SC rules on service tax on corporate guarantees, gives pvt firm relief
New Delhi, Apr 4 2023
No service tax on corporate guarantees by parent company to subsidiaries in absence of consideration, it says
Service tax will not be levied on corporate guarantees by a parent company to its subsidiaries as there is no consideration in question, the Supreme Court has said.
Consideration, the main element of a contract, is a promise, performance, or forbearance bargained by a 'promisor' in exchange for their promise. The court gave the ruling on March 17 in a case involving the commissioner of Central Goods and Services Tax (CGST) and Central Excise versus Edelweiss Financial Services.
“This was a case where the assessee had not received any consideration while providing a corporate guarantee to its group companies. No effort was made on behalf of the Revenue (department of the government) to assail the above finding or to demonstrate that issuance of corporate guarantee to group companies without consideration would be a taxable service. In these circumstances, in view of such conclusive findings of both forums, we see no reason to admit this case,” the court said.
Experts said corporate entities provide guarantees to group companies, often not charging any commission or other consideration for providing such a guarantee. Government revenue authorities have long argued that service tax is payable on corporate guarantees even when done without consideration.
Experts said that under the GST regime, the provision of a corporate guarantee between two related parties, even if provided without consideration, would be subject to tax.
“In the instant case, the assessee had got relief at the stage of original adjudication itself. Revenue has appealed before the apex court. The court has dismissed the appeal at the admission stage itself on the premise that in the service tax regime for a service to be taxable there must be a consideration. This flows from the definition of 'taxable service' in the statute. It is pertinent to mention that the law in the GST regime is different, and the precedent value of this order in the GST regime may be limited,” said Sanjeev Sachdeva, partner at Luthra and Luthra Law Offices India.
In the present case, the holding company of an Indian service provider furnished a corporate guarantee to banks, which enabled the service provider to obtain loans from those banks. Banks charge a fee for furnishing guarantees, but the holding company did not charge any fee for providing this corporate guarantee.
Service tax authorities argued that providing a corporate guarantee constitutes a service provided by the holding company to its subsidiary, and accordingly service tax is applicable. However, the Supreme Court held that to levy service tax on a transaction, it is also necessary to establish that the service provider has received consideration for that transaction. Consideration need not be in monetary form and can take the form of non-monetary consideration as well. However, it is a fundamental condition for determining the liability for service tax on a transaction.
The court ruled that service tax authorities failed to demonstrate that the holding company had received any consideration, either in monetary or non-monetary form, for the transaction involving the corporate guarantee. In the absence of any consideration, it held that the transaction was not subject to tax.
“The law about GST is similar in that consideration is a crucial aspect of a transaction to determine its taxability under GST. A supply of goods or services made without any consideration is also not subject to GST. However, GST has some exceptions, such as in the case of related parties, where even if goods or services are provided without any consideration, they are considered taxable. Therefore, in the current situation under GST, the provision of a corporate guarantee between two related parties, even if provided without consideration, would be subject to tax under GST,” said Ankit Jain, partner, Ved Jain & Associates.
The Supreme Court has reiterated a settled legal position under Service tax that in the absence of a consideration, no service tax can be levied. “This decision could also help in deciding many similar disputes where demands have been raised assuming consideration where there is none,” said Kamal Aggarwal, senior partner-Tax, Singhania & Co.
Under GST, transactions between related parties qualify as supply even without a consideration. “Accordingly, this issue has much wider and more significant implications under the GST regime. We have already seen significant amounts of GST deposited by top corporations including HUL, P&G, etc. Adverse implications on such issues can easily be avoided by adopting proactive planning and transaction structuring,” he said.
Edelweiss Financial Services was served a show-cause notice by the revenue department for not discharging its tax liabilities related to providing corporate guarantees to its subsidiaries within and outside India. The parent company had not charged any consideration for giving corporate guarantees to its subsidiaries.
[The Business Standard]
