Service Tax on Foreign Bond Issue

[Dibyendu Ghosh]

Subsidiary of the client has issued Bonds in foreign country. The proceeds of the issue has been utilised by the subsidiary. Further, repayment of the proceeds has been made by the subsidiary.

Service Tax Department is telling the Holding company to pay Service Tax under Full Reverse Charge on Issue related expenses. Contention of the Department is that as the guarantor is holding company, service tax has to be paid by the holding company.

Whether holding company is liable to pay Service Tax?

[KASTURI SETHI]

Sh.Dibyendu Ghosh Ji,

Your query raises so many questions before final reply is posted. These are :-

1. Whether subsidiary co. is located in India or outside India ?

2. Where is effective use and enjoyment of service ? Where is the beneficiary of the service located ?

3. What is the place of location as per POPS Rules, can be determined only after the reply of above two questions ?

4. Whether it is export of service or not, can be decided only after the above replies ?

5. If ST is applicable, primary responsibility is of subsidiary Co., if subsidiary co. is located outside India then holding company is liable to pay.(being in India)

6. Guarantor is legally bound for all financial liabilities of subsidiary co. Had holding co. not signed as guarantor, even then, it being parent co. and overall in control of all activities of subsidiary co.,cannot brush aside the responsibility of dues of ST department. (pertaining to subsidiary co.)

Confirmed reply can be given only after full facts are known to experts. I do not want to beat about the bush by using 'Ifs' and 'Buts' in imaginative situation.

[Dibyendu Ghosh]

Dear Sir,

Thanks for replying.The answers to your questions are mentioned below:-

1.Subsidiary is located in London

2. The effective use of the proceeds has been utilised by London entity. The expenses of lead runners and credit rating agencies was borne by the London entity only.

Due, to the above reasons, place of provision is London.

Department is arguing on the following basis:.

1. The permission for raising of funds and repayment is granted by the Holding Co. Further, Holding Co. is the guarantor of the Medium Term Note proceeds.

2. Credit rating of the holding entity has been done by foreign rating agencies.

Request you to share your opinion.

[Rajagopalan Ranganathan]

Sir,

I want to know the purpose for which the bonds are issued by the subsidiary. Since the bonds are issued by your subsidiary located in London as per rule 9 of Place or Provision of Service Rules, 2012 the place of provision of f service shall be the location of the service provider if the services are provided by a banking company, or a financial institution, or a non-banking financial company, to account holders. By merely acting as guarantor to subsidiary company the holding company cannot held liable to pay service tax. Here the service receiver and service provider are both located in non-taxable territory. Therefore in my view no service tax is payable by the holding company which i suppose is existing in India.

[KASTURI SETHI]

I fully agree with Sh.Rajagopalan Ranganathan, Sir. Service Tax can be demanded from Holding Co. Only if subsidiary becomes defaulter.Otherwise Holding Co. Not liable at all

AI Summary

Place of provision determines service tax liability; guarantor status alone does not trigger reverse charge. Service tax liability depends on the place of provision and the locations of provider and recipient: services used and enjoyed by the foreign subsidiary abroad are prima facie not taxable in India; guarantor status alone does not automatically make the holding company liable, absent default or a specific rule attributing liability to the guarantor.