CESTAT Mumbai rules no service tax on corporate guarantees to subsidiaries without consideration received

CESTAT Mumbai ruled in favor of appellant regarding service tax levy on corporate guarantees provided to subsidiaries. The tax department demanded service tax based on notional income calculations under Transfer Pricing provisions of Income Tax Act, 1961, despite no actual guarantee fee being charged. The tribunal held that service tax applies only when consideration is received for services. Since appellant charged no commission or consideration for providing corporate guarantees to overseas subsidiaries, no service tax liability arose. The demand was deemed without merit and the appeal was allowed.

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Issues involved:
The issues involved in the judgment are the interpretation of the transaction as provision of bank guarantee, liability for payment of service tax, and the demand for service tax on corporate guarantees given to subsidiaries.

Summary:

Issue 1: Interpretation of transaction as provision of bank guarantee
The department interpreted the transaction as provision of bank guarantee, a taxable service under the Finance Act, 1994, and demanded service tax on corporate guarantees given to subsidiaries. The department issued a show cause notice seeking recovery of service tax. The matter was adjudicated by the Commissioner, confirming the demand and imposing penalties. The appellants appealed before the Tribunal.

Issue 2: Liability for payment of service tax
The department confirmed the service tax demand based on notional income calculated by the appellants as per Transfer Pricing requirements under the Income Tax Act, 1961. However, the Income Tax department had not charged any guarantee fee on the issuance of corporate guarantee to overseas companies. The Tribunal held that since no consideration was charged for providing the corporate guarantees, the appellants cannot be held liable for service tax. The Tribunal referred to a previous decision to support its conclusion.

Issue 3: Demand for service tax on corporate guarantees
The Tribunal noted that the order was affirmed by the Supreme Court, which found that the assessee had not received any consideration while providing corporate guarantees to group companies. As no consideration was involved, issuance of corporate guarantees without consideration was not considered a taxable service. The Tribunal set aside the impugned order and allowed the appeal in favor of the appellants.

In conclusion, the Tribunal ruled in favor of the appellants, setting aside the demand for service tax on corporate guarantees given to subsidiaries.

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