Corporate Guarantees Without Consideration — Not a Taxable Supply Under GSTBombay High Court Clarifies the Law | Writ Petition No. 2087 of 2025

ByJigar Shah
gst

The Facts

M/s. DP Jain & Co. Infrastructure Private Limited, a highway construction company, had provided unconditional corporate guarantees to banks — State Bank of India and Bank of Maharashtra — on behalf of its group and subsidiary companies between 2020 and 2022. Crucially, each guarantee deed expressly recorded that no fee, commission, or consideration was charged or would be charged by the guarantor.

The company’s books had already been examined by the State GST authorities for FY 2017–18 to 2022–23, with no GST demand raised on these guarantees. However, the DGGI subsequently issued summons alleging non-payment of GST on the same transactions.

The Trigger: Notification and Circular

The controversy intensified after the Ministry of Finance introduced Rule 28(2) of the CGST Rules via Notification No. 52/2023-CT (later amended by Notification No. 12/2024-CT), which deemed corporate guarantees provided to related entities as taxable services, with value fixed at 1% per annum of the guaranteed amount — irrespective of whether any consideration was actually received. Circular No. 204/16/2023-GST reinforced this position.

The petitioner challenged these notifications, the circulars, and the show cause notice before the Bombay High Court.

What the Court Held

The Court examined the foundational concepts under the CGST Act — particularly “supply,” “service,” and “consideration” — and arrived at a clear conclusion:

A corporate guarantee issued by a holding company for its subsidiaries, without any consideration, does not constitute a taxable supply under Section 7 of the CGST Act.

Key reasoning:

  • No consideration = No supply. Consideration is an essential ingredient of a taxable supply. Where guarantee deeds themselves record the absence of any fee or commission, the transaction cannot be taxed.
  • Nature of transaction matters. The Court drew a distinction between commercial guarantee businesses and intra-group support arrangements. The petitioner was not in the business of issuing guarantees; the guarantees were internal support mechanisms.
  • Contingent nature. A corporate guarantee is a contingent contract — it crystallises only if invoked. Until then, no actual service is rendered that can be brought to tax.
  • Supreme Court precedent followed. The Court placed reliance on Commissioner of CGST & Central Excise v. Edelweiss Financial Services Ltd., which had similarly held that corporate guarantees without consideration are not taxable.

On Rule 28(2) — Constitutionality Upheld

Notably, while the Court granted relief to the petitioner on merits, it declined to strike down Rule 28(2). It reiterated the well-settled principle that fiscal legislation carries a strong presumption of constitutionality, and courts should exercise restraint in interfering with economic and taxation measures.

This means Rule 28(2) survives — but its application is limited to cases where there is an underlying supply. It cannot independently create a taxable event where none exists.

Outcome

The Bombay High Court (Nagpur Bench) partly allowed the writ petition, quashed the show cause notice dated 28.01.2025, and held that no GST is exigible on corporate guarantees extended by a holding company to its subsidiaries without consideration.

Practical Takeaway

This judgment is significant for holding companies and group structures that routinely provide inter-company guarantees as a matter of commercial convenience rather than for a fee. The absence of consideration remains a complete shield against GST liability — provided it is clearly documented in the guarantee deed itself. Companies should ensure their guarantee documentation explicitly records the nil-consideration position to protect against similar proceedings.

Limitation: Views expressed in this blog are personal views of the author. This blog is for educational purpose as part of knowledge sharing and should not be construed as opinion of the author on the subject.

Related Blogs