Corporate Guarantees issued without any consideration are not taxable under GST: Bombay High Court (Nagpur Bench)

Rule 28 of the Central Goods and Services Tax Rules, 2017 ("CGST Rules") prescribes the manner for determination of the value of supplies made between related persons. W.e.f. 26.10.2023, sub-rule (2) was inserted in Rule 28 to specifically provide for the valuation of corporate guarantees when issued by related parties. By way of this Rule, a deeming value of 1% of the amount guaranteed (on an annual basis) or actual consideration for such guarantee, was fixed as the value of such supplies. Thereby, the supply of service of providing corporate guarantee, by say, a holding company to its subsidiary or any other related party was taxable at the rate of 18% on 1% (annual) of the corporate guarantee so offered.

In the case of D.P. Jain & Co. Infrastructure Pvt. Ltd. v. Union of India, Bombay High Court (Nagpur Bench) reported as 2026 (42) Centax 208 (Bom.), the Petitioner had issued three corporate guarantees in favour of banks to secure credit facilities availed by its subsidiaries during FY 2020-21 to FY 2022-23, i.e., prior to the insertion of the aforementioned Rule 28(2) of the CGST Rules. The Corporate Guarantee deeds specifically stated that the Petitioner would not receive any fee, commission, or other consideration for providing these guarantees.

The Department issued a Show Cause Notice alleging that corporate guarantees provided by Petitioner on behalf of the subsidiaries qualifies as taxable supply of services under GST by placing reliance on Circular No. 204/16/2023 dated 27.10.2023. 

Further, the value of such services was proposed to be determined under Rule 28(1)(c) read with Rule 31, being the provisions applicable prior to the insertion of Rule 28(2).

The Petitioner challenged Rule 28(2) along with Circular No. 204/16/2023-GST dated 27.10.2023 and Circular No. 225/19/2024-GST dated 11.07.2024, which inter alia clarified the taxability and valuation of corporate guarantees under GST. The Petitioner contended that a corporate guarantee is, at best, an actionable claim, which is excluded from the scope of both goods and services under Paragraph 6 of Schedule III to the CGST Act. Accordingly, it was argued that the issuance of a corporate guarantee neither constitutes a supply of goods nor a supply of services and, therefore, is not a taxable supply under the CGST Act. Consequently, Rule 28(2), which prescribes a deeming valuation mechanism for such activity, was challenged as being ultra vires the Act.

a. Whether a corporate guarantee issued by the Petitioner on behalf of its subsidiaries without any consideration constitutes a taxable supply under GST law?

b. Whether the amendment to Rule 28(2) of the CGST Rules, 2017 is constitutionally valid?

The High Court held that the corporate guarantees provided by the taxpayer were not taxable under GST. The Court observed that:

a. The guarantees were issued without any consideration: The Court noted that the corporate guarantee deeds expressly provided that the taxpayer had not received and would not receive any fee, commission, security or other consideration for furnishing the guarantees. Reiterating that consideration is an essential ingredient of “supply” under Sections 7 and 9 of the CGST Act, the Court held that, absent consideration, no taxable supply can arise.

b. A corporate guarantee is a contingent obligation that becomes enforceable only upon default by the borrower: The Court observed that a corporate guarantee merely creates a contingent obligation on the guarantor and becomes enforceable only if the borrower fails to discharge its obligations. The Court further distinguished a corporate guarantee from a bank guarantee, noting that bank guarantees are issued by banks on a regular basis as a part of their business of Banking, whereas corporate guarantees are typically furnished by holding or group companies to support their subsidiaries or associate enterprises. The Court also observed that a corporate guarantee is essentially an in-house arrangement and is not generally issued to customers.

c. The taxpayer was not in the business of providing guarantees and had issued the guarantees solely to support its subsidiaries: The Court emphasised that the taxpayer was not engaged in the business of providing guarantees as a commercial activity. The guarantees had been furnished solely to support the borrowings of its subsidiaries and to safeguard their financial interests. 

The Court placed heavy reliance on the Supreme Court's ruling in Commissioner of CGST & Central Excise v. Edelweiss Financial Services Ltd. [2023 (73) G.S.T.L. 4 (S.C.)], which had held that corporate guarantees issued without consideration are not taxable under the erstwhile service tax regime. 

Accordingly, the Court quashed the show cause notice proposing GST on the corporate guarantees provided by the Petitioner. However, it declined to strike down Rule 28(2) of the CGST Rules, holding that fiscal legislation enjoys a strong presumption of constitutionality, and that there is minimal scope for challenge to constitutional validity.

The ruling is favourable for taxpayers, as the High Court has held that corporate guarantees issued by a holding company to its subsidiaries without any consideration are not subject to GST. However, the Court relied on the Supreme Court's decision in Edelweiss (supra), which was given in the context of the erstwhile Service Tax regime.  The Court did not examine Paragraph 2 of Schedule I to the CGST Act, which expressly deems supplies between related persons, including holding companies and subsidiaries, to be taxable even in the absence of consideration. Since no similar deeming fiction existed under the service tax regime, reliance on a service tax precedent without considering this distinction may be subject to further scrutiny by the Hon’ble Supreme Court.

The Petitioner had also argued that a corporate guarantee may constitute an actionable claim and, therefore, fall outside the scope of both goods and services under the CGST Act. However, the Court did not render any specific finding on this issue, leaving the question open.

Further, while the Court held that such corporate guarantees do not constitute a taxable supply, it simultaneously upheld the validity of Rule 28(2), which prescribes a valuation mechanism for the same activity. This gives rise to certain interpretational issues, as the valuation mechanism for such guarantees has been upheld despite the underlying activity itself being held to be non-taxable. In light of these aspects, it is likely that the Department may challenge the judgment before the Supreme Court.

The judgment also assumes significance given that the taxability of corporate guarantees issued without consideration between related parties remains a highly litigated issue and is presently pending consideration before multiple High Courts, including the Hon’ble Punjab & Haryana High Court in M/s Acme Cleantech Solutions Pvt. Ltd. v. Union of India, CWP 10249 of 2024; the Hon’ble Bombay High Court in Vedanta Ltd. v. Union of India, WP No 4519 of 2024, and the Hon’ble Delhi High Court in Sterlite Power Transmission Limited & Ors. v. Union of India,WP (C) 2966 of 2024. The Hon’ble Punjab & Haryana High Court and the Hon’ble Bombay High Court have granted interim relief by staying the operation of Circular No. 204/16/2023-GST. The outcome of these proceedings is likely to have a significant bearing on the taxability of corporate guarantees under the GST regime.