CESTAT Chennai Rules Exporters Not Liable for Service Tax on Foreign Bank Charges During Export Remittances

 

Introduction

Exporters frequently face deductions by foreign banks when receiving payments from overseas buyers. Until recently, there was uncertainty about whether these charges attract service tax under the Banking & Financial Services category. However, in a recent landmark judgment involving SKM Egg Products Export (India) Ltd., the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Chennai has put this debate to rest. Let’s delve into the ruling, its implications, supporting cases, and practical takeaways for exporters.

1. Background of the Case

• Parties Involved:

  • Appellant: SKM Egg Products Export (India) Ltd. – exporter of egg yolk and albumen powder

  • Respondent: Commissioner of GST & Central Excise

• Key Issue: Foreign banks deducted service charges while processing export proceeds. Tax authorities demanded service tax (~₹1.38 lakh for April–Sept 2013), citing ‘Banking & Other Financial Services.’
  

2. Tribunal's Rationale

CESTAT Chennai, consisting of P. Dinesha and M. Anjani Kumar, set aside the order. Here’s why:

1. Lack of Direct Contractual Nexus

   • The taxpayer had no contractual relationship with the foreign banks. These were third-party charges paid to the Indian remitting bank, not directly by the exporter.
     
     

2. Foreign Banks Served SBI, Not Exporter

   • Charges were collected by foreign banks engaged by SBI to transfer proceeds—not services rendered to the exporter.
     

3. Precedents in Favor of Exporters

   • CESTAT relied on its earlier decisions (Order No. 40223/2023 & 40113/2025) and analogous rulings in Cotton Blossom India Pvt Ltd., confirming non-taxability under similar facts.
     
     

3. Supporting Cases & Outcomes

Case	Key Finding	Outcome
SKM Egg Products Export Ltd.	Foreign bank charges deducted by SBI; no direct service to exporter	No service tax liability
Cotton Blossom India Pvt Ltd.	Customer’s agent in Hong Kong engaged Deutsche Bank Singapore; no direct nexus with exporter	Tribunal upheld no tax
Akshita Exports (CESTAT Ahmedabad)	Commission shown in invoice w/out direct contract; treated as discount	No service tax due

4. What This Means for Exporters

• ✅ No reverse-charge service tax liability for foreign bank charges if the exporter didn’t contract with the foreign bank.

• ✅ Document retention is vital: maintain remittance advices and bank correspondence showing you are not party to foreign bank services.

• ✅ Audit-ready compliance: In disputes, present evidence of absence of contract with foreign bank; the exporter only received proceeds, not services.

5. Practical Tips for Exporters

1. Archive Remittance Advice & Foreign Bank Correspondence: These prove lack of direct engagement.

2. Clarify Bank Roles in Invoices: Note that any foreign charges were deducted by your bank/its agent.

3. Stay Updated on Legal Updates: The ruling is still limited to service tax (pre-GST). Under GST, similar logic applies—imported services must be consumed by exporter to be taxable.

4. Add Clear Payment Terms: Include clauses in export contracts clarifying foreign charges are buyer’s responsibility.

6. Quick FAQ Section

Q1: Are foreign bank charges ever taxable?

A: Yes—if the exporter directly contracts with and pays the foreign bank, those services may attract tax under banking services.

Q2: Does this ruling apply under GST?

A: Logical extension: Only if services are imported and consumed in India by the exporter. Charges deducted by foreign banks not under contract likely remain non-taxable.

Q3: What if foreign bank is appointed by exporter?

A: If export contract authorizes the exporter to choose foreign bank, direct contract may exist—service tax could be applicable.

Q4: Can exporters claim refunds for past deductions?

A: Yes—file appeals for earlier years with documentary proof of non-engagement with foreign banks.

Q5: How much was at stake in SKM Egg case?

A: Approximately ₹1.38 lakh for April–September 2013.

Conclusion

The CESTAT Chennai’s ruling marks a significant win for exporters—it affirms that foreign bank charges are not taxable if there’s no direct contract or service nexus. This provides clarity and financial relief. Exporters should strengthen their documentation and contracts accordingly to safeguard against future tax demands.

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