GST UPDATE

Corporate Guarantee without consideration cannot be treated as supply of service and therefore cannot be subject to tax under GST Law. However, Petition of challenging the Rule 28 inserted via notification and circular stands to be dismissed.

Writ Petition No.:2087 of 2025

Court: High Court of Bombay (Nagpur Bench)

Case Title: M/s D.P. Jain & co. v/s Union of India and others

Outcome:Writ Petition is partly allowed and impugned proceedings were
brushed aside.

Judgement Date: 06.05.2026

BRIEF FACTS OF THE CASE:

M/s DP jain and co. Infrastructure Pvt Ltd (petitioner), engaged in the business of construction of national and state highways. It entered into three corporate guarantee contracts during the period F.Y. 2020-21 to F.Y. 2022-23. All three contracts entered had one similar clause that no consideration/fees, security or any other form of consideration was received by the company.
A detailed investigation was carried out by the Assistant Commissioner of State tax (Investigation) against the Petitioner for the period of F.Y. 2017-18 to 2022-23. Petitioner, produced all the requisite books of accounts and documents. Consequently, the 3 corporate guarantee deeds aforementioned, were discovered from the perusal of the documents and books of accounts produced by the petitioner. However, there was no action initiated against the petitioner by the Assistant Commissioner. Subsequently, Assistant Commissioner DGGI issued summons dated 20.07.2023 alleging non-payment of GST without stating the nature, purpose and provisions under which said investigation was initiated. Therefore, the petitioner informed the intelligence officer vide letter dated 25.09.2023 that an investigation has already been conducted by the Assistant Commissioner (investigation) in the past. However, Deputy Director DGGI wrote a letter to the Assistant Commissioner (Investigation) mentioning by referring to the abovementioned letter that a letter has been moved by the petitioner with a copy of indent dated 03.07.2023 and that the subject matter of investigation done by the Assistant Commissioner DGGI is not covered by the State Tax Investigation.
Subsequently, notification no. 52/2023-Central Tax dated 26.10.2023 amending Rule 28 of the CGST Rules,2017 which was later amended by the Notification number 12/2024- Central Tax , dated 10.07.2024. Pursuant to which a circular no. 204/16/2023 dated 27.10.2023 was issued which clarified that the activity of providing the corporate guarantee will be taxable under GST law. The corporate guarantee was taxed on the grounds that this service is provided for sanctioning credit facilities to another related person and that even when it is made without consideration, it will be taxed as a taxable supply of service. Therefore, the petitioner was held liable to pay tax on the corporate guarantee deeds and a SCN was issued by the Joint/ Additional Director DGGI purporting the demand of tax on those corporate guarantee deeds. Pursuant to which, petitioner preferred a writ petition before the High Court.

QUESTION BEFORE HON’BLE COURT:

Whether Corporate Guarantee issued without any fee/consideration by a parent company on behalf of its subsidiary is taxable?
Whether taxability imposed via issuing notification /circulars by the Revenue Department stands valid without any change in the Act?
How valuation of services to be calculated for the purpose of imposing tax in the case of goods/services which are not available in open market in case of no specific rule applicable for the service?
Whether Court has the power to revoke the notification issued for imposing taxability on the goods/services?
Whether one department of the Revenue can initiate proceedings in the case of the taxpayer in which another department of the Revenue had already concluded proceedings for the same period?

BRIEF ARGUMENTS BY PETITIONER:

Petitioner submitted following contentions: -

Petitioner contended that without examining any legal provisions of CGST Act, 2017, Revenue Department at its own assumption declared that providing Corporate Guarantee is Taxable Supply of Service and pursuant to which, Additional Director General issued SCN purporting a huge amount of GST on the Corporate Guarantee.
Goods and services are two different terms and expression defined under law and the department officials have completely ignored that fact. A transaction which is an actionable claim is specifically covered under the definition of goods under CGST Act 2017 and therefore cannot be treated as service by issuing a circular. Furthermore, there is no notification issued to specify that transaction of actionable claim will be treated as service and not as goods and that Schedule-III specifically excluded transaction as actionable claim as defined under Section 2(102A) of CGST Act 2017.
Petitioner sought quashing and setting aside the sub-rule (2) of Rule 28 of the CGST Rules, 2017 as inserted by Notifications (supra) as the same are ultra-vires to the provisions of CGST Act 2017 and SGST Act and quashing of SCN contending that SCN issued is without jurisdiction.
Furthermore, the indent letter dated 03.07.2023 issued by the Assistant Commissioner (Investigation) did not covered the corporate guarantee issue and as it was not the subject matter of the investigation therefore, it is invalid that Assistant Commissioner DGGI to proceed with the investigation proceedings solely on the ground of non-payment of tax on corporate guarantee.
In view of provisions of clause (b) of Section 6(2) of CGST Act 2017, where a proper officer under the SGST Act or the UTGST Act has initiated any proceedings on a subject matter, no proceedings shall be initiated by the proper officer under this Act on the same subject matter. Therefore, proceedings initiated by Assistant Commissioner of State Tax (Investigation) stands invalid. And that examination and entire assessment for the records of F.Y. 2017-18 to 2022-23 has already been determined and tax has already been paid, therefore, the proceedings conducted by Assistant Commissioner DGGI are without jurisdiction.
Petitioner contended that it is a settled principle of law that a tax liability cannot be created by a circular and that Department (Revenue) has no power either to issue such circular under Section 168 of the CGST Act, 2017 nor has the power to treat a corporate guarantee as taxable supply of service. Further, that any activity is taxable or not has to be determined by due process of adjudication and if a subject matter has been prejudged by Union of India through Secretary, Ministry of Finance Department (Revenue) then in such case adjudication is pointless.
In continuation of above, reference was given to the definition of Goods as defined under Sec. 2(52) of CGST Act which includes actionable claims. However, as per Schedule III of the Act, actionable claims (other than activities like gambling) which shall be neither treated as supply of goods or services and the definition of Taxable supply as per Section 2(108) of CGST Act means a supply of goods or services or both which is liable to tax under CGST Act. In view of above, it can be derived that firstly providing the corporate guarantee is not a taxable supply under CGST Act and secondly it could only fall within the realm of actionable claim.
The impugned circular and notifications were issued after the date of corporate guarantee deeds and it was mentioned in the notification that where there is a supply of service of providing corporate guarantee in respect of corporate guarantee issued or renewed before 26.10.2023, the valuation of said supply is to be done in accordance with Rule 28 as it existed during the instant time. Therefore, the valuation of corporate guarantee could be done as per the Rule 28 which existed at the instant time. Hence, such deeds should not be taxed as per sub rule (2) of Rule 28.
It was argued that in view of specific clause incorporated in the corporate deeds there was no consideration charged for the corporate guarantee and further that the impugned circular is pending i.e. already a matter of sub-judice before the various High Courts.
In continuation of above, reference was given to the definition of “Consideration” and Services” under Section 2(31) of CGST Act and Section 2(102) of CGST Act and “related person” under Section 15 of CGST Act 2017. Further, the term “Supply” is defined under Section 7 of the CGST Act. For this, reference was given to the definition of “guarantee” in simple language means the promise for doing of something or a promise to make payment of certain debt or performance of certain duty of another person’s contractual obligation.
Further, it was argued that services mean anything other than goods, money and securities but includes activities relating to use of money. The taxable supply is defined under Section 2(108) which means a supply of goods or services or both which is leviable to tax under CGST Act. Corporate Guarantee is not a taxable supply under CGST Act and secondly Corporate Guarantee is only could fall within the realm of ‘actionable claim’ which is neither a supply of goods and nor supply of service, hence not taxable. As per Section 2(1) actionable claim if of nomenclature suggests, only a claim and further held that such claim, may be existent, accruing, conditional or contingent. It was submitted that the activity of providing corporate guarantee is not covered under the supply of goods and by the impugned circular the Department amended the Rule 28 against the legal provisions. Therefore, the said rule should be declared as ultra-vires.
Further it was contended that all the corporate guarantees were executed prior to the said amendment as well as the notification dated 26.10.2023. Therefore, the proceedings initiated against the petitioner is illegal and deserves to be quashed and set aside. And that the said circular is already sub-judice as it is pending before various high courts and various high courts have taken the cognizance of the issue involved and stayed the further proceedings and therefore the petitioner is not liable to pay the said GST on corporate guarantees.
Reliance was placed on judicial pronouncements in the case of Scholoss HMA Pvt. Ltd. Vs. Union of India, (2025) 26 Centax 382 (Bom.);

JSW Steel Ltd. Vs. Directorate General of GST Intelligence, (2024) 24 Centax 12 (Del.);
R/ Special Civil Application No. 12179/2024 Torrent Investment Pvt. Ltd. Vs. Union of India & Ors., decided on 20.08.2024 &
Vedanta Ltd. Vs. Union of India, (2025) 26 Centax 244 (Bom.) and other judgements .

Therefore, the impugned Notification and the proceedings initiated by the DGGI should be brushed aside.

BRIEF ARGUMENTS BY REVENUE DEPARTMENT:

Revenue Department contended that:

It was contended that the Petitioner Company is liable to pay the GST on corporate guaranteein view of the amendment in Rule 28(2) of the CGST Act via circular.
The definitions of “services”, “related person” and “supply” given under Section 2(102), Section 15 and Section 7 of the CGST Act 2017 along with meaning of guarantee as defined under Section 126 of Indian Contract Act, 1872 were referred to and was contended that on joint reading it is derived that a Corporate Guarantee can be inferred as an affirmation usually made by a company on behalf of another business entity which usually would be a smaller company. Therefore, corporate guarantee is an agreement between a borrower, lender and guarantor, whereby the guarantor takes on the responsibilities of debt repayment in case of the default by borrower.
In continuation of above, it was contended that principle of valuation in case of GST is that the value of supply of goods or services or both shall be the Transaction Value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. When such supply is between related person, its value will be determined by the valuation rules as prescribed.
By referring to the definition of the term services as provided under CGST Act 2017, providing guarantee against any loan/credit facility, the guarantor basically assists the principal debtor in availing such facility which has an element of service.
Revenue department submitted that where a proper officer under the State GST law has initiated any proceedings on a subject matter, no proceedings shall be initiated by the proper officer under this Act solely on the same subject matter. Since the impugned subject of payment of GST on corporate guarantees dealt by this office was different from the investigation initiated by the Assistant Commissioner of state tax (Investigation) and therefore, there is no illegality in the same.
Furthermore, ccorporate guarantee is a guarantee of one corporate unit to keep itself responsible for the financial obligations.Further, it was submitted that investigation visit and DRC proceedings initiated by the Assistant Commissioner of State Tax did not cover the corporate guarantee issue and therefore, the subject matter of tax on corporate guarantee issue is different and not covered by Senior Intelligence officer (DGGI) in its investigation .
It was submitted that as corporate guarantee is not a commodity or service which is supplied in open market, hence the value of such supply cannot be determined as per clause ‘a’ or ‘b’ of Rule 28 but should be determined as per clause ‘c’. Therefore, the valuation of corporate guarantee as prescribed in view of Rule 31 of CGST Rules 2017 valuation of supply for computing the tax liability is 1% p.a. on the amount guaranteed in the impugned SCN and therefore the petitioner is liable to pay GST.

FINDINGS & JUDGEMENT:

Following are the findings of the Court in the instant case:

Petitioner has executed a corporate guarantee which is a guarantee given by the corporate to cover their own exposure or exposure of some other related entity to their bank. Further, bank guarantees are issued on regular basis as part of the business of banking. Petitioner is not doing the business of providing the corporate guarantee on a regular basis and that the guarantee was for a limited purpose of securing the loan. Corporate guarantee is actually an in house guarantee and is not issued to customers generally.
It was observed that Section 15 of CGST Act should be considered which deals with the value of taxable supply. And for the purpose of this section the definition of related person as per GST law should be considered.
Further, it was observed that transaction value shall be the value of supply of goods or services which is the price actually paid or payable for the supply where the supplier and the recipient of the supply are not related and the price is the sole consideration of supply.
Further it was observed that, corporate guarantee is in the nature of contingent contract which becomes enforceable only at the instance of the bank/financial institution in the event of a default.
Reliance was placed upon the judgement of Hon’ble SC in the case of Commissioner of CGST & Central Excise Vs. Edelweiss Financial Services Ltd., MANU/SC/0648/2023, in which it was held that where the assessee has not received any consideration while providing corporate guarantee to its group companies.
Thus it was held that corporate guarantee issued without consideration are not taxable within the meaning of the Act. But also a flow of consideration for the rendering of service. In the absence of these elements, taxability under Section 66B of the Finance Act,1994.
It was argued that the definition of service as per Section 7, it can be interpreted that although it has a wide coverage but it is a inclusive in nature and therefore it can be held that six conditions are attached to the definition of supply.
It was observed that the clauses which were incorporated in the deed at the time of entering the agreement, itself makes it clear that there was no consideration charged for the supply and reliance can also be placed on the judicial pronouncement in the case of Commissioner of CGST & Central Excise Vs. Edelweiss Financial Services Ltd where it was held that issuance of corporate guarantee to group companies without consideration would not fall within the scope of supply and thus would be non-taxable. Thus, it was held that the for an activity to be taxable under the Finance Act 1994 it must not only involve a provider but also a flow of consideration for the rendering of the service.
Thus, applying the ratio precedent of the case of Commissioner of CGST & Central Excise Vs. Edelweiss Financial Services Ltd (supra) it can be held that corporate guarantee is in the nature of a contingent contract which becomes enforceable only at the instance of the bank/financial institution in the event of a default. There was no flow of consideration for the rendering of service.
Corporate guarantees are issued without any security, whereas bank guarantees are issued without any security whereas bank guarantee mostly require security against offer of such guarantee. Corporate Guarantees are meant to provide assurances to the beneficiaries with same thin line.
With reference to the petitioner’s contentions about the constitutional validity of amendment to Rule 28(2) it was held that reliance was placed on the judgement of Hoechst Pharmaceuticals Ltd. Vs. State of Bihar, MANU/SC/0392/1983 and in the decision of the Constitution Bench in the case of State of West Bengal Vs. Kesoram Industries Limited MANU/SC/0038/2004 and held that, in matters of taxation, the Court must allow the government to make policies and decisions. Where a statute empowers the grant exemption from tax to any specified class, the court would not question the policy of the Government in exercising this power or interfere merely because the exemption crudities or inequities. Mere excessiveness would not render the tax as an unreasonable burden and violate Article 19(1)(g). Even if the taxing statute imposes some hardships, it will not result in restriction on freedom under Article 19(1)(g).
Even if a taxing statute imposes hardships on specific individuals or reduces the earnings of a business, it is not per se a violation of fundamental rights. Taxation law is not open to attack on grounds of inequality.
It was held that the Courts do not sit in appeal over the decisions of the Government to do merit review and that the Government decisions concerning the public revenue has an intrinsic value attached to them.
It was held that in light of the well settled legal position the impugned challenge made for declaring the Sub Rule 2 of Rule 28 shall be declared as ultra-vires is not sustainable. Further it was held that there could be a valid reason administratively, economically etc. which goes in the decision making process before making Rules. Therefore, the contention of the petitioner that the Rule 28 is ultra-vires and therefore stands to be invalid.

Thus, it was held that the writ petition by the petitioner is allowed and impugned SCN stands to be brushed aside.

Various Sections and Rules referred in the instant case:

Sec. 2(11), Sec.2(31), Sec. 2(52), Sec. 2(102), Sec. 2(102A), Sec.2(108), Sec. 6(2), Sec.7, Sec. 9, Sec.15, Sec.28, Sec. 126, Sec. 168, Sec. 76(1) and 76(4) of CGST Act, 2017.
Rule 28(2), Rule 28(a),(b) and (c) of CGST Rules 2017
Notification No. 52/2023-Central Tax, dated 26.10.2023,
Notification No. 12/2024-Central Tax, dated 10.07.2024
Circular-No-204/16/2023, dated 27.10.2023

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GST update /2026-27/0025