Inward remittance - Service Tax liability
NOVEMBER 19, 2014
By S B Parikh
THIS Article is with reference to CBEC Circular No. 180/06/2014-ST dated 14.10.2014 on the subject, 'Levy of service tax on activities involved in relation to inward remittances from abroad to beneficiaries in India through Money Transfer Service Operators (MTSOs) - reg.'
2. Western Union is a major Money Transfer Service Operator (MTSO) operating worldwide. In India, Western Union has appointed many banking agents, government organizations and private sector institutions as their agents. The case of Paul Merchants Ltd. and others - 2012-TIOL-1877-CESTAT-DEL who were agents of Western Union is being widely referred. The main issue involved in this case was whether services of such agents in relation to money transfer from abroad can be treated as export of service or not. In this case, the Tribunal has held that service of Indian agents was 'business auxiliary service' being provided to Western Union; and by majority it was held that the activity of agents amounts to export of service. This case covers the period of positive list regime, i.e. prior to 1.7.2012, when the Export of Services Rules, 2005, were in force.
Some observations made by Hon'ble CESTAT in this case are as under (underline supplied):
Para 3:
"In this business the person located abroad approaches any of the offices of the Western Union or its agents and give money to be remitted to a person in India. The office abroad charges the person abroad commission for remitting money to India. They convert the foreign exchange into Indian rupees and pay the recipient in India following a system to ensure the identity of the person to whom the money is delivered. No charges are levied from the recipient of money in India. PML gets their remuneration from Western Union by sharing the commission collected from the person abroad. They also make some profits due to changes in exchange rate between the date of receipt of money abroad and date of delivery of equivalent Indian Rupees in India. However this profit is subject to the risk of loss if the exchange rate changes adversely for the Western Union and its agents."
Para 5:
"PML appointed sub-agents within the territories allotted to them to establish a large number of outlets in the area to make it easy for the recipient in India to get the money easily without much travel and hassles. PML compensates these sub-agents by sharing the commission received by them from Western Union which commission itself is received from the person located abroad remitting the money to India."
Para 70.3:
"Thus, the Export of Service Rules, 2005 and Taxation of Services (provided from outside India as received in India) Rules, 2006, are basically the rules for determining the place of consumption of Services. These rules in the budget of 2012-13 have been replaced by Place of Provision of Service Rules, 2012, the Rule 3 of which states that the place of provision of a service shall be the location of the service recipient, (who is the service consumer)."
[Comments of author:
Rule 14 of PoPS Rules, 2012, prescribes order of application of rules. Accordingly, where provision of a service is, prima facie, determinable in terms of more than one rule, it should be determined in accordance with the rule that occurs later among the rules that merit equal consideration. Rule 9 specifically covers intermediary services and so, Rule 3 is not applicable for this service. For the services covered under Rule 9, the PoP is the location of service provider (not recipient). This aspect was not discussed in the case of Paul Merchants Ltd. as the period covered under this case was prior to commencement of applicability of PoPS Rules, 2012. Thus, the observation made by Hon'ble CESTAT regarding PoPS Rules, 2012, could be treated as 'per incuriam'.]
Para 76 (iv):
"Money transfer service is being provided by the Western Union from abroad to their clients who approached their offices or the offices of their Agents for remitting money to friends/relatives in India. The service being provided by the agents and sub-agents is delivery of money to the intended beneficiaries of the customers of WU abroad and this service is "business auxiliary service", being provided to Western Union. It is Western Union who is the recipient and consumer of this service provided by their Agents and sub-agents, not the persons receiving money in India."
3. The question "Who is the service receiver?" has been answered at Para 5.3.3 of CBEC's Education Guide as follows:
"5.3.3 Who is the service receiver?
Normally, the person who is legally entitled to receive a service and, therefore, obliged to make payment, is the receiver of a service, whether or not he actually makes the payment or someone else makes the payment on his behalf."
In some cases, Receiver of service may be different from the person/beneficiary to whom service has been rendered by service provider.
Examples:
1. Mr. A arranges a Reception on the occasion of his son's marriage. He engages a caterer to prepare and serve food to guests. Now, the question arises, who is the receiver of service of the caterer, Mr. A or the guests? Though the caterer renders service directly to guests, the receiver of his service is Mr. A only and not the guests because, they have not ordered for the service of the caterer and they are not obliged to make payment for the same.
2. M/s. B engages a courier company for delivery of consignments to their customers. Though courier company delivers consignments to customers of M/s. B, the recipient of service of courier company is M/s. B only; not their customers.
Similarly, in case of money transfer, the service recipient is foreign remitter and not the beneficiary located in India.
4. Following clarification has been given in the new Circular No. 180/06/2014-ST dated 14.10.2014 by superseding earlier Circular No. 163/14/2012-ST dated 10.07.2012. Foreign MTSO have appointed Indian Banks / financial entities as their agents in India, who provide agency/representation service to such MTSO for furtherance of their service to beneficiary in India. The agents are paid a commission or fee by MTSO for their services. In such case, step-wise sequence of transactions has been narrated and following clarifications have been given at serial numbers 2, 3 and 4 of the Table given in the new Circular (emphasis supplied):
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Clarification given in Board's circular
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Author's comments
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S.No.2: The Indian bank or other entity acting as an agent to MTSO in relation to moneytransfer, facilitates in the delivery of the remittance to the beneficiary in India. In performing this service, the Indian Bank/entity facilitates the provision of Money transfer Service by the MTSO to a beneficiary in India.For their service, agent receives commission or fee. Hence, the agent falls in the category of intermediary as defined in rule 2(f) of the Place of Provision of Service Rules, 2012.
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Money transfer service is not provided by MTSO to beneficiary in India. This service is provided by MTSO to foreign remitter/transferor, who is its client.
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S.No.3: Service provided by an intermediary is covered by rule 9 (c) of the PoPS Rules, 2012. As per this rule, the place of provision of service is the location of service provider. Hence, service provided by an agent, located in India (in taxable territory), to MTSO is liable to service tax. The value of intermediary service provided by the agent to MTSO is the commission or fee or any similar amount, by whatever name called, received by it from MTSO and service tax is payable on such commission or fee.
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Agreed, in view of definition of 'intermediary', as given below:
""intermediary" means a broker, an agent or any other person, by whatever name called, who arranges or facilitates a provision of a service (hereinafter called the 'main' service) or a supply of goods, between two or more persons, but does not include a person who provides the main service or supplies the goods on his account".
This service of intermediary does not qualify as export of service under Rule 6A of ST Rules, 1994, as the place of provision of service is not outside India. Service tax is leviable on commission/ fee paid by MTSO to intermediary, even though it is received from abroad in convertible foreign exchange.
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S.No.4 (If the Indian bank/ entity/ agent/ sub-agent charges amount separately to the person who receives remittance): As the service is provided by Indian bank/ entity/ agent/ sub-agent to a person located in taxable territory, the Place of Provision is in the taxable territory. Therefore, service tax is payable on amount charged separately, if any.
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Agreed. For service as 'intermediary', Indian agent receives commission/fee from MTSO. In addition, if the agent charges separately to the beneficiary who receives remittance, such charges are not towards the service in the capacity of 'intermediary', but such charges are towards the 'main service' of Indian bank/ entity, provided to beneficiary. Indian bank/ entity is required to pay service tax on such amount charged separately to beneficiary/transferor, if any.
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As per the new Circular, agents of MTSO are working as 'intermediary', so, the 'place of provision of service' is location of service provider (agent) and so, agents are required to pay service tax on commission/fee received from MTSO. However, benefit of small scale exemption upto value of Rs.10 lakh under Notification No. 33/2012-ST dated 20.06.2012 may be available to some agents, subject to provisions and conditions of that Notification. As per the Proviso (i) to this Notification, taxable services provided by a person under a brand name or trade name, of another person are not eligible for benefit of this Notification. It is possible that Department may view that the agents of MTSO provide service under the brand name or trade name of MTSO and so agents are not eligible for small scale exemption. This view may not be correct inasmuch as agents provide their agency service to MTSO and such agency service is not provided under brand name or trade name of MTSO.
5. Generally, MTSOs like Western Union give commission/fee, as fixed by them, and MTSOs do not reimburse the amount of service tax to agents. As the agents are not in position to recover the amount of service tax from MTSO, it is quite possible that agents may recover the amount of service tax from beneficiary or deduct the amount of service tax from the remittance payable to beneficiary. Indian beneficiary/transferor is left with no option but to bear the burden of service tax on the service provided by agent to MTSO.
6. If we consider foreign MTSO as service provider and Indian beneficiary as service receiver, the beneficiary would be required to pay service tax under reverse charge mechanism on the value of service provided by foreign MTSO. Suppose, MTSO does not charge any commission/fee to remitter, but deducts its charges from the remittance and pays balance amount to beneficiary, whether Indian beneficiary has to pay service tax on such charges in reverse charge mechanism? This method of deducting service charges from remittance has been adopted by banks while sending export proceeds. In this regard Trade Notice No. 20/2013-14-ST-I dated 10.02.2014 issued by Commissioner, Service Tax-I, Mumbai, may be referred. In this Trade Notice, it has been inter alia clarified that the services are provided by foreign bank to the bank in India and not to the Indian exporter and so, in case where foreign bank recovers charges for processing of import/export documents regarding remittance of foreign currency, the banks in India would be treated as recipient of service and, therefore, required to pay service tax. This Trade Notice is applicable where transaction between foreign bank and Indian bank is on principal to principal basis; whereas, the Circular dated 14.10.2014 is applicable where the Indian bank/financial entity works as an agent of foreign MTSO.
7. Now, I attempt to answer two crucial questions in respect of service of MTSO and its agents.
To whom the Indian bank/entity (working as an agent of MTSO) provides service?
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Probable Answer
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Justification
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MTSO
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As per Para 2 and S.No.3 of the Table given in the new Circular, Indian bank / financial entities provides agency/representation service to MTSO.
As the Indian agent has entered into a contract with foreign MTSO, foreign MTSO can be termed as a receiver of service provided by Indian agent. Aforesaid case law of Paul Merchants Ltd. supports this view.
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Beneficiary in India
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As per S.No.4 of the Table given in the new Circular, if Indian bank/ entity/ agent/ sub-agent, charges amount separately to the beneficiary, the service is provided by Indian bank/ entity/ agent/ sub-agent to a person located in taxable territory (beneficiary).
When the Indian beneficiary approaches to the agent of MTSO, he is required to fill up and sign a form prescribed by the MTSO and provided by the Agent. By virtue of signing this form by beneficiary and acceptance of that form by agent, it can be said that the Indian beneficiary/ transferee is legally entitled to receive the service of Indian bank/ entity/ agent/ sub-agent, though he makes payment for this service or someone else (i.e. foreign remitter) makes payment on his behalf.
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To whom foreign MTSO provides service? (In other words, who is recipient of service of foreign MTSO?)
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Probable Answer
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Justification
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Foreign remitter
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As the foreign remitter enters into contract with MTSO for transfer of money, he is a recipient of service provided by MTSO. Aforesaid case law of Paul Merchants Ltd. supports this view.
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Beneficiary in India
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As per S.No.2 of the Table given in new Circular, there is a provision of money transfer service by MTSO to beneficiary in India.
When the Indian beneficiary approaches to the agent of MTSO, he is required to fill up and sign a form prescribed by the MTSO and provided by the Agent. By virtue of signing this form by beneficiary and acceptance of that form by agent, it can be said that the Indian beneficiary/ transferee is legally entitled to receive the service of money transfer provided by MTSO, though he makes payment for this service or someone else (i.e. foreign remitter) makes payment on his behalf.
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I am of the view that Indian beneficiary cannot be treated as receiver of service of foreign MTSO, as he has not hired the service of MTSO. Though he is a beneficiary of service, he cannot be called as a receiver of service of MTSO. Examples given at Para 3 of this Article may be referred.
8. In first paragraph of the recently issued Circular No. 180/06/2014-ST dated 14.10.2014, it has been inter alia mentioned that the clarification given in Circular No. 163/14/2012-ST dated 10.7.2012 covers the scenario where the Indian bank or financial institution provides services on principal to principal basis to the foreign bank/entity, on its own account, and thus the service is covered by the general rule, i.e. rule 3 of the Place of Provision of Service Rules, 2012 (wherein the PoP is location of recipient). This conclusion seems to be perfectly in order. It is, therefore, not understood as to why the earlier Circular dated 10.7.2012 has been superseded by the new Circular dated 14.10.2014.I am of the view that the clarification given in the former Circular dated 10.7.2012 is still valid in view of the comments given below:
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Sl. No.
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Clarification given in earlier Circular dated 10.07.2012 (superseded)
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Comments with reference to new Circular dated 14.10.2014
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1
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There is no service tax per se on the foreign exchange remitted to India from outside for the reason that transaction in money does not constitute a 'service'.
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This clarification has been retained in the new Circular dated 14.10.2014 at S.No.1 of the Table given therein.
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2
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Conversion charges or fees levied for sending such money would also not be liable to service tax as the person sending money and the company conducting remittance are both located outside India.
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(1) Nothing has been mentioned in this regard in the new Circular.
(2) As there is no change in relevant legal provisions during the period between issuance of two Circulars, there should be no change in this clarification.
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3
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Indian bank or financial institution who provides service to the foreign bank or any other entity is not liable to service tax as the place of provision of service shall be the location of recipient of service.
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(1) This clarification covers the scenario where the Indian bank or financial institution provides services on principal to principal basis to foreign bank/entity, on its own account (as mentioned in first paragraph of new Circular). In this situation the PoP of service is the location of recipient of service under Rule 3.
(2) Where the Indian bank or financial institution provides services as an agent of foreign MTSO, such service has to be treated as service of 'intermediary'. In this situation the PoP of service is the location of service provider under Rule 9. So, the service of Indian bank or financial institution, working at agent of MTSO, attracts service tax.
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9. To conclude, I am of the view that:
(1) There was no need to supersede Circular No. 163/14/2012-ST, dated 10.7.2012 in its entirety by Circular No. 180/06/2014-ST dated 14.10.2014. The former Circular covers the scenario where the Indian bank or financial institution provides services on principal to principal basis to the foreign bank/entity, on its own account; whereas, the later Circular covers the situation where the Indian bank or financial entity provides service as an agent of foreign MTSO.
(2) The view mentioned in the new Circular to the effect that MTSO provides money transfer service to beneficiary/transferee needs to be re-examined in as much as the client of MTSO is remitter/transferor, who is the receiver of service.
Barring the above mentioned two points, clarifications given in Circular dated 14.10.2014 seem to be in order and accordingly, Indian agents and sub-agents of MTSO like Western Union, are required to pay service tax on their charges/fees/commission either received from MTSO or received from Indian beneficiary, subject to availability of small scale exemption. There is every chance that MTSO would not reimburse the amount of service tax to its agents and ultimately Indian beneficiaries have to bear the service tax though most of them belong to economically weak class.
This in itself should be a convincing reason for the powers to be to consider issuing an exemption notification. After all, isn't the inward remittance received by the families in India the fruit of sweat and toil of our labour class working in the arid lands?
(The views expressed by the author are strictly personal)
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