In-house corporate guarantee not liable to service tax

Sterlite Industries India Ltd. Vs Commissioner of GST & Central Excise (CESTAT Chennai)

CESTAT Chennai has held that commission received/paid for issuance of corporate guarantee to associate/subsidiary companies is not exigible to service tax under Section 65(12)(a)(ix) of Finance Act, 1994. The Tribunal observed that corporate guarantee is not same as bank guarantee since corporate guarantee is an in-house guarantee issued to safeguard financial health of associate enterprises and is not issued to customers generally. It was also held that only the services listed in Section 65(12)(a)(ix) ibid would be exigible to service tax under Banking and Other Financial Services. The Tribunal in this regard also observed that it was also not the case that the corporate guarantee was issued / procured to enable the bank to issue bank guarantee.

FULL TEXT OF THE CESTAT JUDGEMENT

The appellants are inter alia manufacturers of copper products falling under Chapter 74 of CETA, 1985. Pursuant to audit scrutiny by department officers, it emerged that appellants had received guarantee commission from their associate / subsidiary companies for providing corporate guarantee. It was further noticed that appellants have also paid consideration to M/s. Vedanta Resources Plc. Inc. London (herein after referred to as Vedanta) during the year 2008 – 09 for getting corporate guarantee to secure external commercial loans. Department took the view that the amount so received / paid by the appellant from / to their associate / subsidiary companies for providing corporate guarantee for a consideration would be exigible to service tax under the category of “Banking and Other Financial Services” (BOFS). In consequent, three show cause notices were issued to the appellants as under:-

2. These show cause notices were adjudicated vide a common adjudication order dated 28.9.2012 (impugned order) wherein inter alia the amounts proposed in the show cause notices were confirmed with interest thereon and penalties were also imposed under sections 76, 77 and 78 of the Finance Hence this appeal.

3. When the matter came up for hearing, ld. counsel Shri Vishal Agarwal and Shri Akshit Malhotra appeared and argued on behalf of the appellants. Ld. counsel explained that wherever the appellant was called upon to furnish Corporate Guarantee, they requested their holding company Viz. Vedanta Resources P/c. London to furnish the same. For this, the holding company used to charge the appellant a fee called Guarantee Commission. Similarly, in respect of its associates and subsidiary companies such as Indian Foils Ltd. Madras Aluminium Co. Ltd. etc. wherever these associate enterprises were called upon to furnish Corporate Guarantee for their business, it was the appellant who furnished the same. Till 2006 – 07, the appellant had not recovered any amount from the said associate / subsidiary companies. Even thereafter, they have recovered guarantee commission only from some of the said associate / subsidiary companies. The allegation of the department is that appellant has to pay service tax under reverse charge on the amount paid as guarantee commission to M/s. Vedanta Resources, London and also pay service tax on the amount received as guarantee commission from their associate / subsidiary companies for providing corporate guarantee.

3.1 The arguments of the ld. counsel for appellant was mainly two fold. Firstly, that appellant being a manufacturing company will not fit into the expression of ^„anybody corporate^‟ for providing Banking or Other Financial Services. Second limb of argument is that providing ^„corporate guarantee^‟ will not fall within the services mentioned in BOFS and that corporate guarantee and Bank guarantee are different.

3.2 The ld. counsel adverted to the definition of BOFS as defined under section 65(12) and submitted that appellant not being a ^„body corporate^‟ of the type covered under the definition of ^„Banking or Other Financial Services^‟, the levy of service tax cannot be attracted. That adjudicating authority has wrongly interpreted the definition to conclude that since appellant is a company would fit into the definition and as per Section 65(105)(zm) an institution need not be Banking or Non-Banking Financial Institution to fit into this category and need only be a body corporate. That this is completely contrary to the clarification issued by Board in its Circulars.

3.3 The CBEC in their Circulars dated 9.7.2001 and 4.7.2006 has clarified that the expression ^„any body corporate^‟ or ^„any other person^‟ which is referred to in the definition of BOFS has to be read in ejusdem generis with the preceding words. Applying this clarification, it will be evident that what is covered under the scope of ^„any body corporate^‟ is a corporate which is similar to a bank or financial institution. This clarification also brings out that the intention of the Legislature was only to tax services which are provided by a bank or a financial institution or an institution similar to a bank / financial institution.

3.4 The second argument advanced is that as per the definition of BOFS what is covered is issuing a Bank Guarantee and not issuing Corporate Guarantee. The expression ^„corporate guarantee^‟ is not mentioned anywhere in the definition. Therefore, there can be no liability for issuing corporate guarantee since it is entirely different from Bank Guarantee. In the definition of BOFS under section 65(12) of Finance Act, the Legislature has used the expression ^„namely^‟ and specified the services on which service tax was leviable under that category, thus restricting the scope of the said taxing entry to only all those specified services. It is settled law that the general expression which precedes the word ^„namely^‟ is confined to the itemized expression that follows the word ^„namely^‟. The ld. counsel relies upon the ratio of the following case laws:-

a. Sree Durga Distributors Vs. State of Karnataka – (2007) 4 SCC 476

b. State of Bombay Vs. Bombay Education Society – AIR 1954 SC 561

Providing ^„corporate guarantee^‟ is not one of the itemized service in the definition. Hence, the same cannot be taxed under the head BOFS. Even though the adjudicating authority has admitted that bank guarantee is a guarantee by a bank and a corporate guarantee is a guarantee by the corporate, however, the said authority has still confirmed the demand holding that both guarantees are the same.

3.5 The Tribunal in the case of Banswara Syntex Vs. Commissioner of Central Excise – 2010 (18) STR 68 had clearly laid down that the expression ^„body corporate^‟ referred to in the definition of BOFS covered only such body corporates which are either a banking company or a financial institution or a non-banking financial company. On this settled legal position, the appellant is neither a banking company, a financial institution or even a non-banking financial company. The ld. counsel also relied on decisions in the case of Vidarbha Iron & Steel Corporation Ltd. Vs. Commissioner of Central Excise – 2014 (36) STR 324 (Tri.Mum.), Madras Vanaspathi Ltd. Vs. Commissioner of Central Excise – 2017 (3) GSTL 162 (Tri. Chennai) and Inox Air Products Ltd. Vs. Commissioner of Central Excise – 2015 (38) STR 19 (Mum.)

3.6 In respect of the tax confirmed under reverse charge mechanism in respect of commission paid to M/s. Vedanta, it is submitted that for the purpose of applying Section 66A, it is to be first established that the activity of issuance of corporate guarantee was covered under the taxable head of BOFS. Even assuming without admitting, that the said activity was a taxable service, still no demand could have been raised as the said activity has been undertaken beyond taxable territory and outside the jurisdiction of Finance Act, 1994.

3.7 Further, with regard to the payment of tax under reverse charge mechanism as well as for the tax under forward charge, the said situation is clearly revenue neutral one. In reverse charge the tax paid by the appellant would be available for credit to the appellant. The tax paid under forward charge, it is submitted that as a group, the tax paid by appellant would be eligible as credit to the associates / subsidiaries. That being revenue neutral, the invocation of extended period is unsustainable.

3.8 The issue in dispute is clearly one of interpretation and it cannot be concluded that there was willful suppression or fraud on the part of the appellant. Further, when the issue involved is an interpretational one, extended period of limitation cannot be invoked.

3.9 Moreover, time and again, departmental audits were conducted and in none of the audits the department could find any infirmity with non-payment of service tax on the alleged services of issuance of corporate guarantee. Hence invocation of extended period alleging suppression of facts is clearly illegal and unwarranted.

4. The ld. AR Shri A. Cletus supported the findings in the impugned order. He adverted to section 65(105)(zm) and argued that the taxable service of BOFS means any service provided or to be provided to any person by a banking company or a financial institution including a non-banking financial company or ^„any other body corporate^‟ or commercial concern in relation to banking and other financial services. He submitted that after the amendment, the services of banking and other financial services rendered by ^„any body corporate^‟ would be a taxable service. Such body corporate need not be a Bank of financial institution. The adjudicating authority has rightly analyzed this issue. Referring to the definition contained in section 65(12), he argued that sub-clause (ix) of the said definition enumerates the services of providing a bank guarantee. Guarantee means providing financial security to the person to whom the guarantee is issued. When such guarantee is issued by a bank it is bank guarantee and when issued by a corporate it is corporate guarantee. The functions of both such guarantees are one and the same and therefore providing a corporate guarantee would come within the ambit of providing bank guarantee. The activity of providing a corporate guarantee by the appellant thus falls within the definition of BOFS.

4.1 Countering the argument of the ld. counsel on the reliance placed on the decisions, he submitted that the said decisions do not apply to the facts of the case for the reason that it is not necessary that a corporate body should be a banking company in order to fall within the definition of BOFS. In the present case, undisputedly the appellant is a body corporate and has rendered the activity of issuing a corporate guarantee.

4.2 The ld. AR contended that the taxable service under Section 65(105)(zm) speaks where services to any person inter alia by any body corporate in relation to banking or other financial services. The corporate guarantee issued by body corporate is very much in relation to bank or any other financial services, since only based on such corporate guarantees, the banks would further issue bank guarantee.

4.3 The ld. AR relied upon the Tribunal^‟s decision in Bank of Baroda Vs. Commissioner of Service Tax, Mumbai – 2016 (43) STR 141 (Tri. Mumbai) and submitted that it is laid down that it is not significant as to what is the nature of the person who is providing the service, but if the service is covered under the definition, such service is liable to service tax.

4.4 He further drew attention to the Tribunal decision in Hind Filters Ltd. Vs. Commissioner of Central Excise, Indore – 2017 (51) STR 70 (Tri. Del.) wherein the submission of appellants that though they are body corporate, still they will not be liable to service tax inasmuch as they cannot be classified under the category of banking company or other financial institutions, has been rejected by the Tribunal and has held that service tax will be applicable even to a body corporate.

4.5 He further relied on the decision of the Tribunal in the case of Eicher Motors Ltd. Vs. Commissioner of Central Excise, indore – 2016 (41) STR 721 (Tri. Del.) wherein it was inter alia held that with effect from 16.8.2002, the body corporate would also be liable to service tax for the activity of financial leasing under service tax category of BOFS.

5. Heard both sides.

6. The dispute that comes up for resolution is whether the commission received / paid by the appellant for providing / receiving corporate guarantees (CGs) to/from their associate / subsidiary companies would be exigible to service tax under the category of BOFS for the purpose of Finance Act, 1994.

6.1 For better understanding of the issue, it would be useful to reproduce the definition of BOFS as appearing in Section 65(12) of the Finance Act, 1994.

“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 is entered into between parties for leasing of a specific asset;

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

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

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

(ii) Omitted

(i) merchant banking services;

(ii) securities and foreign exchange (forex) broking,

(iii) and purchase or sale of foreign currency,

(iv) 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,

(vii) advice on mergers and acquisitions and advice on corporate restructuring and strategy;

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

banker to an issue services; and

(ix) other financial services, namely, lending, issue of pay order, demand draft, cheque, 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;”;

(b) foreign exchange broking and purchase or sale of foreign currency including money changing provided by a foreign exchange broker or and authorised dealer in foreign exchange or an authorised money changer, other than those covered under sub-clause (a);

[Explanation. – For the purposes of this clause, it is hereby declared that “purchase or sale of foreign currency, including money changing” includes purchase or sale of foreign currency, whether or not the consideration for such purchase or sale, as the case may be, is specified separately;]

6.2   The taxable service is defined under section 65(105)(zm) as under:-

“Taxable Service” means any service provided or to be provided to any person, by a banking company or a financial institution including a non-banking financial company or any other body corporate or commercial concern, in relation to banking and other financial services”

6.3 After analysis of the above definitions, the main take aways from the aforesaid definitions as applied to the facts of the appeal can be listed as under:-

i. The inclusion of the word ^„other body corporate^‟ came about with effect from 10.9.2004, itself i.e. right from

ii. The definition of BOFS under section 65(12) is a comprehensive definition and not an inclusive definition.

iii. In Section 65(12)(a), the only persons who have been made liable to service tax under this category are banking company, financial institution (including a non-banking financial company) any other body corporate or a commercial

iv. Further, after listing out the category of persons who would be exigible to tax under the category, the services provided by such persons which alone would be exigible to such taxes have been comprehensively and specifically listed out with the use of the words ^„namely^‟.

6.4 Analysis of the second limb of argument would be sufficient to resolve the issue whether the activity of issuing Corporate Guarantee is taxable under BOFS or not. There is no allegation that the appellant herein has performed any of the category of services listed in Sl. No. (i) to (viii) under section 65(12)(a) ibid. The activity of ^„providing bank guarantee^‟ under section 65(12)(ix) ibid under which head the show cause notice has premised the proposed demand, is under the residual category of services listed as ^„other financial services^‟. But here also, a comprehensive and specific list of such residual services has been given and made absolute by usage of the word ^„namely^‟ before such listing. The word ^„namely^‟ has been thoroughly analysed and interpreted by the Hon^‟ble Apex Court in State of Karnataka & Ors. Vs. Balaji Computers & Others in Appeal (Civil) 1120 of 2006 dated 7.12.2006 as under:-

“For proper construction, we deem it necessary to explain how the word ‘namely’ has been described in various dictionaries. In Black’s Law Dictionary, Fifth Edition, the word ‘namely’ has been stated as “a difference, in grammatical sense, in strictness exists between the words namely and including. Namely imports interpretation, i.e., indicates what is included in the previous term; but including imports addition, i.e., indicates something not included”. In Webster’s Encyclopedic Unabridged Dictionary of the English Language, the word ‘namely’ has been stated as ‘that is to say, explicitly, specifically to wit; on item of legislation, namely, certain bail.” In Chambers 21st Century Dictionary the word ‘namely’ has been stated as “used to introduce an expansion or explanation of what has just been mentioned”. In World Book Dictionary, the word ‘namely’ has been stated as ‘that is to say to wit’. Therefore, the word ‘namely’, ordinarily imports of what is comprised in the preceding clause; and it ordinarily serves of equating what follows with the clause described before. This Court in State of Bombay Vs. Bombay Education Society reported in AIR 1954 SC 561, had an occasion to examine the meaning of the words ‘that is to say’ which have been described as ‘explanatory or illustrative words and not words either of amplification or limitation”.

Applying the ratio of the aforesaid judgment laid down by the Apex Court, we find ourselves in agreement with the ld. counsel for appellant that only the services which are listed in Section 65(12)(a)(ix) ibid will be exigible to service tax under that group.

6.5 The show cause notice dated 20.10.2010 has proposed the demand of service tax under BOFS on the premise that “any other body corporate that is providing bank guarantee for a consideration is liable to pay service tax from the date 10.9.2004”. Para 7 of the same notice further alleges that “In the present case, the assessee stood guarantee to their associate / subsidiary companies for providing corporate guarantee for a consideration which is taxable. Further, the assessee paid corporate commission to a foreign company M/s. Vedanta Resources Plc. Inc. London in consideration of getting corporate guarantee to secure external commercial loans which is also taxable under reverse charge method”. The same propositions are reiterated in the subsequent show cause notices dated 22.4.2010 and 19.9.2011.

6.6 From the facts on record, it is evident that the appellants did not provide ^„bank guarantee^‟ to their associate companies in India, neither did they receive any ^„bank guarantee^‟ from parent company abroad. What they provided / received was only a corporate guarantee to /from their associate companies for which exercise they had received / paid guarantee commission. The department has taken the view that Corporate Guarantee and Bank Guarantee are one and the same. We are however unable to agree to this proposition that a corporate guarantee is nothing but bank guarantee by another name. A bank guarantee is given by a bank on behalf of the customer to the beneficiary bank guaranteeing the payment in case of default by customer. A corporate guarantee is a guarantee given by the corporate to cover their own exposure or exposure of some other related entity to their bank. Bank guarantees are issued by Bank on a regular basis as part of their business of Banking. It is nobody^‟s case that appellant is doing the business of providing corporate guarantee on a regular basis. The corporate guarantee that was entered into by appellant is only for the limited purpose of securing loans to its subsidiaries. Corporate guarantees are issued in order to safeguard the financial health of their associate enterprises and to provide it support. For banks, providing bank guarantee is part of their regular course of business and they charge rate on the higher side. Further, these are fool proof instruments of security of the customer and failure to honour the guarantee is treated as a deficiency of services of the bank under banking laws. Corporate guarantee is actually an in-house guarantee and is not issued to customers generally.

6.7 It is also not the case that the corporate guarantee was issued / procured to enable the Bank to issue bank guarantee. On the other hand, as per the facts narrated in the show cause notices, the guarantee commission had been received / paid from / to their associate / subsidiary companies for providing / receiving corporate guarantee which in turn was utilized to secure external commercial loans.

6.8 In the event, we do not find much merit in the propositions of Revenue that the guarantee issued by the appellant was only ^„providing bank guarantee^‟ by a body corporate and secondly, the commission received / paid for issue / receipt of such guarantees to / from associate / subsidiary companies are exigible to service tax liability under section 65(12)(a)(ix) of Finance Act, 1994.

6.9 Ld. AR has been at pains to argue that the taxable entry under section 65(105)(zm) ibid also brings within its fold for the purposes of liability to service tax, services provided in relation to bank and other financial services and since the issue of corporate guarantee by the appellants was only to facilitate issue of bank guarantee by the bank, the activity by the appellant is nothing but a service in relation to issue of banking and other financial services.

6.10 This argument is flawed. In the first place, as already discussed above, the corporate guarantees were not issued to facilitate issue of bank guarantees by the banks but only as an instrument for obtaining external commercial borrowings. True, the words ^„in relation to” are very much present in the definition of taxable services under section 65(105)(zm) ibid. Nonetheless, the services that would come under this score will necessarily have to be those services which are intrinsically or inextricably connected with any of the services of banking or financial services which have been comprehensively listed in section 65(12) ibid.

7. Viewed in this light, we are of the considered opinion that the activity of issue of corporate guarantees by the appellant from their associate / subsidiary companies in India and also the procurement / receipt of corporate guarantee from their parent / associate company abroad will not come within the fold of section 65(12)(a) ibid and in particular sub-clause (ix) of that provision. The appellant succeeds on merits.

8. The ld. counsel has argued on the grounds of revenue neutrality as well as limitation. The show cause notice dated 4.2010, 22.10.2010 and 19.9.2011 have been issued for the periods 2004 – 2011. The appellant has furnished the documents with regard to the audits conducted. The audit report conducted from 18.6.2007 to 29.6.2007 has not raised any objection of non-payment of service tax for providing corporate guarantee. Prior to this an audit was conducted from 19.9.2006 to 21.9.2006 and the report does not show any such objection. All these would go to show that the appellant has not suppressed any facts with intention to evade payment of tax. On such score, the show cause notice issued invoking extended period cannot sustain. The appellant succeeds on limitation also.

9. From the foregoing, we hold that the impugned order requires to be set aside, which we hereby do. The appeal is allowed with consequential relief, if any.