Corporate Guarantees Issued Without Consideration Not Taxable Under GST: Bombay High Court (Nagpur Bench)

Facts 

• M/s D.P. Jain & Co. Infrastructure Private Limited (‘petitioner’) was engaged in the business of highway construction & inter alia had three subsidiaries. During the period 2020 to 22, the petitioner had issued three separate corporate guarantees in favor of a bank on behalf of each subsidiary for the loan taken by such subsidiary.
• Each corporate guarantee deed specifically provided that the petitioner has not received and will also not receive any consideration, fee or commission for issuing such corporate guarantee.
• A Show Cause Notice was issued to the petitioner, whereby DGGI contended that the corporate guarantee provided by the petitioner on behalf of the subsidiaries qualifies as taxable supply of services under GST by placing reliance on CircularNo. 204/16/2023 dated 27 October 2023. Further, the value of supply of such service will be 1% of the guaranteed amount as per Rule 28(1)(c) read with Rule 31.
• The aforesaid SCN was challenged by the petitioner before the Bombay High Court by filing the present writ petition.
• The petitioner contended that corporate guarantees issued by the petitioner without consideration cannot be regarded as a supply under Section 7 of the CGST Act, as the essential element of consideration is absent. It was further argued that tax liability cannot be imposed through departmental circulars, and that such guarantees, being in the nature of actionable claims, do not qualify as services under GST.  

Question before the High Court¹

• Whether the corporate guarantee provided by the petitioner to the banks on behalf of its subsidiaries without any consideration will qualify as a taxable supply under GST?
• Whether the amendment to Rule 28(2) of the CGST Rules, 2017 is constitutionally valid? 

Decision of the High Court 

• The Court held that a corporate guarantee was in the nature of a contingent contract, which becomes enforceable only upon default. Unlike bank guarantees, corporate guarantees are not issued as part of regular commercial activity nor to customers at large. The petitioner was not in the business of providing guarantees, and the transaction was merely incidental to its business. (Para 56)
• Further, the Court also noted that the corporate guarantee was issued by the petitioner without any consideration. Therefore, the Court held that the said activity did not qualify as a taxable supply under GST law. (paras 57–71).
• Reliance was placed 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 held that corporate guarantees issued without consideration are not taxable under service tax. (paras 56–71)
• Further, the Court has upheld the constitutional validity of Rule 28(2) of the CGST Rules, observing that judicial interference in taxing statutes is limited and the amendment is not manifestly arbitrary. (paras 72–79) 

LKS Comments 

• The Court has largely relied on principles evolved under the service tax regime (particularly in the case Edelweiss Financial Services Ltd.), without taking into account the deeming fiction under Para 2 of Schedule I, which treats transactions between ‘related persons’ as taxable supplies under GST even in the absence of any consideration.
• In this case, the petitioner had contended that corporate guarantees may fall within the ambit of ‘actionable claims’, which are neither treated as supply of goods nor services under Schedule III to the CGST Act. However, the judgment does not conclusively address the said argument, leaving the issue open.
• While the Court has held that corporate guarantees provided by the petitioner without any consideration are not taxable, it has simultaneously upheld the constitutional validity of Rule 28(2). This creates a degree of inconsistency, as the valuation mechanism for such guarantees has been sustained despite the underlying activity being held as non‑taxable.
• Given that certain legal aspects have not been addressed by the Bombay High Court in the present judgment, it is likely that the Department may challenge the same before the Supreme Court.

Footnote

1. D P Jain & Co. Infrastructure Private Limited v. Union of India & Ors (Writ Petition No.2087 of 2025)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.