In a significant ruling on cross-border intra-group services, the Mumbai Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has allowed the appeal filed by DBS Bank India Limited, setting aside the service tax demand of approximately covering the period from April 01, 2013 to June 30, 2017, along with penalties under Sections 76, 77, and 78 of the Finance Act, 1994. The Tribunal held that the Indian branch/subsidiary of a foreign bank, while performing credit assessment, loan structuring, disbursement, and monitoring functions for External Commercial Borrowings booked at the Singapore head office, does not qualify as an ‘intermediary’ under Rule 2(f) of the Place of Provision of Services Rules, 2012.
The CESTAT clarified that for any activity to qualify as an ‘intermediary service’ under Rule 2(f) of the Place of Provision of Services Rules, 2012, there must be a minimum of three parties involved, with the intermediary arranging or facilitating a main supply between two principals without providing the main supply on his own account. When an Indian branch or subsidiary of a foreign bank performs functions like credit assessment, loan structuring, disbursement, and monitoring for its head office in connection with External Commercial Borrowings, such activities cannot be classified as intermediary services because the Indian entity and the foreign head office constitute a single legal person rather than two distinct entities.
The services rendered by the Indian entity to its head office are performed on its own account and not as a facilitator of any main supply between two separate principals. The place of provision of such services falls under Rule 3 of the POPS Rules, being the location of the service recipient in Singapore, and the services qualify as exports outside the taxable territory, thereby falling outside the scope of service tax levy under the Finance Act, 1994, added the Tribunal.
The Division Bench comprising S.K. Mohanty (Judicial Member) and M.M. Parthiban (Technical Member) made several critical observations while examining the nature of the relationship between DBS Bank India and DBS Singapore. First, the Tribunal noted that the Indian branch and the Singapore head office were not two distinct legal persons but one and the same legal entity, with the Indian operations being merely a branch of the Singapore-based bank that was later converted into a wholly owned subsidiary under RBI’s policy framework.
The RBI had introduced the scheme of domestic incorporation of foreign banks in the wake of the 2008 global financial crisis to protect local retail depositors, ease resolution processes, and afford greater regulatory comfort. Since the Indian office and Singapore head office constituted a single legal person, the Tribunal found no legal basis to treat the activities performed by the Indian entity as services rendered by one person to another person for the purpose of service tax levy.
The Tribunal further examined the specific clauses of the agreement dated 28.05.2015 and observed that the Indian branch merely performed functions like cultivating client relationships, performing credit analysis, recommending credit risk to the head office, negotiating contractual terms, checking facility agreements, and monitoring loans. The actual decision to grant loans and the assumption of all risks including credit risk, liquidity risk, interest rate risk, and foreign currency risk rested entirely with DBS Singapore.
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The Indian branch had no authority to enter into credit agreements with Indian borrowers on its own, and all such agreements were executed by DBS Singapore alone. The remuneration received by the Indian branch was calculated as 20% of the ascertained income based on a formula involving expected loss, cost of capital, and benefit of capital, and was independent of the consideration involved in the main lending transaction, added the Tribunal.
The Tribunal also relied upon the CBIC Circular No. 159/15/2021-GST dated Sep 20, 2021, which laid down three essential criteria for classifying any activity as ‘intermediary services’. These criteria are: first, the involvement of a minimum of three parties where the intermediary arranges or facilitates the main supply between two principals; second, the existence of two distinct supplies, namely the main supply between the principals and the ancillary supply of arranging or facilitating such main supply; and third, the intermediary service provider must have the character of an agent, broker, or any other similar person who arranges or facilitates the main supply without providing the main supply himself.
The Tribunal found that none of these three criteria were satisfied in the present case because the transaction involved only two parties, namely the Indian branch and DBS Singapore, with no third party involved; there was no separate main supply and ancillary supply; and the Indian branch was providing services on its own account to its head office rather than acting as an intermediary arranging supplies between two distinct principals.
Briefly, the case revolves around DBS Bank India Limited, which was originally registered in India as a foreign branch of DBS Bank headquartered in Singapore under the Banking Regulations Act, 1949. With effect from March 01, 2019, the Indian branch was converted into a wholly owned subsidiary known as DBS Bank India Limited, following the RBI’s scheme for domestic incorporation of foreign banks. During an EA-2000 Audit conducted by the tax department, it was discovered that the bank had received certain income from its Singapore head office during the financial years 2012-13 to 2015-16 under the heads of ‘Commission & Brokerage’ and ‘Miscellaneous Income’ without paying any service tax.
The department scrutinized an agreement dated May 28, 2015 between the Indian branch and DBS Singapore and concluded that the Indian entity was providing services such as origination/referral, structuring, coordination, credit assessment and approval, disbursement, monitoring, and credit facility management to DBS Singapore in connection with External Commercial Borrowings (ECB) to Indian borrowers. The department treated the Indian entity as an ‘intermediary’ between DBS Singapore and Indian borrowers, thereby invoking Rule 9(c) of the Place of Provision Rules, 2012, and demanded service tax along with interest and penalties under Sections 77 and 78 of the Finance Act, 1994. The Commissioner of CGST & Central Excise, Mumbai South, confirmed these demands.
