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

CESTAT Mumbai held that corporate guarantees provided by companies to their subsidiaries without charging any commission or consideration cannot attract service tax liability. The Tribunal found no element of service exists where no consideration is involved, following precedent in Ultratech Cement Ltd. case. Additionally, delayed payment charges by clients for share purchases were ruled not liable to service tax, lacking contractual obligation or consideration flow. The demands were dropped as corporate guarantees cannot fall under banking and financial services definition without consideration. Appeals were allowed in favor of appellants.

---

---

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.

---