Page 34 - GSTL_20th August 2020_Vol 39_Part 3

J66 GST LAW TIMES [ Vol. 39
Banks may not have to pay Service Tax for facilitating
international trade
Indian banks will not have to pay Goods and Services Tax (GST) on Re-
verse Charge Mechanism for facilitating trade for exporters or importers through
foreign banks, if a recent ruling by an Appellate Tribunal is to go by.
In a ` 110 crore relief to State Bank of Bikaner & Jaipur (SBBJ), now
merged with State Bank of India, the Delhi Customs, Excise and Service Tax Ap-
pellate Tribunal (CESTAT) has ruled that the bank is not liable to pay the erst-
while Service Tax on a Reverse Charge Mechanism. This is because it was not the
recipient of any service rendered by the foreign bank and no consideration was
paid by it.
The case may act as a precedent for other Service Tax and GST cases,
where banks may have been held liable to pay tax on reverse charge for merely
being facilitators for exporters or importers.
To facilitate trade, Indian banks provide services to exporters by sending
the export documents to the bank of the importer abroad and collect payment.
The role of the Indian bank, SBBJ in this case, is to settle the payment relating to
export/import of trade, for which it charges Service Tax to the exporters. All
such foreign trade transactions have to be necessarily routed through normal
banking channels as is provided for in the Foreign Exchange Management Regu-
lations.
In a 2017 order, Commissioner of Central Excise and Service Tax had
served SBBJ a demand of ` 110.84 crore towards Service Tax. It came with inter-
est and penalty for not paying Service Tax on foreign bank charges under the
Reverse Charge Mechanism for the period between October, 2010 and March,
2015.
The CESTAT, in its 39-page order, said the bank cannot be said to be the
recipient of service for the activities undertaken by the foreign banks situated
outside India, the charges for which are deducted at source on the export bill.
The appellant bank merely acts on behalf of the Indian exporter and facilitates
the service.
“The appellant bank, therefore, would not be liable to pay Service Tax
under the Reverse Charge Mechanism,” the order said.
The appellate body noted that a similar demand for an earlier period was
dropped on two grounds. The foreign bank does not transact the business of
banking in India. Therefore, it would not fall in the definition of a banking com-
pany, which is a pre-requisite for a service to be covered under ‘banking and
other financial services.’ Secondly, the Indian bank does not pay any amount to
the foreign bank and, in fact, only plays the role of a mediator between the Indi-
an exporter and the foreign banker, representing the foreign importer. No ‘con-
sideration’ was paid to SBBJ for the transactions.
Ranjeet Mahtani, Partner, Dhruva Advisors, said that the Principal Bench
of the Tribunal has settled the vexed issue of whether the exporter’s Indian bank
is the recipient of services from the correspondent/intermediary foreign bank,
which co-assists in settling accounts for an export invoice.
The judgment rendered in SBBJ’s case concludes that the Indian bank
does not receive the services, that there is no consideration paid by it. So, it con-
cludes that there can be no obligation for payment of Service Tax on reverse
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