Bank Charges paid by Foreign Banks — Processing charges for Import/Export documents — Clarifications - Service Tax - 20/2013-14-ST-I

Trade Notice No. 20/2013-14-ST-I Commissioner of Service Tax-I Mumbai dated 10-2-2014 During verification of the records of some of the banks, it has been noticed that, in the case of export and import transactions, where foreign exchange is required to be received in the country or to be remitted, the foreign banks charges a commission/fee from the bank in India, but no Service Tax is being paid thereon. These foreign banks are those with whom the importer or exporter in the foreign country holds a bank account or the said foreign bank is providing some services in relation to forwarding of documents and realisation of proceeds by way of remittances of money. As per the law, Service Tax is required to be paid by the recipient of services in India, in cases where services are provided by a foreign person. In order to examine the factual and legal position, a meeting of major banks along with representatives of Indian Banks Association (IBA) and Foreign Exchange Dealers Association of India (FEDAI) was held and their views were taken. After examination of the factual and legal position, the following clarification is issued. 2. Banks in India are providing services to their customers who may be exporters or importers. For the purpose of forwarding of documents and realisation of proceeds by way of receiving remittance in foreign currency or making payment in foreign currency, the banks in India have to obtain and utilise the services of foreign banks. It was explained to us, including by IBA, that there is no written agreement between banks in India and foreign banks for providing the said services. In fact, in a typical case of export from India, the exporter submits the documents to a bank in India and the said bank in turn forwards these documents to a foreign bank, which may be the banker of the importer in the foreign country or it may be the intermediary bank, which may in turn contact the banker of the importer in the foreign country. The said banker of the importer and/or the intermediary bank in the foreign country charges certain amounts and normally these charges are recovered by them by deducting from the total amount to be remitted to the Indian exporter. Further, in the case of import transactions, where the Bank in India, at the request of the importer, issues an LC, foreign bank charges are paid to the Foreign Bank. The foreign bank and/or the intermediary bank, as the case may be, deal only with the bank in India, and they only correspond and transact with the bank in India and not with the exporter. It is informed to us that since there is no formal agreement between the banks in India and foreign banks regarding the scope of their activity or the quantum of charges etc., all banks around the world, who transact in import and export transactions, subscribe to the Uniform Rules for Collection of Commercial Paper, International Chamber of Commerce Brochure No. 522 (URC 522) effective from 1-1-1996/ Uniform Customs and Practice for Documentary Credits (UCP 600), both issued by International Chamber of Commerce, effective from 1-7-2007, which provide Articles containing terms and conditions which are binding on all the parties subscribing to them. Thus, the need for agreements between banks is superfluous, as they subscribe to the URC 522 and UCP 600, and only the rates of charges need to be periodically fixed. 3. While going through sample import-export documents obtained from the banks, it was noticed that some of the banks are affixing stamps on documents stating that the said transactions of forwarding of documents and realisation of proceeds by way of remittances of money are subject to URC 522/UCP 600. The banks in India appears to be following URC 522/UCP600 for transactions of forwarding of documents and realisation of proceeds by way of remittances of money. 4. In order to understand the obligations of the foreign banks, the banks in India and importer/exporter, the said URC 522/UCP 600 were examined. Article Nos. 4, 8, 10, 11, 16, 21, 26 of URC 522 and Article Nos. 3, 4, 7, 8, 9, 13, 37 of UCP 600, read with other relevant Articles in these two brochures are relevant for the present issue. A combined reading of these Articles shows that there is an implied contract between a bank in India and a foreign bank, whereby, the foreign bank recognizes only the Bank in India for providing their services and for collection of their charges. In case of any clarification on any issue regarding their activity, there is always correspondence between the foreign bank and the bank in India. Even the amount of charges collected by foreign bank is informed only to the bank in India. The exporter or the importer in India comes to know about these charges through their own bank in India. In fact the most interesting aspect is that the importer or the exporter in India is not even aware of the quantum of charges which are charged by the foreign bank. Further, in case of export transactions, if the remittance could not be paid by the foreign importer, in that case the foreign bank recovers the charges from banks in India only and in case of import transactions, if the foreign exporter does not bear the foreign bank charges, the same are recovered by the foreign bank from the bank in India. The combined reading of the relevant articles in the said two internationally accepted conventions, undoubtedly show that services are provided by the foreign bank to the bank in India. Therefore, as per the Service Tax law, as a recipient of service, the bank in India, is required to pay Service Tax under erstwhile Section 66A of the Finance Act prior to 1-7-2012 and under the provisions of Notification No. 30/2012-S.T., dated 20th June, 2012 after 1-7-2012. 5. The views of the banks that services provided by the foreign bank are received by the importer or exporter in India is not factually and legally correct because, for a person to be treated as recipient of service, it is necessary that he should know who the service provider is and there should be an agreement to provide service, which may be oral or written. In the present case, the importer and exporter does not even know who the service provider is, as they are not aware of the identity of the foreign banks which would be providing services. Exporter or importer in India does not have any formal or informal agreement with the foreign bank. Importer or exporter in India does not even know the quantum of charges which the foreign bank would be recovering. Therefore, in view of the above mentioned factual position and also in view of the various articles of URC 522/UCP 600, it is clear that services are provided by the foreign bank to the bank in India. Further, Tribunals have also prima facie held that in such cases, services are provided by the foreign bank to the Indian bank and not to the Indian Exporter. [ M/s. Gracure Pharmaceuticals Ltd. v. Commissioner of Central Excise, Jaipur-I - 2013 (32) S.T.R. 249 (Tri.-Del.) , M/s. Gujarat Ambuja Exports Ltd. v. Commissioner of Service Tax, Ahmedabad - 2013 (30) S.T.R. 667 (Tri.-Ahmd.) ]. 6. It is therefore clarified that, in cases where the foreign banks are recovering certain charges for processing of import/export documents regarding remittance of foreign currency, the banks in India would be treated as recipient of service and therefore required to pay Service Tax. 7. All the banks are requested to follow the above mentioned clarification and to also pay tax for the past period. 8. This Trade Notice is issued with the approval of Chief Commissioner, Central Excise, Mumbai Zone-I. 9. All the Trade Associations are requested to bring the contents of this Trade Notice to the notice of their members in particular and the Trade in general.