2024 (5) TMI 1060 - AT - Service Tax

Corporate guarantee fees not considered Banking and Other Financial Services under Section 65(12)(a)(ix) Finance Act

The CESTAT NEW DELHI held that corporate guarantee fees do not constitute Banking and Other Financial Services (BOFS) under Section 65(12)(a)(ix) of the ... Demand of service tax - Banking and Other Financial services (BOFS) - reverse charge mechanism - lending activity Or an activity in relation to lending - Applicability of service tax on corporate guarantee fees prior to and post 01.07.2012 - Invocation of the extended period for demand - HELD THAT:- We observe that the Show Cause Notice itself recites that the parent company of appellant has given the corporate guarantee. Though there is guarantee fee agreements dated 25.06.2009 & 30.06.2013 executed between appellant and the parent company by virtue of which appellant is paying guarantee fee. But since it is already held that providing corporate guarantee cannot be called as providing BOFS, prior to 01.07.2012, the amount in lieu thereof cannot qualify for the definition of ‘consideration’ as mentioned above. Apparently parent company of appellant is not in business of lending. To our opinion the act of providing a corporate guarantee is a separate mechanism to secure the lending transaction and is not related to the lending activity. It stated that the definition of “Banking and Other Financial Services provided in Section 65(12)(a)(ix) of the Finance Act is restrictive and thus, the terms ‘lending succeeded by the term ‘namely’ has to be interpreted in a restrictive manner restricting the service only to lending activity. It further submitted that corporate guarantee is provided by a third party who is not privy or party to the loan or lending transaction. Therefore, the activity of the providing corporate guarantee is neither a lending activity nor an activity in relation to lending. We draw our support from the case of Olam Agro India Ltd. V. Commissioner of Service Tax, [2013 (11) TMI 1503 - CESTAT NEW DELHI] wherein it was held that “a corporate guarantee does not fall within the ambit of “Banking and Other Financial Services” u/s 65(12) of the Finance Act”, as well as upon the case Sterlite Industries Ltd. vs. Commr. of Central Excise [2013 (8) TMI 452 - CESTAT CHENNAI], to hold that the providing of corporate guarantee does not fall within the ambit of lending activity in terms of Section 65(12)(a)(ix) of the Finance Act. Hence, we hold that question of the activity of extending corporate guarantee by the appellant to its associate companies cannot be called as service in terms of above provision in section 65 B (44) of the Act. Hence we hold service tax cannot be demanded from the appellant under reverse charge mechanism for the period prior 01.07.2012. Demand for the period post 01.07.2012 - Admittedly the tax liability on this amount stands already paid by the appellant along with the amount stands already paid by the appellant along with the amount of interest in May 2015 against the acknowledgment by the department for the same. Thus the liability was discharged prior to issue of the Order-in-Original. But the authorities below have not taken the payment into consideration since the payment stands already made, it cannot be demanded again. We also observe that there is no evidence on record with respect to the observations of ld. Commissioner in Order-in-Original that the corporate guarantee given by the appellant has benefited the associate enterprises in two ways as quoted above. We further observe that issue is no more res-integra as has also been conceded on behalf of the department. Invocation of extended period - We observe that appellant has claimed that there was a lack of clarity on the issue of service tax on Guarantee Fee before July 1, 2012, and that there was no intention to evade payment. Respondent has failed to prove any mala fide intention on the appellant’s part. Hence, it is held that extended period is wrongly been invoked. Thus, it is held that for the entire period from financial year 2009-2010 to 1st July, 2012 the Act of receiving a corporate guarantee from parent company was not an act of receiving Banking and Financial Services. The demand confirmed for the said period is hereby set aside. Hence, the order under challenge is hereby set aside. As a result thereof, the appeal in hand is allowed. Issues Involved:1. Classification of services under 'Banking and Other Financial Services' (BOFS).2. Applicability of service tax on corporate guarantee fees prior to and post 01.07.2012.3. Invocation of the extended period for demand.Summary:Issue 1: Classification of Services under BOFSThe appellant, engaged in manufacturing motorbikes, entered into ECB agreements with foreign banks, backed by corporate guarantees from its parent company in Japan. The department alleged that these guarantees constituted 'Banking and Other Financial Services' (BOFS) u/s 65(12) of the Finance Act, 1994, and issued a Show Cause Notice demanding service tax under the reverse charge mechanism.Issue 2: Applicability of Service Tax on Corporate Guarantee FeesThe Tribunal examined whether the corporate guarantee provided by the parent company falls under BOFS. The definition of BOFS u/s 65(12) was analyzed, concluding that the appellant and its parent company do not qualify as entities providing BOFS, as they are not banking or financial institutions. The Tribunal referenced the case of Olam Agro India Ltd., which held that corporate guarantees do not fall within BOFS. Consequently, for the period prior to 01.07.2012, the corporate guarantee fees do not qualify as 'consideration' for taxable services.For the period post 01.07.2012, the appellant admitted to a service tax liability on an invoice dated 28.02.2013, which was paid along with interest before the issuance of the Order-in-Original. The Tribunal held that since the tax was already paid, it cannot be demanded again.Issue 3: Invocation of Extended PeriodThe Tribunal noted the appellant's claim of lack of clarity on the issue of service tax on Guarantee Fees before 01.07.2012 and found no evidence of mala fide intent to evade tax. Therefore, the invocation of the extended period was deemed incorrect.Conclusion:The Tribunal set aside the demand for the period from FY 2009-2010 to 01.07.2012, holding that the act of receiving a corporate guarantee was not an act of receiving BOFS. For the subsequent period, the demand was acknowledged by the appellant and already paid. Thus, the order under challenge was set aside, and the appeal was allowed.[Pronounced in the open Court on 21.05.2024]