The Mumbai Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that services rendered by an Indian banking office to its Singapore head office in connection with External Commercial Borrowings (ECB) could not be treated as intermediary services merely because the Indian office interacted with Indian borrowers.
The Bench of S.K. Mohanty (Judicial Member) and M.M. Parthiban (Technical Member) concluded that there were no strong grounds to hold that the services provided to the Singapore head office in relation to ECB financing were taxable as “intermediary services”. Consequently, the service tax demands and penalties confirmed in the impugned order were held to be legally unsustainable.
The dispute originated during an EA-2000 audit of the bank’s books of accounts. The Department noticed income recorded under “Commission & Brokerage and Miscellaneous income” for Financial Years 2012-13 to 2015-16, which had been received from DBS Singapore without payment of service tax.
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The Department examined an agreement dated May 28, 2015 and noted that the Indian office was undertaking several activities connected with lending transactions, including origination and referral, structuring and coordination, credit assessment and approval, disbursement, monitoring and credit facility management. According to the Department, these activities were performed by the Indian office as an “intermediary” between DBS Singapore and Indian borrowers.
On that basis, the Department invoked Rule 9(c) of the Place of Provision of Services Rules, 2012, which prescribed the location of the service provider as the place of provision in the case of intermediary services.
The Department subsequently issued a show cause notice dated October 17, 2018 and a statement of demand dated October 1, 2019, covering the periods from April 1, 2013 to March 31, 2016 and April 1, 2016 to June 30, 2017 respectively. The demand was accompanied by interest and proposals for penalties under Sections 77 and 78 of the Finance Act, 1994. The Commissioner confirmed the proposals, prompting the appeal before CESTAT.
Before the Tribunal, the bank argued that it was providing support services to DBS Singapore in connection with the latter’s ECB business involving Indian borrowers.
The activities included origination and referral, development of potential client relationships, structuring and coordination of lending arrangements, credit analysis, evaluation of borrower creditworthiness, negotiation of contractual terms, examination of facility agreements, collateral verification, disbursement, monitoring of loans and follow-up of instalments.
The bank contended that these activities were performed for DBS Singapore on its own account and not as an agent or broker facilitating a separate supply between DBS Singapore and Indian borrowers.
It further submitted that DBS Singapore alone had the authority to decide whether an ECB loan would actually be granted and on what terms. The Indian office could not independently offer or agree to the lending terms without approval from DBS Singapore.
Accordingly, the bank maintained that the services were covered by the general rule under Rule 3 of the Place of Provision of Services Rules, 2012, under which the place of provision was generally the location of the recipient. Since the recipient was DBS Singapore, the bank claimed that the services qualified as being provided outside India and were not liable to service tax in India.
The Tribunal identified two principal questions for determination.
First, it had to decide whether the services supplied by the Indian banking office to DBS Singapore could legally be classified as “intermediary services” for the purpose of service tax.
Second, it had to determine whether the bank was liable for penalties under Sections 76, 77 and 78 of the Finance Act, 1994.
The dispute involved transactions during April 1, 2013 to June 30, 2017 and therefore fell within the post-negative-list service tax regime introduced from July 1, 2012.
The Tribunal examined Rule 2(f) of the Place of Provision of Services Rules, 2012. The provision defined an intermediary as a broker, agent or other person who arranges or facilitates provision of a main service or supply of goods between two or more persons, while expressly excluding a person who provides the main service on his own account.
Rule 3 generally provided that the place of provision of a service would be the location of the recipient. However, Rule 9(c) specifically prescribed the location of the service provider as the place of provision for intermediary services.
The classification was therefore crucial. If the Indian office was an intermediary, Rule 9 could potentially make the services taxable in India. If it was providing services to the overseas entity on its own account, the general place-of-provision rule could apply.
One of the Tribunal’s most significant findings arose from the legal relationship between the Indian office and DBS Singapore.
The Tribunal noted that the Indian operation had originally functioned as a foreign branch of DBS Bank headquartered in Singapore. Subsequently, pursuant to the Reserve Bank of India’s policy permitting foreign banks to establish wholly owned subsidiaries in India, DBS Bank India Limited was established and the Indian business was transferred to it with effect from March 1, 2019.
On examining this background, the Tribunal held that the Indian office and the Singapore head office were not two different persons but constituted the same legal person for the relevant branch structure.
The Tribunal observed that there was therefore no legal basis for treating activities performed by the Indian office for its Singapore head office as services rendered by one person to another person for the purpose of bringing them within the taxable category. On this ground itself, the Tribunal held that the service tax demand could not be sustained.
The Tribunal thereafter examined the agreement dated May 28, 2015 in detail to determine whether the activities could independently qualify as intermediary services.
The agreement provided that the Indian branch would originate credit facilities, manage relationships with Indian companies, conduct credit analysis and perform several related functions. These included evaluating credit risk, recommending credit risk to the head office, negotiating contractual terms, checking facility agreements, resolving legal issues, examining collateral and monitoring loans.
However, the Tribunal placed considerable emphasis on the fact that DBS Singapore retained responsibility for the credit facilities booked at the head office and assumed the associated risks, including credit, liquidity, interest-rate and foreign-currency risks.
Most importantly, the Tribunal found that only DBS Singapore was authorised to enter into credit agreements with Indian borrowers and make the final decision concerning ECB borrowings. The Indian office did not independently determine the lending transaction.
This distinction became central to the Tribunal’s conclusion that the Indian office was not acting as a conventional intermediary between two independent principals.
The agreement provided for remuneration to the Indian office based on a revenue-sharing formula.
The head office was required to pay 20% of the ascertained income relating to credit facilities booked at the head office and originated by the Indian office. The 20% remuneration was divided among origination/referral, structuring/coordination, credit assessment and approval, and disbursement, monitoring and credit facility management.
The Tribunal observed that the compensation represented an arrangement for computing the revenue split pertaining to loans booked at the head office. It noted that the remuneration formula took into account factors such as expected loss, cost of capital and benefit of capital.
According to the Tribunal, the arrangement demonstrated that the activities between the Indian branch and the Singapore headquarters could not simply be characterised as services rendered between two separate persons.
The Tribunal also relied upon the principles relating to intermediary services clarified by the Ministry of Finance in Circular No. 159/15/2021-GST dated September 20, 2021.
Although the dispute arose under the Service Tax regime, the Tribunal considered the clarification relevant because the GST definition of intermediary substantially carried forward the concept contained in the earlier Service Tax Rules.
The clarification identifies several essential characteristics of intermediary services.
The Tribunal noted that an intermediary arrangement ordinarily requires a minimum of three parties: two parties involved in the main supply and a third person who arranges or facilitates that supply.
An activity involving only two parties cannot ordinarily constitute an intermediary service.
The Tribunal explained that intermediary services involve a main supply between two principals and an ancillary supply involving facilitation or arrangement of that main supply.
Where a person himself provides the main supply on a principal-to-principal basis, that activity does not fall within the intermediary concept.
The Tribunal further noted that the expression “arranges or facilitates” indicates a supportive or subsidiary role. An intermediary facilitates someone else’s main supply rather than providing that main supply itself.
The statutory exclusion for a person supplying goods or services on his own account was therefore considered significant.
Applying these principles, the Tribunal found that the necessary elements of an intermediary service were absent.
It observed that the Indian office, DBS Singapore and Indian customers could not be treated as three independent parties in the manner contemplated by the intermediary provisions. The Tribunal found no separate main supply and ancillary intermediary supply arrangement in the transaction under consideration.
It also found that the remuneration received by the Indian office was independent of the consideration involved in DBS Singapore’s provision of services to its customers.
The Tribunal consequently held that the activities were performed on a principal-to-principal basis on the bank’s own account and could not be characterised as intermediary services.
The Tribunal also considered its earlier ruling in Chevron Philips Chemicals India Pvt. Ltd., where services supplied by an Indian entity to an overseas entity were held not to constitute intermediary services where the Indian entity was not acting as an agent between the overseas entity and its Indian customers.
The earlier ruling emphasised factors such as the absence of authority to determine pricing or enter into contracts on behalf of the overseas entity, the independent contractor relationship and the absence of a direct linkage between the service consideration and the overseas entity’s sales.
The Tribunal also referred to decisions concerning Lubrizol Advance Materials and R.S. Granite Machine, where services performed on a principal-to-principal basis for overseas entities were similarly distinguished from intermediary services.
Importantly, the Tribunal noted that the Department had challenged the relevant Tribunal decision before the Supreme Court, but the Supreme Court dismissed the departmental civil appeal on January 29, 2024.
After considering the statutory provisions, contractual arrangement, nature of the activities, remuneration mechanism and judicial precedents, CESTAT concluded that the services provided to the Singapore head office in relation to ECB financial services could not be treated as taxable intermediary services.
The Tribunal specifically held that there were no strong grounds to sustain the allegation that the disputed activities were liable to service tax as intermediary services. As a result, the service tax demands and penalties imposed upon the bank were held to be legally unsustainable.
The Tribunal accordingly set aside the Order-in-Original and allowed the appeal. The order was pronounced in open court on August 17, 2026.
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