Bank Charges Paid to Foreign Banks Not Taxable Under RCM: CESTAT Delhi

 

🔍 Headline Options

• CESTAT Delhi Rules: Foreign Bank Charges on Export Proceeds Not Taxable Under Reverse Charge

• Bank Charges Paid to Overseas Banks Aren’t Taxable Under RCM, CESTAT Delhi Decides

• Delhi Tribunal: No RCM Liability for Exporter on Foreign Bank Fees

Introduction

In a significant win for exporters, the Delhi Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has clarified that bank charges paid to foreign banks are not taxable under the Reverse Charge Mechanism (RCM). This landmark decision, resting on the rationale that such services occur outside India with no direct contractual relationship, offers relief and clarity to export-oriented businesses.

📌 What Is Reverse Charge Mechanism (RCM)?

Under RCM, the recipient of a service pays tax instead of the provider—designed to capture import of services into India. However, ambiguity arises when services are rendered entirely overseas.

The CESTAT Judgment: Case Snapshot

• Parties Involved: Artifacts India, a 100% Export Oriented Unit (EOU) for paper and handicraft items.

• Time Frame: April 2007 – March 2012.

• Contention: Artifacts India did not register for service tax, believing that foreign bank charges and related services were beyond Indian taxing scope.

• Demand Raised: ₹10,09,952 by the Department under RCM for “banking and financial services,” “business auxiliary services,” and “design services.”

• Outcome: Tribunal set aside all demands under Section 66A of the Finance Act. 

🧭 Why Was This Liability Disallowed?

1. Lack of Direct Privity of Contract

• No contractual tie existed between Artifacts India and the foreign bank.

• Foreign banks served overseas buyers directly, who then deducted the fees.

• The exporter merely reimbursed those charges as per seller’s contract taxscan.in.

2. Services Outside India

• Both service provider (foreign bank) and recipient (overseas buyer) were located abroad.

• No Indian jurisdiction applied: outside Section 66B purview.

3. Precedent in Greenply Industries

• The Tribunal reaffirmed its stance in Greenply Industries v. CCE: absence of direct linkage exempts from RCM taxation. 

4. CENVAT Credit Neutrality

• Even if RCM hypothetically applied, CENVAT credit would neutralize any tax burden—making scrutiny purposeless. .

💡 Implications for Exporters & Charter Accountants

1. No Unnecessary Service Tax Liability
   Reimbursements for foreign bank charges should not be taxed under RCM.

2. Avoid Compliance Burden
   Exporters can skip RCM-related registrations based solely on reimbursed foreign bank fees.

3. Documentation Is Crucial
   Maintain clear documentation showing contractual structure—seller bears the cost, not receiving service.

4. Leverage Legal Precedent
   Draft refund claims citing CESTAT Delhi and Greenply Industries rulings.

📋 Comparison Table

Scenario	RCM Applicable?	Reason
Foreign bank charges (on export rem.)	❌ No	No privity; service outside India
Commission to foreign agents	Depends	Requires privity & direct service
Artwork/design fees abroad	❌ No	Reimbursement, not service availed

📝 Real Example

• Case: Artifacts India (Service Tax Appeal No. 55777 of 2014)

• Facts: Paid foreign bank charges & design fees through export agreement.

• Tribunal Finding: Foreign bank charged buyer; Artifacts only bore cost per contract—no direct service.

• Result: Demand dismissed in full. 

👣 Practical Tips for Exporters

1. Review Contracts: Ensure clarity—foreign bank fees should be borne but not serviced to exporter.

2. Maintain Audit Trail: Documents should reflect that you’re reimbursing, not buying services.

3. File Refunds: Use this CESTAT order as legal support.

4. Assess Other Recharges: Commission/design charges may still attract RCM—confirm privity.

Conclusion

The Delhi CESTAT’s ruling is a boon for exporters, clarifying that overseas bank charges reimbursed under contractual terms are not taxable under RCM. By hinging on the absence of direct service receipt and contractual linkage, it offers a clear defense mechanism for similar future disputes. Exporters should ensure contractual clarity, safeguard documentation, and stay updated on evolving jurisprudence.

📌 FAQs

Q1: Do I need to register under service tax for foreign bank fees?
A: No—if there's no direct contractual relationship and the service occurs outside India, RCM does not apply.

Q2: What proof should I maintain?
Invoices, export agreements, and communication showing that the buyer directs these charges and you merely bear them.

Q3: Could GST apply instead of service tax?
While service tax is repealed, the principle applies: no GST is charged under reverse charge for foreign services with no direct contract and no nexus with Indian territory.

Q4: Do design/agent charges pose a risk?
Yes—these may attract RCM if you directly contract and receive services from foreign professionals or agents.

Q5: What if the Indian bank deducts foreign fees and pays foreign bank?
Still, no RCM if the Indian bank acts merely as an intermediary with no contract with exporter or foreign bank 

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