2017 (9) TMI 96 - AT - Service Tax

Reverse charge mechanism - appellant have been receiving the sale proceeds of exports remitted by the foreign purchaser in the bank located in the foreign country and thereafter collected and remitted to the appellant s account through the Indian bank - department was of the view that the foreign bank has been providing taxable service from a non-taxable territory to the appellant which is located in taxable territory for which the appellant as a service recipient is liable to discharge service tax under reverse charge mechanism - Held that - The foreign bank in which the overseas buyer deposits the sale proceeds is chosen by the foreign buyer and not by the appellant, who is situated in India. By no stretch of imagination can such foreign bank be considered as a service provider for the appellant who in most cases would not even be aware of the identity of such foreign bank. The act of deduction of an amount as charges for transfer of the foreign exchange to the Indian bank from the sale proceeds of the appellant is only a facility for collecting such charges from the Indian bank. This cannot be considered as payment of charges for services by the appellant to the foreign bank. It is actual charges deducted being bank to bank transaction. Similar issue decided in the case of GREENPLY INDUSTRIES LTD. Versus COMMISSIONER OF CENTRAL EXCISE, JAIPUR-I 2015 (12) TMI 80 - CESTAT NEW DELHI , where it was held that the appellant cannot be treated as service recipient and no Service Tax can be charged from them under Section 66A read with Rule 2(l)(2)(iv) of the Service Tax Rules, 1994. The levy of service tax is unsustainable - appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Whether the appellants are liable to discharge service tax under reverse charge mechanism for charges deducted by the foreign bank?
2. Whether the extended period for invoking the demand is justified?
3. Whether the charges deducted by the foreign bank can be considered as consideration paid for services under reverse charge mechanism?

Analysis:
1. The appeals involved the common issue of whether the appellants, manufacturers and exporters of knitted readymade garments, were liable to pay service tax under reverse charge mechanism for charges deducted by the foreign bank. The department contended that the foreign bank provided taxable services to the appellants, making them service recipients. The appellants argued that the foreign bank did not provide any service to them, as the bank was chosen by the foreign buyer for remitting sale proceeds. The appellants maintained that the charges deducted by the foreign bank were not subject to service tax, citing Trade Notice and judicial precedents. The Tribunal held that the charges deducted by the foreign bank were not payment for services, as there was no formal agreement between the foreign bank and the appellants. The department's argument was rejected, and the appeals were allowed with consequential relief.

2. The issue of the extended period for invoking the demand was raised during the proceedings. The department argued that the extended period was justified due to the verification conducted by them, which revealed the short-payment of service tax. However, the appellants contended that they had not paid service tax on the belief that the charges were not liable to service tax, and there was no suppression of facts. The Tribunal noted that the appellants had all relevant documents available, and there was no intentional evasion. Therefore, the extended period was deemed not invocable, and the appellants were granted relief on this issue.

3. The Tribunal examined whether the charges deducted by the foreign bank could be considered as consideration paid for services under reverse charge mechanism. The department argued that the charges constituted consideration for services rendered by the foreign bank in transferring sale proceeds. However, the Tribunal, relying on a Trade Notice and a judicial precedent, concluded that the charges deducted were part of a bank-to-bank transaction and not payment for services. The Tribunal emphasized that the appellants did not have a direct relationship with the foreign bank and were not aware of the identity of the bank chosen by the foreign buyer. Therefore, the levy of service tax on the charges deducted by the foreign bank was deemed unsustainable, and the appeals were allowed with consequential relief.

In conclusion, the Tribunal ruled in favor of the appellants on all issues, holding that the charges deducted by the foreign bank were not subject to service tax under reverse charge mechanism. The extended period for invoking the demand was also deemed not applicable due to the absence of suppression of facts. The appellants were granted relief, and the impugned orders were set aside.