Issuance Of Corporate Guarantee On Behalf Of Group Companies Without Consideration Is Not A Taxable Service: Supreme Court

The Supreme Court has held that the issuance of a corporate guarantee on behalf of group companies without consideration is not a taxable service.

The division bench of Justice Hrishikesh Roy and Justice Manoj Misra has observed that, as there is no consideration involved, no service tax would be assessed on the  corporate guarantees given by a parent company to its subsidiaries.

The department has challenged the dropping of proceedings initiated against the assessee, M/s Edelweiss Financial Services Ltd., for having provided a ‘corporate guarantee’ on behalf of its subsidiaries located within and outside India. The department has challenged the non-discharge of tax liability as a provider of ‘banking and other financial services for the period prior to and after June 30, 2012.

The show cause notice had proposed the recovery of Rs. 97,956,437, consisting of guarantees to overseas companies for which consideration had been received and guarantees provided free of charge to their Indian subsidiaries, for rendering taxable services under Section 65(105)(zm) of the Finance Act, 1994, till June 30, 2012, and services as defined in Section 65B(44) for the period thereafter, until March 15, 2015.

The adjudicating authority had concluded that receipt of commission from overseas companies as consideration for the export of services was not taxable. Insofar as domestic facilitation was concerned, the definition in Section 65(12) of the Finance Act, 1994, did not extend to corporate guarantee, which, unlike ‘bank guarantee’, finds no specific enumeration as ‘other financial services’ until June 20, 2012. For the period thereafter, the absence of ‘consideration’ for facilitating a corporate guarantee’ excluded such activities from coverage under the definition of ‘service’ in Section 65B(44) of the Finance Act, 1994.

The CESTAT held that the criticality of ‘consideration’ for determination of service, as defined in Section 65B(44) of the Finance Act, 1994, for the disputed period after the introduction of the negative list regime of taxation, has been rightly construed by the adjudicating authority. For the purposes of taxability under the Finance Act of 1994, any activity must reveal not only a 'provider' in relation to another but also the flow of 'consideration' for the rendering of the service. In the absence of either of these two elements, taxability under Section 66B of the Finance Act of 1994 will not arise. It is clear that there is no consideration insofar as the ‘corporate guarantee’ issued by respondents on behalf of their subsidiary companies is concerned.

The department challenged CESTAT’s order before the Supreme Court.

The assessee contended that issuance of a corporate guarantee to a group company without consideration would not fall within the banking and other financial services and is therefore not a taxable service. He would also read Section 65B (44) of the Finance Act 1994 to point out that the definition of service indicates that it relates to only those services that are rendered for valuable consideration.

"No effort was made on behalf of the Revenue to assail the above finding or to demonstrate that issuance of corporate guarantees to group companies without consideration would be a taxable service," the court said while dismissing the department’s petition.

Case Title: Commissioner Of CGST And Central Excise Versus M/S Edelweiss Financial Services Ltd.

Citation: 2023 LiveLaw (SC) 281

Service Tax - issuance of a corporate guarantee on behalf of group companies without consideration is not a taxable service.

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