The Bangalore bench of the Customs, Excise Service Tax Appellate Tribunal (CESTAT) held that service tax can be levied on the guarantee commission which was paid to the State Government of Karnataka for providing irrevocable guarantee in raising funds from the debt market.
Krishna Bhagya Jala Nigam Ltd, the appellant 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.
The assessee appealed against the order passed by the 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.
B. N. Gururaj, the counsel for the assessee contended that the 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.
P. Saravana Perumal, the counsel for the department contended that the assessee was nothing but the support service for raising finance to meet the day-to-day operations by the 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.
The Bench observed that the definition of “support service” under Section 65B(49) of the Finance Act, 1994 does not cover the service of guarantee received by the assessee from the Government of Karnataka for raising funds from the debt market.
The two-member bench comprising D M Misra (Judicial) and Pullela Nageswara Rao (Technical) held that raising of finance for day-to-day operations by the assessee was a ‘service’ in the ordinary course of business operation and squarely falls within the scope of the definition of ‘support service’ and thus the assessee was liable to discharge service tax on the Guarantee commission paid to Government of Karnataka.
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