The Gujarat High Court has delivered a significant ruling on the GST applicability to corporate guarantees between related companies, holding that GST cannot be imposed on corporate guarantees furnished before October 26, 2023, when Rule 28(2) of the CGST Rules came into effect. The Court found the retrospective application of the valuation mechanism unconstitutional, observing that it violated Articles 14 and 19(1)(g) of the Constitution of India.
At the same time, the Court clarified that GST would apply to corporate guarantees that continued beyond October 26, 2023. The judgment also partially modified the valuation mechanism under Rule 28(2), removing the words “whichever is higher” from the rule.
The ruling was delivered by a Division Bench comprising Justice A.S. Supehia and Justice Vaibhavi D. Nanavati in Torrent Power Ltd. & Ors. v. Union of India & Ors. and connected matters.
Background of the Corporate Guarantee GST Dispute
The petitions were filed primarily by holding companies that had issued corporate guarantees in favour of their subsidiaries and other related entities. The guarantees in question were furnished before October 26, 2023, when the specific valuation mechanism under Rule 28(2) was introduced.
The taxpayers challenged the levy of GST on such guarantees and questioned the constitutional validity of the relevant provisions of the CGST Act, Rule 28(2), and CBIC circulars dated October 27, 2023 and July 11, 2024.
The central issue was whether the Government could retrospectively apply the newly introduced valuation mechanism to corporate guarantees that had already been issued when there was no corresponding valuation provision specifically prescribing taxation at 1% of the guaranteed amount.
Corporate Guarantees Between Related Persons Are Taxable Supplies
The Gujarat High Court rejected the broader argument that corporate guarantees between related companies are completely outside the GST framework merely because they are furnished without consideration.
The Court recognised that under the GST regime, transactions between related persons can constitute taxable supplies even where no consideration is received, subject to the statutory provisions governing such transactions.
This position marks an important distinction from the earlier service-tax regime, under which the absence of consideration could prevent a corporate guarantee from being treated as a taxable service.
Therefore, the judgment does not eliminate GST on corporate guarantees altogether. Instead, it principally addresses the retrospective application and valuation mechanism introduced through Rule 28(2).
Retrospective GST Levy Before October 26, 2023 Held Unconstitutional
The most important aspect of the judgment concerns guarantees issued before October 26, 2023.
The High Court held that applying Rule 28(2) to such earlier guarantees amounted to imposing a new tax burden retrospectively. According to the Court, taxpayers had arranged their financial and commercial affairs based on the law prevailing when the guarantees were furnished.
The Court found that imposing GST retrospectively could create an unexpected financial burden, particularly because corporate guarantees may remain operative for several years.
It therefore held that the levy of GST on corporate guarantees furnished before October 26, 2023 under Rule 28(2) was violative of Articles 14 and 19(1)(g) of the Constitution.
The Court also observed that there was no legal authority for collecting GST under the newly introduced valuation mechanism for the period preceding October 26, 2023.
GST Applies From October 26, 2023 if the Guarantee Continues
While protecting taxpayers from the retrospective levy, the Court made an important clarification.
Where a corporate guarantee issued before October 26, 2023 continued after that date, GST could be levied from October 26, 2023 onwards.
The Court treated the taxable event as recurring in nature. Consequently, the fact that a guarantee was originally issued before the introduction of Rule 28(2) would not permanently exempt the transaction from GST if the guarantee continued after the rule became effective.
Thus, businesses need to examine the period during which each corporate guarantee remained operative rather than merely relying upon its original execution date.
Rule 28(2) Partially Read Down
Another major issue before the Gujarat High Court was the valuation mechanism under Rule 28(2).
The rule prescribed valuation at 1% of the amount of the guarantee or the actual consideration, whichever was higher.
The petitioners argued that this formula could result in GST being charged on an artificial value significantly higher than the actual consideration received for furnishing the guarantee.
The Court noted that in some of the cases before it, the actual guarantee commission was approximately 0.25% to 0.30%, whereas the prescribed 1% mechanism could result in taxation on a substantially higher value.
The Court therefore found the expression “whichever is higher” to be arbitrary and inconsistent with Articles 14 and 19(1)(g).
Instead of striking down Rule 28(2) completely, the Court read down the provision by removing the words “whichever is higher.”
Consequently, the valuation has to operate on the basis of the applicable statutory mechanism without automatically requiring the higher of the two amounts to be adopted.
Section 15(4) of CGST Act Upheld
The petitioners had also challenged the constitutional validity of Section 15(4) of the CGST Act, which provides the statutory framework for determining the value of supplies involving related persons.
The Gujarat High Court upheld the constitutional validity of this provision.
Therefore, the judgment does not invalidate the broader legislative framework for valuation of related-party transactions. The Court’s intervention is specifically focused on the manner in which Rule 28(2) operated, particularly its retrospective application and the phrase requiring the higher value to be adopted.
Relief to Taxpayers and Refund of Excess GST
The Court also examined proceedings initiated under Section 74 of the CGST Act, which deals with tax recovery involving allegations of fraud, wilful misstatement or suppression of facts with an intention to evade tax.
The impugned proceedings against the petitioners were quashed to the extent covered by the Court’s findings. The Court further directed that excess GST deposited by the taxpayers be refunded, while permitting adjustment of amounts where appropriate.
The Court also set aside the CBIC circulars dated October 27, 2023 and July 11, 2024 to the extent that they were inconsistent with its conclusions. The Revenue was permitted to issue fresh administrative instructions consistent with the judgment.
Torrent Power Corporate Guarantee and Pledge of Shares
In the case concerning Torrent Power, the Court separately examined an arrangement involving a corporate guarantee coupled with an agreement for pledging shares.
The Court found that the pledge secured the subsidiary’s obligations and provided for appropriation of the pledged shares in the event of default. It concluded that the arrangement satisfied the relevant requirements of the Contract Act and constituted a supply of services attracting GST under the applicable valuation mechanism.
Key Takeaways for Businesses
The Gujarat High Court judgment has significant implications for holding companies, subsidiaries and other related entities involved in corporate guarantee arrangements.
Businesses should review their historical corporate guarantees and identify the date on which each guarantee was furnished, whether it continued beyond October 26, 2023, and the valuation adopted for GST purposes.
The ruling provides substantial relief against retrospective GST demands for the period preceding October 26, 2023. However, guarantees continuing after that date may remain subject to GST.
The judgment also provides an important constitutional safeguard against retrospective tax burdens that materially alter the legal and financial consequences of transactions already undertaken.
Case Details
Case Number: R/Special Civil Application No. 12175 of 2024 and connected matters
Court: Gujarat High Court
Bench: Justice A.S. Supehia and Justice Vaibhavi D. Nanavati
The ruling is likely to have considerable significance for ongoing GST disputes involving corporate guarantees, related-party transactions, Rule 28(2), valuation of guarantees and retrospective taxation.