The Hon’ble Bombay High Court in the case of D P Jain & Co. Infrastructure Private Limited vs Union of India & Ors. [Writ Petition No. 2087 Of 2025, order dated May 06, 2026] held that executing a corporate guarantee by a holding company in favour of its subsidiary, without any consideration, is not a “supply” or “supply of service” taxable under Section 9 of the CGST Act, 2017. The Hon’ble Court further held that in absence of any consideration flowing to the guarantor, GST liability cannot arise merely on the basis of Circular No. 204/16/2023-GST dated October 27, 2023 and Rule 28(2) of the CGST Rules.
Facts:
M/s. D P Jain & Co. Infrastructure Private Limited (“the Petitioner”) was engaged in the business of construction of National and State Highways. The Petitioner executed corporate guarantees in favour of State Bank of India and Bank of Maharashtra on behalf of its subsidiary/group companies namely DPJ Pollachi HAM Project Private Limited, D P Jain Bangalore Chennai Expressways Private Limited and D P Jain TOT Toll Roads Private Limited for availing term loans amounting to Rs. 310.63 crores, Rs. 507.36 crores and Rs. 1196 crores respectively. In all the deeds of corporate guarantee, there were specific clauses stating that the Petitioner has not received and shall not receive any security, fee, commission, or any other consideration from the borrower for giving this guarantee.
The Union of India and GST Authorities (“the Respondent”) initiated proceedings against the Petitioner alleging non-payment of GST on corporate guarantee services by issuing summons dated July 20, 2023 and subsequently issuing Show Cause Notice No. 02/2025-GST dated January 28, 2025. The Respondent relied upon Notification No. 52/2023-Central Tax dated October 26, 2023 inserting Rule 28(2) in the CGST Rules, 2017 and Circular No. 204/16/2023-GST dated October 27, 2023 clarifying that corporate guarantees provided by a holding company to its subsidiary even without consideration would constitute taxable supply of services.
The Petitioner contended that corporate guarantee is not a taxable supply under the CGST Act, 2017 and could at best fall within the realm of an “actionable claim”, which is excluded from GST under Schedule III. It was further contended that no GST could be levied in absence of consideration and that a circular cannot create tax liability contrary to the statute. The Petitioner also challenged the constitutional validity of Rule 28(2) inserted vide Notification No. 52/2023-Central Tax and amended vide Notification No. 12/2024-Central Tax.
The Respondent contended that corporate guarantee provided by related persons constituted taxable supply of services and valuation thereof had to be determined under Rule 28(1)(c) read with Rules 30 and 31 of the CGST Rules, 2017. The Respondent further contended that corporate guarantee services are not available in open market and therefore valuation at 1% per annum of guaranteed amount was justified.
Aggrieved by the summons proceedings, impugned circulars, Rule 28(2), and show cause notice demanding GST on corporate guarantees, the Petitioner approached the Hon’ble Bombay High Court seeking quashing of the proceedings and declaration that Rule 28(2) was ultra vires the CGST Act, 2017.
Issue:
Whether execution of corporate guarantee by a holding company in favour of its subsidiary without any consideration constitutes a taxable “supply of service” under Section 7 read with Section 9 of the CGST Act, 2017 and whether Rule 28(2) of the CGST Rules, 2017 is ultra vires the Act?
Held:
The Hon’ble Bombay High Court in Writ Petition No. 2087 Of 2025 held as under:
- Observed that, Section 7 of the CGST Act requires essential ingredients for a transaction to qualify as “supply”, including existence of consideration.
- Noted that, all the three corporate guarantee agreements specifically provided that the Petitioner has not received and shall not receive any security, fee, commission or any other consideration from the borrower.
- Observed that, corporate guarantees are in-house guarantees issued to support subsidiary/group companies and are distinct from bank guarantees issued in ordinary course of banking business.
- Noted that, the Petitioner was not engaged in the business of providing corporate guarantees on regular basis and the guarantees were issued only for securing loans of subsidiaries.
- Observed that, the execution of corporate guarantee is in the nature of a contingent contract which becomes enforceable only upon default by the borrower.
- Observed that, for an activity to be taxable there must exist both a “provider” and “consideration” and in absence of consideration, taxability does not arise.
- Held that, executing a corporate guarantee to its subsidiary is not in the nature of supply and supply of service taxable under Section 9 of the CGST Act, 2017.
- Noted that, the challenge to constitutional validity of Rule 28(2) could not be sustained as fiscal statutes enjoy greater latitude and courts ordinarily do not interfere with legislative policy in taxation matters.
- Directed that, Show Cause Notice No. 02/2025-GST dated January 28, 2025 and summons dated July 20, 2023 issued against the Petitioner be quashed and set aside.
Our Comments:
The present judgment is one of the most significant pronouncements under GST on taxability of corporate guarantees. The Hon’ble Bombay High Court has substantially aligned GST jurisprudence with the service tax regime laid down by the Hon’ble Supreme Court in Commissioner of CGST & Central Excise vs Edelweiss Financial Services Ltd. [MANU/SC/0648/2023]. In Edelweiss, the Supreme Court affirmed the Tribunal’s reasoning that “consideration” is a foundational requirement for levy of service tax and in absence of consideration, issuance of corporate guarantee to group companies cannot constitute taxable service. The Tribunal had specifically held that “consideration is the recompense for the contractual undertaking that authorizes levy while assessable value is only for computation of levy.” The present judgment adopts identical reasoning under GST and treats consideration as indispensable for invoking Section 7 of the CGST Act.
Further it is important to note the distinction between corporate guarantees and bank guarantees. It observed that bank guarantees are commercial instruments issued in ordinary course of banking business against consideration, whereas corporate guarantees are “in-house guarantees” extended to subsidiaries to safeguard financial health of associate enterprises. This reasoning substantially diverges from the department’s approach in Circular No. 204/16/2023-GST dated October 27, 2023, which treated corporate guarantees between related parties as taxable even without consideration.
Relevant Provisions:
Section 7(1) of the CGST Act, 2017
“(1) For the purposes of this Act, the expression – “supply” includes-
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
(aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration.
Explanation .-For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another;
(b) import of services for a consideration whether or not in the course or furtherance of business; and
(c) the activities specified in Schedule I, made or agreed to be made without a consideration;
…”
Section 2(31) of the CGST Act, 2017
“(31) “consideration” in relation to the supply of goods or services or both includes–
(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government: Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;”
Rule 28(2) of the CGST Rules, 2017
“28. Value of supply of goods or services or both between distinct or related persons, other than through an agent. –
(2) Notwithstanding anything contained in sub-rule (1), the value of supply of services by a supplier to a recipient who is a related person located in India, by way of providing corporate guarantee to any banking company or financial institution on behalf of the said recipient, shall be deemed to be one per cent of the amount of such guarantee offered per annum, or the actual consideration, whichever is higher.
Provided that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the value of said supply of services”
Circular No. 204/16/2023-GST dated October 27, 2023
“Whether the activity of providing personal guarantee by the Director of a company to the bank/ financial institutions for sanctioning of credit facilities to the said company without any consideration will be treated as a supply of service or not and whether the same will attract GST or not.?
Rule 28 of Central Goods and Services Tax Rules, 2017 (hereinafter referred to as “CGST Rules”) prescribes the method for determining the value of the supply of goods or services or both between related parties, other than where the supply is made through an agent. In terms of Rule 28 of CGST Rules, the taxable value of such supply of service shall be the open market value of such supply.
RBI has provided guidelines for obtaining personal guarantee of promoters, directors and other managerial personnel of the borrowing concerns vide Para 2.2.9 of its Circular No. RBI/2021-22/121 dated 9th November, 2021
2.2.9 Guidelines relating to obtaining of personal guarantees of promoters, directors, other managerial personnel, and shareholders of borrowing concerns Banks should take personal guarantees of promoters, directors, other managerial personnel or major shareholders for the credit facilities granted to corporates, public or private, only when absolutely warranted after a careful examination of the circumstances of the case and not as a matter of course. In order to identify the circumstances under which the guarantee may or may not be considered necessary, banks should be guided by the following broad considerations:
…”
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