By TIOL News Service

MUMBAI, JUNE 15, 2018: THE brief facts of the case are that the Respondent had set up an Ultra-mega power project at Singrauli in the State of Madhya Pradesh and for the purpose of raising finance for this project, they availed External Commercial Borrowings (ECBs) from several overseas lenders.

Revenue was of the view that all the fees, charges paid by the Respondent to the foreign Banks fell under the category of taxable services of "Banking & Financial Services" and "Legal Consultancy Services" and service tax was payable thereon under reverse charge.

Incidentally, the assessee had deposited the service tax liability of Rs.13.53 crores together with interest of Rs.3.65 crores on all expenses and fees, except 'exposure fees' charged by various overseas banks and institutions who had lent loans to the respondent assessee.

As regards ‘exposure fees', it is the contention of the assessee that the same are an element of ‘interest' and in support they relied upon letters issued by the Bank confirming that no services had been rendered by the said US ExIm Bank to the Respondent in lieu of such 'exposure fee'.

The Commissioner of Service Tax, Mumbai, while confirming/appropriating the rest of the demand (without imposing any penalty) dropped the service tax demand on the element of "Exposure Fees" and, therefore, Revenue is in appeal before the CESTAT.

The AR adverted to the definition of Exposure Fees and Interest Rates mentioned in the "The Export-Import Bank of the United States (Ex-Im Bank) Policy and Planning Division Policy Handbook, June 2005" and submitted that exposure fees are akin to interest but it is not interest. In as much as Section 65B(30) of Finance Act, 1994 defines 'interest' as meaning interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim, similar rights or obligation) but does not include any service fee or other charges in respect of moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized and thus the 'Exposure Fee' can never be considered as an interest under the provisions of Finance Act, 1994.

The arguments of the AR were rebutted by the assessee respondent by a similar marathon submission.

The Bench after considering the same, in a verbose order, inter alia observed -

On merits - Exposure Fee, whether liable to Service Tax

++ The revenue has relied upon the terminology of the agreement as well as policy handbook to canvass that "Exposure fee" is not interest.

++ When the lender bank itself vide its three letters has clarified the position as to what is the intention and rationale behind charging "Exposure fee", we hold that the interpretation made by the revenue is not sustainable. We also find that in order to comply with the OECD agreement which required the US Exim Bank to give a break up of interest, they were charging the same into two components i.e Commercial Interest Reference Rates (CIRR) and Minimum Premium Rate (MPR). It is only for the convenience that CIRR was considered as ‘interest' and MPR was considered as "Exposure fee".

++ The revenue has relied upon the judgment of Supreme Court in case of CCE, New Delhi Vs. Connaught Plaza Restaurant Pvt. Ltd., New Delhi - 2012-TIOL-114-SC-CX to state that the common parlance test would be applicable in such case as "exposure fee" is never understood as "Interest". We are of the view that the term has to be understood not only with its terminology but on the basis of intention of the contracting parties. The US Exim bank vide its letter dt. 14.03.2014 has clarified that the Exposure fee is part of pricing for the loan (akin to the interest rate) and not fees for any service rendered to the borrower by the Exim Bank.

++ When the intention of the charging party is apparent, in that case it has to be considered that the said amount is a loan pricing element and not towards any service.

++ Coming back to definition of term Interest in terms of Section 65B(30) of FA, 1994, we find that the Interest is payable in any manner in respect of money's borrowed or debt incurred (including a deposit, claim, similar rights or obligation). In the present case based upon our above findings we have reached to the conclusion that the exposure fee is the manner of payment of interest of which the rate is arrived at on the basis of various factors associated with the borrowings. The amount of such Exposure fee is never fixed but is variable depending upon the factors as communicated by the US Exim Bank and clarified by the Bank. We, thus, after considering all the above factors, and in view of our findings as above hold that the "Exposure fee" charged by the US Exim bank cannot be considered as any service by the Bank to the Respondent but is only an interest and is not liable to any service tax.

Penalty (on confirmed demand):

++ We find that the issue involved the interpretation of law. There were many cases on the issue that whether the service of borrowing is liable to service tax on reverse charge basis which this Tribunal decided in the case of Tata Steel - 2015-TIOL-2464-CESTAT-MUM that the said service is taxable but by difference between two members and finally with the views of third member, hence the issue being of interpretation, the bona fide belief of the respondent that the services were not taxable is genuine.

++ Unless the ingredients of knowingly non-payment of service tax is established, the penalties under Section 76 or 78 cannot be imposed. We thus do not find any reason to impose penalty upon Respondent in respect of charges on which the service tax was paid belatedly by them but before the issuance of show cause notice.

Concluding that there is no merit in the appeal filed by the revenue, the impugned order was upheld and the Revenue appeal was dismissed.

(See 2018-TIOL-1852-CESTAT-MUM)