The Hon’ble Supreme Court has recently held in Commissioner v. M/s Edelweiss Financial Services Ltd., that no service tax would be levied on corporate guarantees provided by a parent company on behalf of its group companies as there is no consideration involved.
Facts:
The present case has arisen after the issuance of show cause notice by the Revenue (‘the Appellant’) against M/s. Edelweiss Financial Services Ltd. (‘the respondent’) which proposed a recovery of Rs. 97,95,62,947/-, comprising Rs. 3,22,01,255/- as service tax for providing a corporate guarantee to its overseas group companies for which consideration had been received and of Rs. 94,73,61,692/- towards corporate guarantees provided free of charge to its Indian group companies, for rendering taxable service under section 65(105) (zm) of Finance Act, 1994 (‘the Act’) till 30th June 2012 and 'service' defined in section 65B (44) of the Act for the period thereafter till March 2015.
The principal commissioner of GST & Central Excise, Mumbai East (‘Adjudicating Authority’) dropped the proceedings on 27.10.2017 initiated against the respondent for having provided a ‘corporate guarantee' without consideration on behalf of its Indian and overseas group companies and not discharging service tax liability thereto as a provider of banking and other financial services for the period prior to, and after, 30th June 2012.
Adjudicating Authority, after considering that corporate guarantees are distinct from bank guarantees, the same shall also not be covered under section 65(12) of the Act with respect to Banking and other financial services which includes bank guarantee. And also concluded that receipt of commission from overseas companies, being considered for export of services, was not taxable
Aggrieved by dropping of proceedings against the respondent, the Appellant approached the Customs Excise & Service Tax Appellate Tribunal (‘CESTAT’) which held that as far as domestic companies were concerned, the issuance of corporate guarantee to a group company without consideration would not fall under the definition of service as given under section 65B (44) of the Act.
Furthermore, CESTAT stated that the criticality of ‘consideration’ for the determination of the taxability of service, as defined in section 65B (44) of the Act for the disputed period after the introduction of the ‘negative list’ regime of taxation has been rightly construed by the Adjudicating Authority.
The Appellant, thus aggrieved, filed a Civil Appeal in the Hon’ble Supreme Court.
Held:
The Hon’ble Supreme Court after considering the submissions made and facts of the case, found that in the present case, the assessee had not received any consideration while providing corporate guarantee to its Indian group companies.
The Hon’ble Supreme Court found that there was no effort made on behalf of the Appellant to assail the above finding or to show that issuance of corporate guarantee to group companies in India without consideration would be a taxable service.
The Supreme Court also dismissed the contention raised by the Ld. Counsel of the Appellant that the matter should be admitted and tagged along with Civil Appeal No. 428/2020 @ Diary No.42703/2019 (Commissioner of Service Tax Audit II Delhi IV Vs. M/S DLF Cyber City Developers Ltd.) as the said case is similar to the present case on the ground that the Appellant has not been able to show that the factual matrix of the said case is identical to the present one.
The Hon’ble Supreme Court with the above findings, dismissed the Civil Appeal filed by the Appellant.
Our Analysis:
The Hon’ble Supreme Court decision is a significant ruling on the issue of whether corporate guarantees are taxable under the service tax regime. The Hon’ble Court held that corporate guarantees given without consideration are not taxable within the meaning of the Act.
Though this decision gives an idea on the general principles of taxability of corporate guarantees given by parent / group companies in relation to the borrowings or other transactions of subsidiaries / other group companies, it may not completely give an insight into the applicability of the provisions of GST law (Central Goods and Services Act, 2017 (‘CGST Act’)) on the subject matter.
Now, let us examine the applicability of the CGST Act on such similar transactions where corporate guarantees are given by the parent company on behalf of its group companies. The provisions of the CGST Act which relate to such transactions are discussed in brief below:
Section 7 of the CGST Act provides that all forms of supply of goods or services such as sale, transfer, barter, exchange, license, rental, lease, or disposal made or agreed to be made for consideration by a person in the course or furtherance of business would be treated as supply.
Section 7(1)(c) of the CGST Act read with schedule I of the CGST Act provides for activities to be treated as supply between related persons even if made without consideration.
Furthermore, entry no. 2 of schedule I provide that the supply of goods or services or both between related persons or between distinct persons as specified in section 25 when made in the course or furtherance of business will be treated as supply even if made without consideration.
As per the definition of related person under section 15 of the CGST Act has been provided where holding and subsidiary companies or directors or employees are treated as related parties for the purpose of entry no. 2 of schedule I.
Therefore, the corporate guarantee provided by the parent company on behalf of its related group company may be covered under the scope of supply even though there may not be any monetary consideration exchanged between the parent company and its related group company. So, these transactions may get attracted under the CGST Act.
Authored by Jitin Bharadwaj, Advocate at Metalegal Advocates. The views are personal and do not constitute legal opinion.