Exporters Not Liable To Pay Service Tax On Foreign Bank Charges Deducted From Export Proceeds: CESTAT

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that exporters cannot be saddled with service tax liability under the reverse charge mechanism on charges deducted by foreign banks while remitting export proceeds to India. The bench of Justice Ajayan T.V. (Member Judicial) and M. Ajit Kumar (Member Technical), allowed the appeal filed by Lingeswara Creation and set aside the service tax demand, interest, and penalties imposed by the department. The dispute arose after the department alleged that foreign banks situated abroad deducted certain charges from export sale proceeds before remitting the balance amount to the exporter’s Indian bank account. According to the department, such deductions represented consideration paid by the exporter for “Banking and Other Financial Services” received from foreign banks, thereby attracting service tax liability under Section 66A of the Finance Act, 1994 read with the reverse charge provisions. A show cause notice was issued alleging that the exporter failed to discharge service tax liability, did not obtain registration, and failed to file ST-3 returns. The adjudicating authority confirmed the demand along with interest and imposed penalties under Sections 77 and 78 of the Finance Act. The Commissioner (Appeals) also upheld the order, following which the matter reached the Tribunal. Before the Tribunal, the exporter argued that the issue was already settled in favour of exporters by earlier decisions of the Tribunal, particularly in the case of SKM Egg Products Export (India) Ltd., wherein it was held that service tax under reverse charge on foreign bank charges deducted from export proceeds is payable only by the actual service recipient, namely the Indian bank, and not by the exporter. Buy Now: Service Tax Judgements E-Compilation – April 2026 The appellant contended that while export proceeds were being remitted, the foreign buyer’s bank deducted certain charges before transmitting the amount to the exporter’s Indian bank. The Indian bank thereafter deducted its own charges before crediting the balance amount to the exporter. It was specifically argued that the service tax demand related only to charges retained by foreign banks and not those collected by the Indian bank, on which service tax had already been discharged. The exporter further argued that remittance of export proceeds is merely a “transaction in money”, which stands excluded from the definition of “service” under Section 65B(44)(a)(iii) of the Finance Act, 1994. Reliance was placed on judicial precedents including Vodafone India Ltd. and Paul Merchants Ltd. to submit that mere transmission of funds does not constitute a taxable service. It was also submitted that there was no contractual relationship or privity of contract between the exporter and the foreign remitting bank. According to the appellant, the foreign bank acted only on the instructions of the foreign buyer for fulfilling the buyer’s payment obligations, and therefore the exporter could not be treated as the recipient of any service provided by the foreign bank. The Tribunal accepted the exporter’s contention and observed that the show cause notice was based merely on assumptions without any supporting evidence to establish a service provider-service recipient relationship between the exporter and the foreign banks. The Bench noted that there was no agreement, invoice, or documentary evidence showing that foreign banks had rendered any taxable service directly to the exporter. Referring to its earlier decision in Adayar Gate Hotel Ltd., the Tribunal reiterated that for levying service tax, the department must establish a clear nexus between the service activity and the consideration paid for such service. The Tribunal further emphasized that tax demands cannot be sustained on assumptions and presumptions. It held that in the absence of proof showing that the exporter had engaged the foreign banks or received any taxable service from them, the entire demand was unsustainable. The Bench also found merit in the exporter’s argument that the Indian bank, and not the exporter, was the actual recipient of any banking service rendered by the foreign intermediary banks. The Tribunal relied heavily on earlier rulings including SKM Egg Products Export (India) Ltd., Theme Exports Pvt. Ltd., and Dileep Industries Pvt. Ltd., where similar service tax demands had been quashed. Distinguishing the Madras High Court ruling in BGR Energy Systems Ltd., relied upon by the department, the Tribunal observed that the facts of that case involved issuance of bank guarantees through intermediary foreign banks and were entirely different from simple remittance of export proceeds. The Tribunal ultimately held that no service tax liability could be imposed on the exporter under reverse charge in respect of foreign bank charges deducted from export proceeds. Accordingly, the impugned order was set aside and the appeal was allowed with consequential relief. Case Details Case Title: Lingeswara Creation Versus Commissioner of Central Excise and Service Tax Citation: JURISHOUR-1140-CES-2026(CHE) Case No.: Service Tax Appeal No.40056 of 2017 Date: 05.05.2026 Counsel For Appellant: J.V. Niranjan, Advocate Counsel For Respondent: J. Aparna, Advocate Click Here To Read Order Read More: JURISHOUR | TAX LAW DAILY BULLETIN : 6 May, 2026

Exporters Not Liable To Pay Service Tax On Foreign Bank Charges Deducted From Export Proceeds: CESTAT

Membership Required

Latest articles

GSTR-5A Filing for OIDAR Services: GST Compliance Rules Every Foreign Digital Platform Must Know

No Service Tax Recovery Notice Maintainable After Voluntary Reversal Of CENVAT Credit Pointed Out During Audit: CESTAT

CESTAT Quashes Rs. 29.72 Lakh Service Tax Demand on Rent-a-Cab Services

Campus Placement Fees Collected From Students Not Taxable Under Service Tax: CESTAT

More like this

GSTR-5A Filing for OIDAR Services: GST Compliance Rules Every Foreign Digital Platform Must Know

No Service Tax Recovery Notice Maintainable After Voluntary Reversal Of CENVAT Credit Pointed Out During Audit: CESTAT

CESTAT Quashes Rs. 29.72 Lakh Service Tax Demand on Rent-a-Cab Services

About us

Company

Categories