The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that an exporter cannot be treated as the recipient of banking services merely because foreign or intermediary banks deducted charges while transmitting export proceeds from overseas buyers.
The bench of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) has observed that services involving the preparation and compilation of regulatory dossiers for obtaining overseas approvals for pharmaceutical products could not automatically be classified as “Scientific or Technical Consultancy Services”.
The appellant/assessee is a manufacturer and exporter of pharmaceutical products, received payments for its exports from foreign buyers through banking channels. During the transmission of these payments, foreign or intermediary banks deducted certain charges and remitted the remaining amount, which was ultimately credited to the exporter’s bank account in India.
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The department treated the assessee as the recipient of the services provided by the foreign banks. It reasoned that the bank charges reduced the amount ultimately received by the exporter and that the transmission of funds through banking channels facilitated the receipt of export proceeds.
On that basis, the Department demanded service tax from the company under the reverse charge mechanism.
The Tribunal, however, found that the Department had not produced any material showing that assessee had engaged the foreign banks, entered into a contractual arrangement with them, or was under an obligation to pay consideration to those banks for services provided to it.
The Bench observed that merely bearing the economic impact of a deduction during the remittance process would not automatically create a service provider-service recipient relationship between a foreign intermediary bank and the Indian exporter.
“For levy under Reverse Charge, the taxable relationship contemplated under the Finance Act, 1994 must first be established,” the Tribunal observed.
The CESTAT noted that the foreign buyer remitted the export consideration through its own banking arrangements. The participation of correspondent or intermediary banks in transferring the funds was essentially part of an inter-bank arrangement.
Therefore, in the absence of evidence that the exporter had engaged the foreign banks to provide services to it, service tax could not be imposed merely because the amount ultimately credited to the exporter’s account was net of certain banking charges.
The Tribunal noted that the same issue had arisen in assessee’s case for the earlier period from 2006-07 to 2010-11.
In its Final Order No. 30919/2020 dated September 9, 2020, the Tribunal had examined the taxability of deductions made by foreign banks while transmitting export proceeds and had set aside the demand.
The Bench found no material difference between the facts considered in the earlier proceedings and those involved in the present appeal. It further noted that the Revenue had not shown that the earlier decision had been stayed or reversed by a higher judicial forum.
The Tribunal consequently held that there was no justification to adopt a different view for the subsequent period.
It also referred to the decision in Eastman Exports Global Clothing Private Limited v. Commissioner of Central Excise and Service Tax, Coimbatore, in which it was held that amounts deducted during the transmission of export proceeds would not attract service tax in the absence of the necessary service provider-recipient relationship.
The demand under “Banking and Other Financial Services” was therefore set aside.
The second dispute concerned payments made by assessee to two foreign entities—DADA Consultancy and Pharpe Dr. D.R. Iban.
For marketing pharmaceutical products in foreign jurisdictions, the company was required to obtain approvals from the relevant regulatory authorities. Such approvals required the submission of applications and dossiers containing information relating to product composition, specifications, analytical results and other relevant particulars.
The assessee had engaged the two foreign entities to compile and prepare clinical and non-clinical overviews and other documents required for filing applications before overseas regulatory authorities.
The Department classified these activities as “Scientific or Technical Consultancy Services”. Its case was that the consultants possessed scientific and technical expertise, their teams included professionals from pharmaceutical and biomedical fields, and preparing the regulatory documents required an examination of scientific and technical information concerning the products.
The company contended that the foreign agencies had only compiled information already available with it or contained in published material and prepared the necessary regulatory dossiers and forms.
According to the assessee, the consultants did not conduct independent scientific research, experimentation or technical studies concerning its products. Nor did they provide advice or consultancy in any discipline of science or technology.
Accepting the company’s contention, the Tribunal observed that the essential character of a service must be determined from the activity actually undertaken and not merely from the professional qualifications of the service provider.
The Bench held that the possession of scientific or technical expertise by a consultant does not, by itself, convert every activity performed by that consultant into a scientific or technical consultancy service.
For an activity to fall within the disputed taxable category, there must be advice, consultancy or scientific or technical assistance provided by a scientist, technocrat, or science or technology institution or organisation in a discipline of science or technology.
“Preparation and compilation of documentation for regulatory filings from information already available with the appellant or in published literature cannot, without anything further, be equated with Scientific or Technical Consultancy,” the Tribunal stated.
The Bench once again relied on its 2020 decision in assessee’s own case. In that decision, involving the same foreign service providers and substantially identical activities, the Tribunal had followed the ruling in IPCA Laboratories Limited v. Commissioner of Central Excise and Service Tax, LTU, Mumbai.
It had held that services relating to obtaining permissions and registrations and satisfying regulatory requirements for marketing pharmaceutical products abroad could not, merely for that reason, be classified as scientific or technical consultancy services.
The Tribunal found no demonstrated change in either the nature of the services or the material facts for the period covered by the present appeal.
The CESTAT also took note of the company’s submission that it had discharged service tax on the payments under the category of “Management or Business Consultant Service”.
The amount paid under that category had been appropriated in the impugned order, while the adjudicating authority simultaneously confirmed the demand by reclassifying the same activity as “Scientific or Technical Consultancy Service”.
The Bench held that once the classification adopted by the Revenue was found unsustainable, the consequential demand based on that classification could not survive.
It accordingly ruled that services provided by DADA Consultancy and Pharpe Dr. D.R. Iban for preparing and compiling regulatory documentation and assisting in obtaining overseas regulatory approvals did not fall within the scope of scientific or technical consultancy services.
Since the principal service tax demands under both disputed categories were held unsustainable, the Tribunal also set aside the consequential demands for interest and penalties.
The Bench additionally observed that, concerning the regulatory consultancy services, assessee had already been paying service tax by classifying the activity under a different taxable category. The dispute was therefore essentially one relating to classification and interpretation.
The Tribunal held, did not warrant the imposition of a penalty for an alleged short payment arising solely from a different classification subsequently adopted by the Revenue.
The company had also challenged the computation of penalty under Section 76 of the Finance Act, 1994, considering the amendment that took effect on April 8, 2011. The Tribunal found it unnecessary to decide that issue separately because the substantive tax demands themselves had been set aside.
The CESTAT quashed the impugned adjudication order and granted consequential relief in accordance with law.
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