The Mumbai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that service tax is not payable under the reverse charge mechanism (RCM) on arrangement fees paid to the Asian Development Bank (ADB) and the International Finance Corporation (IFC).
The bench of S.K. Mohanty (Judicial Member) and Sanjiv Srivastava (Technical Member) set aside the service tax demand raised against IDFC First Bank Ltd., relying on earlier judicial precedents and clarificatory circulars issued by the Central Board of Indirect Taxes and Customs (CBIC).
The appeal arose from proceedings initiated against IDFC First Bank Ltd., which, during the relevant period, was registered as an Infrastructure Finance Company (NBFC) with the Reserve Bank of India and was engaged in providing banking and financial services. The bank had availed loans from ADB, headquartered in Manila, Philippines, and IFC, headquartered in Washington D.C., USA, and had paid arrangement fees in foreign currency for processing those loans.
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During an audit, the department observed that the bank had not discharged service tax liability under the reverse charge mechanism on the arrangement fees paid to these overseas entities. According to the department, the services received from ADB and IFC were taxable in India and the recipient was required to pay service tax under RCM.
The bank, however, contended that both ADB and IFC enjoy statutory exemptions from taxation under their respective governing statutes in India. It relied on the provisions of the Asian Development Bank Act, 1966, and the International Finance Corporation (Status, Immunities and Privileges) Act, 1958, which grant immunity from taxation to the organizations, their assets, income, operations, and transactions.
Rejecting the bank’s contention, the department initiated show cause proceedings and sought to levy service tax on the arrangement fees paid to the two international financial institutions. The adjudicating authority confirmed the demand, and the Commissioner (Appeals) subsequently upheld the order on March 5, 2018, prompting the bank to approach the Tribunal.
The CESTAT noted that the issue was no longer res integra and had already been decided by a coordinate bench in Coastal Gujarat Power Ltd. v. Commissioner of Service Tax, Mumbai-I, wherein it was held that services provided by ADB and IFC are exempt from service tax in view of the statutory immunities available under the ADB Act and IFC Act.
The Tribunal further observed that although the Revenue had challenged the Coastal Gujarat Power ruling before the Supreme Court, the appeals were subsequently withdrawn and dismissed by the apex court on July 29, 2019.
The Bench also took note of CBIC Circular No. 83/02/2019-GST dated January 1, 2019, which clarified that services provided by ADB and IFC are exempt from GST. Thereafter, CBIC issued another circular on January 15, 2019, clarifying that the same principle would apply mutatis mutandis to the service tax regime as well.
According to the Tribunal, these circulars, coupled with the withdrawal of the Revenue’s appeal before the Supreme Court, left little room for dispute regarding the taxability of such services.
The CESTAT held that the bank was not liable to pay service tax under the reverse charge mechanism on arrangement fees paid to ADB and IFC. Consequently, the impugned order was set aside and the appeal was allowed.
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