Bombay HC Rules Corporate Guarantees Without Consideration Not Taxable Under GST

The Bombay High Court held that corporate guarantees issued by D.P. Jain & Co. to subsidiaries without consideration did not qualify as a taxable “supply” under GST. Accordingly, it quashed the summons and SCN, while upholding Rule 28(2) of the CGST Rules.

The writ petition had been filed in the Bombay High Court by D.P. Jain & Co. Infrastructure Private Limited (Petitioner). The key dispute relates to corporate guarantees. In the present case, the company had provided guarantees to banks for credits taken by its subsidiaries for the purpose of highway and infrastructure projects. These guarantees were issued without charging any fee, commission, or consideration from the subsidiaries.

By referencing Circular No. 204/16/2023, dated October 27, 2023, and the changes introduced to Rule 28 of the Central Goods and Services Tax Rule, 2017, the tax authorities initiated proceedings against the company. According to the government, providing a corporate guarantee to a concerned company is treated as a taxable supply of service under GST, even if no consideration is received.

As result, the tax authorities issued a summons and a show cause notice (SCN) raising GST demand on the guarantees. However, the company argued that the tax authorities cannot treat a corporate guarantee as a taxable service without consideration. To support its claim, the company also cited an earlier judgement of the Supreme Court in a case titled Commissioner of CGST & Central Excise v. Edelweiss Financial Services Limited, wherein the court had held that a taxable service cannot exist in the absence of consideration.

The company further claimed that these types of guarantees are only internal support arrangements between group companies and not commercial services. When the High Court analysed the facts of the case, it endorsed the company’s arguments.

It observed that the company was involved in the business of providing guarantees and that the guarantees were issued only to support subsidiaries in obtaining loans. Since no consideration was received, the essential requirement of “supply” under GST law was missing. Therefore, the Court set aside the impugned summons and show-cause notice issued against the company. However, the Court refused to strike down Rule 28(2) of the CGST Rules, holding that courts generally do not interfere with tax policy decisions unless they are clearly unconstitutional.