The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Principal Bench, New Delhi, has held that Letter of Credit (LC) charges recovered by a trading company from domestic buyers in connection with High Seas Sale (HSS) transactions cannot be subjected to service tax under the category of “banking and other financial services” when the LC is actually issued by a bank and the underlying transaction is predominantly a sale of goods.
The bench of Binu Tamta (Judicial Member) and P. V. Subba Rao (Technical Member) has observed that the relationship between STC and the HSS buyer was that of seller and buyer, and not service provider and service recipient. Merely recovering LC-related expenses from the buyer does not establish that a taxable financial service was rendered.
The appeal arose from an Order-in-Original passed by the Principal Commissioner, CGST, Delhi South Commissionerate. The Department had confirmed service tax demands against STC under the category of “banking and other financial services” under Section 65(12) of the Finance Act, 1994 for the period up to June 30, 2012, and under the post-negative-list service tax regime thereafter.
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The case concerned STC’s business model involving import of goods and their subsequent sale to domestic buyers through High Seas Sale agreements. A domestic buyer would approach STC with details of the goods required, including the foreign supplier and agreed price. STC would then arrange the import transaction and coordinate with an Indian bank for opening a Letter of Credit in favour of the foreign supplier or its banker.
After the foreign supplier shipped the goods, STC and the domestic buyer entered into an HSS agreement before the goods entered the Indian landmass.
As part of these transactions, STC recovered 0.54% of the LC value from the domestic buyer towards expenses incurred for opening the LC through the bank. In addition, STC charged a trading margin of 1.25% of the LC value.
The company maintained that these amounts formed part of the overall price payable for the imported goods sold under the HSS arrangement rather than consideration for a separate taxable service.
The Department, however, viewed the LC charges as separate consideration for arranging banking and financial facilities for the customers.
The dispute originated from a CERA audit of STC’s service tax records for 2007-08 to 2009-10. The audit objected to STC’s failure to pay service tax on the LC charges recovered from domestic buyers.
Based on the audit objection, the Department issued a Show Cause Notice dated October 19, 2012, proposing recovery of ₹4.03 crore in service tax on LC charges reimbursed during the relevant period. Penalties under Sections 76, 77 and 78 of the Finance Act, 1994 were also proposed.
Four further Show Cause Notices were subsequently issued for 2012-13 to 2016-17. The Commissioner ultimately confirmed a total demand of ₹3.12 crore, along with interest and penalties, by invoking the extended limitation period under the proviso to Section 73(1).
Before the Tribunal, STC argued that the LC was issued exclusively by the bank and not by STC. The company merely approached the bank for issuance of the LC in connection with the import transaction.
According to STC, the bank provided the actual payment guarantee to the foreign supplier. If the buyer failed to make payment, the bank was responsible for making payment in accordance with the LC. Therefore, STC argued, it could not be regarded as the provider of an LC or banking service.
STC further submitted that the recovered LC charges formed part of the cost of the imported goods sold to the HSS buyer. The buyer ultimately purchased the goods from STC, and the parties had a seller-buyer relationship rather than a service-provider relationship.
The department took the opposite position. It argued that STC was not merely selling goods but was also arranging banking facilities for its customers.
According to the Department, STC separately recovered LC opening charges, LC negotiation charges and bank charges from its customers. The Department pointed out that in several transactions such amounts were recovered through separate debit notes after the commercial sale transaction had been completed.
The Revenue relied upon Section 65(12)(a)(ix), which specifically referred to financial services including the issue of letters of credit. It contended that STC, being a body corporate or commercial concern, had arranged the LC facility for customers and had received consideration for that financial arrangement.
The Department also argued that the activity continued to be taxable after July 1, 2012 under the broader definition of “service” under Section 65B(44).
The central question as whether the agreement was essentially one for trading goods or for providing services involving facilitation of LC issuance.
The Tribunal noted that the agreement itself was titled a “High Seas Sale Agreement”, indicating that its predominant purpose was the sale of goods.
The Tribunal observed that STC had imported the goods ordered by the customer and thereafter sold those goods to the customer under the HSS arrangement. While STC had to coordinate with the bank for opening an LC to complete the import transaction, the actual guarantee of payment was provided by the bank and not by STC.
A key observation of the Tribunal was that the terms of the HSS agreement established a straightforward sale transaction.
The agreement specifically provided that the amount payable by the buyer included LC charges as well as all costs incurred by the seller. The Tribunal found this clause significant because it demonstrated that the LC-related expenses were incorporated into the consideration payable for the goods.
Consequently, the Tribunal held that the parties were in a seller-buyer relationship, and not in a service-provider and service-recipient relationship. Since this basic requirement for classification as a service was absent, the LC charges could not be treated as consideration for a taxable service.
The Tribunal then examined Section 65(12)(a)(ix) of the Finance Act, 1994, which covered specified financial services including the issue of letters of credit.
The Bench rejected the Department’s attempt to extend the provision to STC merely because the company had approached a bank for opening the LC and had subsequently recovered the bank charges from its buyer.
The Tribunal emphasized that only banks and entities engaged in banking or similar financial activities possess the authority and ability to issue an LC. The expression “other financial services” could not be stretched to cover an ordinary trading organization merely because it incurred an LC-related expense during a sale transaction.
CESTAT also referred to Circular No. 83/1/2006-ST dated July 4, 2006. The circular clarified that the expression “any other person” in the relevant statutory provisions was to be read ejusdem generis with the preceding categories.
The Tribunal noted that the circular treated “other financial services” as a residuary category covering services normally rendered by banks and financial institutions.
Since STC was a purely trading organization and was not engaged in banking or financial services similar to those provided by banks or financial institutions, the Tribunal held that it could not be brought within the taxable category.
The Department had alternatively argued that the transaction was taxable even after July 1, 2012 under the broader definition of “service”.
CESTAT rejected this argument as well.
The Tribunal noted that Section 65B(44) defines “service” as an activity carried out by one person for another for consideration, but expressly excludes an activity constituting merely a transfer of title in goods by way of sale.
Since STC was selling imported goods to the HSS buyer and was not authorised to issue the LC on behalf of the buyer, the Tribunal found that no separate service was rendered by STC. The transaction therefore fell within the exclusion relating to transfer of title in goods.
The Tribunal also relied upon earlier decisions to underline that the mere movement or recovery of money does not automatically make an amount “consideration” for a taxable service.
Referring to Indusind Bank Ltd. v. Commissioner of Service Tax, Chennai and B.G. Exploration & Production India Ltd. v. Commissioner of CGST & CX, Navi Mumbai, the Tribunal observed that there must be a service-provider and service-recipient relationship and the Department must establish that the amount received represents consideration for rendition of a service.
Thus, the fact that STC recovered the LC-related amount from its customer was insufficient, by itself, to establish service tax liability.
CESTAT also found support from its earlier decision in Indian Oil Corporation Ltd. v. Commissioner of CCE, Goa, which involved a similar High Seas Sale arrangement.
In that case, the Tribunal had held that where goods were imported by the seller in its own name and subsequently sold to the buyer on a principal-to-principal basis, expenses incurred before transfer of the goods formed part of the sale price and could not automatically be treated as consideration for Business Auxiliary Service.
Applying the same reasoning, the present Bench concluded that STC’s LC expenses, incurred in connection with the import transaction and recovered under the terms of the HSS sale, did not become taxable service consideration merely because they were separately identifiable.
STC had additionally argued that the LC charges represented pre-import expenses forming part of the transaction value of the imported goods.
The Tribunal noted that STC first paid the LC charges to the Indian bank and subsequently recovered those charges from the HSS buyer. The buyer also paid customs duty on the imported goods.
In these circumstances, the Tribunal held that imposing service tax on the same LC-related amount would effectively result in another layer of taxation, particularly when the HSS agreement expressly included the seller’s costs in the consideration for the goods.
The Tribunal further addressed STC’s alternative argument that the transaction constituted a composite arrangement.
It found that the principal purpose of the HSS agreement was the sale of goods, while procuring the LC was merely connected with completing that sale.
Accordingly, the LC-related activity could not be artificially separated from the principal sale transaction for imposing service tax on the amount recovered from the buyer. The Tribunal referred to the Supreme Court’s decision in Union of India v. Mohit Minerals Pvt. Ltd., concerning composite supplies, and applied the principle that the principal nature of the transaction has to be considered rather than artificially splitting an integrated commercial arrangement.
STC had also challenged the invocation of the extended period of limitation, particularly in respect of the earlier period covering 2007-08.
The appellant argued that the Department had already conducted a CERA audit in 2010 and had knowledge of the issue, while the first Show Cause Notice was issued only on October 19, 2012. It therefore contended that the extended limitation period could not be invoked in the absence of fraud, collusion, wilful misstatement or suppression of facts.
However, the Tribunal did not find it necessary to decide the limitation question because it had already decided the substantive issue in favour of STC.
CESTAT concluded that the impugned service tax demand had no legal basis. It held that STC was a trading organization and that the LC charges recovered from HSS buyers were connected with the sale of imported goods rather than consideration for banking or financial services.
The Tribunal accordingly held that no service tax was chargeable on the LC charges recovered by STC from its HSS buyers.
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