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TMI Blog2024 (10) TMI 771X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. Since in the instant case, as no consideration has been charged by the Associated Enterprises from the Applicant and where the supplier of service is located outside India, the time of supply shall be the date of entry in the books of account of the recipient of supply i.e. Indian subsidiary and the GST liability is to paid by the Applicant at one time basis at the time of supply. If the GST under RCM is to be paid on periodical basis, then in order to determine the value of supply, whether the value of loan is to be divided equally amongst the relevant years of guarantee and GST is to be paid considering 1% of such divided deemed value each year or 1% of only remaining outstanding value of loan at the beginning of each subsequent year in term of Rule 28 (2) of the CGST Rules 2017? - HELD THAT:- If the guarantor executes the contract of guarantee without consideration, in the GST regime prior to 26.10.2023, for the benefit of a related party, GST would be payable on the basis of the valuation mechanisms as per Rule 28 (1) of RGST/CGST rules 2017 at the time of execution of the contract - GST under reverse charge mechanism is payable on 1% of deemed total value of loan after gua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Applicant for providing corporate guarantee. 3. The aforesaid corporate guarantee received by the Applicant remains in effect till the final settlement date of the loan contract between the Applicant and the bank/financial institution. In other words, there is no requirement of any periodic renewal of the said guarantee; rather, it is valid for a specified period of time, i.e. from the effective date of the Deed of Guarantee and the final settlement date. Sample copies of the Deeds of Guarantee entered into by the foreign group companies and the loan agreements entered into by the Applicant and the banks/financial institutions are attached herewith as Appendix-1. 4. Recently, vide Notification No. 52/2023-Central Tax dated 26.10.2023, Rule 28 of the CGST Rules was amended and sub-rule (2) of the said Rule was inserted to provide that the value of supply in case of supply of service of corporate guarantee between related parties would be 1% of the amount of guarantee or the consideration paid, whichever is higher. In the present case, it is reiterated that no consideration has been paid by the applicant to the guarantors. 5. In view of the above, the present application is filed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions, is called a continuing guarantee . The relevant portion of the said Section along with relevant illustrations is reproduced hereunder for the sake of reference: 129. Continuing guarantee , A guarantee which extends to a series of transactions , is called a continuing guarantee . (a) A, in consideration that B Wilf employ C in collecting the rent of B's zamindari, promises B to be responsible, to the amount of 5,000 rupees, for the due collection and payment by C of those rents. This is a continuing guarantee. (b) A guarantees payment to B, a tea-dealer, to the amount of 100, for any tea he may from time to time supply to C. B supplies C with tea to above the value of 100, and C pays B for it. Afterwards, B supplies C with tea to the value of 200. C fails to pay. The guarantee given by A was a continuing guarantee, and he is accordingly liable to B to the extent of 100. (c) A guarantees payment to B of the price of five sacks of flour to be delivered by B to C and to be paid for in a month . B delivers five sacks to C. C pays tor them. Afterwards B delivers four sacks to C, which C does riot pay for. The guarantee given by A was not a continuing guarantee, and acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... due fulfillment of these engagements stipulated in the lease during the whole term of its continuance. It would be unduly straining the language of Section 129 to call it a continuing guarantee. 13. We are therefore of opinion that the view taken by the lower appellate Court was justified. We accordingly dismiss this appeal with costs including in this Court fees on the higher scale. 4. In view of the above, it is submitted that where a guarantee is extended for a single transaction, it would amount to a one-time guarantee and not a continuous guarantee. Hence, it is submitted that where a guarantee is received by the Applicant from its foreign group companies regarding repayment of the loan availed by the Applicant within a specified period, it would amount to a one-time guarantee. 5. Further, it is submitted that under GST regime, the definition of continuous supply of services is given under Section 2 (33) of the CGST Act. The said Section defines the expression continuous supply of services as a supply of services which is provided, or agreed to be provided, continuously or on recurrent basis, under a contract. for a period exceeding three months with periodic payment obligatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, it is submitted that while guarantee is a one-time transaction between the guarantor, lender and the borrower but it continues for a specified period of time. Therefore, it is not a continuous supply since the said supply is not provided on a continuous or recurrent basis, rather the said supply is provided only once when the guarantor enters into the contract with the lender. 6.4 Additionally, since no actual payment is made by the Applicant to the guarantors for extending corporate guarantees to them, the condition of periodic payments as envisaged under Section 2 (33) of the CGST Act is not satisfied in the present case. Therefore. it is submitted that providing corporate guarantee is not a continuous supply as envisaged under the provisions of Section 2 (33) of CGST Act. 6.5 Further, it is submitted that the date of execution of the deed of guarantee would be deemed to be the date of provision of corporate guarantee as per amended provision of Rule 28 (2) of the CGST Rules and deemed value @ 1% of such guarantee offered is considered to be deemed consideration from the date of the said amendment, where there is no consideration for such guarantee. It is submitted that the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vt. Ltd. v. CCE, Meerut, 2009 TIOL 968 (T) Wherein the Hon'ble Tribunal held that there was no continuous providing of information and/or know-how; the know-how was received in 1990, prior to introduction of intellectual property service as a taxable service. Though royalties in the form of deferred payments were remitted subsequent to introduction of the taxable service, in installments, the taxable service cannot be considered to have been provided after introduction of the provision. The relevant portion of the said judgement is reproduced below: 6. We have carefully considered the submissions from both sides. We also perused the agreement and the show cause notice. 'n the show cause notice it is alleged that the appellant was granted exclusive right to manufacture, use and sell within the territory, the preparation utilizing the know how and scientific and technical information and the teachings of the patents on payment of royalty. It is also alleged in the show cause notice that the appellant was receiving know-how during the disputed period. However, from the agreement it is noticed that there is no evidence of continuous providing of information, know-how in relatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including ULIP charges At the time of levy or recovery of the charges from the policyholder. 6.10 In view of the above decisions and FAQ's, it is submitted that the time of supply of providing corporate guarantee shall be the date of issuance of corporate guarantee and that the same is not a continuous supply as there is no renewal of the said guarantee. 6.11 In view of the above, it is submitted that as the guarantor enters into the contract once for providing guarantee with the banks/financial institution and there is no renewal of the said guarantee therefore, the rendering of corporate guarantee is not a continuous supply. 6.12 Additionally, without prejudice to the above, it is submitted that Rule 28 (2) has not specified the methodology of how GST under reverse charge mechanism would be paid if GST is to be paid periodically. Rather, it has just stated that the value of supply of providing corporate guarantee shall be deemed to be one per cent of the amount of such guarantee offered..... . From the wordings of the said Rule, it can be observed that the intention of the Legislature is to ensure that the value of the supply is no more than one percent of the guarantee offer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tee offered, or the actual consideration, whichever is higher. 7.2 In the present case, there is no consideration paid by the Applicant to the foreign group companies. Hence, the deemed value of supply of providing corporate guarantee would be the one percent of the guarantee offered. 7.3 Further, as submitted above, it is reiterated that providing corporate guarantee is not a continuous supply of service. Therefore, the value of supply on which GST under reverse charge mechanism is leviable should be 1% of the guaranteed amount as given in the Deed of Guarantee and should be levied at the time of issuance of such corporate guarantee. 7.4 However, if GST under reverse charge mechanism has to be paid on a periodic basis, then it is submitted that value of loan for which guarantee is given needs to be divided equally amongst the relevant years of guarantee and GST under reverse charge mechanism is to be paid considering 1% of such divided value each year in terms of Rule 28 (2) of CGST Rules. 7.5 In this regard, it is reiterated that the value of supply in terms of Rule 28 (2) of the CGST Rules cannot be greater than 1% of the amount of guarantee involved as per the Deed of Guarantee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each subsequent year in terms of Rule 28 (2) of the CGST Rules. C. QUESTIONS ON WHICH THE ADVANCE RULING IS SOUGHT: - Q1. Whether GST under reverse charge mechanism on issuance of corporate guarantee is payable one-time or on periodical basis, considering that the guarantee has been issued only once and is valid for specified period of time without requirement of any periodical renewal in terms of Rule 28 (2) of the CGST Rules Q)2. Without prejudice to the above, if GST under reverse charge mechanism is to be paid on periodical basis, then to ascertain the value of supply: a) whether value of loan for which guarantee is given needs to be divided equally amongst the relevant years of guarantee and GST under reverse charge mechanism is to be paid considering 1% of such divided value each year in terms of Rule 28 (2) of CGST Rules, or b) whether GST under reverse charge mechanism is payable on 1% of total value of loan in first year, and on 1% of only remaining outstanding value of loan at beginning of each subsequent year in terms of Rule 28 (2) of the CGST Rules? D. PERSONAL HEARING: - In the matter, personal hearing was granted to the applicant on 30.04.2024. Adv. Narendra Singhvi, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supply even when there is no consideration for the same. 9.3 Section 140 of the Indian Contract Act, 1872 provides for the right of subrogation, which states that once the guarantor has paid off the debt of the principal debtor, he steps into the shoes of the creditor and is possessed of all the rights that a creditor has against the principal debtor. Section 126 of the Indian Contract Act, 1872 defines a contract of guarantee as a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the surety ; the person in respect of whose default the guarantee is given is called the principal debtor , and the person to whom the guarantee is given is called the creditor . Section 127 provides that anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee. On an analysis of Section 126 and Section 127 of the Indian Contract Act, it is evident that any act done or promise made for the benefit of the principal debtor (for instance, to provide a loan to the principal debtor) performed by the creditor (a bank or a f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or. Accordingly, the date of accrual of the benefit of the guarantee to the principal debtor and the date of execution of the contract of guarantee by the surety with the creditor would always be the same. Consequently, in such corporate guarantee arrangements, the date of execution of the contract of guarantee would be the date of provision of service and as a result the time of supply would be the date of execution of the contract of guarantee. Corporate Guarantee by Foreign Holding Company to Indian Subsidiary Company: - 10. Where the guarantee is given by the one entity located outside India for a borrowing by related entity in India, the transaction will qualify as 'import of services' under GST. In case of import of services, Notification No. 10/2017-Integrated Tax (Rate) requires the person located in taxable territory to discharge tax liability on the same on reverse charge basis. If the subsidiary entities in India were not discharging GST under reverse charge on such guarantees till 26.10.2023, it would be essential to revisit the position and compute the value in terms of rule 28 (1) and discharge GST under reverse charge. For all transactions post 26.10.2023, va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of supply shall be the date of entry in the books of account of the recipient of supply or the date of payment, whichever is earlier. Where there is no consideration involved, the time of supply would be the date of entry in the books of account of the recipient (Indian subsidiary). The GST liability is to be paid by recipient of service on onetime basis at the time of supply. Question 2.2 Without prejudice to the above, this advance ruling is also sought to ascertain if GST under reverse charge mechanism is to be paid on periodical basis, then to ascertain the value of supply : i) whether value of loan for which guarantee is given needs to be divided equally amongst the relevant years of guarantee and GST under reverse charge mechanism is to be paid considering 1% of such divided deemed value each year in terms of Rule 28 (2) of CGST Rules, or ii) whether GST under reverse charge mechanism is payable on 1% of deemed total value of loan in first year, and on 100 of only remaining outstanding value of loan at beginning of each subsequent year in terms of Rule 28 (2) of the CGST Rules? Comments ; -The main issue raised in this question is settled by the comments given to Question 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charge mechanism is to be paid on periodical basis, then to ascertain the value of supply: a) whether value of loan for which guarantee is given needs to be divided equally amongst the relevant years of guarantee and GST under reverse charge mechanism is to be paid considering 1% of such divided value each year in terms of Rule 28 (2) of CGST Rules, or b) whether GST under reverse charge mechanism is payable on 1% of total value of loan in first year, and on 1% of only remaining outstanding value of loan at beginning of each subsequent year in terms of Rule 28 (2) of the CGST Rules? 5) With regard to question No. 4 (i) above, we find that in the instant case, the Corporate Guarantee is received by the Applicant i.e. subsidiary company from Foreign Group Companies in respect of loan taken from banks and financial institution for which Foreign Company does not charge any consideration from the Applicant leading to the conclusion that it is import of service received by the Applicant. Therefore, in order to identify the time of supply, it essential to discuss the provisions of Section 13 (3) of CGST Act, 2017 which are as under- In case of supplies in respect of which tax is paid or l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan after guarantees executed after 26-10-2023 as per rule 28 (2) of RGST/CGST rules 2017 on one time basis at the time of execution of the contract, if the guarantor executes the contract of guarantee without consideration, for the benefit of a related party in the GST regime post 26.10.2023. In view of the above discussion, we rule as under: RULING Q1. Whether GST under reverse charge mechanism on issuance of corporate guarantee is payable one-time or on periodical basis, considering that the guarantee has been issued only once and is valid for specified period of time without requirement of any periodical renewal in terms of Rule 28 (2) of the CGST Rules? Ans 1. GST under RCM is required to be paid at one time and not periodically considering that the guarantee has been issued only once and is valid for specified period of time without requirement of any periodical renewal in terms of Rule 28 (2) of the CGST Rules Q2 . Without prejudice to the above, if GST under reverse charge mechanism is to be paid on periodical basis, then to ascertain the value of supply: a) whether value of loan for which guarantee is given needs to be divided equally amongst the relevant years of guarant ..... X X X X Extracts X X X X X X X X Extracts X X X X
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