In a significant judgment for corporate groups and infrastructure companies, the Bombay High Court has held that corporate guarantees provided by a holding or group company to banks on behalf of its subsidiaries without consideration are not taxable under the Goods and Services Tax (GST) regime.
The ruling came in the case of D P Jain & Co. Infrastructure (P.) Ltd. v. Union of India and is expected to have a far-reaching impact on GST disputes involving corporate guarantees between related entities.
Background of the Case
The petitioner, D P Jain & Co. Infrastructure (P.) Ltd., had furnished corporate guarantees to banks and security trustees for loans availed by its subsidiary and special purpose vehicle (SPV) companies during the period from 2020 to 2022. These guarantees were issued to support infrastructure projects undertaken by the subsidiaries.
Importantly, the guarantee agreements specifically mentioned that the holding company had neither received nor intended to receive any commission, fee, security, or consideration from the borrower entities for providing such guarantees.
Earlier, the State GST authorities had conducted investigations covering financial years 2017-18 to 2022-23. During those proceedings, the authorities examined the company’s books of accounts, GST returns, balance sheets, and corporate guarantee documents. No GST demand was raised in relation to the guarantees at that stage.
However, later, the Directorate General of GST Intelligence (DGGI) initiated separate proceedings alleging that GST was payable on such corporate guarantees.
GST Amendments and Department’s Stand
While the investigation was ongoing, the Central Government issued Notification No. 52/2023-Central Tax dated 26 October 2023 inserting Rule 28(2) in the CGST Rules. This rule introduced a deemed valuation mechanism for corporate guarantees provided between related parties.
Subsequently, Circular No. 204/16/2023-GST dated 27 October 2023 and Circular No. 225/19/2024-GST dated 11 July 2024 clarified that corporate guarantees given by a holding company to its subsidiary, even without consideration, would be treated as taxable supplies under GST.
Relying upon these circulars and amendments, the department issued summons and a show cause notice proposing levy of GST on the petitioner by treating the guarantees as taxable services.
The petitioner challenged:
- The GST liability on corporate guarantees issued without consideration
- The legality of the circulars
- The constitutional validity of Rule 28(2) of the CGST Rules
- The summons and show cause notice issued by the DGGI
Key Issue Before the Court
The primary question before the Court was whether a corporate guarantee furnished by a holding or group company for its subsidiary without any consideration could be treated as a “supply of service” under Section 7 of the CGST Act, 2017.
The case also examined whether the government, through circulars and delegated legislation, could impose GST on such transactions even when no consideration existed.
Bombay High Court’s Observations
The Bombay High Court held that the corporate guarantees provided by the petitioner were admittedly without consideration. The guarantee deeds themselves clearly recorded that no fee, commission, or financial benefit was received by the holding company.
The Court observed that consideration is one of the essential elements of a taxable supply under GST. In absence of consideration, the transaction would generally fall outside the scope of “supply” under Section 7 of the CGST Act.
According to the Court, a corporate guarantee issued by a parent or holding company for the financial assistance of its subsidiary is fundamentally different from a commercial guarantee issued by banks or financial institutions in the ordinary course of business.
The Court emphasized that the petitioner was not engaged in the business of commercially providing guarantees. Instead, the guarantees were merely an internal financial support mechanism intended to protect the economic interests of the corporate group.
Reliance on Supreme Court’s Edelweiss Judgment
The High Court heavily relied upon the landmark decision of the Supreme Court of India in Commissioner of CGST and Central Excise v. Edelweiss Financial Services Ltd.
In the Edelweiss case, the Supreme Court had held under the erstwhile service tax regime that corporate guarantees issued without consideration to related entities could not be subjected to service tax.
Applying the same principle under GST law, the Bombay High Court reiterated that for a transaction to qualify as a taxable service, two conditions are essential:
- There must be a service provider and service recipient relationship
- There must be consideration flowing for such service
Since neither commercial intent nor consideration existed in the present case, the guarantees could not be classified as taxable supplies.
Court’s View on Circulars and Rule 28(2)
The Court further clarified that departmental circulars cannot create tax liability contrary to the provisions of the CGST Act.
Merely because the circulars declared corporate guarantees without consideration as taxable would not automatically make them liable to GST if the statutory requirements of “supply” were not fulfilled.
However, the Court refused to strike down Rule 28(2) of the CGST Rules. It held that delegated legislation in taxation matters carries a strong presumption of constitutionality and courts should interfere only in cases of clear arbitrariness or constitutional violation.
Therefore, while the Court upheld the validity of Rule 28(2) and the circulars, it simultaneously held that they could not be applied to tax transactions where no consideration existed.
Final Verdict
The Bombay High Court partly allowed the writ petition and quashed the summons and show cause notice issued against the petitioner.
This judgment provides substantial relief to holding companies and corporate groups that provide financial support to subsidiaries through corporate guarantees without charging any commission or fee.
The ruling is likely to become an important precedent in ongoing GST litigation relating to related-party corporate guarantees and may significantly restrict the department’s attempt to levy GST on purely intra-group financial support arrangements without consideration.