High Court holds Rule 2B of Service Tax Determination of Value Rules in respect of foreign exchange conversion services valid vis-àvis 67(1)(i) and 67(4) of Finance Act, 1994 – Explains the rationale of valuation mechanism under Rule 2B.
Facts:
The petitioner alleged that respondent levied service tax with respect to remittances made by foreign buyers in foreign currency, although the petitioner was not liable to pay service tax on the amounts of foreign currency remitted to India. Further, if at all service tax becomes applicable, the same can be only on the gross charges levied by the bank for the services rendered i.e. on commission or conversion charges and cannot be on the whole amount of the foreign remittance as provided in the rules, especially when the prescription for determination of value by the rules is specifically made subject to the provisions of sub-sections (1),(2)&(3) of section 67.
Held:
Examining Explanation 2 to section 65B(44), the Court held that such exemption does not apply to conversion of currency from one form to another, and hence, no exemption can be claimed insofar as the respondentbank converts the foreign remittance to Indian currency. Circular No.163/14/2012 –ST dated 10/07/2012 also does not apply to the services of conversion of money, which is the issue in dispute in this case. What is dealt with in the said circular is the remittance of foreign currency in India from overseas. Remittances and conversion both are distinct events and it is the latter that is a taxable event.
As regards the application of service tax valuation rules, the Court held that the prescription of determination of value for taxable service by rules u/s. 67(4), is not to the exclusion of the previous sub-sections of section 67, but is subject to the provisions of the said section. Sub-clauses (i), (ii) & (iii) of section 67(1) also speak of ascertainment and how the value has to be determined, providing sufficient guidelines to the rule making authority. Although the petitioner is correct, insofar as accepting that he is liable to service tax only on the charges (commission and exchange) levied by the respondent bank, which constitutes consideration in money and thereby gross amount charged in terms of section 67(1)(i), it does not prevent the authorities from examining whether there is consideration in other than money terms, which is not ascertainable, in which event tax will have to be levied as prescribed in the rules.
In the context of Rule 2B of the Service Tax (Determination of Value) Rules, 2006 the petitioner contended that when the bank purchases the currency at Rs.45/$ and sells the same at a higher amount, the margin would be in terms of money and so long as it is not specifically charged by the bank, that would go beyond the prescription of “gross amount”. The Court however noted that when the bank purchases currency against rupee (which is conversion service) the bank does not receive any consideration in terms of money. The bank could purchase foreign currency as permissible under the various enactments and sell it immediately or later when prices may go up or fall. Therefore, at the time of such purchase i.e. conversion the consideration is unascertainable. This consideration since not crystallised in terms of money is not ascertainable as gross amount charged. It is this unascertainable component which statute permits to be ascertained by section 67(4) read with Rule 2B.
Analysing Rule 2B, the Court noted that the rule does not levy tax on any higher amount received by the bank when selling such foreign currency purchased at a higher price, at a later point; nor is the liability affected if the bank suffers a loss, in selling it for a lesser price at the latter date. The valuation of service is done, as on the date of sale/purchase and with reference to RBI rate, which necessarily presumes that none involved in “money changing” would purchase a particular currency, at a higher rate than RBI prescribed rate. Thus in the example, if RBI reference rate is Rs. 45.50/$, the difference of 50 paise per dollar is the ostensible consideration received by the bank for each dollar.
The Court therefore held that it cannot be said that service tax is charged with reference to the remittances. The entire remittance amount is taken only for valuation purpose and that too units of currency alone and the tax is levied only on that component, which the bank stands to gain by purchasing the currency at a lower rate than the RBI reference rate. Therefore, this prescription of the measure in the rules as sanctioned by the statute is perfectly in consonance with the statutory provisions.
As regards Rule 6(7B) of the Service Tax Rules, the petitioner contended that such option shall be exercised on the total Indian currency converted from foreign currency in a year and therefore maximum service tax liability per year cannot exceed Rs. 6,000/-. Negating the contention, the Court held that such option shall be exercised against every taxable event i.e. for each of the transactions in a year and not on the total Indian currency converted from foreign currency in that year.
