The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chandigarh Bench, has held that corporate guarantees issued by a company in favour of its group entities without charging any commission or consideration cannot be subjected to service tax under the Finance Act, 1994.
The bench of S. S. Garg (Judicial Member) and P. Anjani Kumar (Technical Member) has observed that corporate guarantees issued without charging any consideration cannot attract service tax merely because the recipient company may have secured loans on favourable terms.
The dispute arose from two show cause notices issued to appellant/assessee for the periods April 2013–March 2015 and April 2015–March 2016. The department alleged that the company had provided taxable services by issuing corporate guarantees on behalf of its associated enterprises without charging any commission.
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Despite acknowledging that no fee, commission or consideration had been received by the company, the department sought to levy service tax on a notional value by assuming that a guarantee commission ought to have been charged. The adjudicating authority confirmed service tax demands of ₹1.91 crore for FY 2013-15; and ₹1.66 crore for FY 2015-16, along with applicable interest and penalties. These orders were subsequently upheld by the Commissioner (Appeals), prompting the assessee to approach the Tribunal.
Representing the appellant, counsel argued that the company had not received any consideration whatsoever for issuing the corporate guarantees and therefore the activity could not be regarded as a taxable “service” under Section 65B(44) of the Finance Act, 1994.
The company also relied upon a Chartered Accountant’s certificate confirming that no commission or consideration had been charged or received for issuing the guarantees.
The assessee further submitted that the issue had already been conclusively settled in favour of taxpayers through several Tribunal decisions as well as the Supreme Court’s affirmation of the decision in the Edelweiss Financial Services case.
The central issue was whether furnishing a corporate guarantee without receiving any consideration amounts to a taxable service.
The Tribunal noted that both the show cause notices and the adjudication orders themselves admitted that the assessee had not charged any consideration for issuing the guarantees.
It held that under the negative list regime introduced through Section 65B(44), the existence of consideration is an essential ingredient for treating an activity as a taxable service. In the absence of consideration, the activity falls outside the ambit of service tax.
The Tribunal extensively relied upon the Mumbai Bench’s decision in Commissioner of CGST & CE, Mumbai East v. Edelweiss Financial Services Ltd., which was subsequently upheld by the Supreme Court.
The Tribunal reiterated that taxation under the Finance Act requires both a service provider; and consideration flowing for the service rendered.
Without these elements, no levy under Section 66B can arise.
It also rejected the department’s argument that indirect or non-monetary commercial benefits could be treated as consideration for levy of service tax.
The CESTAT set aside the orders passed by the Commissioner (Appeals), allowed both appeals filed by the assessee, and granted consequential relief in accordance with law.
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