The Customs, Excise & Service Tax Appellate Tribunal, New Delhi, has held that Letter of Credit (LC) charges recovered by The State Trading Corporation of India Ltd. (STC) from domestic buyers in high seas sale transactions cannot be subjected to service tax under the category of “banking and other financial services”.
The Tribunal found that the underlying transaction between STC and the domestic buyer was predominantly one of sale of imported goods on a high seas sale basis. The LC facility was arranged through a bank only to facilitate the import transaction, and the charges incurred for opening the LC formed part of the overall cost recoverable from the buyer under the High Seas Sale Agreement.
Background of the Dispute
STC, a Government of India international trading company, imported goods based on requirements placed by domestic buyers. For facilitating payment to overseas suppliers, STC arranged for Letters of Credit through Indian banks. After shipment of the goods, STC entered into High Seas Sale Agreements with domestic buyers before the goods entered the Indian landmass.
In addition to the trading margin, STC recovered an amount calculated at 0.54% of the LC value towards expenses incurred in opening the Letter of Credit. The Department treated these recoveries as consideration for providing “banking and other financial services” and demanded service tax.
The dispute covered both the period prior to 1 July 2012, when specified taxable service categories applied, as well as the post-negative-list period.
Issue Before CESTAT
The principal issue before the Tribunal was whether the High Seas Sale Agreement represented a transaction for sale of goods or whether STC was also independently rendering a taxable service by facilitating the issuance of Letters of Credit for domestic buyers.
The Revenue argued that arranging an LC and separately recovering charges for such arrangements constituted a financial facilitation service taxable under Section 65(105)(zm) read with Section 65(12)(ix) of the Finance Act, 1994.
STC contended that the LC itself was issued by the bank and not by STC. The recovery merely represented reimbursement of expenses incurred as part of the import and sale transaction. According to STC, its relationship with the high seas buyer was that of seller and buyer, rather than service provider and service recipient.
CESTAT’s Findings
The Tribunal examined the High Seas Sale Agreement and observed that its dominant purpose was clearly the sale of goods.
The agreement expressly provided that the amount payable by the buyer included LC charges and represented the entire amount payable to the seller, including all costs incurred by STC. This contractual arrangement demonstrated that LC expenses were part of the consideration connected with the sale transaction.
Accordingly, the Tribunal held that the relationship between STC and the high seas buyer was that of seller and buyer. The essential requirement of an independent service-provider and service-recipient relationship was therefore absent.
Only Banks or Similar Financial Entities Render the Relevant LC Service
CESTAT rejected the Department’s interpretation of “banking and other financial services”.
Although Section 65(12)(a)(ix) referred to services relating to the issue of Letters of Credit, the Tribunal observed that an LC is actually issued by a bank. STC merely approached its banker for opening the LC required for completing the import transaction.
The expression relating to banking and financial services could not be stretched to treat a trading organisation, which was neither a bank nor an entity carrying on activities similar to banking or financial institutions, as providing such a taxable service merely because it recovered the associated LC costs.
The Tribunal also relied upon Circular No. 83/1/2006-ST dated 04 July 2006, which clarified that the relevant statutory expressions must be understood in the context of services normally rendered by banks, financial institutions and similar service providers.
Post-Negative-List Period Also Not Taxable
The Tribunal reached the same conclusion for the period after 1 July 2012.
Under Section 65B(44) of the Finance Act, 1994, a “service” required an activity performed by one person for another for consideration. The Tribunal noted that STC was not authorised to issue the LC to the overseas supplier and was not rendering an independent financial service to the high seas buyer.
Its transaction remained a trading activity involving transfer of title in goods, which fell within the exclusion contemplated in the statutory definition of “service”.
Mere Flow of Money Is Not Consideration for a Service
A significant principle reiterated by the Tribunal was that every flow of money does not automatically constitute consideration for a taxable service.
For service tax to apply, the Department must establish the existence of a service-provider and service-recipient relationship and demonstrate that the amount received represents consideration for an identified taxable service.
Since STC incurred LC expenditure for facilitating its own import and sale transaction and subsequently recovered the same under the contractual arrangement with the buyer, recovery of that amount by itself could not create a taxable service.
LC Charges Form Part of High Seas Sale Transaction
CESTAT also referred to the principle applied in Indian Oil Corporation Ltd. v. Commissioner of CCE, Goa, where expenses incurred before transfer of goods in a principal-to-principal sale transaction were regarded as forming part of the sale price rather than consideration for a separate service.
In STC’s case, the High Seas Sale Agreement specifically incorporated all costs incurred by the seller into the consideration payable by the buyer. The Tribunal therefore held that the LC charges could not independently attract service tax.
Composite Nature of the Transaction
The Tribunal further observed that the primary object of the High Seas Sale Agreement was the sale of goods and that procuring an LC was merely an activity linked to completing that sale.
Referring to the principle recognised by the Supreme Court in Union of India v. Mohit Minerals Pvt. Ltd., CESTAT held that such a bundled transaction could not be artificially vivisected merely to levy tax on the LC component when the principal transaction was the sale of goods.
Thus, the LC charges recovered as part of the price of the goods could not be separated and subjected independently to service tax.
Limitation Issue Left Open
STC had also challenged part of the demand on limitation and argued that invocation of the extended period under Section 73(1) of the Finance Act, 1994 was unjustified.
However, since the Tribunal decided the substantive taxability issue entirely in favour of STC, it considered it unnecessary to examine the limitation question.
Final Decision
CESTAT held that STC was not providing banking or other financial services to the high seas buyers merely because it arranged an LC through its banker and recovered the related expenditure.
The impugned adjudication order was held to be devoid of merit and was set aside, and STC’s appeal was allowed.
Key Takeaway
Where a High Seas Sale Agreement establishes a principal-to-principal relationship of seller and buyer and LC expenses incurred through a bank form part of the agreed sale consideration, recovery of those expenses does not by itself constitute consideration for an independent banking or financial service.
The judgment also reinforces the wider service-tax principle that mere recovery or flow of money cannot create a taxable service unless an identifiable service is actually rendered for consideration.
