2019 (9) TMI 1123 - AT - Service Tax

Service tax not applicable on corporate guarantees; 'Offshore Upfront Fee' considered interest, not taxable.

The Tribunal held that the appellant-assessee was not liable to pay service tax on corporate guarantees provided to banks/financial institutions, as no ... Taxability of corporate guarantee without consideration - Consideration as essential element of taxable service - Burden of proof to establish indirect consideration or benefit - Classification of upfront fee as interest or fee - Interest on loan excluded from taxable value by revenue circularTaxability of corporate guarantee without consideration - Consideration as essential element of taxable service - Burden of proof to establish indirect consideration or benefit - Appellant-assessee not liable to pay service tax on corporate guarantees given to banks/financial institutions on behalf of holding companies/associates where no consideration was received. - HELD THAT: - The tribunal recorded that it is an admitted fact the appellant-assessee did not receive any consideration either from the financial institutions or from their associates for providing the corporate guarantees. The department's demand rested on assumptions and presumptions that associates obtained loans at lower rates and that the differential interest constituted consideration, but no evidence was produced to substantiate such indirect benefit. In the absence of proof of consideration or demonstrable benefit flowing to the guarantor, the activity cannot be treated as a taxable service under Banking and Financial Institutions. Applying the principle that consideration is an essential element of a taxable service and that the revenue bears the burden to establish such consideration, the tribunal held that no service tax was payable in respect of the guarantees, and consequently any penalties premised on the demand could not be sustained. [Paras 3, 4]Impugned orders confirming demand of service tax on corporate guarantees set aside; no service tax or penalty payable.Classification of upfront fee as interest or fee - Interest on loan excluded from taxable value by revenue circular - Offshore Upfront Fee charged on foreign currency buyer credit facility is an element of interest and not a separate taxable fee; hence not includible in taxable value for service tax. - HELD THAT: - The tribunal examined the nature of the Offshore Upfront Fee and the material produced by the respondent, including a bank communication indicating that the upfront charge was in substance interest on the buyer credit transaction as per RBI guidelines. Given that interest on loans is excluded from taxable value under the revenue circular relied upon, the tribunal concluded that the charge is interest rather than a distinct service fee. Thus the demand for service tax on that amount was correctly dropped by the adjudicating authority and the revenue's appeal failed for lack of merit. [Paras 7]Revenue's appeal dismissed; no service tax payable on the Offshore Upfront Fee.Final Conclusion: The appeals by the appellant-assessee are allowed insofar as service tax demands and penalties on corporate guarantees are set aside; the revenue's appeal is dismissed insofar as the Offshore Upfront Fee is held to be interest not subject to service tax. Issues:1. Taxability of corporate guarantee provided by the appellant-assessee to banks/financial institutions.2. Tax liability on 'Offshore Upfront Fee' paid to foreign bankers by the respondent.Issue 1: Taxability of Corporate Guarantee:The appellant-assessee provided corporate guarantees to banks/financial institutions on behalf of their associates. The Revenue alleged tax liability under Banking and Finance Institution Services, contending that the activity is taxable. However, the appellant-assessee argued that they did not receive any consideration for providing the corporate guarantee. The Tribunal noted that no consideration was received by the appellant-assessee from the financial institutions or their associates for the guarantees. The demand for service tax was based on assumptions regarding lower interest rates for associates, but no evidence supported this claim. Consequently, the Tribunal held that the appellant-assessee was not liable to pay service tax on the corporate guarantees provided, both before and after July 1, 2012. The impugned orders demanding service tax were set aside, and no penalty was imposed on the appellant.Issue 2: Tax Liability on 'Offshore Upfront Fee':The respondent was engaged in providing services like maintaining office and commercial complexes. The Revenue issued show cause notices to levy service tax on the 'Offshore Upfront Fee' paid to foreign bankers for 'Foreign Currency Buyer Credit Facility.' The Revenue argued that the fee was interest, thus subject to service tax. The respondent contended that the fee was part of the cost of capital provided by the offshore lenders. The Tribunal examined whether the fee constituted interest or a fee. The respondent presented a letter from a bank stating that the fee was interest on buyer credit transactions as per RBI guidelines. The Tribunal concluded that the fee was indeed interest and, as per a circular, interest on loans is not taxable. Consequently, the Tribunal held that the respondent was not liable to pay service tax on the fee. The appeal by the Revenue was dismissed, upholding the impugned order dropping the demand against the respondent.In conclusion, the Tribunal ruled in favor of the appellant-assessee regarding the taxability of corporate guarantees and the respondent concerning the tax liability on the 'Offshore Upfront Fee.' The judgments emphasized the absence of consideration for the guarantees and the nature of the fee as interest, respectively, leading to the dismissal of the demands for service tax in both cases.