Bombay HC Affirms That GST Is Not Applicable On Corporate Guarantees Issued Without Consideration

BRIEF FACTS OF THE CASE

• The Petitioner is engaged in the business of construction of national and state highways under NHAI projects (HAM / TOT model), and, in the course of its business, furnished corporate guarantees in favour of banks to secure term loans sanctioned to its subsidiary/SPV companies executing the projects. In connection with such financial arrangements, the Petitioner executed three corporate guarantees between 2020 and 2022 in favour of State Bank of India and Bank of Maharashtra. Each of the corporate guarantees specifically stipulated that no security, fee, commission, or any other consideration was received or would be received by the Petitioner for providing such guarantees.
• The State tax authorities investigated the Petitioner for the period 2017–18 to 2022–23, during which all relevant documents, accounts, and financial statements were examined, and no adverse findings were made regarding the corporate guarantees. However, the Directorate General of GST Intelligence (DGGI) subsequently initiated a separate investigation by issuing a summons dated 20 July 2023, alleging non-payment of GST without clearly specifying the scope or legal basis of the investigation.
• Thereafter, Notification No. 52/2023-CT dated 26 October 2023 inserted Rule 28(2) in the CGST Rules and Circular No. 204/16/2023 dated 27 October 2023 (later followed by another circular in July 2024) was issued, clarifying that the provision of corporate guarantees by a person on behalf of a related person, including by a holding company to its subsidiary, even without consideration, would be treated as a taxable supply of service under GST, and the value of supply shall be 1% of the amount of guarantee offered per annum or the actual consideration, whichever is higher.
• Relying on the aforesaid amendments and circulars, the GST authorities initiated proceedings against the Petitioner and issued a show cause notice demanding tax on the value of the corporate guarantees by treating them as taxable services.
• The Petitioner approached the Hon’ble Bombay High Court challenging the validity of the circulars and the amended Rule 28(2), as well as contending that the execution of corporate guarantees without consideration does not constitute a “supply” under the CGST Act and hence is not liable to GST.

KEY OBSERVATIONS OF THE HON’BLE HIGH COURT

• The Hon’ble Bombay High Court held that the issuance of corporate guarantees by the Petitioner in favour of banks on behalf of its subsidiary/group companies, without any consideration, does not constitute a “supply” under Section 7 of the CGST Act, 2017 and therefore is not liable to GST.
• The Court emphasised that for an activity to qualify as a taxable supply, the essential elements of “supply” and “consideration” must co-exist. Relying on the decision of the Hon’ble Supreme Court in Commissioner of CGST v. Edelweiss Financial Services Ltd., MANU/SC/0648/2023, the Court reiterated that in the absence of any consideration flowing from the beneficiary to the guarantor, issuance of a corporate guarantee cannot be treated as a service liable to tax. Since the Petitioner had not received any fee, commission, or consideration for providing the guarantees, the fundamental requirement for the levy of GST was absent. The High Court held that the legal principle under the service tax regime squarely applies under GST, as the concept of consideration remains fundamental.
• The Court further observed that corporate guarantees extended by a holding company to its subsidiaries are in the nature of “in-house” arrangements intended to support group entities and are not undertaken as an independent commercial activity in the ordinary course or furtherance of business. Such guarantees are contingent obligations, enforceable only upon the borrower's default, and therefore do not constitute an immediate supply of services.
• The Court rejected the stand of the Revenue that, by virtue of Circular No. 204/16/2023 and subsequent circulars, corporate guarantees, even without consideration, can be treated as taxable services. The Court held that a Circular issued under Section 168 of the CGST Act cannot create tax liability where none exists under the statute, and the executive cannot, by way of clarification, expand the scope of “supply” beyond what is contemplated under the Act.
• With respect to the valuation provisions introduced under Rule 28(2) of the CGST Rules, 2017, the Court upheld their constitutional validity, observing that valuation machinery provisions cannot be invoked unless the underlying transaction itself qualifies as a taxable supply. However, the mere existence of a valuation rule deeming a value for corporate guarantees does not, itself, render the transaction taxable in the absence of consideration.
• While the Hon’ble Court quashed the impugned proceedings and reaffirmed that issuance of corporate guarantee without consideration does not attract GST, however, the Court declined to strike down the constitutional validity relating to the provisions of Rule 28(2) based upon the settled legal principle that there is a minimal scope for challenge to constitutional validity, and legislature should be allowed some play in the joints for it has to deal with complex problems which do not admit of a solution through any doctrine or straitjacket formula.
• Besides, the Court also found that the DGGI proceedings amounted to parallel investigation without jurisdiction, given that the State GST authority had already completed investigation for the same period. The Court also observed the DGGI summons to be vague and arbitrary as it did not clearly specify the legal basis for the investigation.

AURTUS COMMENTS

• Taxability on corporate guarantees has been a contentious issue since the service tax regime, and the dispute has continued under the GST law. However, a consistent legal position is now emerging, as courts are increasingly inclined to hold that corporate guarantees, particularly those issued without consideration as part of intra-group financial support, do not satisfy the essential ingredients of “supply” under Section 7 of the CGST Act. Further, in most situations, the banks do not permit the guarantor to charge any consideration for providing a corporate guarantee.
• The Courts have repeatedly emphasised that taxability must first be independently established before valuation provisions can be invoked and have granted ad-interim stay against the enforcement of the demand for GST on corporate guarantees: [1] CWP-409-2026 - M/s Panacea Biotec Ltd. vs. UOI & Ors (P&H.) [2] CWP-4519-2024 - Vedanta Ltd. vs. Union of India (Bom.) [3] CWP-2966-2024 - Sterlite Power Transmission Limited & Ors. vs. Union of India & Ors. (Del.) [4] CWP-35338,35346-35348 of 2024 - Greenko Solar Power (Medak) Ltd vs The Additional Commissioner & Ors (Tel.)
• These interim decisions align with the Bombay High Court’s observation that GST is not applicable on corporate guarantees issued without consideration, and the levy cannot be imposed merely based on a Circular. Clearly, there is judicial reluctance to accept the Revenue’s position that such transactions can be artificially taxed through circulars or valuation rules, such as Rule 28(2). In Acme Cleantech Solutions Pvt. Ltd. vs. Union of India and Others. [Civil Writ Petition No. 10249/2024, P&H HC] granted interim relief by staying the operation of the impugned Circular No. 204/2023, holding that such clarification cannot pre-determine taxability and cannot curtail the adjudicatory powers of authorities.
• It is also noteworthy that Rule 28(2) creates a liability related to “providing corporate guarantee to any banking company or financial institution on behalf of the said recipient” and one could potentially still argue that the said Notification is ultra-vires the provisions of the GST Law as the actual ‘recipient’ in the transaction is the banking company and not the recipient of the corporate guarantee. As per the definition under Section 2(93) of the CGST Act, ‘recipient’ is inter alia defined to mean – “(c) where no consideration is payable for the supply of a service, the person to whom the service is rendered.” In this regard, the Notification itself makes it clear that the services are rendered to a banking company or financial institution, and that the related person is merely the beneficiary of those services.
• Also, the amendment above excludes cross-border guarantees where the recipient of service is located outside India from the purview of the amended Rule 28(2) of the CGST Rules. In such instances, the provisions of rule 28(1) shall apply, and the condition of actual remittance/collection of convertible foreign exchange into India for it to qualify as an export of services shall continue to be relevant. In instances where no value is recovered for the provision of such guarantees, the conditions of export are not satisfied, preventing suppliers from treating the same as exports. It would therefore be relevant to assess whether the clarification by the Government that such valuation provisions do not apply to the export of the services of providing corporate guarantee between related persons, implicitly clarifies that such supplies, when provided to persons located outside India, are exports, based on the location of such recipients, and there is no requirement to receive consideration (deemed consideration). In Manish Trivedi v. State of Rajasthan (2014) 14 SCC 420, the Supreme Court held that it is well settled that the legislature is competent to create a legal fiction. A deeming provision is enacted for the purpose of assuming the existence of a fact that does not really exist. When the legislature creates a legal fiction, the court must ascertain for what purpose the fiction is created and after ascertaining this, assume all those facts and consequences which are incidental or inevitable corollaries for giving effect to the fiction. Any insistence on receipt of consideration as an absolute requirement would clearly attract the maxim lex non cogit ad impossibilia, since the law does not compel the performance of an impossibility
• Further, the amendments to Rule 28 and subsequent clarifications merely aim to bring clarity on aspects of valuation for such supplies and not on the issue of taxability, as such transactions have always been, in the view of the Government, a part of taxable supplies. By stating so, the CBIC failed to delve into the question of whether the issuance of a corporate guarantee, typically by a parent company, would qualify as a supply when it is issued as a contingent obligation or as part of its shareholding function, and often without any consideration. The provisions under the Companies Act, 2013 (Sections 185 and 186), inter alia, allow for inter-corporate guarantees among related parties without any conditionality regarding the payment of commission between the companies. This practice of providing a corporate guarantee is also well accepted and acknowledged by the Reserve Bank of India.
• Lastly, there is no clarification from CBIC on whether the issuance of a letter of comfort or similar letters can be equated to a corporate guarantee for the purposes of taxability and valuation, as commercially these are treated differently, and a letter of comfort is merely an assurance and does not take any responsibility for the debts/loans sanctioned to the related entity.

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