Dear All,

As you may be aware, vide Circular No. 204/16/2023-GST dated October 27, 2023 (‘the Circular’), the CBIC had clarified certain aspects relating to taxability and valuation of corporate guarantee provided by person on behalf of other related person (including guarantee by a holding company to its subsidiary company).

Recently, the Hon’ble Punjab and Haryana High Court, in a writ petition filed by M/s Acme Cleantech Solutions Pvt. Ltd. (‘the Petitioner’), has granted a stay on operation of the point no 2. of the Circular concerning the taxability of corporate guarantee between related parties. The High Court also directed that the Appellate Authority shall be free to decide the case of the Petitioner without being influenced by the Circular.

The Petitioner in the above matter placed reliance on the interim order passed by Hon’ble Delhi High Court in case of Sterlite Power Transmission Vs. Union of India wherein the following key issues were raised:

• Provision of Corporate guarantee is in the nature of a contingent contract which is not enforceable till the guarantee is enforced by the entity to which the guarantee is provided;
• Value of enforcement is not dependent on the value of the guarantee and it is only where the guarantee is enforced, the issue of service may arise, if at all; and
• As such fixing a value at 1% of the Corporate Guarantee provided would put onerous burden on the entity providing the Corporate guarantee.

Further developments on this issue would be relevant for international/domestic corporations giving corporate guaranties for their group entities. We will keep you posted on further developments in this respect.