The Hon’ble Bombay High Court (Nagpur Bench) (“High Court”) in the matter of D P Jain & Co. Infrastructure Private Limited v. Union of India & Ors. has held that a corporate guarantee issued without any consideration by a company on behalf of its related entities to secure loans availed by such entities, does not constitute a ‘taxable supply’ for the levy of GST in terms of Section 9 in terms of the Central Goods and Services Tax Act, 2017 (“CGST Act”).

Facts:

1. Petitioner issued three corporate guarantees in favour of the lender banks (2020 to 2022) in connection with loan facilities availed by its related entities expressly declaring in the guarantee deeds that no security, fee, commission, or any other consideration was received or payable for the same.
2. Subsequently, through Notification No. 52/2023-Central Tax, dated 26.10.2023 and Circular No.204/16/2023 dated 27.10.2023 the Government inserted Rule 28(2) into the Central Goods and Services Tax Rules, 2017 (“CGST Rules”) clarifying that the provision of corporate guarantees even without any consideration would constitute a taxable supply of service under GST.
3. Acting on the said notification and circular, the Respondents initiated proceedings against the Petitioner, fastening GST liability on the corporate guarantees so issued.
4. Aggrieved, the Petitioner filed writ petition before the High Court, challenging both the impugned proceedings and the constitutional validity of Rule 28(2) of the CGST Rules, on the ground of being ultra vires to the provisions of the CGST Act.

Issue: 

Whether the issuance of corporate guarantees by the Petitioner in favour of lender banks, on behalf of its related entities and without any consideration, could be treated as a ‘taxable supply of service’ under the CGST Act?

Discussion and Ruling:

The key findings of the Hon’ble High Court are as follows:

• Corporate guarantees issued by the Petitioner were merely in-house guarantees provided to support the borrowings of its group entities and were not commercial services rendered in the ordinary course of business.
• The execution of a corporate guarantee is a contingent contract which becomes enforceable only at the instance of the bank/financial institution in the event of default.
• Taxability of service does not arise in the absence of a provider of service and flow of consideration for the rendering of such services in light of the decision in Commissioner of CGST & Central Excise v. Edelweiss Financial Services Ltd., 2023 (73) G.S.T.L. 4 (S.C.).
• Issuance of corporate guarantees, without any consideration did not constitute a supply and was therefore, not taxable under Section 9 of the CGST Act.

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