Relief for Huawei: CESTAT Rules Corporate Guarantee not Taxable under Service Tax in Absence of Consideration [Read Order]

The Chandigarh Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that a corporate guarantee extended by an associated enterprise without any consideration is not taxable under the service tax regime.

Huawei Telecommunications India Co. Pvt. Ltd. had received demand notices from the Service Tax Department for the periods 2010–11 to 2017–18. The central allegation was that the overseas parent entity of Huawei provided corporate guarantees to banks in India on behalf of the Indian company, and such guarantees should be classified under "Banking and Other Financial Services" (BOFS), so attracting service tax under the reverse charge mechanism.

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The department relied on the Safe Harbour Rules under Income Tax law to assume a notional consideration of 2% on the guaranteed amount, arguing that even if no actual consideration was paid, the corporate guarantee conferred financial benefits, such as lower borrowing costs, on the appellant, making it a taxable service.

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The appellant’s counsel countered that no consideration was paid to its overseas parent for issuing the corporate guarantees and that, in the absence of such consideration, the activity does not qualify as a taxable service under Section 65B(44) of the Finance Act, 1994. They further submitted that a corporate guarantee is not equivalent to a bank guarantee and should not be automatically categorized under BOFS.

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The department’s counsel argued that the benefit derived by Huawei in the form of lower interest rates and financial support justified treating the guarantees as taxable services. They also argued that the value of the benefit could be quantified using notional valuation rules even in the absence of direct consideration.

The two-member bench comprising Judicial Member S. S. Garg and Technical Member P. Anjani Kumar observed that the definition of service under the pre-GST regime requires both a service and a consideration. The tribunal found no evidence of consideration paid or payable for the corporate guarantees and ruled that the imposition of a notional 2% value was legally unsustainable.

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The tribunal held that the mere economic benefit to the appellant is not sufficient to constitute taxable service in the absence of monetary consideration. The tribunal set aside the demand of Rs. 14.66 crore raised on the corporate guarantees and also quashed the associated interest and penalties.

To Read the full text of the Order CLICK HERE

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