Bombay High Court On GST On Corporate Guarantees: Relief For Taxpayers, But The Debate Is Not Entirely Over
The Bombay High Court has delivered an important ruling on the taxability of corporate guarantees under GST by holding that execution of corporate guarantees in favour of subsidiaries, without any fee, commission or consideration, would not constitute a taxable supply of service under the CGST Act.
Key Ruling
The Court held that absence of consideration is fatal to levy of GST on corporate guarantees and reaffirmed that tax liability must emanate from the statute and cannot be created merely through departmental circulars.
Background
The petitioner company had issued corporate guarantees in favour of banks and financial institutions to secure credit facilities sanctioned to its subsidiaries engaged in infrastructure and highway projects.
The guarantees were issued without charging any fee, commission, or other economic consideration from the borrowing entities.
The GST authorities sought to levy GST on such guarantees by relying upon Circular No. 204/16/2023 and Rule 28(2) of the CGST Rules, which introduced a deemed valuation mechanism for corporate guarantees between related parties.
Observations Of The Court
- A corporate guarantee issued without consideration does not satisfy the essential ingredients of “supply” under Section 7 of the CGST Act.
- Corporate guarantees are distinct from bank guarantees and cannot be mechanically equated with commercial banking transactions.
- Corporate guarantees are generally “in-house” financial support arrangements within a corporate group and not services supplied in the ordinary course of business.
- Tax liability cannot be imposed merely through departmental circulars in the absence of statutory authority.
- The Court relied upon the principles laid down by the Supreme Court in Edelweiss Financial Services regarding absence of consideration.
- While granting relief to the taxpayer, the Court declined to strike down Rule 28(2) as unconstitutional.
Key Takeaway
The ruling significantly strengthens the position that corporate guarantees issued without any fee or commission may not constitute taxable supply under GST. However, the Court has left the post-amendment framework under Rule 28(2) open for further judicial examination.
Conclusion
The Bombay High Court has provided important relief to taxpayers by reaffirming that consideration remains a foundational requirement for levy of GST on corporate guarantees. At the same time, the controversy surrounding post-October 2023 guarantees and valuation under Rule 28(2) is likely to continue before higher judicial forums.