Applicability of GST on corporate guarantee wherein related parties are involved and there is no consideration, has been a matter of dispute since introduction of GST. By far the position under Service Tax stands clear pursuant to pronouncement of judgement by Supreme Court in case of Commissioner of CGST And Central Excise Vs M/S Edelweiss Financial Services Ltd [2023-TIOL-26-SC-ST] wherein it was held that if no consideration is involved, corporate guarantee shall not qualify to be a taxable service.
However under GST regime, DGGI and State audit authorities are seeking GST on corporate guarantee, in the hands of the 'Guarantor' by taking cognizance of Schedule I to Central Goods and Services Tax Act, 2017 (hereinafter referred to as 'CGST Act').
In this article, we have discussed the arguments which may support the position that corporate guarantee shall not qualify to be a 'Supply' and also the contentions which department may rely upon to treat it as 'Supply'.
We shall first discuss the arguments supporting the contention that Corporate Guarantee shall not qualify to be a Supply.
Corporate Guarantee- Not a Supply
1. In order to rule out corporate guarantee from the definition of 'Supply', it is pertinent to evaluate the term 'Supply' as defined under Section 7 of CGST Act. The same reads as under:
(1) For the purposes of this Act, the expression - "supply" includes-
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
(aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration.
Explanation .-For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another;
(b) import of services for a consideration whether or not in the course or furtherance of business; 2 [and]
(c) the activities specified in Schedule I , made or agreed to be made without a consideration;
2. We shall now evaluate each of the parameters of supply. The first limb of the definition is whether corporate guarantee qualifies to be 'Goods' or 'Services'.
Goods as defined under Section 2(52) of CGST Act reads as below:
"goods" means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply
Services as defined under Section 2(102) of CGST reads as below:
(102) "services" means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination
for which a separate consideration is charged
Corporate guarantee shall not qualify to be goods since there is no movable property involved. Hence, we shall refer to the definition of 'Service'. The term 'Service' is wide in its connotation to include anything other than goods and therefore corporate guarantee shall qualify to be a 'Service'.
3. Once it is clear that corporate guarantee qualifies to be a service, we shall also discuss the second important parameter of supply i.e. consideration. However, there is an exception to this condition which is covered under clause (c) of Section 7(1) of CGST Act. The said clause covers the activities to be treated as supply even if made without consideration. With respect to corporate guarantee provided by a related person to another related person, it is pertinent to refer to Sl. No. 2 of Schedule I to CGST Act. The same reads as below:
(2) Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:
Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.
4. As can be seen from above, even in case where consideration is not involved, an activity may still qualify to be a supply if the same is covered under Schedule I to CGST Act. Therefore, we shall now evaluate the last limb of 'supply' definition i.e. 'in course or furtherance of business'. While the term 'in course or furtherance of business' has not been defined under CGST Act, we shall discuss the term 'business' as defined under Section 2(17) of CGST Act.
(17) "business" includes -
(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;
(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);
(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;
(d) supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;
(e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members;
(f) admission, for a consideration, of persons to any premises;
(g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;
(h) activities of a race club including by way of totalisator or a license to book maker or activities of a licensed book maker in such club; and
(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities
5. Hence, the term business as defined above includes trade, commerce, manufacture, profession etc. whether or not for pecuniary benefit or any activity/transaction incidental to the same or an activity/ transaction in nature of trade, commerce etc. carried out occasionally, supply of goods or services in connection with commencement or closure of business, facilities/benefits provided by society, club etc. to its members, admission of any person to any premises for a consideration, services supplied by a person as the holder of an office in course or furtherance of his profession/vocation, activities of a race club and activity/transaction undertaken by Central or State Government as public authorities.
6. We would also like to highlight the clarification issued by CBIC vide FAQs on GST (3rd Edition) dated 15 December 2018. The same reads as under:
Q.9 What do you mean by "supply made in the course or furtherance of business"?
Ans. "Business" is defined under Section 2(17) include any trade, commerce, manufacture, profession, vocation etc. whether or not undertaken for a pecuniary benefit. Business also includes any activity or transaction which is incidental or ancillary to the aforementioned listed activities. In addition, any activity undertaken by the Central Govt. or a State Govt. or any local authority in which they are engaged as public authority shall also be construed as business. From the above, it may be noted that any activity undertaken included in the definition for furtherance or promoting of a business could constitute a supply under GST law.
7. Hence, one may take a view that corporate guarantee would not get covered under the definition of business since the said activity is neither carried out by an entity as its core business nor it would be incidental to the core business of an entity. On contrary, in case of bank guarantee, the same would qualify to be a core business activity for a bank.
8. Therefore, corporate guarantee for a business entity may not qualify to be a supply of service since the same would not be in course or furtherance of its business. A similar view was taken by Delhi Tribunal in case of M/s Sowar Pvt Ltd Vs The Commissioner of Service Tax Delhi-II [2023-TIOL-342-CESTAT-DEL] wherein CESTAT held that since the appellant is not into the business of financing i.e. it is neither a banking nor a non-banking financial institute, it shall not get covered under the category of person excisable to tax under Banking and Other Financial for provision of corporate guarantee.
9. Further, IN RE: M/S. EMCURE PHARMACEUTICALS LIMITED 2022 (1) TMI 186 - AUTHORITY FOR ADVANCE RULING, MAHARASHTRA Applicant was providing canteen and transportation facility to employees. AAR in this case held that these services were neither connected nor incidental or ancillary with the business of the applicant, who were engaged in developing, manufacturing and marketing of pharmaceutical products. Therefore, the provision of canteen and transportation facility to employees is not in course or furtherance of business of the applicant.
10. Also, IN RE: M/S. THE TATA POWER COMPANY LIMITED 2021 (11) TMI 398 - AUTHORITY FOR ADVANCE RULING, MAHARASHTRA Applicant was recovering an amount towards top-up and parental insurance premium from the employee. AAR held that the activity of recovery of said amount from employees towards the payment of top-up and parental insurance premium shall not get covered under the definition of the term 'business' since applicant is not engaged in the business of providing insurance service.
11. In view of the above discussion, an assessee may take a position that provision of corporate guarantee is not its core business activity as the same is not provided in course or furtherance of its business. Hence, even in case there is no consideration involved, it would not get covered by entry 2 of Schedule I to CGST Act since the said entry is further restricted by the term 'in course or furtherance of business'.
12. Alternatively, a view can also be take that issuance of corporate guarantee by holding company for its subsidiary can be considered as shareholder activity. In this case holding company being the shareholder issues corporate guarantee to protect its investment in securities. Therefore, there is no underlying service involved.
13. Another argument which an assessee can put forth is that the debtor on whose behalf guarantee is given would not qualify to be a 'recipient of service' in terms of Section 2(93) of CGST Act. He can argue that the guarantor is not a party to the financing arrangement between bank and the debtor since in this case, bank qualifies to be a supplier of service and the debtor is the recipient of service.
14. Further, another ground which can be argued is that provision of corporate guarantee qualifies to be actionable claim since it gives rise to an unsecured contingent debt and this debt can be claimed by Banks from parent company in case subsidiaries fails to pay. Therefore, it shall get covered under Sl. No. 6 of Schedule III to CGST Act.
Corporate Guarantee- If considered as 'Supply'
15. We shall now discuss the contentions which department would rely upon to cover corporate guarantee under the definition of 'Supply'.
16. The analysis made in forgoing paras would continue to remain same i.e. corporate guarantee would be considered as 'Supply of Service'. With respect to the other condition i.e. consideration, even in case where there is no consideration between related parties, it shall get covered by virtue of entry 2 of Schedule I to CGST Act provided it is in course or furtherance of business.
17. Coming to the important parameter of the definition i.e. 'in course or furtherance of business', department can take a view that, corporate guarantee being an occasional activity undertaken by the assessee, it would get covered under Section 2(17)(c) of CGST Act, as referred above. Therefore, it would be treated as an activity carried out in course of business.
18. Further, department may draw an inference from Circular No. 34/8/2018-GST dated 01.03.2018, wherein it was clarified that services provided by Central or State Government to any business entity including PSUs by way of guaranteeing the loan taken from financial institutions against consideration shall be taxable.
19. In view of the above, since all the conditions with respect to definition of supply are fulfilled, department would treat corporate guarantee as 'Supply of service'. Also, to support its argument, department would place reliance upon the circular dated 1 March 2018.
20. Recently, Mumbai Tribunal in case of Hindustan Construction Company Ltd Versus Commissioner Of Service Tax, Mumbai –VII [2023 (8) TMI 1144 - CESTAT MUMBAI] held that both corporate guarantee and bank guarantee are akin to each other. Also, purpose of both these are same, while one is the species and the other one is its genesis. Therefore, in this case tribunal held that since the appellant has received the consideration for providing guarantee to its related company, service tax is liable to be paid on the same. Hence, department may also place reliance on this judgement to further supports its contention that GST is applicable on corporate guarantee.
21. Also, the reference to the judgement of Supreme Court in case of Commissioner of CGST And Central Excise Vs M/s Edelweiss Financial Services Ltd [2023-TIOL-26-SC-ST] may not support the assesse's stand on taxability in case where no consideration is involved since the transactions covered under Schedule I to CGST (specifically entry 2 of Schedule I to CGST Act) are considered as deemed supply under GST. Therefore, reliance on this judgement per se the condition of involvement of 'consideration' would not help.
22. Having considered that department would treat corporate guarantee as 'Supply', the next question would arise with respect to valuation of supply. In this case, assessee would consider determining the value in terms of 2nd Proviso to Rule 28 of Central Goods and Services Tax Rules, 2017 (herein after referred to as 'CGST Rules') considering that the recipient is eligible for full ITC. However, the department may dispute this valuation in light of Transfer pricing provisions. CBDT has issued safe harbour rules which prescribes the value to be considered in case of corporate guarantee provided to wholly owned subsidiary.
23. As can be seen from above discussion, while there are sufficient grounds to support the view that corporate guarantee would not qualify to be a supply but the same is not free from litigation wherein department may take a divergent view.
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