2018 (6) TMI 385 - AT - Service Tax

Exposure fee - service or an element of Interest on loan? - Liability of Service tax - reverse charge mechanism - foreign exchange remittances made by the Respondent towards various expenses and fees incurred for raising External Commercial Borrowings (ECB) from various banks and institutions - Revenue was of the view that all the fee, charges paid by the Respondent to the foreign Banks fall under the category of taxable services of Banking & Financial Services and Legal Consultancy Services received by them from the Banks/ institutions/ companies based outside India and the Respondent is liable to discharge the service tax liability on the same under reverse charge mechanism - penalty. Whether the Exposure Fee paid by the Respondent to the US Ex-Im Bank is liable for service tax considering the same as Service or it is an element of interest on loan so availed by the Respondent? - Held that - It is apparent that the interest rates would depend upon the various factors and the interest can be increased or reduced by charging under various heads. It is apparent that even the Indian Banks give loan to business entities on different interest rates under which the base rate remains same but the interest rate is varied by charging or not charging interest under some other head. In the instant case we find that the rate of interest from Commercial Banks and IIFC UK is based on two factors i.e 6 Months Libor rate plus fixed rate of interest in case of EXIM Bank, the two factors considered were fixed rate of interest @ 3.665 plus exposure fee @ 6.74%. Both the interest rates are much or less similar. The said position has not been considered by the revenue in its appeal. The revenue has relied upon the terminology of the agreement as well as policy handbook to canvass that Exposure fee is not interest. However we do not agree with the submission of the revenue for the reason that for deciding the nature and meaning of term Exposure fee various facts and factors has to be taken into consideration. The nomenclature given by the party cannot determine the true character of an agreement. Further when the lender bank itself vide its three letters has clarified the position as to what is the intention and ratio behind charging Exposure fee , we hold that the interpretation made by the revenue is not sustainable. When the intention of the charging party is apparent in that case it has to be considered that the said amount is a loan pricing element and not towards any service. Various books, websites and other source of information relied upon by the Respondent support their claim Coming back to definition of term Interest in terms of Section 65B (30), we find that the Interest is payable in any manner in respect of money s borrowed or debt incurred (including a deposit, claim, similar rights or obligation). In the present case, we have reached to the conclusion that the exposure fee is the manner of payment of interest of which the rate is arrived at on the basis of various factors associated with the borrowings. The amount of such Exposure fee is never fixed but is variable depending upon the factors as communicated by the US Exim Bank and clarified by the Bank. We thus after considering all the above factors and in view of our findings as above hold that the Exposure fee charged by the US Exim bank cannot be considered as any service by the Bank to the Respondent but is only an interest and is not liable to any service tax. Penalty on the amount of service tax paid by the Respondent on other service fee and charges which was recovered by the lenders from the Respondents - Held that - There are bonafides on the part of respondent - the Respondent has very good team of employees well conversant with tax matters and it is not tenable that they were not aware of such provisions relating to service tax. Further ignorance of law is not excuse. That they never disclosed the fact related to payment of said fees/ charges to the department. Appeal dismissed - decided against Revenue.

Summary

Issues Involved:
1. Liability of Service Tax on "Exposure Fee" charged by US Ex-Im Bank.
2. Imposition of Penalty under Section 78 of the Finance Act, 1994.

Detailed Analysis:

1. Liability of Service Tax on "Exposure Fee" charged by US Ex-Im Bank:

The core issue was whether the "Exposure Fee" paid by the Respondent to the US Ex-Im Bank constituted a service liable to service tax or was an element of interest on the loan. The Respondent had set up an Ultra-mega power project and availed External Commercial Borrowings (ECBs) from various overseas lenders, including the US Ex-Im Bank, which charged an "Exposure Fee."

The revenue contended that the "Exposure Fee" should be categorized under taxable services such as "Banking & Financial Services" and "Legal Consultancy Services" under the reverse charge mechanism, making the Respondent liable for service tax. They argued that the fee was not interest but a service fee or risk premium.

The Respondent argued that the "Exposure Fee" was an element of interest, supported by letters from the US Ex-Im Bank clarifying that the fee was not for any service rendered but part of the loan pricing. The adjudicating authority agreed with the Respondent, noting that the fee was akin to interest and not a service fee.

The Tribunal upheld the adjudicating authority's decision, emphasizing that the "Exposure Fee" was part of the interest charged by the US Ex-Im Bank. The Tribunal considered various factors, including the nature of the fee, the intention of the contracting parties, and comparisons with interest rates charged by other lenders. They concluded that the "Exposure Fee" was indeed interest and not subject to service tax.

2. Imposition of Penalty under Section 78 of the Finance Act, 1994:

The revenue appealed for the imposition of a penalty on the Respondent for the late payment of service tax on other fees and charges associated with the ECBs. They argued that the Respondent, being well-versed in tax matters, should have been aware of their tax liabilities and that ignorance of the law was not an excuse.

The Respondent contended that their non-payment of service tax was due to a bona fide belief that the services related to borrowing were not taxable. They pointed out that they had disclosed the entire amount of the "Exposure Fee" in their balance sheet and paid the service tax along with interest before the issuance of the Show Cause Notice.

The Tribunal agreed with the Respondent, noting that the issue involved the interpretation of law and that there was no evidence of deliberate non-payment of service tax. They emphasized that penalties under Section 76 or 78 could not be imposed without establishing that the non-payment was knowing and deliberate. The Tribunal upheld the adjudicating authority's decision to waive the penalty, recognizing the Respondent's bona fide belief and voluntary payment of service tax before the Show Cause Notice.

Conclusion:

The Tribunal dismissed the revenue's appeal, upheld the adjudicating authority's decision, and confirmed that the "Exposure Fee" was part of the interest and not subject to service tax. They also upheld the decision to waive the penalty, recognizing the Respondent's bona fide belief and voluntary compliance.