Corporate guarantees are different from bank guarantee and not leviable to service tax.

PJ/Case Law/2014-15/2181

Case:-STERLITE INDUSTRIES LTD Vs COMMISSIONER OF CENTRAL EXCISE, TIRUNELVELI.

Citation:-2013-TIOL-1722-CESTAT-MAD

Brief facts:-The applicant had provided corporate guarantees to their subsidiary companies during the period 2004-05 to 2008-09. On the commission received for providing such guarantee, they had not paid any service tax. Revenue was of the view that the service was taxable under section 65(105)(zm) read with section 65(12) (a) (ix) of Finance Act, 1994 and initiated proceedings for tax not paid.

Further, during 2008-09 the applicant had made payment to Vedanta Resources Plc. Inc. London for securing external commercial loans and paid commission to Vedanta Resources Plc. Inc. London. Revenue was of the view that the applicant should have paid tax on this service received as per the provisions of section 66A of the Finance Act, 1994. Since no tax was paid on this account, the Show cause Notice demanded tax on this count also and was adjudicated. The total amount of demand confirmed against the applicant was Rs.16,34,84,700/- along with interest and penalties.

Aggrieved by the order of the adjudicating authority, Appellants have filed this appeal along with a stay petition for waiver of pre-deposit of dues arising from the impugned order for admission of the appeal.

Appellants contention:-The Ld Counsel for appellant draws our attention to the definition of "banking and Financial services" at section 105 (12) which reads as under:

(12) "banking and other financial services" means -

(a) the following services provided by a banking company or a financial institution including a non-banking financial company or any other body corporate [or commercial concern], namely:-

(i) financial leasing services including equipment leasing and hire-purchase;

[Explanation. - For the purposes of this item, "financial leasing" means a lease transaction where -

(i) contract for lease was entered into between two parties for leasing of a specific asset;

(ii) such contract was for use and occupation of the asset by the lessee;

(iii) the lease payment was calculated so as to cover the full cost of the asset together with the interest charges; and

(iv) the lessee was entitled to own, or had the option to own, the asset at the end of' the lease period after making the lease payment;

[(ii) * * * *]

(iii) merchant banking services;
(iv) securities and foreign exchange (forex) brooking, and purchase or sale of foreign currency, including money changing;

(v) asset management including portfolio management, all forms of fund management, pension fund management, custodial, depository and trust services;

(vi) advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisitions and advice on corporate restructuring and strategy;

(vii) provision and transfer of information and data processing;

(viii) banker to an issue services; and

(ix) other financial services, namely, lending; issue of pay order demand draft, letter of credit and bill of exchange; transfer of money including telegraphic transfer, mail transfer and electronic transfer, providing bank guarantee, overdraft facility, bill discounting facility, safe deposit locker, safe vaults; operation of bank accounts;"

It was pointed out that Revenue was trying to bring the activity in clause (ix). He argues that clause (ix) covers only "bank guarantees". "Corporate guarantees" and "bank guarantees" were understood to be totally different in trade. While bank guarantee was a liquid instrument which can be cashed by making a simple demand on the bank for violation of the terms and conditions as specified in the guarantee, cashing a Corporate guarantee was a much more complex process. While banks may issue bank guarantees against a corporate guarantee, a person who wants recourse to a liquid guarantee will not accept corporate guarantee instead of bank guarantee. He further points out that the services specified in clause (ix) were so specified using the expression "services namely" and so the scope of the words cannot be expanded to cover other types of activities.

The Counsel prays that there was no merit in the argument of Revenue and hence appeal should be admitted without any pre-deposit. In the case of service provided by Vedanta Resources Plc. Inc. London, the Counsel submits that the service cannot in the first place be categorized as 'banking and financial service' and secondly the entire activity was performed outside India and hence cannot be the subject matter of service tax levy in India.

Respondents contention:-Opposing the prayer, the Ld. A. R. for Revenue submits that from the definition at section 65(12) (a), it can be seen' that services provided by anybody corporate other than a banking company or NBFC will also be covered by the definition. He further argues that the corporate guarantee was similar in nature to bank guarantee. The service cannot escape the tax net for the reason that the guarantee was given by a corporate entity other than a Banking company or NBFC. Further, he submits that in respect of banking and financial services, the liability for services received from outside India was to be judged with reference to place of residence of the recipient of service and not the place of performance of service.

Reasoning of judgement:-It was found that clause 12 (a) of section 65 (105) as also sub-clause (ix) of section 65 (12) (a) specifies services using the expression "services namely". Such language gives very little scope for an expansive construction of the items enumerated. One expression used therein was "bank guarantee". Commercially bank guarantee and Corporate guarantee were two different financial instruments. This interpretation does not render the expression "any body corporate" used in section 65 (12) redundant because it still had meaning in respect of other sub-clauses at (i), (iii), (iv), (v) etc. However the taxing entry at section 65 (105) (zm) reads as under:

65 (105) “taxable service” means any [service provided or to be provided], -
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(zm) to any person, by a banking company or a financial institution including a nonbanking financial company, or any other body corporate or commercial concern, in relation to banking and other financial services;

Therefore, if the impugned corporate guarantee was given in relation a banking and financial service specified at section 65 (12) of Finance Act 1994, there may be force in the argument of Revenue. But the Show cause Notice or adjudication proceedings do not bring out any such case.

So we were of the view that prima facie there was not much merit in the contention of Revenue. So we waive the requirement of pre-deposit of dues arising from the impugned order for admission of appeal and stay its collection during the pendency of the appeal.

Decision:- Pre deposit was waived.

Conclusion:- The analogy of the case is that there is a difference between the bank guarantee and guarantee furnished by corporate. As the definition of banking and financial services clearly specified the kind of services taxable and there was specific mention of bank guarantee and no mention of corporate guarantee, service tax cannot be levied on corporate guarantee under “banking and other financial services”.

Prepared by: Aashish Bohra

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PJ/Case Law/2014-15/2181

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