Introduction: In a significant legal development, the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) Mumbai has ruled in favor of UltraTech Cement Ltd. in a case against the Commissioner of CGST & CX (Central Goods and Services Tax & Central Excise). The case revolved around the taxation of corporate guarantees provided by UltraTech Cement without receiving any commission. This article provides an in-depth analysis of the case, the arguments presented, and the implications of the CESTAT Mumbai’s decision.
1. Background of the Case: UltraTech Cement Ltd. was engaged in the business of manufacturing various categories of cement and was also registered with the Service Tax department as an Input Service Distributor (ISD). During the disputed period, UltraTech Cement Ltd. had provided corporate guarantees to its wholly-owned subsidiary, Ultra Tech Cements Middle East Investments Limited (UCMEIL), as well as to other associate enterprises. These guarantees were given to lender banks to facilitate foreign currency loans for overseas acquisitions and capital commitments.
2. Taxation Dispute: The Service Tax department interpreted these transactions as a provision of bank guarantee, categorizing it as a taxable service under the Finance Act, 1994. They argued that UltraTech Cement Ltd. was liable to pay service tax under the taxable category of ‘banking and other financial services’ for providing these corporate guarantees. A show cause notice was issued, seeking to recover a substantial service tax demand from UltraTech Cement Ltd.
3. The Impugned Order: The matter was adjudicated by the Commissioner of GST & Central Excise, Mumbai East Commissionerate, who issued an “Order-in-Original” confirming the service tax demand, along with interest and penalties. This order was challenged by UltraTech Cement Ltd., leading to the appeal before the CESTAT Mumbai.
4. Legal Arguments: The crux of the dispute was whether the corporate guarantees provided by UltraTech Cement Ltd. should be subject to service tax. The department argued that even though no commission or fees were charged by UltraTech Cement Ltd., the notional income, calculated under Transfer Pricing as per the Income Tax Act, made it taxable. The department also mentioned that the Income Tax department had charged guarantee commission on the issuance of corporate guarantees to overseas companies.
5. CESTAT Mumbai’s Decision: The CESTAT Mumbai, in its decision, ruled in favor of UltraTech Cement Ltd. The tribunal noted that there was no consideration in the form of a commission or fees received by UltraTech Cement Ltd. for providing corporate guarantees. They emphasized that for a service to be taxable under the Finance Act, 1994, there should be both a “provider” and the flow of “consideration” for the service. Since there was no consideration in this case, the tribunal concluded that UltraTech Cement Ltd. should not be held liable for service tax.
6. Precedent and Supreme Court Ruling: The CESTAT Mumbai decision in this case aligns with a previous case, Commissioner of CGST & Central Excise Vs. Edelweiss Financial Services Ltd., which was affirmed by the Hon’ble Supreme Court. In this ruling, it was established that providing corporate guarantees without consideration would not be considered a taxable service.
Conclusion: The CESTAT Mumbai’s decision in the UltraTech Cement Ltd. case has significant implications for the taxation of corporate guarantees without commission. The ruling reinforces the principle that for a service to be taxable under the Finance Act, 1994, there must be both a service provider and consideration for the service provided. This decision is consistent with previous legal precedents and was affirmed by the Supreme Court. It provides clarity on the tax treatment of corporate guarantees, ensuring that entities providing such guarantees without receiving a commission are not subject to service tax.
FULL TEXT OF THE CESTAT MUMBAI ORDER
Briefly stated, the facts of the case are that the appellants herein are inter alia, engaged in the business of manufacture of various categories of cement. The appellants are also registered with Service Tax department as Input Service Distributor (ISD) and for providing services other than those listed in the negative list. The appellants had setup a wholly owned subsidiary in Dubai viz., Ultra Tech Cements Middle East Investments Limited (UCMEIL), through which the appellants have acquired stakes in operating companies in Middle East, such as M/s Star Cement LLC, RAK etc. During the disputed period, UCMEIL had availed foreign currency loans for the purpose of overseas acquisition. The appellants being the promoter of the said subsidiary company M/s UCMEIL, provided corporate guarantee to lender banks without affecting their cash flows. The appellants had also given a corporate guarantee, in respect of loans availed by Star Cement Co., LLC, RAK (subsidiary of UCMEIL) for the purpose of capital commitments and for working capital facility availed by the associate enterprise. The corporate guarantees issued by the appellants are on behalf of their subsidiaries, where the appellants hold 100% or a significantly higher level of shareholding. There is, therefore no risk of the beneficiary companies defaulting on their obligation, since the appellant’s investment in the beneficiary company is already at risk. The appellants had also maintained the statutory records pertaining to corporate guarantees issued to the parties as per the Regulations prescribed by the Ministry of Corporate Affairs, New Delhi under Notification dated 31.03.2014. In the event of non-fulfillment of the obligations to repay the clients (borrowers) on whose behalf the guarantee has been given by the appellants to the third party, the appellants are required to make payment directly to third party. However, there is not a single incident, where the third party has invoked such corporate guarantee provided by the appellants.
1.1 Under the above back drop of the issue, the department interpreted the transaction as provision of bank guarantee, which is a taxable service under clause (viii) / (ix) of Section 65 (12) of the Finance Act, 1994 and thus, liable for payment of service tax under the taxable category of ‘banking and other financial services’ on the corporate guarantee given to the subsidiaries by the appellants. The department had demanded service tax for the period prior to 01.07.2012 under the category of ‘banking and other financial services’ and post 01.07.2012 under the taxable head of ‘service’ defined under Section 65(B)(44) ibid. Accordingly, the department had issued the show cause notice dated 26.10.2017, seeking to recover service tax demand of Rs.33,57,64,719/- on the corporate guarantee given to the subsidiaries by the appellants. The matter was adjudicated by the learned Commissioner of GST & Central Excise, Mumbai East Commissionerate, Mumbai vide Order-in-Original NO. 207/VR/COMMR./ME/2018-19 dated 18.02.2019 (for short, refereed herein as ‘the impugned order’), in confirming the entire demand along with interest proposed for recovery in the SCN dated 26.10.2017. Besides, the impugned order had also imposed penalties under Section 77 and 78 ibid, on the appellants. Feeling aggrieved with the impugned order, the appellants have preferred this appeal before the Tribunal.
2. Heard both sides and examined the case records.
3. The Show Cause Notice dated 26.10.2017 was issued based on the results of investigation as mentioned therein at paragraph 9 in page The department had accepted that the appellants had not charged any commission/fees to the overseas companies as well as the companies situated in India for issuance of the corporate guarantee. However, the service tax demand was confirmed on the basis of the calculation of notional income made by the appellants as per the requirements under the Transfer Pricing under the Income Tax Act, 1961. The department had also stated that the Income Tax department had charged guarantee commission as arm’s length commission on the issuance of corporate guarantee to overseas companies. We find that the assessment order passed by the Income Tax Officer was appealed against before the learned Commissioner of Income-Tax (Appeals), Mumbai, which was allowed in favour of the appellants, with direction to the assessing officer to delete the addition, holding that no guarantee fee was actually charged on the loans concerned. Further, we also find that the appellants did not charge any consideration for providing the corporate guarantees. Insofar as levy of service tax is concerned, the same should be on the amount of consideration received for provision of such service. In the present case, since there is no involvement of any commission amount in the form of consideration, the appellants cannot be saddled with the service tax liability as demanded in the impugned order. We find that the issue involved in the present dispute is squarely covered by the decision of this Tribunal in the case of Commissioner of CGST & Central Excise Vs. Edelweiss Financial Services Ltd., 2022-VI L-998-CESTAT- MUM BAI-Service Tax, wherein it was held as under: –
“7. The adjudicating authority has, rightly, declined to be guided by the decision of the Tribunal in re Kaveri Agri Care Pvt Ltd as it is settled law that interim orders do not offer themselves as binding precedent and the lack of elaboration of the observation therein detracts from its employability to advance the case of Revenue. The decision of the Tribunal in re Neyveli Lignite Corporation Ltd deals with an entirely different set of facts and the explanation therein of ‘guarantee’, as commonly understood, for placing that dispute in a context is of no assistance here.
8. The criticality of ‘consideration’ for determination of service, as defined in section 65B(44) of Finance Act, 1994, for the disputed period after introduction of ‘negative list’ regime of taxation has been rightly construed by the adjudicating authority. Any activity must, for the purpose of taxability under Finance Act, 1994, not only, in relation to another, reveal a ‘provider’, but also the flow of ‘consideration’ for rendering of the service. In the absence of any of these two elements, taxability under section 66B of Finance Act, 1994 will not arise. It is clear that there is no consideration insofar as ‘corporate guarantee’ issued by respondent on behalf of their subsidiary companies is concerned.
9. The reliance placed by Learned Authorised Representative on the ‘non-monetary benefits’ which may, if at all, be of relevance for determination of assessable value under section 67 of Finance Act, 1994 does not extend to ascertainment of ‘service’ as defined in section 65B(44) of Finance Act, 1994. ‘Consideration’ is the recompense for the ‘contractual’ undertaking that authorizes levy while ‘assessable value’ is a determination for computing the measure of the levy and the latter must follow the former.”
4. We further find that the order of the Tribunal (supra) was affirmed by the Hon’ble Supreme Court vide judgement dated 17.03.2023 in dismissing the Civil Appeal filed by the Commissioner of CGST & Central Excise. The relevant paragraph in the said judgement is extracted herein below:
“7. The above would suggest that this was a case where the assessee had not received any consideration while providing corporate guarantee to its group companies. No effort was made on behalf of the Revenue to assail the above finding or to demonstrate that issuance of corporate guarantee to group companies without consideration would be a taxable service. In these circumstances, in view of such conclusive finding of both forums, we see no reason to admit this case basing upon the pending Civil Appeal No. 428 @ Diary No. 42703/2019, particularly when it has not been demonstrated that the factual matrix of the pending case is identical to the present one.”
5. In view of the foregoing discussions, we do not find any merits in the impugned order, insofar as it has confirmed the adjudged demands on the appellants. Therefore, by setting aside the impugned order, the appeal is allowed in favour of the appellants.
(Operative portion of the order pronounced in open court)