Service Tax Liability on Government Guarantee Commission for Irrevocable Debt Market Fundraising

Conclusion: Since raising of finance for day-to-day operations by assessee was squarely covered within the scope of the definition of ‘support service’ and thus assessee was liable to discharge service tax on the Guarantee commission paid to Government of Karnataka or raising funds from the debt market.

Held: Assessee was engaged in implementing the ongoing Upper Krishna multipurpose irrigation projects and other related irrigation projects entrusted to it by the Government of Karnataka and were registered with the Service Tax Department for providing ‘works contract service’ and also discharging service tax under reverse charge mechanism, namely, manpower supply, legal services, rent-a-cab service and director’s sitting fee, etc. Assessee appealed against the order passed by Commissioner of Central Tax to confirm the recovery of the service tax amount of Rs. 16,31,36,263/- for the period from 01.07.2012 to 30.06.2017 with interest and penalty. Assessee contended that assessee was a wholly owned public sector undertaking of the Government of Karnataka and was formed exclusively for the development of Upper Krishna River multipurpose irrigation project for utilization of Krishna River water allocated to the State of Karnataka under Bachawat Award. Also submitted that since the transaction was governed by a Statute, hence, it was not a business transaction and the commission paid was not leviable to service tax. Department contended that assessee was nothing but the support service for raising finance to meet the day-to-day operations by assessee by raising funds from the debt market, hence falling within the scope of “support service” and taxable during the relevant period up to 2016. It was held that the definition of “support service” under Section 65B(49) of the Finance Act, 1994 did not cover the service of guarantee received by assessee from the Government of Karnataka for raising funds from the debt market. Raising of finance for day-to-day operations by assessee was a ‘service’ in the ordinary course of business operation and squarely fell within the scope of the definition of ‘support service’ and thus assessee was liable to discharge service tax on the Guarantee commission paid to Government of Karnataka.

FULL TEXT OF THE CESTAT BANGALORE ORDER

This is an appeal filed against the Order-in-Original No. BLR-NORTH-COMM-02/2020-21 dated 30.04.2020 passed by the Commissioner of Central Tax, Bengaluru North Commissionerate.

2. Briefly stated facts of the case are that the appellant is engaged in implementing the ongoing Upper Krishna multipurpose irrigation projects and other related irrigation projects entrusted to it by the Government of Karnataka. They were registered with the Service Tax Department w.e.f. 17/05/2013 for providing ‘works contract service’ and also discharging service tax under reverse charge mechanism, namely, manpower supply, legal services, rent-a-cab service and director’s sitting fee etc. Also, they have separate service tax registration for the activities carried out at Almatti Dam site and Bheemarayanagudi project within jurisdictional Central Excise /Service Tax authorities. On the basis of intelligence, investigation was initiated and on scrutiny of documents, recording of statements and analysing of evidences, it was noticed that though the Appellant paid guarantee commission to the Government of Karnataka for providing unconditional and irrevocable guarantee for raising funds from debt market however, they failed to discharge service tax on the said guarantee commission under reverse charge mechanism and also had not declared the said guarantee commission in the periodical ST-3 returns filed. Consequently, show cause notice was issued to the Appellant for recovery of service tax amount of Rs. 16,31,36,263/- for the period from 01.07.2012 to 30.06.2017 with interest and penalty. Also, an amount of Rs.8,43,87,602/- paid during the period 01.04.2016 to 30.6.2017 proposed to be appropriated. On adjudication, the demand was confirmed with interest and penalty; also, the amount paid was appropriated against the said demand. Hence, the present appeal.

3.1 The learned Advocate for the appellant submits that the appellant is a wholly owned public sector undertaking of the Government of Karnataka and was formed exclusively for the development of Upper Krishna River multipurpose irrigation project for utilization of Krishna River water allocated to the State of Karnataka under Bachawat Award. The appellant is mostly supported by the State budget and earns very little revenue from the farmers and the water used for irrigation is almost free of cost. Karnataka Power Corporation has set up a medium size hydel power project using the water from the reservoir owned by the appellant, on which royalty is earned. Further, some water rates are collected from industrial consumers, otherwise, the appellant has only miscellaneous income such as rent from shops and various offices in their residential colony.

3.2 Upper Krishna project was financed from borrowed funds by issuing “bond”, which was guaranteed by the Government of Karnataka. Towards this guarantee, the appellant pays 1% of the guarantee sum as guarantee commission. Periodically the appellant also raises money from Banks for construction operation and maintaining the reservoir and canals, for which guarantee is given by the Government of Karnataka.

3.3 It is his submission that the financial guarantee issued by the Government of Karnataka is governed by the Karnataka Ceiling on Government Guarantees Act, 1999. Section 3 of the said Act prescribes upper limit for the guarantees which can be given by the Government of Karnataka; but the proviso thereunder makes an exception with respect to the borrowing by the appellant and allows the Government of Karnataka to give guarantee without any limit, subject to payment of guarantee commission.

3.4 It is his argument that since the transaction is governed by a Statute, hence, it is not a business transaction and the commission paid not leviable to service tax. In support, he relies on the judgment of this Tribunal in the case of Superintendent of Police, Sawai Madhopur vs. CCE 2019-TIOL-3430-CES TA T-DELHI.

3.5 Further, he submits that the present demand of service tax falls into two different periods – one, during the period when the definition of “support service” was on the statute book in Section 65B(49) of the Finance Act, 1994, i.e. upto 01.04.2016; and the second period is after omission of the said definition. For the second period the Appellant had discharged service tax.

3.6 The learned Advocate submits that from the definition of ‘support service’, it would be clear that finance guarantee does not fall within its scope, even the same cannot come within the definition of service. He submits that giving financial guarantee cannot be outsourced by anyone else. The lenders seek guarantees from third parties (other than the borrowers), whose name and credit worthiness are unimpeachable such as a bank or a government or an institution specializing in giving guarantees.

3.7 He further submits that the ld. Commissioner has not recorded a specific finding as to why giving financial guarantee is a “support service” but in a tangential finding held that providing guarantee by Government of Karnataka is a ‘service’ under Section 65B(44) of Finance Act, 1994. It is his contention that the adjudicating authority mis-classified the service provided by the Government of Karnataka. Further, he submits that for the period after the omission of Section 65B(49) w.e.f. 01.04.2016, the appellant has discharged service tax upto June, 2017.

3.8 Further, he submits that giving financial guarantee is a banking or financial service and since the Government of Karnataka is not a bank or financial institution, guarantee given by it, cannot be classified under SSBC. In support, he refers to the judgment of Hon’ble Delhi High Court in the case of Olam Agro Industries Ltd vs. CCE – 2014 (33) STR 234 (Del.).

3.9 Further, assailing confirmation of the demand invoking extended period, the ld. Advocate has submitted that even though the investigation was commenced in June, 2015, but the show cause notice was issued to the appellant in October, 2017 and during these two years only two letters were issued. It is his contention that invoking the extended period of limitation ought to have ended with the date of commencement of investigation. Any demand thereafter ought to be considered subject matter of second and subsequent statement of demand.

3.10 Further, he has submitted that the appellant has paid service tax of Rs. 8,43,87,602/- on guarantee commission after the omission of the definition of “support service” which was paid in normal course under self-assessment from 01.04.2016 is not tax short paid or short levied. Hence, inclusion of that amount in the demand raised is bad in law as the appellant has filed periodically ST-3 returns during the said period.

3.11 Further, he has submitted that the appellant being a PSU, has no motive for evasion of tax. In support, he refers the ratio of the judgments of this Tribunal in the cases of IOCL vs. CCE – 2013 (291) ELT 943 (Tri.) and Markfed Refined Oil & Allied Industries vs. CCE – 2008 (229) ELT 557 (Tri. Del.).

4. Per contra, the ld. A.R. for the Revenue reiterates the findings of the ld. Commissioner. He submits that the guarantee given by the Government of Karnataka to the appellant is nothing but the support service for raising finance to meet the day-to-day operations by the appellant by raising funds from the debt market, hence fall within the scope of “support service”, hence taxable during the relevant period up to 2016. Also, since the appellant is registered with Service Tax department for providing other taxable services but failed to disclose the said payment of commission to the Government of Karnataka against the guarantee received for raising funds; therefore, the ld. Commissioner has rightly invoked the extended period in demanding service tax not paid by the appellant. Also, he submits that the imposition of penalty on the Appellant in the circumstances of the case is justified.

5. Heard both sides and perused the records.

6. We find that the appellant has commenced discharging service tax on commissions paid to the Government of Karnataka for providing guarantee in raising funds from the debt market from 01.04.2016. The present dispute is demand of service tax on the commissions paid by the appellant for the period prior to 04.2016. Thus, the issues need to be determined are whether: (i) service tax is payable under the commission paid by the appellant to the Government of Karnataka on reverse charge mechanism basis as per Rule 2(l)(d)(i)(E) of the Service Tax Rules, 1994 for the period from 01.07.2012 to 31.03.2016; (ii) Invoking of extended period and imposition of penalties is justified.

7. It is not in dispute that for the period from 01.07.2012 to 03.2016 and 01.04.2016 to 30.06.2017, the appellant have paid commissions for guarantee issued by the Government of Karnataka in raising funds by them from debt market. It is not in dispute that the appellant is a public sector undertaking and majority of shares are held by the Government of Karnataka. It is also not in dispute that post 01.04.2016 to 30.06.2017, the appellant accepting the said services as taxable service discharged service tax on the same and does not dispute the same in the present appeal. However, for the period 01.07.2012 to 31.03.2016, they resisted levy of service tax on the ground that definition of “support service” under Section 65B(49) of the Finance Act, 1994 does not cover the service of guarantee received by the Appellant from Government of Karnataka for raising funds from the debt market.

8. “Support Service” has been defined under Section 65B(49) reads as follows:

“(49) ‘support service’ means infra structural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis.”

9. The ld. Commissioner in the impugned order referring to the definition of ‘service’ introduced w.e.f. 01.07.2012 under Section 65B(44), Taxable service under Section 65B(51), negative list of services prescribed under Section 66(D) and also analysing the definition of “support service” under Section 65B(49) of the Finance Act, 1994 concluded that the unconditional and irrevocable guarantee received by the appellant from the Government of Karnataka is nothing but a ‘service’ and satisfies the definition of ‘support service’ provided by the Government of Karnataka and consequently liable to service tax under reverse charge mechanism. The contention of the appellant that providing the guarantee is not a ‘service’, hence, not a taxable service, therefore, the commissions paid to the Government of Karnataka do not fall under the scope of “support service”.

10. We do not find merit in the argument of the appellant, in as much as reading the definition of “ service” and “support service” in juxtaposition, it is clear that the said definition of ‘support service’ is exhaustive and takes in its fold all activities of infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract etc. Thus, raising of finance for day-to-day operations by the appellant is a ‘service’ in the ordinary course of business operation, squarely falls within the scope of the definition of ‘support service’. Therefore, the appellant is liable to discharge service tax on the Guarantee commission paid to Government of Karnataka during the period 01.07.2012 to 31.03.2016 for providing unconditional and irrevocable guarantee in raising funds from the debt market.

11. On the issue of invoking extended period of limitation, we find that the ld. Commissioner in the impugned order has held that the returns filed by the appellant for the period April, 2016 to September, 2016 does not reflect the payment of service tax of Rs. 6,56,57,301/- and the payment of service tax for the period from April, 2016 to June, 2017 was made during the period March, 2017 to August, 2017 i.e. much after the investigation was conducted by the DGCEI between June and July of 2015. He has observed that though the payment of guarantee commissions to the Government of Karnataka is reflected in the Appellant’s books of accounts, however, the same has not been reflected in the periodical ST-3 returns filed with the department; thus, non-mentioning in the ST-3 Statutory Returns indicate their intention to evade tax by suppressing vital and relevant facts.

12. The investigation was conducted by DGCEI somewhere around June 2015 and statements of Shri K. Somashekhar and Shri Charles Sujay Kumar were recorded. In the said statements, it has been admitted that the guarantee commission was paid to the Karnataka State government but service tax was not discharged on the same. It was clearly stated that the policy decision with regard to the discharge of service tax rests with Sri R.S. Pasupathi, Chief Executive Officer(Finance) and Shri Ajay Seth, Managing Director of the company. But, the said officials of the company were not examined to ascertain as to why the service tax was not paid by the appellant company, even though tax on various other services received were discharged on reverse charge mechanism basis. The extended period of limitation could be invoked only when evidence collected lead to an inference that there has been fraud, collusion, suppression, misdeclaration or contravention of any of the provisions with intent to evade payment of duty. In the present case, the Department has failed to place on record evidence indicating that there has been intention not to discharge service tax on the guarantee commission even though the appellant has been aware of the legal position that service tax is payable on guarantee commission paid to the State government of Karnataka for providing irrevocable guarantee in raising funds from debt market. Moreover, the appellant is a public sector undertaking and in the absence of specific evidence to support that there has been intentional evasion of service tax, extended period cannot be invoked merely on finding the failure on their part to discharge service tax. We find support from the judgement of this Tribunal in the case of Indian Oil Corporation Vs. CCE -2013 (291) ELT 449 (Tri-Ahmd). For the said reason also, we do not find merit in imposing penalty on the appellant.

13. In the result, the impugned order is modified and the demand is confirmed for the normal period of limitation with interest. Penalties imposed are set aside. Appeal disposed of on above terms.

(Order pronounced in the court on 26/10/2023)