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Informist, Friday, Apr. 24, 2026

 

NEW DELHI – The Supreme Court will decide on the liability of Indian banks to pay service tax on foreign bank charges under the reverse charge mechanism in export or import transactions. The top court issued a notice to ICICI Bank on a plea by the Commissioner of Service Tax, Mumbai, seeking to levy service charge on the bank for being the recipient of service from foreign banks on the latter's charges to importers or exporters.

 

In export of goods, ICICI Bank provided services to the exporters for collection of the remittances made by the overseas buyers towards the proceeds of exports. In a cross-border transaction, this would typically involve the issue of documentary credit by opening a letter of credit from the buyer or importer abroad through their foreign bank in the importing country, through the exporter's bank in the country of export.

 

This mechanism of issuance of letter of credit by banks provides assurance to the exporter avoiding any uncertainty of payment. Similarly, the importer is being protected against the risk of default by the exporter, since valid documents like export invoice, shipping bill, and bill of lading are presented by the exporter to their bank for effectively transferring the title of the export goods to the buyer abroad.

 

If an exporter sells a product, the foreign banks would deduct some charges and remit the net amount to the exporter's bank situated in India, in this case ICICI Bank. Thereafter, ICICI Bank would convert proceeds of export received at the prevailing applicable exchange rate and credit the money to the Indian exporter's bank account in Indian rupees. In respect of imports, ICICI Bank provided services for Indian importers in issuing, amending letter of credits for imports, making payment in foreign currency to the supplier abroad on receipt of documents covering the imports.

 

The service tax department said that the transaction where the foreign banks were recovering certain charges for processing import or export documents regarding remittances of money to India, the banks in India, such as ICICI Bank, are the recipient of service and therefore they are required to pay service tax. Accordingly, the service tax department issued demand notices to ICICI Bank for the period 2012 to 2017.

 

ICICI Bank said that during the collection of foreign remittances for the exporters in India, the foreign banks deduct charges from the remittance amount of the exporter and remit the net amount to the banks in India, as the Indian banks act as an agent of their customer. Therefore, the bank was not the service recipient and no service tax can be levied on them.

 

Further, in the case of import of goods by an Indian entity, the importer alone makes payment of the price of the goods and the bank issuing letter of credit is not involved in such payment, said ICICI Bank. The foreign bank charges are paid by the Indian importer alone and also borne by them separately and payment for these charges are not being made by the Indian bank, said ICICI Bank.

 

At 1453 IST, shares of ICICI Bank were down 1.3% at INR 1,330 on the National Stock Exchange.  End

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Reported by Surya Tripathi

Edited by Ashish Shirke

 

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