No Service Tax on Corporate Guarantee provided for Group Companies
This is to apprise you on recent ruling in the case of DLF Projects Limited v. CCE, 2020-TIOL-870-CESTAT-CHD passed by the CESTAT. Vide this ruling, the CESTAT has held that Corporate Guarantee (‘CG’) extended to Banks and Financial Institutions (‘Banks’) on behalf of Group Companies is not exigible to Service Tax.
- The taxpayer executed CG in favor of Banks to act as surety on behalf of Group Companies. CG enabled Group Companies desirous of obtaining loans, to obtain loans at concessional interest rates.
- The taxpayer did not charge any consideration from Group Companies or Banks for providing CG.
- The department contended that the taxpayer provided service to Group Companies and demanded Service Tax on extension of CG.
The CESTAT allowed taxpayer’s appeal and held that no Service Tax is payable basis following reasons:
- There was an absence of consideration since the taxpayer did not receive any consideration from Banks or Group Companies; and\
- Department’s contention that Group Companies received loans at concessional interest rate and differential interest amount shall be consideration for payment of Service Tax, is incorrect. Service Tax cannot be demanded basis assumption or presumption where consideration is absent.
Demand of Service Tax on CG is an industry wide issue on which multiple litigations are pending as on date. This ruling brings welcome relief to the taxpayers and lays down the correct principle of law that Service Tax cannot be demanded in the absence of consideration even between related parties.
Notably, the taxpayers need to re-assess this issue under GST regime. The related party transactions are taxable under GST regime even if made without consideration.