2024 (2) TMI 967 - AT - Service Tax

Corporate guarantees to subsidiaries without consideration don't attract service tax liability, delayed payment charges also exempt

M/s IIFL Holding Ltd. Versus Commissioner of CGST & Central Excise, Mumbai Central (Vice-Versa)

CESTAT Mumbai held that corporate guarantees provided by companies to their subsidiaries without charging any commission or consideration cannot attract ... Classification of services - banking and other financial services or not - service of giving bank guarantee - Demand of service tax on delayed payment charges - Dropping of demands in respect of the assessee-appellants providing corporate guarantees to their subsidiary companies on the ground that it cannot be brought under the definition of ‘banking and other financial services’ provided under Section 65 (12) ibid. Classification of services - banking and other financial services or not - service of giving bank guarantee - HELD THAT:- The department had accepted that the assessee-appellants had not charged any commission/fees to the overseas subsidiary companies as well as to the subsidiary companies situated in India for issuance of the corporate guarantee. However, the service tax demand was proposed on the basis of commissions usually charged by the commercial banks for providing bank guarantee. Further, it is also found that the assessee-appellants did not charge any consideration for providing the corporate guarantees as stated in the SCN and as noted by the learned Commissioner in the impugned order. Insofar as levy of service tax is concerned, the same should be on the amount of consideration received for provision of such service. Thus, prima facie it appears that there is no element of service inasmuch as there is no consideration involved in providing corporate guarantee by the assessee appellants. The Co-ordinate Bench of this Tribunal had examined the issue of levy of service tax on provision of corporate guarantees by a company to its subsidiaries, on the basis of notional value equivalent to commission charged by banks for providing bank guarantees, in the case of M/S ULTRATECH CEMENT LTD. VERSUS COMMISSIONER OF CGST & CX, MUMBAI EAST [2023 (10) TMI 1363 - CESTAT MUMBAI]. In this case, the Tribunal had held that insofar as levy of service tax is concerned, the same should be on the amount of consideration received for provision of such service. In the present case, since there is no involvement of any commission amount in the form of consideration, the appellants cannot be saddled with the service tax liability as demanded in the impugned order. - Thus, above views on the issue have been duly supported by the decision of the Tribunal in the above order. Demand of service tax on delayed payment charges - HELD THAT:- From Circular dated 28.02.2023, it is clear that in the present case in the absence of any contractual obligation or flow of consideration for the specific act of tolerating an act etc., it cannot be said that such delayed charges in payment by a client in payment for purchase of shares could be said to be a service under the category of declared service for the purpose of levy of service tax, that is separate from the stock broking services. The issue of Delayed Payment Charges (DPC) arising in the context of purchase of shares have been addressed by the Co-ordinate Bench of this Tribunal in the case of Religare Securities Limited Vs. Commissioner of Service Tax, Delhi [2014 (4) TMI 588 - CESTAT NEW DELHI] by holding that the same is not liable to service tax. Thus, there are no merits in the impugned order, insofar as it has confirmed the adjudged demand on the assessee-appellants in respect of delayed payment of charges paid by the clients for the actual delay, if any, in payment for the purchase of shares or other stocks, which are in no way can be considered as service of ‘tolerating or refraining from an act, or to tolerate an act or a situation, or to do an act”. Therefore, by setting aside the impugned order to this extent, the appeal is allowed in favour of the appellants. Dropping of demands in respect of the assessee-appellants providing corporate guarantees to their subsidiary companies on the ground that it cannot be brought under the definition of ‘banking and other financial services’ provided under Section 65 (12) ibid - HELD THAT:- In respect of the period after 01.07.2012, even though the taxable service has been defined in clause 44 of Section 65B ibid, as an activity carried on by a person for another for consideration and includes a declared service, inasmuch as the show cause notice itself states that no consideration has been paid by any of the subsidiary companies to the assessee-appellants for providing corporate guarantees, by way of commission brokerage fees or any other form, the demand cannot be sustainable. Appeal disposed off. Issues Involved:1. Service tax on provision of corporate guarantees.2. Service tax on delayed payment charges.Summary:1. Service Tax on Provision of Corporate Guarantees:The Department initiated an investigation based on intelligence received, scrutinizing whether appropriate service tax had been paid by the assessee-appellants for various services rendered, including corporate guarantees provided to subsidiaries. The Department alleged that the service of giving bank guarantees falls under taxable services as per Section 65(12) of the Finance Act, 1994, and thus, service tax should be paid on corporate guarantees provided to subsidiaries. However, the assessee-appellants argued that as per RBI Guidelines, no consideration is charged for providing corporate guarantees, and hence, no service tax is applicable. The Commissioner, considering the RBI guidelines and the absence of consideration, concluded that corporate guarantees do not fall within the scope of taxable services. The Tribunal upheld this view, citing the absence of consideration and referencing previous decisions, including the Supreme Court's judgment in Commissioner of CGST & Central Excise Vs. Edelweiss Financial Services Ltd., which affirmed that no service tax is applicable in the absence of consideration for corporate guarantees.2. Service Tax on Delayed Payment Charges:The Department also demanded service tax on delayed payment charges, interpreting it as a declared service of 'agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act' under Section 66E of the Finance Act, 1994. The Commissioner dismissed the assessee-appellants' contention that delayed payment charges are part of stock broking services, treating them as separate and distinct activities. However, the Tribunal found that the issue had been examined by the CBIC and clarified that in the absence of a contractual obligation or consideration, delayed payment charges cannot be considered a separate service for the purpose of service tax. The Tribunal referenced the case of Religare Securities Limited Vs. Commissioner of Service Tax, Delhi, which held that delayed payment charges are not liable to service tax as they are penal charges for delayed payments and not part of the stock broking service.Conclusion:The Tribunal set aside the demand for service tax on corporate guarantees due to the absence of consideration and upheld the view that delayed payment charges are not subject to service tax as they are penal charges and not a separate service. The appeals filed by both the assessee-appellants and the Department were disposed of accordingly, with the cross-objection also disposed of.