Whether service tax under RCM is liable on service providers (situated in abroad) who have provided bank guarantees through banks to guarantee borrowings by appellant?

PJ/Case Law/2020-2021/3639

Phoenix International Freight Services Pvt. Ltd. v. Commissioner — 2017 (47) S.T.R. 129 (Tribunal)
Brief facts: The appellant is a Public Limited Company registered as a Non-Banking Finance Company under Section 45-IA of the Reserve Bank of India Act, 1934. They entered into a Guarantee Fee Agreement on 15th January, 2010 with M/s. Dexia Micro-Credit Fund, Luxembourg (Dexia for short), a public limited company registered in that country. As per the agreement Dexia agreed to provide a guarantee to Standard Chartered Bank, London in relation to the amount borrowed by the appellant from Standard Chartered Bank, Hyderabad. In lieu of the guarantee provided by Dexia, the appellant paid a guarantee fee to Dexia. They also entered into a similar agreement guarantee agreement with M/s. Cordaid, Netherlands [Cordaid] as per which Cordaid would place and pledge a deposit with M/s. Rabo India Finance Private Ltd. [Rabo India for short] by means of a guarantee from Rabo Netherland. In lieu of this guarantee, the appellant paid a guarantee fee to Cordaid. Pursuant to an audit of the appellant’s records for the period October, 2008 to March, 2013, a show cause notice dated 17-10-2014 was issued to the appellant covering the period April, 2009 to March, 2012 demanding service tax of Rs. 29,21,803/- along with interest on the guarantee fees paid by the appellant to M/s. Dexia and M/s. Cordaid. It is the case of the department that the overseas service providers Dexia and Cordaid provided bank guarantees which are taxable under the head of banking and other financial services as per Section 65(12) of the Finance Act, 1994. In the definition of banking and other financial services, providing bank guarantee is specifically included. Under Section 66A of the Finance Act, 1994, where any services specified under Clause (105) of Section 65 are provided by a person who has his permanent residence outside India and received by a person in India, such service shall be taxable as if the recipient himself had provided services in India. Therefore, under this reverse charge mechanism, the appellant, as a recipient of the services of banking and financial services in the form of bank guarantee, was liable to pay service tax on the consideration for such services paid by them.
Issue:Whether service tax under RCM is liable on service providers (situated in abroad) who have provided bank guarantees through banks to guarantee borrowings by appellant?
Appellant contention:Learned Counsel for the appellant submits that in the first place, the services which have been provided are not in the form of bank guarantee at all. Bank guarantee is a guarantee provided by a bank. What is provided in their case is a form of corporate guarantee because it is provided by a company and not by a bank. Therefore, the services which they received are clearly not covered under the definition of banking and other financial services. Her second line of argument was that they were audited before the show cause notice was issued therefore it cannot be held that they had suppressed any facts. Their operations were in the knowledge of the department and they cannot be alleged to have suppressed any facts or willfully misstated any facts with an intent to evade payment of duty. Thirdly, she argued that the entire demand is under reverse charge mechanism and they themselves are registered with the service tax and have been availing the benefit of Cenvat credit. If any service was taxed under reverse charge mechanism, they will be entitled to the benefit of Cenvat credit of the service tax paid. Therefore, the entire exercise is revenue neutral. In view of the fact that the demand is completely revenue neutral, extended period of limitation cannot be invoked as held by the Tribunal, Mumbai in the case of Jet Airways (I) Ltd. v. CST, Mumbai [2016 (44) S.T.R. 465 (Tri. - Mum.)]. Civil appeal filed by the assessee against this order was dismissed by the Hon’ble Apex Court as reported in 2017 (7) G.S.T.L. J35 (S.C.)]. Therefore, the issue of invoking extended period of limitation in case of revenue neutrality has attained finality at the hands of the Apex Court. For this reason, also extended period of limitation cannot be invoked and no penalties can be imposed upon them. Once the extended period of limitation is not allowed, the entire demand is time barred and it needs to be set aside on this ground alone.
Authority contention:Learned AR, on the other hand, reiterates the finding of the lower authorities and asserts that the demand was correctly raised by the department and confirmed by the lower authority and by the first appellate authority. He argues that the appellants have not disclosed to the department that they were availing the benefit of these services and paying an amount to their overseas service providers. Therefore, the extended period of limitation can be invoked. On merits he would argue that although the companies which have provided the services are themselves not banks what was provided was essentially in the nature of a bank guarantee for the appellant. This guarantee assures that if the appellant defaults in payment to M/s. Standard Chartered Bank or to M/s. Robo India, the guarantor company will indemnify the banks against such loss. The case of Sterlite Industries Ltd. v. CCE [2019 (2) TMI 1249 (CESTAT-Madras)] relied upon by the Learned Counsel for the appellant does not apply in this case because in the case of Sterlite Industries, the company was providing guarantee to it’s own subsidiaries and there was no bank involved in there. Therefore, the nature of guarantee provided was that of corporate guarantee and not a bank guarantee. As opposed to these cases, in the present case Standard Chartered Bank, London has provided a guarantee to Standard Chartered Bank India at the behest of M/s. Dexia and M/s. Dexia was paid a fee by the appellant for the purpose. Similar is the case with M/s. Cordaid. Therefore, this takes the form of bank guarantee and therefore, the demand is sustainable on merits.
Judgment and Order: The arguments on both sides and perused the records. “Providing Bank Guarantees” is clearly covered by the definition of Banking and other Financial Services under Section 65(12) of the Finance Act, 1994. These services can be provided by
(a)        a banking company;
(b)       financial institutions including a non-banking financial company; or
(c)        any other body corporate or commercial concern.
A plain reading of Section 65(12) shows that it covers various services including providing a bank guarantee by a banking company, financial institution or any other body corporate or commercial concern. It is true that Dexia and Cordaid are not banking companies but they have provided bank guarantees through Standard Chartered Bank and through Robo, Netherlands, respectively to guarantee the borrowings by the appellant. Learned Counsel argued that these are corporate guarantees and we are not convinced. These are not the guarantees provided by a corporation for its subsidiaries but are pure bank guarantees provided through banks by the service providers. Therefore, on merits, we find that the appellant received banking and financial services from abroad and is liable to discharge service tax under reverse charge mechanism.
Prepared By- CA Kunal Karnawat

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PJ/Case Law/2020-2021/3639

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