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In today's scenario, for the purpose of export of goods or services from India and import of goods or services to India, there are various requirements. Out of which, in case of export of goods/services, one requirement is forwarding of documents & receiving of money in foreign currency. In the same manner, for the purpose of import transactions, there is requirement of receiving of documents & making payment in foreign currency. In order to fulfill, the above-mentioned requirements i.e. forwarding of documents and realization of proceeds by way of receiving remittance in foreign currency or making payment in foreign currency, the banks in India are utilizing the services of foreign banks.

Practically, in a typical case of export from India, the exporter submits the documents to a bank in India and the bank in turn forwards these documents to the 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 foreign bank collects the payment from foreign importer and transfers it to Indian bank.

For the above-mentioned transactions, the intermediary bank in the foreign country charges certain amounts and these charges are recovered by them by deducting a specified amount from the total amount to be remitted to the Indian exporter. Now, question arises, whether the above-mentioned foreign bank services, constitutes a taxable activity under Service tax law or not? Before adverting to the merits of the issues about applicability of service tax on the same, we need to carefully analyze service tax provisions applicable w.e.f. 1-7-2012.

As, under this new system of levy of service tax, 'service' has been defined under clause 44 of newly inserted section 65B, which provides as follows:

any activity carried out by a person for another for consideration, and includes a declared service. On the reading of definition of service, it is clear that every activity which is carried out by a person to another for a consideration would constitute a service under Service tax law, hence chargeable to Service tax. However, the above-mentioned definition of service shall not include transaction in money i.e. if a person is engaged in the transactions in money; such transaction would not be deemed to be covered under the purview of Service tax. Now, for the given situation, one may raise a plea that the foreign banks are providing services for remittance of money in foreign currency to Indian banks and also making payment to foreign exporter in the foreign currency, hence, such transaction would be covered under 'Transaction in money', hence, not chargeable to Service tax.

For the same, it is hereby pertinent to mention that 'transaction in money' cannot be put at one place being numerous i.e. it is important to note that services related thereto should be specifically identified so that the levy of Service tax can be clearly established. Also, for the same, clarification has been mentioned in the Education Guide on Taxation of Services-dated 20.06.2012 issued by CBEC. The same can be mentioned as under:

2.6.3 Would the making of a draft or a pay order by a bank be a transaction only in money?

No. Since the bank charges a commission for preparation of a bank draft or a pay order, it is not a transaction only in money. However, for a draft or a pay order made by bank the service provided would be only to the extent of commission charged for the bank draft or a pay order. The money received for the face value of such instrument would not be consideration for a service since to the extent of face value of the instrument it is only a transaction in money.

2.6.4  Would the debt collection services or credit control services be considered to be transaction only in money? 

No. Such services provided for consideration are taxable. On the reading of above-mentioned clarification issued by CBEC, it can be said that transactions in money like deposits in or withdrawals from a bank account, advancement or re-payment of principal sum on loan to someone would not be liable to Service tax. However, if for the above-mentioned transactions, a commission or service charge is recovered, then, such charges would be deemed a consideration for transaction in money, hence liable for Service tax.

The same ratio can also be applied in the instant matter i.e. as the foreign banks are providing services for realization and payment of money in foreign currency and for the same, they are charging a fee, hence, fee charges would be a consideration for the services in relation to 'Transaction in Money', hence, liable for Service tax. In in this regard, a clarification through a Circular No. 163/14/2012-ST dated 10th July 2012 has been issued by CBEC, which makes a clarification on service tax on remittances of foreign currency. The same can be read as under:

Subject: Clarification on service tax on remittances - regarding. Concerns have been expressed in various forums regarding the leviability of service tax on the remittance of foreign currency in India from overseas.

2. The matter has been examined and it is clarified that there is no service tax per se on the amount of foreign currency remitted to India from overseas. In the negative list regime, "service" has been defined in clause (44) of section 65B of the Finance Act 1994, as amended, which excludes transaction in money. As the amount of remittance comprises money, the activity does not comprise a "service" and thus not subjected to service tax.

3. In case any fee or conversion charges are levied for sending such money, they are also not liable to service tax as the person sending the money and the company conducting the remittance are located outside India. In terms of the Place of Provision of Services Rules, 2012, such services are deemed to be provided outside India and thus not liable to service tax.

4. It is further clarified that even the Indian counterpart bank or financial institution who charges the foreign bank or any other entity for the services provided at the receiving end, is not liable to service tax as the place of provision of such service shall be the location of the recipient of the service, i.e. outside India, in terms of Rule 3 of the Place of Provision of Services Rules, 2012.

Thus, this Circular clarifies that no Service tax would be charged on the amount of foreign currency remitted to India from overseas, as it is mere transaction in money. Further, there would not be any Service tax incidence on the remittance charges levied for sending the money to India, as it is service provided outside India. In the same manner, when Indian Bank is charging from foreign Bank or foreign party for services provided in India, it would also not liable to pay service tax as the service recipient (foreign Bank or entity) is outside India, as a result of the same, location of service recipient is outside India, hence not taxable.

But, it is hereby pertinent to mention that the said Circular shall be applicable so only if both service provider and service receiver are outside India i.e. when a foreign importer directly approaches foreign banks for making remittance in foreign currency in India. In such a case, the person receiving money in India would not be the service recipient, he would be only beneficiary i.e. the person who approaches foreign banks for making remittance in foreign currency in India would be service receiver & foreign bank would be service provider and both will be outside India. In such a case, if foreign bank is charging any fee for making remittance in foreign currency in India, it would not be liable to Service tax because place of provision of service is outside India.

However, when a foreign bank forwarding the documents and making realization of proceeds by way of receiving remittance in foreign currency & remitted it to Indian bank, there is always correspondence between the foreign banks and banks in India. Further, amount charged for the same by the foreign bank is only informed to the bank in India. In this regard, the most interesting aspect is that importer or exporter in India is not even aware about these charges which are charged by the foreign banks. Beside this, in the cases 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. In the same manner, 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. In other words, for the above-mentioned transactions, the foreign bank deals only with the banks in India, not with the exporter/importer. On the combined reading of said accepted conventions, it is undoubtedly clear that for the above-mentioned transactions, the foreign banks are providing its services to the banks in India.

Further, 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 valid because for a person to be treated as recipient of service, it is necessary that he should know who is service provider and there should be an agreement to provide service between service provider and service receiver, which may be oral or written. But, for the above-mentioned transactions, the importer and exporter does not have any formal or informal agreement with the foreign bank and also don't knows quantum of charges which the foreign bank is recovering. On the basis of above-mentioned discussion, it can be said that the foreign banks is not directly providing its services to exporters or importer rater they are providing their services to the banks in India.

Thus, charges recovered by the foreign banks for processing of import/export documents regarding remittance of foreign currency and payment in foreign currency, the banks in India would be treated as recipient of service and therefore would be liable to pay Service tax under "Reverse-charge mechanism" as per the provisions of Notification no. 30/2012-ST dated 20.06.2012. Further, the foreign banks are providing above-mentioned services to Indian Banks from a location which is situated at a place outside India, hence the taxability of the service will be more specifically governed by Place of Provision Rules, 2012 (POP rules). Now, we move further to understand the determination of place of provision of services as provided in Place of Provision Rules, 2012 (POP rules). Default rule 3 provides that, the place of provision of service shall be deemed to be the place of location of service receiver.

However, this rule is applicable only when none of other rule applies. As per Rule 3 if a service is not covered by an exception under one of the later rules, and is consequently covered under this default rule, then the receiver's location will be considered as the place of provision of service. For the same, it is hereby pertinent to mention that for the above-mentioned transactions, the Indian banks maintains NOSTRO account in their record in order to maintain record of transactions with foreign bank. In the same manner, the foreign bank maintains VOSTRO accounts in their record. Thus, it can be said that the foreign bank is providing banking services in relation to account to the Indian banks.

Thus, the above-mentioned banking services would be governed by Rule 9 of Provision of Service Rules, 2012 which provides that the place of provision of following services will be determined on the basis of location of service provider. The clause regarding banking services as per Rule 9 can be mentioned as under:

Services provided by a banking company or a financial company, or a non-banking financial company to account holders. Now, one may raise a question, whether a foreign bank company will cover under the meaning of banking company. In order to resolve above-mentioned question, reference can be made of Section 5(d) of Banking Regulation Act, 1949, which specifically says a banking company shall include a banking company which is registered under Section 3 of the Companies Act, 1956 and also include a foreign bank company which fall within the meaning of Section 591 of the companies act, 1956 & engaged in banking services in India.

The same can be read as under:

As per Section 5(d) of Banking Regulation Act, 1949, company means any company as defined in Section 3 of the Companies Act, 1956 and includes a foreign company within the meaning of Section 591 of that Act. On the reading of above-mentioned clarification, it can be said that as, now a days, various foreign banks are providing banking services in India and registered under the Companies Act i.e. we can say that a foreign banks are complying with the conditions mentioned in Section 591 of the companies act as a result falling under the meaning of 'Banking Company' as defined under Reserve Bank of India Act, 1934.

Beside this, another requirement to be cover under Rule 9 is that banking services which are provided to accounts holder in the bank should be eligible to interest and the same is clear from the definition of "account" mentioned under Service tax law:

(b) 'account' means an account bearing interest to the depositor and includes a non-resident external account and a non-resident ordinary account; Now come to banking transactions in hand i.e. for the above-mentioned banking transactions, the banks in India maintains NOSTRO account in their record in order to maintain record of transactions with foreign bank vice-versa the foreign banks maintains VOSTRO accounts in their record on which no interest is payable. The same is clear from RBI master Circular no. 3/2012-13 dated 2nd July 2013, which clarifies that VOSTRO accounts are not eligible for interest. The relevant portion of above-mentioned circular can be mentioned as under:

4. Instructions regarding operations in the Rupee VOSTRO accounts (a) **** (f) Balances in such accounts will not qualify for payment of interest. On the reading of wordings of above-mentioned notification, it is clear that VOSTRO accounts are not eligible for the payment of interest i.e. no interest is payable on VOSTRO account. However, in order to cover under Rule 9, banking services should be provided in relation to account which bears interest.

On the basis of above-mentioned discussion, it can be said that as VOSTRO account is not cover under the definition of 'account' as it does not bears interest, hence banking services provided by foreign banks shall not be covered under Rule 9 of the place of provision rules, 2012.

Thus, as a conclusion, it can be said that the services provided by the foreign banks is not qualify as services provided to an account holder, thus, the place of provision will be determined by default Rule 3 which provides that location of service recipient shall be the place of provision of services. Hence, for the matter in hand, the place of provision of the services provided by the foreign banks will be location of service recipient i.e. in India. Thus, even after considering the place of provision rules 2012, the place of provision of foreign bank services would be in India, hence chargeable to Service tax.

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