By TIOL News Service

MUMBAI, JAN 20, 2016: THE appellant BOB received services from M/s. Society for Worldwide Interbank Financial Telecommunication (SWIFT) which is a non-resident entity, not having an office in India; that BOB was utilizing the services of SWIFT network essentially to transmit, financial messages internationally which culminated in foreign exchange remittance transactions getting completed, between BOB and the intended recipient of the said foreign exchange, like banks, customers etc.; that BOB was paying commercial considerations to SWIFT for hiring the said services periodically.

Revenue wanted BOB to pay service tax on reverse charge basis under the category of "Banking and Other Financial Services" (BOFS) under sub clause (vii) of Section 65 (12) "provision and transfer of information and data processing" from 16-7-2001. The demand of Rs.47 lakhs for the period March 2005 to September 2008 was confirmed by the adjudicating authority and that for the earlier period was dropped; amount of tax already paid on 01.11.2008 was appropriated.

Before the CESTAT, the appellant inter alia submitted that tax under reverse charge is not payable for import of services prior to 18.04.2006 in view of decision in Indian National Ship Owners Association - 2009-TIOL-150-HC-MUM-ST as affirmed - 2011-TIOL-05-SC-ST. And moreover, as SWIFT is a society where all the commercial banks are member of the society and the services are provided only to members, therefore, principle of mutuality applies and society and members cannot be considered as two different persons; that the services cannot be said to be rendered by SWIFT to Bank. Reliance is placed on the decisions in Ranchi Club Ltd. - 2012-TIOL-1031-HC-JHARKHAND-ST, Sports Club of Gujarat Ltd. - 2013-TIOL-528-HC-AHM-ST, Matunga Gymkhana - 2015-TIOL-108-CESTAT-MUM & Indian Chambers of Commerce & Industry - 2014-TIOL-701-CESTAT-DEL.

It is also submitted that if at all the service tax on the services of SWIFT is payable, the same will be available to the appellant in the form of Cenvat Credit and to the extent of Cenvat Credit on such service, the service tax liability of the bank shall stand reduced. Therefore, the whole exercise of payment of service tax and availing the Cenvat Credit shall amount to 'revenue neutrality'. The appellant also harped on the point of limitation on the ground that Adjudicating Authority has refrained from imposing penalty by invoking Sec 80 of FA, 1994.

The AR reiterated the findings of the adjudicating authority.

After extracting the definition of "Banking and Other Financial Services" the Bench observed that the services would fall within its ambit if the following ingredients exist:

(i) Service is provided by

(a) a banking company

Or

(b) a financial institution

Or

(c) a non banking financial company

Or

(d) any other body corporate

Or

(e) any other person.

(ii) Service is of - 'provision and transfer of information and data processing'.

It is further observed -

Merits:

+ The appellant is receiving the services from SWIFT - the service involved is transfer of information and also includes data processing. As far as transfer of information, there is no dispute even by the appellant. As regard the provision of data processing the messages sent through SWIFT are encrypted and decrypted in SWIFT's central system and thereafter it is re-encrypted before the transaction to the beneficiary SWIFT customer. Thus the message data is processed at both locations to prevent data loss. This clearly shows that the data is processed in the entire process of transferring of messages through SWIFT operating centre.

+ The services provided by SWIFT involves providing of information related to financial transactions viz. transfer of funds; transfer of information contained in the said message after processing the data contained therein. The data contained in the said financial message when presented for processing is raw data which when processed become useful information for the customers viz. banks, financial institutions etc., who then use the said processed information to debit and credit the customers accounts accordingly, i.e., funds settlement between the banks.

+ The computer network operating systems i.e., SWIFT network, installed at BOB, SWIFT Network at Belgium and at the recipient's end, for whom the message is intended, manipulate raw data into information and likewise information systems typically take raw data as input to produce information as output.

+ From the discussions above, it appears that to facilitate transmission of financial messages, computer network systems known as SWIFT network are installed at BOB and at the receiver's end i.e. between all intended sender's and recipient's end and SWIFT network based at Belgium, which acts as the transporter/carrier of messages, receives, processes and transmits data between such intended users. Therefore, it appears that the entire activity of messaging of financial transactions with the intention to transfer funds, confirm receipt of such messages etc. is done exclusively with the objective to retrieve the information contained in the said financial message, process the same and then transfer the processed information to the respective customers, i.e. presenting and recipient banks, financial institutions etc., as the case maybe. After the processing is complete in all respects, such processed data leads to settlement of funds between BOB and the recipient banks.

+ It is clear that the activities appear to amount to provision and transfer of information and data processing in relation to banking and other financial services, as defined under the Act and clearly covered under the entry provided in sub-clause (a)(vii) of Section 65(12) i.e. "provision and transfer of information and data processing".

+ Moreover, there is no dispute that the SWIFT is a 'body corporate' and covered under the definition of 'Banking and Other Financial Services".

+ Moreover, the appellant being liable to pay the service tax is 'deemed service provider'. Therefore, the status of the appellant is required to be considered and not the status of service provider who is located outside India . For this reason, the appellant is undisputedly the deemed banking and other financial institution.

+ In view of Indian National Ship Owners Association case (supra), service tax is not payable prior to 18-4-2006, therefore, the demand of the period prior to 18-4-2006 is not sustainable .

Mutuality principle:

+ The relationship between the SWIFT and the Appellant is not like Club or Association and their members. Even in the case of club or association, if the members are paying for a specific service, the said payment in not exempted from service tax. What is not taxable is only the subscription charges paid by the members of association. Moreover in the present case, SWIFT is acting as a business organization and charging their service charges from the bank on the basis of actual quantum of service provided to the banks. The banks are not paying some subscription to the SWIFT but they are paying towards the actual quantum of services received by them from SWIFT. In view of this fact, it is clear that the transaction between the Bank and the SWIFT is purely a business transaction; therefore the principle of mutuality does not exist in such transaction.

CENVAT - Revenue neutrality:

+ The bank is providing various services, some of the services are taxable and some are exempted. Therefore, it cannot be decided that the entire service tax payable on services of SWIFT can be allowed as Cenvat Credit. We do not agree that it is a case of revenue neutrality . However, if the appellant is able to satisfy the concerned jurisdictional authority that the service is used for providing the taxable services, Cenvat Credit shall be allowed.

Limitation:

+ There are two separate provisions, one is for the invoking extended period i.e. proviso to Section 73(1) and other is Section 80 under which if a reasonable cause is shown, penalty can be waived. Therefore, merely because Section 80 was invoked, it cannot be said that proviso to Sec 73(1) shall not apply. Both provisions have separate ingredients. In the present case the appellant have not disclosed the data related to service charges paid to SWIFT to the department. Therefore, as there is a suppression of the fact on the part of the appellant, proviso to Section 73(1), gets correctly invoked. Therefore, demand is not hit by time bar. However as the issue involved interpretation of definition of "Banking and Other Financial Services", there is a reasonable cause for not imposing the penalty by invoking Section 80.

Conclusion:

(a) The demand pertaining to the period prior to 18-04-2006 is set aside.

(b) The demand of service tax for the period from 18-04-2006 along with interest is maintained. No penalty is imposable.

(c) The appeal is partly allowed.

(See 2016-TIOL-216-CESTAT-MUM)