The Customs, Excise & Service Tax Appellate Tribunal (CESTAT) Mumbai has held that Indian banks are not liable to pay service tax under the reverse charge mechanism (RCM) on charges deducted by foreign banks while processing export remittances.
The bench of S.K. Mohanty (Judicial Member) And M.M. Parthiban (Technical Member) has observed that the Indian Bank is not the recipient of any service rendered by the Foreign Bank and, therefore, there is no liability to pay service tax on a reverse charge mechanism.
The verdict came in a long-running dispute involving Bank of Baroda, which had challenged a September 25, 2016 order from the Commissioner of Service Tax-I, Mumbai. The original order had confirmed a demand for service tax of ₹17.06 crore, interest, and penalties, holding the bank liable as the “recipient” of services from foreign correspondent banks.
Bank of Baroda, like other Indian banks, facilitates exporters in collecting payments from overseas buyers through three modes:
- Do Not Send — exporter sends documents directly to the foreign buyer.
- Bank to Customer — exporter’s bank sends documents to the importer via courier.
- Bank to Bank — exporter’s bank sends documents to the importer’s bank abroad.
In such transactions, foreign banks deduct their processing charges from the remittance before transferring the net amount to Indian banks. The tax department had argued that these deductions amounted to services rendered to Indian banks, attracting service tax under Notification No. 30/2012-ST.
Following a 2014 show cause notice, the Commissioner ruled that Bank of Baroda was liable under Section 66B and 68 of the Finance Act, 1994, along with penalties under Sections 76 and 77.
The tribunal observed that Indian banks act merely as agents for exporters and are not the actual recipients of services from foreign banks. No consideration flows from the Indian bank to the foreign bank; charges deducted abroad are borne by the exporter, not the bank. As per the Supreme Court’s rulings in Bhayana Builders and Intercontinental Consultants, only amounts constituting consideration for taxable services can be included in the valuation.
The bench further noted that the 2014 trade notice from the Mumbai Commissionerate, which the department relied on, was based on interim orders and did not hold binding legal authority.
Setting aside the Commissioner’s order, CESTAT ruled that “confirmation of service tax liability on Indian banks in export transactions… does not stand legal scrutiny.” The demand, interest, and penalties were quashed, and the appeal was allowed in favour of Bank of Baroda.
Case Details
Case Title: Bank of Baroda Versus Commissioner of Service Tax
Case No.: Service Tax Misc. Application No. 86201 of 2024
Date: 08.08.2025
Counsel For Appellant: CA Mehul Jivani
Counsel For Respondent: AR S.K. Yadav
Mariya is the Senior Editor at Juris Hour. She has 5+ years of experience on covering tax litigation stories from the Supreme Court, High Courts and various tribunals including CESTAT, ITAT, NCLAT, NCLT, etc. Mariya graduated from MLSU Law College, Udaipur (Raj.) with B.A.LL.B. and also holds an LL.M. She started as a freelance tax reporter in the leading online legal news companies like LiveLaw & Taxscan.
