Service Tax leviable on Corporate Guarantee Commission: CESTAT [Read Order]

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Delhi bench has held that Service Tax can be imposed on Corporate Guarantee Commission as the same can be treated as ‘Business Auxiliary Service’ under the provisions of the Finance Act, 1994.

In the instant case, the appellants, Olam Agro India Ltd, in order to obtain loan from various Indian Banks, they obtained corporate guarantee in favour of banks in India from M/s Olam International Limited, Singapore. They also required to pay commission amounting to 1 per cent of the value of such corporate guarantee to their parent company at Singapore. Such amounts were paid in foreign exchange. The department demanded service tax from the appellant on such commission under reverse charge basis, by terming the same as ‘Business Auxiliary Service’.

On second appeal by the appellants, the Tribunal bench noted that a corporate guarantee is used when a corporation agrees to be held responsible for completing the duties and obligations of debtor to a lender, in case the debtor fails to comply with the terms of the debtor- lender contract. Whereas a bank guarantee is a promise from a bank that the liability of the debtor will be met in the event the debtor fails to favour his contractual obligations.

“Therefore, the nature of corporate guarantee as well as of bank guarantee is one and the same i.e. for facilitation of the lending facilities. The bench noted that the parent company has executed corporate bank guarantee in favour of banks in India for facilitation of lending of funds to the appellant and in lieu of the said guarantee the appellant paid 1 per cent of value of guarantee as commission to their parent company at Singapore by way of foreign exchange remittance and their parent company provided them debit notes on quarterly basis.

“The copies of the said debit notes clearly indicate the transactions with regard to lending facilities in India and therefore through Corporate Guarantee Commission the appellant are chargeable to Service Tax. And the commission paid was taxable under ‘Business Auxiliary Service’. Merely because the name of the guarantee has been changed from ‘Bank’ to ‘Corporate’ it cannot be said that it won’t fall under ‘Business Auxiliary Service’ as defined under Section 65 (105) of the Finance Act, 1994,” the bench said.