GST on corporate guarantees issued without any consideration: Torrent Power Ltd V Union of India & Ors, (2026) 45 Centax 217 (GUJ)

The Petitioners, principally holding/group companies, had furnished corporate guarantees in favour of banks and financial institutions for loans and credit facilities availed by their subsidiaries/related entities. The guarantees were, in several cases, furnished without any consideration, fee or commission.

The Department issued Show Cause Notices (“SCNs”) and Order under Section 74 proposing to demand GST on corporate guarantees, including guarantees executed prior to the insertion of Rule 28(2) (i.e., prior to 26.10.2023).

The Petitioners inter alia challenged: 

• The constitutional validity of Rule 28(2) of the CGST Rules, which prescribes a deemed valuation of 1% per annum (or actual consideration, whichever is higher) for supply of services by way of corporate guarantees between related persons; 
• The constitutional validity of Section 15(4) of the CGST Act; 
• The validity of Circular No. 204/16/2023-GST dated 27.10.2023 and Circular No. 225/19/2024-GST dated 11.07.2024 (collectively referred to as “Circulars”) issued by the Central Board of Indirect Taxes and Customs ("CBIC"), seeking to levy and clarify GST on corporate guarantees; 
• Show cause notices and Order issued under Section 74 of the CGST Act.

The Hon’ble High Court analysed various issues raised by the Petitioners and held that execution of a corporate guarantee by a holding company in favour of its subsidiary constitutes a taxable supply of service under Section 7 read with Entry 2 of Schedule I to the CGST Act. The Court inter alia held that: 

1. Corporate guarantees constitute a ‘supply of service’: A holding company and its subsidiary are ‘related persons’ under the Explanation to Section 15 of the CGST Act. The Court held that the execution of a corporate guarantee, even without consideration, satisfies the expression ‘supply of services’ in the course of business under Section 7 read with Entry 2 of Schedule I. The Court held that consideration for the guarantee is supplied by the creditor bank advancing credit to the subsidiary (Section 127 of the Indian Contract Act, 1872), and that on payment of a guaranteed debt, the holding company is subrogated to the creditor bank's rights against the subsidiary under Section 140, read with the principal debtor's implied promise to indemnify the surety under Section 145 of the Contract Act. The Court treated this subrogation as the connecting link establishing a supply of service by the holding company to the subsidiary.
2. Furnishing a guarantee falls within ambit of definition of ‘business’: In terms of inclusive definition of ‘business’ in Section 2(17) of the CGST, extending a corporate guarantee to a subsidiary is an activity ‘incidental or ancillary’ to the Holding Company's business, so it is irrelevant that issuing guarantees is not the Holding Company's core or main business, and irrelevant that there is no profit motive or repetition of the activity.
3. Corporate guarantees also fall within Sr No 5(e) of Schedule II: The Court held that a Holding Company's statutory relationship with its subsidiary under Section 2(87) of the Companies Act, 2013 constitutes a binding legal tie (vinculum juris). By virtue of this relationship, the holding company is bound by legal duty to do or not do something for its subsidiary. Accordingly, furnishing a guarantee to provide financial security amounts to ‘agreeing to the obligation to do an act’ and is a deemed supply of services under Sr No 5(e) of Schedule II to the CGST Act.
4. Rejection of the ‘actionable claim’ argument: The Court rejected the Petitioners' argument that a corporate guarantee is an actionable claim and therefore falls outside ‘supply’ under Schedule III to the CGST Act. It held that ‘debt’, for this purpose, must be understood under Section 3 of the Transfer of Property Act, 1882, and not under Article 366(8) of the Constitution or the Insolvency & Bankruptcy Code. Since a corporate guarantee creates only a secondary, contingent liability triggered by the subsidiary's default, unlike an actionable claim, which is a direct, transferable right to payment, it does not fall within ‘actionable claim’ and remains outside the exclusion under Schedule III read with Section 7(2)(a) of the CGST Act.
5. Section 15(4) and Rule 28(2) are intra vires, subject to a partial read-down: The Court upheld Section 15(4) and Rule 28(2) of the CGST Rules as intra vires the CGST Act and Articles 14, 19(1)(g) and 265 of the Constitution. However, the expression ‘whichever is higher’ (as between the deemed value of 1% per annum and the actual consideration) in Rule 28(2) was read down as arbitrary and violative of Articles 14 and 19(1)(g) of the Constitution. The Court observed that unlike the Safe Harbour provisions under Rule 10TD of the Income Tax Rules, 1962 (which served as the basis for the 1% benchmark and which are optional in nature), Rule 28(2) of the CGST Rules provides no corresponding option to the taxpayer to pay GST on the actual commission/charge.
6. No retrospective levy for guarantees issued prior to 26.10.2023: The Court held that applying Rule 28(2) to corporate guarantees furnished before the rule's introduction on 26.10.2023 is unduly harsh, in violation of Articles 14 and 19(1)(g), and would amount to unjust enrichment, since no valuation mechanism existed in law for that period. The levy applies only w.e.f. 26.10.2023, including guarantees that were executed prior to but continue to subsist beyond the said date.
7. Circulars partly set aside: The CBIC Circulars were set aside only to the extent they run contrary to the Court's findings, leaving the Revenue free to issue fresh circulars consistent with the judgment.
8. Determination of time of supply: The Court held that the time of supply is determined under Section 13(2)(c), i.e., the date on which the subsidiary reflects the guarantee in its books of account, which recurs every financial year and aligns with the ‘per annum’ valuation under Rule 28(2). It further held that a corporate guarantee is not a ‘continuous supply of service’ under Section 2(33) of the CGST Act, as it lacks periodic payment obligations. The guarantee is a one-time undertaking with a continuing obligation whereas it is only the operation of the guarantee that is continuous over a period, and its benefit accrues to the subsidiary on execution.
9. Extended limitation / Section 74 proceedings quashed: Where the Revenue had invoked Section 74 of the CGST Act (i.e., on grounds of fraud, wilful misstatement or suppression) to raise demands and penalties on corporate guarantees, the Court quashed demand while holding that a disputed, bona fide interpretation of a genuinely contested legal question does not amount to wilful suppression, particularly where the underlying facts were known to the Revenue.

The Gujarat High Court's ruling represents a materially different view on the core taxability question than the Bombay High Court's (Nagpur Bench) decision in D.P. Jain & Co. Infrastructure Pvt. Ltd.  (supra). While the Bombay High Court (Nagpur Bench) held that the absence of consideration is fatal to the levy, the Gujarat High Court has held that when a creditor-bank provides a loan facility to a subsidiary/ related entity, that specific act constitutes the consideration for the corporate guarantee furnished by the Holding Company, and that the Schedule I and Schedule II provisions independently deem the guarantee to be a taxable supply of service regardless of whether a fee is charged.

That said, reading down of the expression ‘whichever is higher’ in Rule 28(2) is a positive and practically significant outcome, since it removes the risk of GST being charged at the flat 1% benchmark where the actual guarantee consideration is lower, and confines the levy to the actual consideration in such cases. However, since the Court has otherwise upheld Rule 28(2) and the underlying taxability of corporate guarantees, this relief is likely to remain a continuing point of dispute between taxpayers and the Revenue on valuation. Further, the Court's ruling on prospective applicability of Rule 28(2) is also a positive outcome, as it held that corporate guarantees furnished before insertion of Rule 28(2) were not leviable to GST as no valuation mechanism existed in law for that period, provided the corporate guarantee did not continue beyond 26.10.2023.

In light of the divergent views taken by the Bombay High Court (Nagpur Bench) and the Gujarat High Court on the taxability of corporate guarantees furnished without consideration, and the issue being pending before other High Courts, the question is likely to ultimately be settled by the Hon’ble Supreme Court.