Service Tax Under RCM on Foreign Bank Charges: CESTAT Delhi Exonerates Indian Exporter in Sarda Energy Case

Background and Context

A significant ruling has emerged from CESTAT Delhi concerning the liability of Indian exporters to pay service tax on foreign bank charges under the reverse charge mechanism (RCM). The Tribunal, in Sarda Energy And Minerals Ltd Vs Commissioner (Appeal) (CESTAT Delhi), Service Tax Appeal No. 53954 of 2023, decided on 25/09/2026, set aside a service tax demand of ₹1,88,022 (inclusive of cesses) along with the associated interest and penalty that had been confirmed against the appellant by the lower authorities.

The case arose from an audit of the appellant's books of accounts, during which it was observed that the assessee had recorded various expenses attributed to overseas entities — including charges described as "bank commission," "international bank charges," "stamping charges," "correspondence charges," and "bank charges against receipt of dividend." Payments of commission to overseas entities in connection with export of goods and import of services were also noticed. On this basis, a show cause notice dated 03/09/2019 was issued, invoking the extended period of limitation under the proviso to Section 73(1) of the Finance Act, 1994, and proposing recovery of service tax under the RCM framework.

The Assessee: Profile and Registration

The appellant, Sarda Energy And Minerals Ltd, holds Central Excise registration No. AAACR6149LXM001 and is engaged in the manufacture of Sponge Iron, Billets, Wire Rods, Ferro Alloys, Fly Ash Bricks, and allied products falling under Chapter Headings 72 and 27 of the CETA 1985 (5 of 1986). The assessee was availing Cenvat Credit on inputs, input services, and capital goods under the Cenvat Credit Rules, 2004.

The Demand: How It Was Computed

The audit identified the following period-wise expenses and corresponding service tax liability:

The total demand comprised Service Tax of ₹1,82,137 + Education Cess of ₹320 + Secondary and Higher Education Cess of ₹160 + Swachh Bharat Cess of ₹4,233 + Krishi Kalyan Cess of ₹1,172 = ₹1,88,022.

The show cause notice called upon the assessee to explain:

1. Why service tax of ₹1,88,022 should not be demanded under the proviso to Section 73(1) of the Finance Act, 1994, invoking the extended five-year limitation period read with Section 68(2) and Section 174(2) of the CGST Act, 2017;
2. Why interest should not be recovered under Section 75 of the Finance Act, 1994; and
3. Why penalty should not be imposed under Section 78 of the Finance Act, 1994 for alleged suppression of facts with intent to evade service tax.

Orders Passed by the Lower Authorities

Adjudicating Authority

The Adjudicating Authority, vide Order-in-Original No. 15/ST/AC/RPR-I/2021-22 dated 23.07.2021, confirmed the demand, ordered recovery of interest under Section 75, and imposed a penalty of ₹1,88,022 — equivalent to the service tax confirmed — under Section 78 of the Finance Act, 1994 read with Section 174 of the CGST Act, 2017.

Commissioner (Appeals)

The assessee challenged the adjudication order before the Commissioner (Appeals), CGST, Customs & Central Excise, Raipur, who upheld the order vide Appeal No. RPR-EXCUS-000-APP-064-22-23 dated 01.12.2022, holding:

"Accordingly, I hold that the demand of service tax amounting to Rs.1,88,022/- is recoverable from the Appellant under proviso to Section 73(1) of the Act. Regarding recovery of interest under Section 75 of the Act, I find that once demand is upheld the recovery of interest follows suit automatically and that there is no scope of discretion to waive the interest liability under the statute. Thus, I hold that they are liable to pay interest. Further, as there has been suppression of material facts and contravention of various provision of the Act and the Rules made thereunder with intent to evade payment of service tax, I hold that penalty is imposable on the Appellant under Section 78 of the Act."

Aggrieved by this, the assessee preferred the present appeal before CESTAT Delhi.

Arguments Advanced Before CESTAT

Assessee's Submissions

The learned counsel appearing on behalf of Sarda Energy contended: