2025 (11) TMI 1277 - AT - Service Tax

No Service Tax on Overseas Parent Corporate Guarantee under Banking and Other Financial Services; CESTAT Sets Aside Demand

CESTAT Chandigarh allowed the appeal, holding that no service tax was payable under Banking and Other Financial Services on corporate guarantees provided ... Levy of service tax - Corporate Guarantee provided by Overseas parent company, for the loans obtained by the appellants from Banks - Banking and Other Financial Services (BOFS) - reverse charge mechanism - HELD THAT:- Interestingly, the Revenue does not establish as to how the Overseas Parent Company of the appellants is engaged in Banking and Other Financial Services. Moreover, it is not established as to what’s the remuneration paid by the appellant in this regarding. Revenue wishes to consider the commission charged by the Bankers as the Remuneration paid by the appellants to the overseas company. If the commission is accruing to the bankers, it is not understood as how the same can be held to be the consideration paid by the appellants to their overseas company. The allegation falls flat on both the counts. Moreover, the issue is no longer Res Integra having been decided by the Tribunal in a number of cases. Delhi Bench of the Tribunal held, in the case of M/s Sowar Pvt Ltd [2023 (5) TMI 193 - CESTAT NEW DELHI] that 'We hold that question of the activity extending corporate guarantee by the appellant to its associate companies cannot be called as service terms of above provision in section 65 B (44) of the Act.' The issue is no longer Res Integra - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether provision of a corporate guarantee by an overseas parent company for loans obtained by the appellant attracts service tax under the category 'Banking and Other Financial Services' (BOFS). 2. Whether a corporate guarantee, where no consideration is charged by the guarantor from the beneficiary, constitutes a 'service' within the meaning of Section 65B(44) of the Finance Act and is taxable under the BOFS definition. 3. Whether the commission or standard bank charges for guarantees (e.g., 2% rule under valuation/IT rules) can be treated as consideration paid by the borrower to an overseas guarantor for purposes of levying service tax. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of corporate guarantee under BOFS Legal framework: The BOFS definition applies to services provided by a banking company, financial institution, non-banking financial company or any other body corporate or commercial concern engaged in the business of banking or financial services; specific services (e.g., lending, bank guarantees, overdraft) are enumerated with the effect of delimiting the category. Precedent treatment: The Tribunal benches (including the Delhi Bench) have treated the BOFS definition as a comprehensive/delimiting definition that renders only persons falling within the listed categories liable under BOFS for the listed services. Earlier tribunal decisions have uniformly held that entities not engaged in banking/financial business cannot be brought within BOFS merely because they provide a guarantee. Interpretation and reasoning: The Court construed the BOFS definition as comprehensive rather than merely illustrative, emphasizing the use of words like 'namely/means' to show the list is restrictive. Because the overseas parent company is not shown to be a banking company, financial institution, NBFC or a commercial concern in the business of providing financial services, its act of giving a corporate guarantee cannot be classified as BOFS. The Revenue failed to establish that the guarantor belonged to any BOFS category. Ratio vs. Obiter: Ratio - A corporate guarantee provided by an entity that is not a banking/financial concern does not attract tax under BOFS. Obiter - Observations about the comprehensive nature of the BOFS definition and its textual bearings on persons and services support but are ancillary to the holding. Conclusion: The corporate guarantee is not exigible to service tax under the BOFS category where the guarantor is not a banking/financial entity; the Revenue's contention that the overseas parent's guarantee falls within BOFS is rejected. Issue 2 - Requirement of consideration for a taxable 'service' Legal framework: Section 65B(44) defines 'service' as any activity carried out by a person for another for consideration; services listed in the negative list are excluded. Valuation and taxability presuppose existence of consideration. Precedent treatment: Multiple Tribunal decisions have consistently held that an activity cannot be a taxable service unless there is an element of consideration; absent consideration, the definition of service is not satisfied. Interpretation and reasoning: The Show Cause Notice and documentary record indicated that no commission, fee, interest or remuneration was charged by the overseas guarantor for providing the corporate guarantee. Supporting evidence (bank letter and loanee undertakings) corroborated absence of any payment to the guarantor. The Court applied the statutory definition and found that without consideration the activity of providing a corporate guarantee does not constitute a 'service' liable to service tax. Ratio vs. Obiter: Ratio - Absence of consideration precludes characterization of corporate guarantee as a taxable 'service' under the statutory definition. Obiter - General commentary on the necessity of consideration for taxability reinforces the ratio. Conclusion: Where no consideration is paid or payable to the guarantor, provision of corporate guarantee does not meet the statutory definition of 'service' and is not taxable. Issue 3 - Treating bank commission or standard charge as consideration paid to overseas guarantor Legal framework: Valuation Rules provide methods for determination of value where consideration exists; income-tax rules may specify standard charges (e.g., 2% commission) for certain transactions for income-tax purposes, but taxability under service tax requires actual consideration to the service provider. Precedent treatment: Tribunals have distinguished between bank charges/commissions (accruing to banks) and consideration paid to an overseas guarantor; they have declined to equate standard banking commission with consideration to a non-bank guarantor absent evidence of remittance or accrual to that guarantor. Interpretation and reasoning: The Revenue sought to import the bank's commission rate (2%) or banker's usual remuneration and treat it as consideration paid by the borrower to the guarantor. The Court found no basis for conflating a bank's commission (which accrues to the bank) with consideration to an overseas corporate guarantor. There was no evidence that such commission was paid or payable to the guarantor or that the guarantor charged any fee; hence the contention is legally and factually untenable. Ratio vs. Obiter: Ratio - Bankers' commission/standard rates cannot be treated as consideration to the guarantor for service tax purposes in absence of factual/prima facie evidence of payment to the guarantor. Obiter - Remarks on inappropriateness of transplanting valuation or income-tax norms to create consideration where none exists. Conclusion: Commission charged by banks cannot be presumed to be consideration paid to an overseas guarantor; such presumption cannot sustain service tax liability without evidence of payment or accrual to the guarantor. Cross-references and Consolidated Conclusion Cross-reference: Issues 1 and 2 are interlinked - even if a corporate guarantee were considered a type of financial service, taxability under BOFS still requires that the guarantor be of the class envisaged in BOFS and that consideration exists (see Issues 1 & 2 above). Consolidated Conclusion: The Court held that the impugned demand for service tax on corporate guarantees provided by an overseas parent was unsustainable. The Revenue failed to establish (a) that the guarantor belonged to the BOFS category, and (b) existence of consideration paid to the guarantor. Accordingly, the demand was set aside; the Tribunal followed earlier consistent decisions on these legal points.