In the prevalent economic disorder, it is indeed necessary and obligatory for the holding companies to protect their subsidiary companies from any financial losses and difficulties. For doing so, the concept exists of providing a guarantee by the Holding Company on the loan taken by the subsidiary company from any banks or financial institutions. Guarantee, in general term, is understood to mean ‘the assurance given by one party for payment of another’s party obligation to the holder of the debtor’s obligation’.
The Legislature of our country also certainly felt the need to bring the concept of guarantee under the statutory obligation, and thus enacted Section 185 under the Companies Act, 2013, which provides for guaranteeing the loan by the Holding Company towards their Subsidiary Company. Section 185 of the Companies Act, 2013 is read as –
“185. Loan to directors, etc.— (1) Save as otherwise provided in this Act, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person:
Provided that nothing contained in this sub-section shall apply to—
(a) the giving of any loan to a managing or whole-time director—
(i) as a part of the conditions of service extended by the company to all its employees; or
(ii) pursuant to any scheme approved by the members by a special resolution; or
(b) a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India;
(c) any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or
(d) any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company……………..”
Meaning thereby, Companies Act ‘recognised’ Corporate Guarantee and majorly the objective behind the same is to safeguard the interest of both i.e. the lender (who gives the loan) and the borrower (to whom the loan is given). Having regard to the direct or indirect commercial interest of the Company, the corporate guarantee is given with a view to safeguard and to further business interest.[1]
Corporate Guarantee under Service Tax –
To understand the concept of Corporate Guarantee under Service Tax, let us first examine whether corporate guarantee qualifies as services or not. That as per the definition of ‘Service’ given under Section 65B of the Finance Act 1994, it means “any activity carried out by a person for another for consideration…….”
From the above, it can be deduced that to fall under the umbrella of ‘service’, the following conditions mandatorily need to be satisfied, which are inter alia as follow –
i. It should be an activity;
ii. Activity should be carried out by one person for another;
iii. Such activity should be in lieu of Consideration.
Meaning thereby, if any of the afore-mentioned primary conditions is missing, then activity fails to qualify as ‘Service’. Accordingly, to bring a Corporate Guarantee under the purview of service tax, it has to first satisfy the conditions of services, supra. At this juncture, it is important to dwell upon some judicial pronouncements dealing with the issue of Corporate Guarantee.
The Hon’ble CESTAT New Delhi, in the matter of Olam Agro India Ltd. Vs. C.C.E., Delhi-II bearing Final Order Nos. 52650-52651/2018 considered the activity of corporate guarantee as service and classified the same under ‘Business Auxiliary Service’ (under sub-section (iv) ‘procurement of goods or services which are inputs for the client’) and levied service tax on the commission given by the holding company to its parent company.
However, the fate of the Olam Agro(supra) is still pending finalization before the Hon’ble Supreme Court.
Thereafter, the Hon’ble CESTAT in the matter of DLF Cyber City Developers Limited Versus COMMISSIONER OF S.T., DELHI-IV cited in 2019 (28) G.S.T.L. 478 (Tri. – Chan.) took a divergent view and held that in the circumstances where there is no flow of consideration from holding company to parent company, service tax cannot be levied.
Now aggrieved of the same, the Revenue approached Hon’ble Supreme Court and the issue is yet again pending for consideration.
From the above array of judgments, it can be deduced that there lies inconsistency within the department itself with respect to the taxability of the Corporate Guarantee under Service tax law.
Corporate Guarantee under GST –
To fall under the scope of GST, any activity should first fall within the ambit of Section 7 of the CGST Act 2017. Section 7 of the CGST Act 2017 is read as follow –
“Section 7 – Scope of supply –
(1) For the purposes of this Act, the expression “supply” includes—
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
……………………….
(c) the activities specified in Schedule I, made or agreed to be made without a consideration;
……………………….”
In general parlance, the activity of exercising Corporate Guarantee is carried without consideration as the same is entrepreneurial in nature and is done to safeguard the financial health of the subsidiary company. Owing to it, the same is also unsecured in nature as there is no security provided by the subsidiary company if there is a default of the loan. Now since ‘any activity made or agreed to be done without consideration’ comes within the purview of Schedule I of the CGST Act 2017, let us examine as to whether the service of corporate guarantee would fall within its scope or not?
As per Schedule I of the CGST Act 2017, “Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:” Taking inference therefrom, the holding and subsidiary company may be treated as a related person by the virtue of Explanation a(iv) or a(v) of Section 15 of the CGST Act 2017. If that be so, then the transaction of Corporate Guarantee may be brought within the scope of GST.
It is also discernible fact that by bringing the concept of ‘activities to be treated as supply even if made without consideration’ the department has widened its scope of tax imposition.
However, dispute per se exists where the basic question arises that ‘whether corporate guarantee can even be considered as supply of service or not?’ GST being comparatively new law, there exists certain cases laws under IT Act which do not consider ‘Corporate Guarantee’ as provision of service and the same are discussed as below –
The Hon’ble ITAT-Ahmedabad in the matter of Micro Ink Limited v. ACIT bearing I.T.A. No.: 2873/Ahd/10 has held corporate guarantee not be a service and while holding so, the Hon’ble bench held that “When the legislature itself does not group ‘guarantees’ in the ‘provision for services’ and includes it in the ‘capital financing’, it is reasonable to proceed on the basis that issuance of guarantees is not to be treated as within the scope of normal connotations of expression ‘provision for services’.”
In Suzlon Energy Limited, Ahmedabad vs The Dcit.,Circle-8,, Ahmedabad bearing ITA No.2074 & 2179/Ahd/2013 similar view was again taken by the Hon’ble ITAT-Ahmedabad and in due course, it was held that “the issuance of corporate guarantees in question was not in the nature of ‘provision for services’ and these corporate guarantees were required to be treated as shareholder participation in the subsidiaries.”
Conclusion –
From the above, it can be deduced that the concept of Corporate Guarantee as taxable or not is still murkier. It is a highly disputable area and therefore, the Central Government must come up with certain clarification or guidelines for the treatment of Corporate Guarantee under GST as well. Apart from the above-mentioned scenario where there is no consideration, clarity is also needed where there is a flow of consideration for providing the corporate guarantee as is in the case of Olam Agro(supra).
[1] The Bombay Dyeing & Mfg. Co. Limited v. DCIT in ITA No. 1716/Mum/2017 dated 27.10.2017
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Excellent analysis, nice article