In a significant case, the Supreme Court has held that the issuance of a corporate guarantee on behalf of group companies without consideration is not a taxable service and no need to levy service tax.
The department has challenged the dropping of proceedings initiated against the assessee, M/s Edelweiss Financial Services Ltd., for having provided a ‘corporate guarantee’ on behalf of its subsidiaries located within and outside India.
The department issued a show cause notice proposing, the recovery of Rs. 97,956,437, consisting of guarantees to overseas companies for which consideration had been received and guarantees provided free of charge to their Indian subsidiaries, for rendering taxable services under Section 65(105) (zm) of the Finance Act, 1994, till June 30, 2012, and services as defined in Section 65B(44) for the period thereafter, until March 15, 2015.
The adjudicating authority held that receipt of commission from overseas companies as consideration for the export of services was not taxable. Insofar as domestic facilitation was concerned, the definition in Section 65(12) of the Finance Act, 1994, did not extend to corporate guarantee, which, unlike ‘bank guarantee’, finds no specific enumeration as ‘other financial services’ until June 20, 2012. For the period thereafter, the absence of ‘consideration’ for facilitating a corporate guarantee’ excluded such activities from coverage under the definition of ‘service’ in Section 65B(44) of the Finance Act, 1994.
On appeal, CESTAT held that the assessee had not received any consideration while providing a corporate guarantee to its group companies. No effort was made on behalf of the Revenue to assail the above finding or to demonstrate that issuance of corporate guarantee to group companies without consideration would be a taxable service.
The respondent-assessee contended that issuance of a corporate guarantee to a group company without consideration would not fall within the banking and other financial services and is therefore not a taxable service. He would also read Section 65B (44) of the Finance Act 1994 to point out that the definition of service indicates that it relates to only those services that are rendered for valuable consideration.
The division bench of Justice Hrishikesh Roy and Justice Manoj Misra has observed that no service tax would be assessed on the corporate guarantees given by a parent company to its subsidiaries in absence of consideration.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to TaxscanAdFree. Follow us on Telegram for quick updates.
