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 Finance Act prior to 01.07.2012. The tribunal ruled that providing corporate guarantee is a separate mechanism to secure lending transactions and not related to lending activity itself. For the post-01.07.2012 period, the appellant had already discharged the tax liability in May 2015 before the Order-in-Original was issued. The tribunal also found that the extended period was wrongly invoked as there was no mala fide intention to evade payment. The demand was set aside and the appeal was allowed.

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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 BOFS
The 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 Fees
The 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 Period
The 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]

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