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TMI Blog2024 (10) TMI 771X X X X Extracts X X X X X X X X Extracts X X X X ..... A WIND FARM ASSETS LIMITED, Account no, 09, Survey no. 66/1, Maanpura Kala Village, Tehsil-Arnod, Pratapgarh-312619, Rajasthan (hereinafter "the applicant") is fit to pronounce advance ruling as it falls under the ambit of the Section 97 (2) (a) given as under: (c) determination of time and value of supply of goods or services or both. (e) determination of the liability to pay tax on any goods or services or both. A. SUBMISSION OF THE APPLICANT (in brief):- The Applicant is a company incorporated under the Companies Act, 1956 and existing under the Companies Act, 2013, which is involved in the business of development and operation of renewable power projects and allied activities. The Applicant is having operational capacity of 45 MW in wind energy in the state of Rajasthan. The generated electricity from plants is sold to the State Electricity Board as per the Power Purchase Agreements (PPA). 2. As a part of the shareholder activity, the overseas group companies provide corporate guarantee to banks and financial institutions in respect of loans taken by Applicant. The foreign group company does not charge any consideration from the Applicant for providing corporate guarante ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year; and on 1% of only remaining outstanding value of loan at beginning of each subsequent year. For instance, if the amount guaranteed by the Applicant is Rs. 5,00,000/- and the said guarantee is valid for a period of 5 years, then the question is whether the GST has to be paid as follows: Sr. No. Year Amount of Loan Remaining at the beginning of the year GST to be paid on the value of 1. First Year Rs. 5,00,000/- Rs. 5,000/- 2. Second Year Rs. 4,00,000/- Rs. 4,000/- 3. Third Year Rs. 3,00,000/- Rs. 3,000/- 4. Fourth Year Rs. 2,00,000/- Rs. 2,000/- 5. Fifth Year Rs. 1,00,000/- Rs. 1,000/- B. INTERPRETATION AND UNDERSTANDING OF APPLICANT ON QUESTION RAISED (in brief) 1. The corporate guarantee received by the Applicant from foreign group companies in respect of loan obtained by the Applicant from a bank/financial institution is a one-time guarantee and not a continuing guarantee and hence, the same is not a continuous supply of service in terms of Section 2 (33) of the CGST Act. 2. In order to analyse the present issue, reference is made to Section 129 of the Indian Contracts Act, 1872 which states that a guarantee which extends to a series of transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration of the payment of a certain sum of money as rent was o single transaction. Equally, the guarantee was one transaction ensuring the due performance of the lessee during the continuance of the lease. The successive payments of rent upon each installment falling due cannot be treated as successive transactions and the guarantee with reference to the same cannot be held to be "a continuing guarantee" under Section 129, Contract Act. The above view is supported in principle by the decision of this Court in In re, Gopal Singh v. Bhawani Prasad [1888] 10 All. 531 in which it was held that assuming that the guarantee sought to be construed was a continuing guarantee within the meaning of Section 131, Contract Act, still having regard to the object for which the two guarantees were given it must be concluded that the parties intended in the one case that the lessor should be guaranteed for all rent which might become due during the currency of the lease.... 12. The lease was granted once for all for a definite period of five years. The stipulations for the several payments stipulated for were definite engagements constituting one transaction. The guarantee was given by the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tee continues over a period of time. 6.2 Herein, it is pertinent to refer to an example of a hire purchase transaction, wherein the consumer buys the goods and makes a down payment, while the remaining balance is paid in instalments. Even in this situation, the "supply" happens once only, i.e., at the time of entering into the agreement, but the consideration is received over a period of time. Similarly, even in the present case, "supply" of corporate guarantee happens once when the Deed of Guarantee is entered into by the foreign group company, however, the obligation of guarantor (i.e., the foreign group company) continues till the guarantee period. Therefore, it is submitted that merely because the guarantee continues for a certain period of time, the same cannot constitute a continuous supply; rather, it will constitute a single event of supply. 6.3 Additionally, it is submitted that guarantee is required for giving security to lender for loan to a borrower. The Deed of Guarantee is entered into between the guarantor and the lender at the time of providing the loan to the borrower. The default in the payment by the borrower may or may not happen at any point of time during th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olicy would be the taxable event for levy of service tax. The Tribunal rejected the contention of the Department that the underlying supply of insurance service is a continuing one. This decision has been upheld by the Hon'ble Supreme Court in 2022 (64) G.S.T.L. 513 (S.C.). The relevant portion of the said judgement is reproduced below: "15. It can be noticed from the above re-produced provision of the Insurance Act that the insureds risk was covered only, after the premium payable is received by insurance company or a guarantee that it will be paid. This would indicate that the insurer is expected to render the services on the day when the premium is received by him. It is also to be noted that the insurance business is covered by the provisions of Insurance Act and, hence, the appellants herein has to issue policy in consonance with the provisions of Insurance Act. Appellant cannot assure the coverage of risk of an insurer, unless the premium payment is received in advance. In other words, the services rendered by the appellants as a general insurance company will take place on the date when appellant receives the insurance premium on the policy..." 6.8 Reliance is placed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her, reliance is also placed on the FAQs issued by the CBIC on Banking, Insurance and Stock-Brokers Sector wherein time of supply of life insurance service has been discussed. The said FAQ has clarified that for a new policy, the time of supply would be the time of issuance of the policy. Further, in respect of renewal of the policy, the FAQ has clarified that the time of supply would be the time of issuance of renewal notice for insurance premium. The relevant FAQ is reproduced below: "70. What would be the time of supply of life insurance services? Insurance policies are contracts for indemnifying any loss suffered by the policyholder. The policyholder is required to pay a premium at the time of inception of the policy. Renewal premiums are required to be paid on periodical basis during the tenure of the policy. For renewal of the policies the policyholders are allowed grace period ranging from 15 days to 30 days in accordance with the IRDA (Protection of Policyholders' Interests) Regulation, 2002. The time of supply of life insurance services to the policy holders would be as under: - (a) New Policy-At the time of issuance of the policy; (b) Renewal of Policy - The t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of loan for which guarantee is given needs to be divided equally amongst the relevant years of guarantee and GST under reverse charge mechanism is to be paid considering 1% of such divided value for each year in terms of Rule 28 (2) of CGST Rules. 7.1 For determining the "value of supply" of a transaction between related persons regarding provision of corporate guarantee, it is relevant to refer to Rule 28 (2) of the CGST Rules. The provision provides that the value of supply of services by a supplier to a recipient who is a related person, by way of providing corporate guarantee to any banking company or financial institution on behalf of the said recipient, shall be deemed to be one per cent of the amount of such guarantee offered, or the actual consideration, whichever is higher. The relevant portion of the said Rule is reproduced below: 28. Value of supply of goods or services or both between distinct or related persons, other than through an agent- (2) Notwithstanding anything contained in sub-rule (1), the value of supply of services by a supplier to a recipient who is a related person, by way of providing corporate guarantee to any banking company or financial institu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded value each year in terms of Rule 28 (2) of CGST Rules. Conclusion: In view of the above submission, in the present case: 8.1 Corporate guarantee provided by the foreign group company in respect of loan taken by the Applicant, from a bank/financial institution is a one-time guarantee and hence, the same is not a continuous supply in terms of Section 2 (33) of the CGST Act. In view of the same, GST under reverse charge mechanism would be payable only once, when the foreign group company enters into the contract for providing corporate guarantee with the banks/financial institution since there is no renewal of the said guarantee in terms of Rule 28 (2) of the CGST Rules. 8.2 Without prejudice to above, even if GST under reverse charge mechanism has to be paid on a periodic basis, value of loan for which guarantee is given needs to be divided equally amongst the relevant years of guarantee and GST under reverse charge mechanism is to be paid considering 1% of such divided value each year in terms of Rule 28 (2) of CGST Rules. 8.3 Without prejudice to above, even if GST under reverse charge mechanism has to be paid on a periodic basis, GST under reverse charge mechanism is paya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are related. It specifically covers the cases of provision of corporate guarantee by a holding company to a bank / financial institution for securing credit facilities for its subsidiary company. 9.2 CBIC vide Circular No. 34/8/2018-GST dated 01.03.2018 had 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. However, an exemption was later provided in respect of such services supplied by Central /State/UT Government to their undertakings or PSUs vide S. No. 34A of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017. Thus, by the corollary, it is construed that only aforementioned services by way of guaranteeing the loans taken by such undertakings or PSUs from banking companies and financial institutions is exempt and all other services of similar nature would be taxable. As per section 7 (1) (c) read with Para 2 of Schedule I to the CGST Act, 2017, any services between related persons or distinct persons in the course or furtherance of business qualifies as a 'supply' leviable to GST even in the absence of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of corporate guarantee cannot be construed to be a continuous supply of service within the meaning of Section 2 (33) of the CGST Act, 2017. The point of transfer of service is the point at which the surety binds himself to the creditor. The entire scheme of point of taxation (or) time of supply provisions under the GST law rests on the pillar that the supplier must discharge tax liability when the recipient avails the benefit of the services rendered. Inseparability is an exclusive service characteristic that renders it essentially impossible to divorce the supply or production of service from its consumption. Services, being intangible in nature cannot be stored prior to their consumption, Consumption of service implies obtaining the benefit from the service. In almost all cases, it is based on the guarantee of the surety that the loan is sanctioned to the principal debtor i.e., the principal debtor obtains the benefit of having the loan sanctioned (or obtaining loan at reduced interest rates) from the creditor, solely based on the guarantee provided by the surety. The same can be evidentially proven considering the credit characteristics of the principal debtor. Thus, the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration), GST would be payable on the basis of valuation mechanism as prescribed by Rule 27 at the time of execution of the contract. If the guarantor executes the contract of guarantee without consideration, for the benefit of a related party in the GST regime post 26.10.2023, GST would be payable on the basis of valuation mechanism introduced by Rule 28 (2) i.e., 1% of guarantee amount at the time of execution of the contract. Where such contract is for the benefit of a third party (without consideration), GST would be payable on the basis of valuation mechanism as prescribed by Rule 27 at the time of execution of the contract. Comments: - Question 2.1 This advance ruling is sought to ascertain whether GST under reverse charge mechanism on issuance of corporate guarantee is payable one-time or on periodical basis, considering that the guarantee has been issued only once and is valid for specified period of time without requirement of any periodical renewal in terms of Rule 28 (2) of the CGST Rules. Comments: - In corporate guarantee arrangements, in case of import of services of corporate guarantee from foreign entity to Indian entity, time of supply as per 2nd proviso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the comments of the Jurisdictional Tax Authority. We have also considered the issues involved, on which advance ruling is sought by the applicant, and relevant facts. 2) The Applicant is a company incorporated under the Companies Act, 1956 and existing under the Companies Act, 2013, which is involved in the business of development and operation of renewable power projects and allied activities. The Applicant is having operational capacity of 45 MW in wind energy in the state of Rajasthan. The generated electricity from plants is sold to the State Electricity Board as per the Power Purchase Agreements (PPA). 3) As a part of the shareholder activity, the overseas group companies provide corporate guarantee to banks and financial institutions in respect of loans taken by Applicant. The foreign group company does not charge any consideration from the Applicant for providing corporate guarantee. 4) The questions on which Advance Ruling is sought by the Applicant are as under- (i) Whether GST under reverse charge mechanism on issuance of corporate guarantee is payable one-time or on periodical basis, considering that the guarantee has been issued only once and is valid for specified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cant and where the supplier of service is located outside India, the time of supply shall be the date of entry in the books of account of the recipient of supply i.e. Indian subsidiary and the GST liability is to paid by the Applicant at one time basis at the time of supply. 7) The next question raised by the Applicant is if the GST under RCM is to be paid on periodical basis, then in order to determine the value of supply, whether the value of loan is to be divided equally amongst the relevant years of guarantee and GST is to be paid considering 1% of such divided deemed value each year or 1% of only remaining outstanding value of loan at the beginning of each subsequent year in term of Rule 28 (2) of the CGST Rules 2017. 8) In this context, we find it pertinent to mention here that as it has already explained above that GST is required to paid at one time for Import of Service, there is no question of payment of GST periodically. 9) With regard to value of Supply, we observe that- (a) If the guarantor executes the contract of guarantee without consideration, in the GST regime prior to 26.10.2023, for the benefit of a related party, GST would be payable on the basis of the va ..... 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