2021 (9) TMI 450 - AT - Service Tax

Challenging Tax on Corporate Guarantees: Precedent, Inconsistencies, and Clarity

Infrastructure Leasing & Financial Services Ltd Versus Commissioner of Service Tax – I

The appellant challenged the order-in-original imposing taxable service on corporate guarantees, citing inconsistencies with judicial precedent and ... Levy of service tax - Banking and other financial services - commission charged for providing ‘corporate guarantee’ to their customers - HELD THAT:- The decision in OLAM AGRO INDIA LTD. VERSUS C.C. E-DELHI-II [2018 (8) TMI 102 - CESTAT NEW DELHI] has established that commission earned by providing ‘corporate guarantee’ is taxable, as ‘business auxiliary service’, under section 65(105)(zzb) of Finance Act, 1994. The decisions of the Tribunal, in M/S BANK OF BARODA VERSUS CCE, JAIPUR-I [2014 (3) TMI 653 - CESTAT NEW DELHI] and in RADIOWANI VERSUS COMMISSIONER OF SERVICE TAX, MUMBAI-I [2018 (6) TMI 928 - CESTAT MUMBAI], reinforce the imperative of certainty of tax, as reflected in the classification of service proposed by tax authorities in the show cause notice, and as the pivot for the fulcrum of adjudicatory competence. It can be gauged from the narrative of the impugned order that, initially, the tax authorities had the same inclination but, for unfathomable reasons, a different ‘taxable service’ was invoked for initiating recovery proceedings. Consequently, there was patent lack of certainty of tax in the mind of the show cause notice issuing authority. The impugned order has failed to set about determining the congruity of that facilitation within the definition of ‘taxable service’ in section 65(105)(zm) of Finance Act, 1994 - Appeal allowed - decided in favor of appellant. Issues:1. Challenge to order-in-original regarding taxable service of corporate guarantees.2. Failure to discharge liability for providing corporate guarantees.3. Interpretation of corporate guarantees and bank guarantees.4. Validity of show cause notice and classification of taxable service.5. Tax liability on corporate guarantees as business auxiliary service.6. Certainty of tax classification in show cause notice.7. Lack of certainty in tax determination by authorities.8. Non-payment of tax on bank guarantees issued by the appellant.Analysis:1. The appellant challenged the order-in-original seeking to set aside the imposition of taxable service on corporate guarantees, arguing that certain guarantees were not intended to be included. They contended that the show cause notice contradicted judicial precedent regarding the nature of the activity as 'business auxiliary service'.2. The appellant, engaged in providing financial services, failed to pay liability for providing corporate guarantees despite specific inclusion in the Finance Act, 1994. The recovery of dues and penalties for the period in question were confirmed in show cause notices, which were challenged in the present proceedings.3. The distinction between corporate guarantees and bank guarantees was emphasized by the appellant, questioning the indiscriminate perception of guarantees as releasing funds. They argued that the legal instrument defining taxable service did not allow for segregation of 'bank' from 'guarantee'. Reference was made to legal principles and decisions to support this argument.4. The appellant highlighted the importance of a clear and precise show cause notice in determining tax liability. They argued that the tax collector must propose a specific classification of the taxable service, failing which the liability cannot be imposed. Legal precedents were cited to support this contention.5. The authorized representative contended that the commission earned from providing corporate guarantees was taxable as business auxiliary service. The decisions in previous cases reinforced the necessity of certainty in tax classification proposed in show cause notices.6. The decisions in previous cases emphasized the significance of certainty in tax classification for adjudicatory competence. The lack of certainty in tax determination by the authorities was evident in the present case, leading to the setting aside of the impugned order.7. The impugned order failed to determine the congruity of the facilitation of bank guarantees within the definition of taxable service. The lack of clarity and certainty in the tax determination process led to the appeal being allowed and the order set aside.This comprehensive analysis of the judgment addresses the various issues raised in the case, providing a detailed examination of the arguments presented and the legal principles applied by the tribunal.