Corporate guarantee and buyer credit interest outside service tax when no consideration is received and upfront fee is interest

Service tax was held not leviable on a corporate guarantee furnished for holding companies or associate enterprises where the record showed no consideration received by the assessee; the demand and penalty were set aside. The Offshore Upfront Fee paid to foreign bankers on a buyer credit facility was treated as interest, not an independent fee for taxable services, because the evidence and bank communication showed it formed part of the RBI-guided credit arrangement. As interest on a loan or buyer credit transaction falls outside the taxable value, the demand on this component also failed and the dropping of demand was upheld.

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Issues: (i) Whether service tax was payable on corporate guarantee provided by the assessee on behalf of holding companies or associate enterprises when no consideration was received; (ii) Whether Offshore Upfront Fee paid to foreign bankers on buyer credit facility was interest or fee, and whether service tax was payable thereon.

Issue (i): Whether service tax was payable on corporate guarantee provided by the assessee on behalf of holding companies or associate enterprises when no consideration was received.

Analysis: The demand was founded on the assumption that the associates obtained loans at a lower rate and that the differential interest represented consideration. The record did not show any consideration received by the assessee from the financial institutions or from the associates for furnishing the corporate guarantee. In the absence of consideration, the activity could not be subjected to service tax.

Conclusion: Service tax was not payable on the corporate guarantee, and the demand and penalty were set aside in favour of the assessee.

Issue (ii): Whether Offshore Upfront Fee paid to foreign bankers on buyer credit facility was interest or fee, and whether service tax was payable thereon.

Analysis: The relevant circular treated interest on loan as outside the taxable value. On the evidence produced, including the bank's communication, the Offshore Upfront Fee was found to be nothing but interest on the buyer credit transaction under the RBI-guided arrangement, and not an independent fee for taxable services.

Conclusion: The Offshore Upfront Fee was interest and not liable to service tax, so the Revenue's appeal failed and the dropping of demand was upheld.

Final Conclusion: The assessee succeeded on the substantive tax issues, the demands were set aside or upheld as dropped, and the Revenue's challenge was rejected.

Ratio Decidendi: Service tax is not leviable where no consideration is received for furnishing a corporate guarantee, and interest on a loan or buyer credit transaction does not form part of the taxable value for service tax purposes.

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