A major development in GST jurisprudence has come from the Bombay High Court, which has held that a corporate guarantee furnished by a holding company to banks on behalf of its subsidiary, without charging any consideration, does not amount to a taxable supply of service under the GST law.
Case Snapshot:
D P Jain & Co. Infrastructure (P.) Ltd. v. Union of India
Date of Order: 06 May 2026
Background of the Case
The petitioner company had executed corporate guarantees in favour of banks and security trustees for loans availed by its subsidiaries and special purpose vehicle companies during the period 2020–2022. The guarantee documents specifically recorded that the petitioner would not receive any fee, commission, security, or other consideration for providing the guarantees.
Earlier, State GST authorities had investigated the petitioner’s affairs for the financial years 2017-18 to 2022-23 and examined its books, GST returns, balance sheets, and related documents. Despite reviewing the corporate guarantees, no GST demand was raised.
Subsequently, the Directorate General of GST Intelligence (DGGI) initiated separate proceedings alleging that GST was payable on the corporate guarantees. During the investigation, the Central Government issued Notification No. 52/2023-Central Tax dated 26.10.2023, which inserted Rule 28(2) into the CGST Rules and prescribed a deemed valuation mechanism for corporate guarantees between related persons. The Government also issued Circular No. 204/16/2023-GST and Circular No. 225/19/2024-GST, stating that corporate guarantees provided by a holding company to its subsidiary would be treated as taxable supplies even if no consideration was charged.
Based on these changes, the department issued a show cause notice demanding GST on the guarantees. The petitioner challenged both the departmental action and the validity of the circulars and Rule 28(2).
Key Issues Before the Court
-
Whether a corporate guarantee provided without consideration constitutes a taxable “supply of service” under Section 7 of the CGST Act.
-
Whether the GST circulars could validly declare such guarantees taxable even in the absence of consideration.
-
Whether Rule 28(2) of the CGST Rules was ultra vires the CGST Act.
-
Whether the DGGI proceedings were legally sustainable.
Bombay High Court’s Decision
No GST on Corporate Guarantees Without Consideration
The Court held that the guarantees were furnished purely as intra-group financial support measures and not as commercial guarantee services. Since the petitioner did not receive any consideration, the fundamental requirement of “supply” under Section 7 of the CGST Act was not satisfied.
The Court emphasised that a corporate guarantee given by a holding company to support its subsidiary is materially different from a bank guarantee issued in the ordinary course of business. The petitioner was not engaged in the business of providing guarantees commercially; rather, the guarantees were intended to secure loans for group entities.
The Court relied heavily on the Supreme Court judgment in Commissioner of CGST and Central Excise v. Edelweiss Financial Services Ltd., where it was held under the service tax regime that issuance of corporate guarantees to group companies without consideration is not taxable. Applying the same principle to GST, the Court held that both a provider-recipient relationship and consideration are essential elements for a taxable service.
Circulars Cannot Create Tax Liability
The High Court made it clear that administrative circulars cannot override the statutory provisions of the CGST Act. If the activity does not qualify as a “supply” under Section 7, a circular cannot independently create a tax liability.
Therefore, the Court rejected the department’s attempt to levy GST solely on the basis of the impugned circulars.
Challenge to Rule 28(2) Rejected
While granting relief to the petitioner, the Court did not strike down Rule 28(2) of the CGST Rules. The Court observed that fiscal legislation and delegated legislation enjoy a strong presumption of constitutionality, and courts generally interfere only when there is a clear constitutional violation or manifest arbitrariness.
Accordingly, the challenge to the vires of Rule 28(2) was rejected, even though the specific demand raised against the petitioner was quashed.
Final Outcome
Relief Granted to the Petitioner
The Bombay High Court partly allowed the writ petition and quashed the show cause notice and summons issued by the GST authorities. However, it declined to invalidate Rule 28(2) and the circulars in their entirety.
Why This Ruling Matters
This judgment is significant for corporate groups and holding companies that routinely provide financial support to subsidiaries. The ruling reinforces the principle that GST can be levied only when the statutory ingredients of a taxable supply are present. Mere issuance of a corporate guarantee, without any fee or consideration, does not automatically trigger GST liability.
The decision also highlights an important limitation on departmental circulars: they may clarify the law, but they cannot expand the scope of taxation beyond what the statute permits.
For businesses facing GST demands on intra-group corporate guarantees, this judgment provides a strong precedent, especially where the guarantees are issued without any commercial consideration.