Indirect Tax Alert - Service tax is not leviable on corporate guarantees provided without consideration
05 April 2023
Facts of the case
- Edelweiss Financial Services Limited (Taxpayer) is inter alia engaged in providing financial services. Until May 2015, the Taxpayer had inter alia provided corporate guarantees to its group companies situated in India without consideration
- A show cause notice was issued to the Taxpayer inter alia proposing to levy Service tax, treating the aforesaid corporate guarantee provided to its group companies as being covered under the purview of the term ‘service’, under section 65B(44) of the Finance Act, 1994 (Finance Act)
- The aforesaid show cause notice was decided in favour of the Taxpayer. The Tax Authorities filed an appeal before CESTAT which was also dismissed
- Subsequently, the Tax Authorities filed an appeal before the Hon’ble Supreme Court.
Contentions by the Taxpayer
- As regards the guarantee provided till 30 June 2012, it was submitted that the provision of corporate guarantee to a group company without consideration would not fall within the purview of ‘banking and other financial services’ and hence, would not be leviable to Service tax
- Under the Negative List regime, effective 1 July 2012, the existence of ‘consideration’ is one of the essential elements to classify a transaction under the purview of the definition of ‘service’ under Section 65B(44) of the Finance Act. Since the activity does not qualify as a ‘service’, there cannot be any tax liability.
Contentions by the Tax Authority
- The Tax Authority submitted that the present case is similar to Civil Appeal No. 428/2020 in the matter of Commissioner of Service Tax, Audit-II, Delhi IV Vs. DLF Cyber City Developers Ltd. (ongoing), pending before the Hon’ble Supreme Court. As a result, the present matter should be admitted and tagged along with the aforesaid matter.
Observations and Ruling by the Hon’ble Supreme Court
- Relying on the orders passed by the adjudicating authority and CESTAT, the Hon’ble Supreme Court observed that in the present case, the Taxpayer had not received any consideration to providing a corporate guarantee to its group companies in India
- Further, the Tax Authorities have failed to assail the said finding or demonstrate that issuance of corporate guarantee to the group companies without consideration would be a taxable service
- Considering the above and conclusive findings provided in the said orders, the present appeal cannot be admitted based on the pending matter.
The aforesaid ruling upholds the following principles laid down in the CESTAT order:
- Effective 1 July 2012, the existence of ‘consideration’ is one of the essential ingredients of ‘service’ and imposition of Service tax is unsustainable in the absence of the flow of consideration
- ‘Consideration’ is recompense for the ‘contractual’ undertaking that authorises levy while ‘assessable value’ is a determination for computing the measure of the levy, and the latter must follow the former and non-monetary benefits if at all, will be relevant only to determine the assessable value.
The scope of the term ‘supply’ under Section 7 of the Central Goods and Services Tax Act, 2017 (CGST Act) also has ‘consideration’ as an essential element, similar to the definition of ‘service’ under the Finance Act. However, an exception is carved out for activities specified in Schedule I to the CGST Act, which would be treated as ‘supply’ even in the absence of consideration leading to this judgement not being applicable under the GST regime in case of activities specified in Schedule I to the CGST Act.
[Supreme Court of India, M/s. Commissioner of CGST and Central Excise Vs. Edelweiss Financial Services [Civil Appeal Diary No. 5258/2023], dated 17 March 2023]