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TMI Blog2018 (6) TMI 385X X X X Extracts X X X X X X X X Extracts X X X X ..... ondon 486 2 December, 2011 Export Import Bank of the United States 650 3 December, 2011 The Export-Import Bank of China, China Development Bank and Bank of China Limited, All of Shanghai 1109 4 March, 2012 Standard Chartered Bank, Mizuho Corporate Bank Ltd & DBS Bank Ltd 150 Total 2395 2. The revenue initiated investigations against the Respondent with respect to foreign exchange remittances made by the Respondent towards various expenses and fees incurred for raising External Commercial Borrowings (ECB) from various banks and institutions referred to above. 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. It was alleged that the services have been specified under section 65 (105) (zm) of the Finance Act, 1994 and under Section 65 (105) (zzzzm) of the Finance Act, 1994 respectively which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proposed to recover interest and impose penalty for failure to discharge service tax liability by due dates under various provisions of the Finance Act, 1994. Another Show Cause Notice dated 04.04.2016 was issued demanding service tax of Rs. 5,17,22,752/- on the exposure fees liability of the Respondent for the financial year 2014 to 2015. The demands were made on the ground that the Respondent being recipient of services from outside India is liable for tax . 5. The adjudicating authority vide the impugned order confirmed demand of service tax on services on other charges, fee and expenses and on which the service tax was paid by the Respondent. However he set aside the demand of service tax on "Exposure Fee" and also waived the penalty u/s 78 of the Finance Act, 1994. Hence the present appeal by the revenue. 6. Shri Roopam Kapur, ld. Commissioner (AR) appearing for the revenue submits that "Exposure Fee' is collected by Export Import Bank of United States. He submits that the definition of Exposure Fees and Interest Rates as per the "The Export-Import Bank of the United States (Ex-Im Bank) Policy and Planning Division Policy Handbook, June 2005 is as under : EXPOSURE FEE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gov/releases/H15/data.htm under the heading of "U.S. government securities" and the subheading of "Treasury constant maturities," for a maturity closest to the duration of the payment Default plus one percent (1%) Section 6 - Condition precedent 6.02(g)- Exposure Fee, Other Fees and Expenses - Ex-Im Bank shall have been paid the Exposure Fee or arrangements satisfactory to Ex-Im Bank for the payment thereof shall have been made. All other fees and expenses then due and payable under Section 7 shall have been paid. 7. He submits that thus it can be seen from the above, that the Exposure Fee percentage is applied to the total of U.S. Contract Financed Portion amount and local Cost financed portion and IDC financed portion amount only. In the subject agreement the rate of interest is 3.66% and the Exposure fees Amount is 6.747 % i.e. U.S. $ 41,083,590. US EX-IM bank charges two types of amount for the loan provided to borrowers. One is interest and another is Exposure Fee. Exposure fee is determined based on various factors such as Category of Country of Borrower Credit Classification of the Borrower, Percentage of Loan Cover, Repayment Period, Drawn-down Period etc. According ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lected by the lender Bank, is subsequently paid to the insurance company i.e. Sinosure, NEXI or Euler Hermes etc. It reveals that Exposure Fee is charged by the US Exim Bank as a risk premia for providing Insurance Service, and not as an interest for providing Banking & Financial Service, but being bundled service, it is being classified under Banking & Financial Service. In all cases (i.e. Sinosure Premium NEXI Premium or Kuler Hermes Premium etc.), the Respondent have voluntarily paid Service Tax on such charges (Risk Premia) charged by various ECAs. As per RBI master circular No. RBI/2012-13/70 dated 2.07.2012, the banks are free to determine Rate of interest and for which they should factor risk premium, however once an interest rate is fixed, there cannot be a separate interest rate for covering the risk premium. Other fees are also charged like Exposure fee such as commitment fee but they are in the nature of charges and not interest. As per CBEC Circular No. 137/62/2011- ST dt. 21.10.2011 it has been clarified that Commitment Charges are in nature of charges for services rendered and not interest. According to the definition, as provided under Finance Act, 1994 after negativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S is safeguarded. This service is normally the function of EXIM bank is insuring the receivables of seller of goods or services and is equivalent to the functioning of Export Credit and Guarantee Corporation of India. That in medium and Loan Guarantee as EXIM bank as shown exposure fees as cost to EXIM bank besides processing fees, application fee and commitment fee and show interest as something which was negotiable between lender and borrower. That in RBI form the Exposure fees has been separately shown as separate of interest. He also submitted that the RBI Circular are not applicable to the facts of the present case as it is covered by the ECB guidelines for which Reserve Bank of India has issued separate set of instructions as same are covered under FEMA. The direct loans are given by the EXIM Bank on the Fixed Interest rates based on Commercial interest Reference Rate which is based on the Bond rates and the CIRR is interpolated on the basis of the period of loan and the respective bond rates. He submitted that the loans by the sovereign authorities is to be linked to the bond rates of the respective country even if OECD agreement is perused. He relies upon the chart of Bond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay usually give some indication of the nature of the document and that the nature and true purpose of a document has to be determined with reference to the terms of the document. From the CBEC Clarification dated 21.10.2011 it is clear that the nomenclature given by the parties to a particular payment is not determinative of its true character. The mere fact that "exposure fees" is described as a fee or risk premium or compensation is not enough to hold that the same is not interest. The Revenue has relied upon the Policy Hand Book of the US Ex-Im Bank which describes Exposure Fees as "compensation" for contending that the said Exposure Fees, having been described as compensation, cannot be regarded as interest. This ground is totally untenable as a Constitutional Bench of the Supreme Court in the case of Central Bank of India vs. Ravindra reported in 2002 (1) SCC 367 has described interest as "compensation paid by the Borrower to the lender for deprivation or use of his money". The website of US Ex-Im Bank on which reliance was placed by the revenue also describes interest as a "fees". It is, therefore, clear that the expressions "interest", "fees" and "compensation" are not mutua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest to be similarly bifurcated into two components i.e. MCLR, which is the base rate, and spread, which represents the credit risk premium. Both MCLR as well as spread are components of "interest" as per the RBI Circular and Directions dated 03.03.2016. The fact that interest is composed of various components, of which credit risk premium (termed by the US Ex-Im Bank as Exposure Fees and by RBI as "Spread") is one of essential components established by several international authorities, institutes and leading academics. He relies upon following : (i) CFA Institute's LOS 5.a wherein the five components of interest rates are named as Real Risk-Free Rate , Expected Inflation, Default-Risk Premium, Liquidity Premium, Maturity Premium. (ii) Federal Reserve Bank of Minneapolis' showing four component form part of interest which includes a risk premium to compensate the bank for the degree of default risk inherent in the loan request. (iii) The Quarterly Journal of Economics, Vol.34, No.3, (May 1920) published by the Oxford University Press describing "variable premium for risk involved in the lending" as one of the factors that go into the determination of interest rate. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrowed can be paid in different manners. Such payments do not lose the character of interest merely because they are described as "fees or charges". Likewise, a fees or charge will not cease to be a fee or a charge merely because it is described as "interest". The common parlance meaning of the term 'interest' has been correctly ascertained by the Commissioner in his order. He relies upon following books, websites and other sources of information establish the common parlance meaning of the term "interest": (i) http://www.businessdictionary.com (ii) http://en.wikipedia.org/wiki/Real_interest_rate (iii) http://www.investorwords.com/2531/interest.html#ixzz3 7moNWt G9 (iv) The Major Law Lexicon by P. Ramanatha Iyer (Vol.III, 4th Edition) (v) Encyclopaedic Law Lexicon, Justice C.K. Thakker (2nd Ed., 2014) (vi) Mitra's Legal and Commercial Dictionary (6th edition) (vii) Words and Phrases Lexis Nexis (4th edition) (Vol.I), (viii) The Law Lexicon, P. Ramanatha Aiyar (3rd edition 2012) (Vol.III), (ix) Wharton's Law Lexicon (16th Edition - Reprint 2015) 9. There is no basis for the assumption that interest cannot be computed or deducted upfront at the time of sanction or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter. Similarly, in the case of HUDCO Supra and Punjab National Bank Supra, the issue involved pertained to pre-payment charges and commitment charges, respectively, which were administrative charges and not in the nature of risk premia. The revenue's contention that "once an interest rate has been fixed, there cannot be a separate charge for covering risk premium" is not supported by any authority or RBI Guidelines. In fact, the RBI Circular dated 17.12.2015 and Directions dated 03.03.2016 accepts that a 'spread' to cover 'credit risk premium' can now be recovered by the Indian banks 'separately ', over and above the 'MCLR.' The Circular and Direction of the RBI therefore disprove the Revenue's ground. Further the submission of revenue that there are many other fees and charges that are also collected as a percentage of the debt (upfront fees, processing fees, commitment fees), on which service tax is admittedly payable is also incorrect. The Commissioner correctly noted that the quantum of exposure fees is determined on the basis of several factors such as time period of the repayment of loan; rating of the country; credit worthiness of the borrower; whether the exposure fee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its balance sheet the entire amount of Exposure Fee paid to the US Ex-Im bank under head "Expenditure incurred in foreign currency." This balance sheet was a public document available for anyone to examine and therefore the ground in the Revenue's appeal that the Respondent had suppressed relevant facts of the department is totally incorrect. 11.3 Despite the fact that the view taken by the Tribunal in the Tata Steel Supra has still not attained finality as the appeal filed has been filed and is pending against this order before the Supreme Court/High Court. The Respondent decided not to contest the matter further and deposited the entire amount of tax and interest thereon well before the issue of Show Cause Notice. In issues of interpretation such as this, imposition of penalty particularly when an assessee comes forward to deposit the tax and interest with a view to close the matter as totally unwarranted. The fact that one of the members of Tribunal which heard and contested the case of Tata Steel Supra concurred with the view that services in relation to borrowing were not covered under the category "Banking and other financial services" is sufficient evidence of the bonafide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, LOC Commission charges, Legal & Consultancy charges, LC Commission Charges, LC Charges, Upfront fees, Comfort fees etc. The Export Import Bank of China, China Development Bank and Bank of China Ld. All of Shanghai have collected Upfront fees etc and the Standard Chartered Bank, Mizuho Corporate Bank Ltd. and DBS Bank Ltd have collected Commitment charges, Agency fees, Facility Agent Fees, Upfront fees etc. The Respondent has discharged the service tax liability on all such fee and charges. Coming to the agreement between the Respondent and Deutsche Bank Trust Company Americas, as Ex- Im Facility Agent and Export- Import Bank of the USA, we find that the rate of Exposure fee to be charged from the Borrower would depend upon various factors like Category of Country of Borrower, Credit Classification of the Borrower, Percentage of Loan Cover, Repayment Period, Drawn-down Period etc. The bank is charging two types of amount from the Respondents on account of borrowings made by the Respondent. The fixed interest has been charged from the Respondent @ 3.66% p.a whereas the exposure fee has been charged taking into account the above factors. In case of India the rate of Exposure fee w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k's board approval. We hope the above clarifies that an Exposure Fee is a fee charged based on the transaction risk assessment of Ex-lm Bank and is not charged for any "service" rendered to the Borrower by Ex-lm Bank". Further, EXIM Bank USA vide their letter dated June 12, 2014 stated as under : " This letter aims to further clarify the definition of "Exposure Fee" based on our letter dated March 14. 201J 4 and May 22, 2014. As mentioned in our previous correspondence, an Exposure Fee is a fee charged by Export Credit Agencies, under the OECD regulations, for the risk that a transaction will not be repaid. The exposure fee levied and collected by Exim Bank at the time of disbursement of each tranche of the total loans sanctioned and on the amount of each tranche. An Exposure Fee is a percentage fee charged based on the risk assessment by Ex-Im Bank and is assessed against the total amount disbursed to the Borrower. Ex- Im Bank determines Exposure Fees- based on several factors, including: * Credit rating of the Borrower * Credit enhancements, if any Percentage of Cover * Product (Guarantee/ Direct Loan) * Repayment Period (Years) * Disbursement Perio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of reference: No Lender Availed Amount Applicable Interest Rate 1 Commercial Banks USD 90 Million Upto March 31, 2015 - 6m LIBOR + 3.75%p.a. From April 1. 2015 to March 31, 2019 - 6m LIBOR + 4.00% p.a. After April 1, 2019 - 6 m LIBOR + 4.25% p.a. 2 IIFC UK USD 452 Million Applicable Interest Rate for relevant period during which Disbursement is made:- Upto Sep 30, 2012 - 6 m LIBOR + 4.85% p.a From Oct 1, 2012 to May 1,2014- 6 m LIBOR + 2.10% p.a. From May 2, 2014 to Sep 14, 2014 - 6 m LIBOR + 3.80% p.a. Sept 15, 2014 to March 25, 2015 6m LIBOR + 3.80% p.a. From March 26, 2015 onwards - 6m LIBOR + 2.85% p.a. 3 US Exim USD 508.2 Million Fixed - 3.66% p.a. + Exposure Fee - 6.747% of disbursed amount or 0.696% on a yearly basis. 28.2 It is observed from the above that apart from EXIM Bank, USA they had also borrowed from different Commercial Banks and IIFC, UK for the same project. The rate of "interest' that is charged for the loan given by them depended on two factors: (a) 6 Months LIBOR plus (b) Specific rate of interest i.e. 2.10% or 2.85% or 3.75% or 3.80% or 4.00% or 4.85% P.A. This rate of interest varied for different per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y dependent upon the tenure of loan and credit classification. The revenue has contended that the interest rate charged by the US Exim bank is still higher from the Bond rates of 2.3% during the year 2011 even after adding 1 to 1.3% hike over such bond rates as the CIRR is based on bond rates and CIRR is interpolated on the basis of period of loan and respective period of bond rates. Such comparison has been made to show that the contention of Respondent and adjudicating authority to substantiate the exposure fees is equivalent to the risk element of interest charged is incorrect. We find that the contention of the revenue is not acceptable for the reason that the interest rate and the exposure fees charged by the US Exim Bank would depend on global scenario as well as various factors and not only dependent upon Bond rates. Had the case been so the Respondent would not have availed the loan facility on such interest rates from the US Exim bank. Any borrowing would consider the interest rate factor considering all factors and if the rates of US Exim bank is not competitive as being sought to be portrayed the Respondent would not have availed loan. Further we find that once the US Ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt. c. The total cost to the borrower, including interest and all other charges levied on a loan, should be justifiable having regard to the total cost incurred by the bank in extending the loan, which is sought to be defrayed and the extent of return that could be reasonably expected from the transaction. d. An appropriate ceiling should be fixed on the interest, including processing and other charges that are levied on such loans, which should be suitably publicised". 17. From the above 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors : - the applicable country risk classification ; - the time at risk (i.e the Hoizon of Risk or HOR); - the selected buyer risk category of the obligor ; - the percentage of political and commercial risk cover and quality of official export credit product provided; - any country risk mitigation technique applied; and - any buyer risk credit enhancements that have been applied. b) ............................... 19. The above both together constitute "Interest" and the RBI has recognized the said practice in its Circular No. RBI/2015 - 16/273 DT. 17.12.2015 by which MCLR system (Marginal Cost of Funds based lending rate). It requires the interest to be bifurcated into two components i.e 'MCLR' which is the base rate and 'Spread' which represents the credit risk premium. Both i.e MCLR and Spread are components of interest as per the RBI Circular and directions. Even the circular dt. 17.12.2015 and directions dt. 03.03.2016 issued by the RBI permits the banks to recover the "spread" to cover "credit risk premium" separately over and above MCLR. The revenue has relied upon the judgment of Hon'ble Supreme Court in case of CCE, New Delhi Vs. Connaught Place Res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Punjab National Bank 2015 (38) STR 498 (TRI) and Hudco Ltd. 2012 (26) STR 531 (TRI) relied upon by the revenue are not applicable to the present case, none of them dealt with the issue of "Exposure fee" but of pre - payment charges and commitment charges respectively which were administrative charges and not in the nature of risk premia as correctly pointed out by the Respondents. 20. The Appellant has also sought to levy 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. It has been contended that the service tax was paid only after constant persuasion by the revenue and they did not come forward to make payment immediately. That 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. We find that the issue involved the interpretation of law. There were many cases on the issue that whether the service of borrowing is liable to ser ..... X X X X Extracts X X X X X X X X Extracts X X X X
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