Corporate Guarantee without consideration-Bombay High Court Reaffirms that Corporate Guarantees Without Consideration Are Not Taxable Supplies

Corporate Guarantee without consideration-Bombay High Court Reaffirms that Corporate Guarantees Without Consideration Are Not Taxable Supplies



Introduction

The issue relating to levy of GST on corporate guarantees provided by holding companies or group entities in favour of banks and financial institutions for securing loans of subsidiaries has become one of the most contentious disputes under the GST regime. The controversy significantly intensified after insertion of Rule 28(2) in the CGST Rules and issuance of CBIC Circular No. 204/16/2023-GST dated 27.10.2023, whereby the Government sought to treat corporate guarantees issued without consideration as taxable supply of services between related persons.
The Bombay High Court in the case of M/s. D.P. Jain & Co. Infrastructure Private Limited v. Union of India has now delivered one of the most important rulings on this issue and has categorically held that issuance of corporate guarantee without consideration does not constitute taxable supply of service under GST. 
The judgment assumes immense significance because it analyses:
  • the concept of “supply” under Section 7,
  • the requirement of “consideration”,
  • the distinction between bank guarantees and corporate guarantees,
  • the applicability of Rule 28,
  • and the Supreme Court ruling in Edelweiss Financial Services Ltd.
The ruling is likely to become one of the foundational precedents in future litigation relating to taxability of corporate guarantees under GST.

Facts of the Case

The petitioner company was engaged in construction of National Highways and infrastructure projects. The petitioner had issued multiple corporate guarantees in favour of banks for securing loans sanctioned to its subsidiary and associate entities engaged in infrastructure projects under HAM and TOT models. 
The corporate guarantees were executed pursuant to conditions imposed by:
  • State Bank of India, and
  • Bank of Maharashtrawhile sanctioning large term loans to the group entities.
Importantly, each guarantee deed specifically contained a clause stating that:
  • the petitioner had neither received nor would receive
  • any fee,
  • commission,
  • security,
  • or any other considerationfor issuing the corporate guarantees. 
Subsequently, DGGI initiated investigation against the petitioner alleging non-payment of GST on corporate guarantees.
During the pendency of such proceedings:
  • Rule 28(2) was inserted through Notification No. 52/2023 dated 26.10.2023,
  • and CBIC issued Circular No. 204/16/2023 dated 27.10.2023 clarifying that corporate guarantees provided to related persons, even without consideration, would constitute taxable supply of services. 
The petitioner challenged:
  • the summons,
  • the show cause notice,
  • the circulars,
  • and constitutional validity of Rule 28(2).

Distinction Between Bank Guarantee and Corporate Guarantee

One of the most important aspects of the judgment is the Court’s detailed discussion distinguishing:
    bank guarantees; and
    corporate guarantees.
The Court observed that bank guarantees are issued:
  • in regular course of banking business,
  • against consideration,
  • usually against security,
  • and for commercial customers.
In contrast, corporate guarantees are essentially:
  • “in-house guarantees”,
  • issued to support associate enterprises,
  • primarily intended to safeguard financial health of subsidiaries or group entities,
  • and not issued as part of any regular commercial business activity. 
The Court specifically observed that:
  • the petitioner was not engaged in business of providing guarantees on regular basis,
  • and the guarantees were issued only for limited purpose of securing loans for subsidiaries.
This distinction became crucial because GST liability fundamentally depends upon existence of taxable “supply”.

Requirement of Consideration under GST

The Court thereafter examined the statutory framework under GST.
Section 7 defines “supply” to include supply of goods or services:
  • made for consideration,
  • in course or furtherance of business. 
Section 2(31) defines “consideration” to include:
  • payment in money or otherwise,
  • or monetary value of any act or forbearance,in response to supply. 
Section 2(102) defines “services” to mean:
  • anything other than goods, money and securities. 
The Court observed that although providing guarantee may contain an “element of service”, mere existence of such service element does not automatically result in taxability unless the essential ingredients of taxable supply are satisfied. 
The Court identified six essential parameters necessary for existence of taxable supply:
  • supply of goods/services,
  • consideration,
  • course or furtherance of business,
  • taxable person,
  • taxable supply,
  • supply within taxable territory. 
The Court therefore emphasized that:consideration is a foundational requirement for taxable supply.

Reliance on Supreme Court Judgment in Edelweiss Financial Services Ltd.

The Court extensively relied upon the Supreme Court judgment in Commissioner of CGST & Central Excise v. Edelweiss Financial Services Ltd.
The Edelweiss case arose under the service tax regime where the Supreme Court upheld the Tribunal’s finding that issuance of corporate guarantees without consideration does not constitute taxable service.
The Supreme Court had approved the Tribunal’s observations that:
  • for an activity to be taxable,
  • there must exist:
  • a provider of service, and
  • flow of consideration.
In absence of either element:
  • taxability cannot arise. 
The Bombay High Court held that the same principle squarely applies under GST because:
  • GST is also a tax on supply,
  • and consideration continues to remain central to taxability under Section 7.
The Court therefore held that:
  • where no consideration exists,
  • no taxable supply can arise merely because a related-party transaction exists.

Rule 28 Cannot Create Taxability in Absence of Supply

The department had argued that:
  • since corporate guarantees were issued between related persons,
  • valuation could be determined under Rule 28,
  • and tax could therefore be levied.
The Court rejected this proposition and held that:
  • Rule 28 only deals with valuation,
  • but valuation provisions cannot create taxability where foundational requirement of supply itself is absent. 
This principle is extremely important.
The Court effectively clarified that:Backhand Index Pointing Right valuation machinery provisions become relevant only after taxable supply itself is first established.
Thus:
  • absence of consideration destroys the very foundation of taxability,
  • and Rule 28 cannot independently create a taxable event.

Corporate Guarantee as Contingent Contract

Another important observation made by the Court is that corporate guarantee is in nature of:
  • a contingent contract,
  • enforceable only upon default by borrower. 
This observation substantially weakens the departmental argument that mere execution of guarantee automatically creates present taxable supply.
The Court recognized that:
  • a corporate guarantee merely creates a contingent financial obligation,
  • and in absence of consideration, such arrangement cannot automatically be treated as taxable service.

Effect of CBIC Circular No. 204/16/2023

CBIC Circular No. 204/16/2023 had clarified that:
  • corporate guarantees provided even without consideration would constitute taxable supply of services. 
The Court effectively held that such circular cannot override:
  • statutory provisions,
  • or Supreme Court interpretation.
The judgment reinforces the settled legal principle that:a circular cannot create tax liability where statute itself does not impose one.
This aspect of the ruling is likely to have substantial impact on future litigation involving departmental circulars attempting to artificially widen taxability.

Findings of the Court

The Court ultimately held that:
  • the petitioner had not received any consideration whatsoever,
  • the guarantees were merely in-house support mechanisms for subsidiaries,
  • the petitioner was not engaged in business of providing guarantees,
  • and therefore issuance of corporate guarantee did not constitute taxable supply under GST. 
The Court therefore quashed:
  • the summons,
  • and the show cause notice issued against the petitioner. 
However, the Court simultaneously rejected the constitutional challenge to Rule 28(2).
The Court held that:
  • fiscal legislation enjoys strong presumption of constitutionality,
  • delegated fiscal legislation is entitled to wider latitude,
  • and Rule 28(2) cannot be struck down merely because hardship is alleged. 
The Court relied upon:
  • R.K. Garg,
  • Hoechst Pharmaceuticals,
  • Kesoram Industrieswhile discussing limited scope of judicial interference in fiscal legislation. 
Thus:
  • Rule 28(2) survives constitutionally,
  • but cannot be invoked unless taxable supply itself exists.

Practical Implications of the Judgment

This judgment is likely to have massive implications for:
  • holding companies,
  • infrastructure groups,
  • multinational groups,
  • promoter entities,
  • and corporate groups issuing intra-group guarantees.
The ruling substantially strengthens taxpayer arguments in disputes involving:
  • inter-company guarantees,
  • shareholder support arrangements,
  • comfort letters,
  • financial support undertakings,
  • and related-party guarantees.
The judgment also creates strong defence in cases involving:
  • guarantees issued without commission,
  • guarantees issued before insertion of Rule 28(2),
  • and intra-group financial support arrangements.
Another important implication emerges regarding retrospective disputes.
The Court repeatedly noted that:
  • all guarantees in present case were issued before insertion of Rule 28(2). 
This observation may become highly relevant in future litigation involving:
  • retrospective demands,
  • pre-26.10.2023 guarantees,
  • and retrospective valuation disputes.

Conclusion

The Bombay High Court judgment in D.P. Jain & Co. Infrastructure Pvt. Ltd. represents one of the most important judicial pronouncements on taxability of corporate guarantees under GST.
The Court has categorically held that where:
  • no consideration flows,
  • no commercial guarantee business exists,
  • and guarantee is merely an in-house support mechanism for subsidiaries,the transaction does not constitute taxable supply of service under GST.
At the same time, the Court has maintained constitutional validity of Rule 28(2), thereby leaving scope for future litigation in cases where:
  • guarantee commission exists,
  • commercial guarantee activity exists,
  • or factual consideration can be established.
Nevertheless, for genuine intra-group guarantees issued without consideration, the judgment provides a strong and comprehensive defence against GST demands and substantially weakens the department’s attempt to tax every inter-company support transaction merely because related persons are involved.
Copy of the judgment is attached.

Disclaimer

The information contained in this article is for general informational purposes only and does not constitute legal, tax, or professional advice. Each case requires specific evaluation based on facts and applicable laws. Readers are advised to seek professional advice before taking any action.
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