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Service Tax Exemption on ADB & IFC Loans Announced

18 Jun 2012

The CESTAT (Mumbai Bench) in a recent interim decision has examined the tax immunity granted to transactions of the Asian Development Bank (ADB) and the International Finance Corporation (IFC). Taxand India examines the facts of the case to discover what impact, if any, the likely outcome will have on the taxpayer.

Facts of the case
Coastal Gujarat Power Ltd., 'the Taxpayer', a Tata Group company, had raised External Commercial Borrowing from ADB and IFC (from their branches located outside India) for its Ultra Mega Power Project. Apart from interest, the taxpayer made certain other payments such as commitment charges, upfront fees, arrangement fees, agency fees and out of pocket expenses.

Under clause 1 of Article 56 of the ADB Act, 1966, and section 9 (a) of Article VI of the IFC Act, 1958, certain immunities are granted to the ADB and IFC Bank exempting its assets, property, income, operations and transactions from all taxation and from all customs duties. Consequently, no service tax was paid (under the reverse charge mechanism) by the taxpayer on the above payments made to ADB and IFC.

Taxand India digs deeper into the case, including a look at the contentions of the taxpayer and the revenue

Taxand's Take

This is an important decision which prima facie decides the issue, relating to levy of service tax on charges in relation to funding by ADB, IFC and other international agencies for infrastructure projects of national importance such as the Ultra Mega Power Project. The ADB, IFC or any other international agencies are granted immunity from taxation as they are set up for encouraging economic development. These international agencies are set up under international convention for augmenting economic growth and hence enjoy supremacy (under the Constitution) over the domestic laws. These aspects of Constitutional importance were brought to the notice of the Tribunal and were also appreciated by the Tribunal while granting stay.

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Mukesh Butani
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