2019 (2) TMI 1249 - AT - Service Tax

Banking and Other Financial Services (BOFS) - providing corporate guarantee for a consideration - whether the commission received / paid by the appellant for providing / receiving corporate guarantees (CGs) to/from their associate / subsidiary companies would be exigible to service tax under the category of BOFS for the purpose of Finance Act, 1994? Held that - There is no allegation that the appellant herein has performed any of the category of services listed in Sl. No. (i) to (viii) under section 65(12)(a) ibid. The activity of providing bank guarantee‟ under section 65(12)(ix) ibid under which head the show cause notice has premised the proposed demand, is under the residual category of services listed as other financial services‟. But here also, a comprehensive and specific list of such residual services has been given and made absolute by usage of the word namely‟ before such listing - only the services which are listed in Section 65(12)(a)(ix) ibid will be exigible to service tax under that group. A corporate guarantee is a guarantee given by the corporate to cover their own exposure or exposure of some other related entity to their bank. Bank guarantees are issued by Bank on a regular basis as part of their business of Banking. It is nobody‟s case that appellant is doing the business of providing corporate guarantee on a regular basis. The corporate guarantee that was entered into by appellant is only for the limited purpose of securing loans to its subsidiaries. Corporate guarantees are issued in order to safeguard the financial health of their associate enterprises and to provide it support. For banks, providing bank guarantee is part of their regular course of business and they charge rate on the higher side. Further, these are fool proof instruments of security of the customer and failure to honour the guarantee is treated as a deficiency of services of the bank under banking laws. Corporate guarantee is actually an in-house guarantee and is not issued to customers generally. There is no merit in the propositions of Revenue that the guarantee issued by the appellant was only providing bank guarantee‟ by a body corporate and secondly, the commission received / paid for issue / receipt of such guarantees to / from associate / subsidiary companies are exigible to service tax liability under section 65(12)(a)(ix) of Finance Act, 1994. The activity of issue of corporate guarantees by the appellant from their associate / subsidiary companies in India and also the procurement / receipt of corporate guarantee from their parent / associate company abroad will not come within the fold of section 65(12)(a) ibid and in particular sub-clause (ix) of that provision. The appellant succeeds on merits. Time limitation - revenue neutrality - Held that - The show cause notice dated 22.4.2010, 22.10.2010 and 19.9.2011 have been issued for the periods 2004 2011. The appellant has furnished the documents with regard to the audits conducted. The audit report conducted from 18.6.2007 to 29.6.2007 has not raised any objection of non-payment of service tax for providing corporate guarantee. Prior to this an audit was conducted from 19.9.2006 to 21.9.2006 and the report does not show any such objection. All these would go to show that the appellant has not suppressed any facts with intention to evade payment of tax - SCN invoking extended period cannot sustain - appeal succeeds on limitation also. Appeal allowed - decided in favor of appellant.

Issues Involved:
1. Whether the commission received/paid by the appellant for providing/receiving corporate guarantees (CGs) to/from their associate/subsidiary companies is exigible to service tax under the category of "Banking and Other Financial Services" (BOFS) as per the Finance Act, 1994.
2. Whether the activity of issuing corporate guarantees falls under the definition of BOFS.
3. Applicability of service tax under reverse charge mechanism for commission paid to M/s. Vedanta Resources Plc., London.
4. Revenue neutrality and the invocation of the extended period of limitation.

Detailed Analysis:

1. Exigibility of Service Tax under BOFS:
The appellants, manufacturers of copper products, received guarantee commission from their associate/subsidiary companies for providing corporate guarantees and paid consideration to M/s. Vedanta Resources Plc., London for securing external commercial loans. The department issued three show cause notices alleging that these amounts are exigible to service tax under BOFS. The adjudicating authority confirmed the demands with interest and imposed penalties under sections 76, 77, and 78 of the Finance Act, 1994.

2. Definition and Scope of BOFS:
The appellant argued that as a manufacturing company, it does not fit the definition of "anybody corporate" providing BOFS. They contended that corporate guarantees are not the same as bank guarantees and are not listed under BOFS services. The CBEC circulars clarified that "any body corporate" should be read in ejusdem generis with banks or financial institutions. The Tribunal supported this view, stating that the definition of BOFS is comprehensive and specific, listing services exhaustively with the word "namely," thus restricting the scope to those services.

3. Corporate Guarantee vs. Bank Guarantee:
The appellant argued that corporate guarantees differ from bank guarantees and are not listed under BOFS. The Tribunal agreed, noting that corporate guarantees are in-house guarantees issued to safeguard the financial health of associate enterprises, not as part of regular business like bank guarantees. The Tribunal found no merit in the department's proposition that corporate guarantees are equivalent to bank guarantees.

4. Reverse Charge Mechanism:
The appellant contended that even if the activity was taxable, it was undertaken outside the taxable territory, beyond the jurisdiction of the Finance Act, 1994. The Tribunal agreed, noting that the corporate guarantees were not issued to facilitate bank guarantees but to secure external commercial borrowings.

5. Revenue Neutrality and Limitation:
The appellant argued that the situation was revenue neutral as the tax paid under reverse charge would be available for credit. They also argued that the issue involved interpretation, not willful suppression or fraud, making the invocation of the extended period of limitation unsustainable. The Tribunal found that departmental audits had not raised any objections regarding non-payment of service tax for corporate guarantees, indicating no suppression of facts. Therefore, the extended period of limitation could not be invoked.

Conclusion:
The Tribunal concluded that the activity of issuing corporate guarantees does not fall under the definition of BOFS, and the commission received/paid for such guarantees is not exigible to service tax. The appeal was allowed on merits and limitation, setting aside the impugned order with consequential relief.

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