances and, if applicable, it should only be on the gross charges levied by the Bank for the service rendered. The court dismissed the petition, stating that the service tax was correctly levied on the conversion of foreign currency to Indian rupees, which is a taxable event under the Finance Act, 1994.

2. Scope of "banking and other financial services" under Section 65(12) of the Finance Act, 1994:
The court rejected the petitioner's argument that the term "banking and other financial services" under Section 65(12) applies only to private money changers. The provision covers services rendered by any banking company, financial institution, or non-banking financial company, including nationalized banks. The emphasis is on the service provided, not the type of establishment providing it. Therefore, the respondent-Bank's service of converting foreign currency falls within the scope of this provision.

3. Exemption of transactions in money from service tax under Section 65B(44) of the Finance Act, 1994:
The petitioner contended that the transaction in money should be exempt from service tax. However, the court clarified that Explanation 2 of Section 65B(44) excludes conversion of currency from the exemption. The service tax is levied on the conversion of foreign currency to Indian rupees, not on the remittance itself. The court noted that the Central Board of Excise and Customs Circular (Exhibit P1) did not apply to the conversion service, thus, the petitioner could not claim exemption based on it.

4. Valuation of taxable services under Section 67 of the Finance Act, 1994:
The court discussed the valuation of taxable services under Section 67. It stated that the gross amount charged by the service provider for the service provided is the basis for service tax. The court explained that the rules prescribed under Section 67(4) for determining the value of taxable services are subject to the provisions of subsections (1), (2), and (3). The court upheld the rule that the taxable value for currency conversion is the difference between the selling rate and the RBI reference rate, multiplied by the total units of currency exchanged.

5. Application of Rule 6(7B) of the Service Tax Rules, 1994 for compounding service tax liability:
The petitioner argued for the application of Rule 6(7B) of the Service Tax Rules, 1994, which allows for an option to pay service tax based on a specified rate for the entire year. The court rejected this argument, stating that the taxable event is the service provided, and the valuation must be made for each transaction. The option under Rule 6(7B) applies to each taxable event in a year, not cumulatively for all transactions in a year. The court emphasized that the rule provides different rates for the gross amount of currency exchanged, underscoring that the levy is on each transaction.

Conclusion:
The court found no illegality in the service tax levied and collected by the respondent-Bank on the conversion of foreign currency. The tax was correctly imposed on the conversion service, and the valuation method prescribed by the rules was in consonance with the statutory provisions. The writ petition was dismissed with no costs.