Service tax on corporate guarantees, ECB facilitation charges and CENVAT reversal was partly deleted, sustained and remanded.

Corporate guarantees issued to group companies without commission, fee, interest or other consideration were held not taxable because the statutory definition of service was not satisfied, so the demand was deleted. Facilitation charges paid in connection with external commercial borrowings were treated as services received from a non-taxable territory; reverse charge liability applied and the demand was sustained. The short reversal of CENVAT credit relating to exempted services was inadequately examined, as the authority did not properly address common input services, exempt activities and proportional reversal, so that issue was remanded for fresh adjudication.

---

---

Issues: (i) Whether service tax was payable on corporate guarantees extended without consideration; (ii) whether service tax was payable on facilitation charges for external commercial borrowings; and (iii) whether the dispute relating to short reversal of CENVAT credit attributable to exempted services required reconsideration.

Issue (i): Whether service tax was payable on corporate guarantees extended without consideration.

Analysis: Taxability under the Finance Act, 1994 in the negative list regime requires both a service provider and the flow of consideration. Where corporate guarantees are issued for group companies without any commission, fee, interest, or other consideration, the activity does not satisfy the statutory definition of service.

Conclusion: The demand on corporate guarantee was not sustainable and was set aside in favour of the assessee.

Issue (ii): Whether service tax was payable on facilitation charges for external commercial borrowings.

Analysis: The amount paid to the foreign branch of the bank was treated as facilitation charges connected with arranging external commercial borrowings. The assessee did not adduce documentary evidence to show that the payment was merely interest. Since the service was received from a person located in a non-taxable territory, the recipient was liable under the reverse charge mechanism, and the amount was not covered by the exclusionary provisions of the negative list.

Conclusion: The demand on facilitation charges was upheld against the assessee.

Issue (iii): Whether the dispute relating to short reversal of CENVAT credit attributable to exempted services required reconsideration.

Analysis: The adjudicating authority rejected the assessee's reliance on precedent in a cursory manner and did not adequately deal with the submissions concerning common input services, exempted activities, and proportional reversal. The issue therefore required fresh examination on the basis of the materials and documents to be placed before the authority.

Conclusion: The issue was remanded to the adjudicating authority for reconsideration in favour of the assessee to that extent.

Final Conclusion: The order was modified by deleting the demand on corporate guarantees, sustaining the demand on facilitation charges, and sending the CENVAT credit issue back for fresh decision, with the appeal succeeding only in part.

Ratio Decidendi: Under the Finance Act, 1994, taxability of a service depends on both the existence of a service and consideration, while liability under reverse charge applies where a taxable service is received from a non-taxable territory; issues inadequately reasoned by the adjudicating authority may be remanded for fresh adjudication.

---