2026-VIL-883-GUJ
  1. Home
  2. 2026-VIL-883-GUJ

SGST High Court Cases

GST on Corporate Guarantees – Scope of Supply under Section 7 of CGST Act, 2017 – Petitioners had furnished corporate guarantees without any consideration to their subsidiaries to enable the subsidiaries to avail credit facilities from banks. Petitioners contended that corporate guarantee is not a supply as no consideration is paid, it is a contingent contract under Section 31 of Indian Contract Act and does not satisfy the four conditions of supply being activity, service, to related party and in course or furtherance of business - Revenue contended that corporate guarantee constitutes supply under Section 7 read with Schedule I Article 2 and Entry 5(e) of Schedule II of CGST Act – Whether corporate guarantee furnished without consideration between holding company and subsidiary is a taxable supply under GST regime – HELD - A corporate guarantee constitutes a supply under Section 7 of the CGST Act read with Schedule I Article 2 and Entry 5(e) of Schedule II of the CGST Act. The furnishing of a corporate guarantee by a Holding Company for its Subsidiary without any consideration falls within the purview of supply contemplated under Schedule I Article 2 which deems supply of goods or services or both between related persons to be taxable supply even when made without consideration provided the supply is made in the course or furtherance of business - The execution of a corporate guarantee constitutes a transaction of agreeing to the obligation within Entry 5(e) of Schedule II. Although corporate guarantee is contingent in nature and involves no immediate cost, once it is executed it constitutes a legal obligation and hence an identifiable supply of service - The merger of the statutory provisions of CGST Act with the provisions of the Indian Contract Act through the prism of Schedule I and Schedule II demonstrates that corporate guarantee is embraced within the taxable supply framework – Corporate guarantees furnished by holding companies to subsidiaries constitute taxable supply under Section 7 read with Schedule I Article 2 and Entry 5(e) of Schedule II of CGST Act - GST - Valuation of Corporate Guarantees - Constitutional Validity of Rule 28(2) CGST Rules - flat 1% Valuation – Petitioners challenged the validity of Rule 28(2) of CGST Rules which prescribes deemed valuation of corporate guarantees at 1% of guarantee amount or actual consideration, whichever is higher. Petitioners contended that the flat 1% valuation is arbitrary, violative of Article 14 and 19(1)(g) of Constitution and deprives them of the right to declare actual value under Rules 30 and 31 - Revenue defended the rule on ground that it adopts Safe Harbor rule from Income Tax and represents minimum acceptable commission considering market rates of 0.5% to 3%. Petitioners further contended that actual charges on corporate guarantees are much lower at 0.25% to 0.3% – Whether flat 1% deemed valuation of corporate guarantees is constitutionally valid and whether expression whichever is higher operates arbitrary – HELD - The provision of Rule 28(2) of CGST Rules fixing deemed valuation at 1% of guarantee amount is Constitutionally valid as the concept of deeming fiction is well-recognized in taxation statutes where actual value cannot be ascertained. The Supreme Court in Wipro Limited has held that deeming fiction can be applied only when actual cost is not ascertainable - In case of corporate guarantees where parties may not specify any consideration, a uniform deeming fiction of 1% serves the purpose of ensuring certainty and avoiding litigation. However the expression “whichever is higher” is arbitrary and violative of Article 14 and 19(1)(g) of the Constitution. This expression compels the assessee to pay tax on 1% even when actual consideration charged or payable is lower than 1% thereby depriving the assessee of the flexibility available under Rules 30 and 31 to determine reasonable valuation. The expression operates without any nexus to actual cost and becomes confiscatory in nature. The expression whichever is higher shall accordingly be read down – Rule 28(2) of CGST Rules is constitutionally valid except the expression “whichever is higher” which is struck down as arbitrary and violative of Article 14 and 19(1)(g) of Constitution - GST - Retroactive Application of Rule 28(2) - Corporate Guarantees Executed Before Rule Introduction – Petitioners had executed corporate guarantees before 26 October 2023 when Rule 28(2) came into force. Revenue issued demands for the period since GST regime inception in July 2017 applying the 1% valuation retrospectively to all guarantees – Whether imposition of GST levy based on Rule 28(2) on corporate guarantees executed prior to 26 October 2023 is constitutionally valid and whether such retroactive application violates Articles 14 and 19(1)(g) – HELD - The introduction of Rule 28(2) w.e.f. 26 October 2023 is retroactive in nature as it applies to corporate guarantees executed prior to its introduction. While the legislature has competence to make laws retrospective or retroactive such power remains subordinate to fundamental rights enshrined in the Constitution. The retroactive application of Rule 28(2) to guarantees executed before 26 October 2023 imposes an unexpected financial burden on taxpayers who had arranged their affairs based on the prevailing law - The levy during pre-26 October 2023 period when no levy existed violates the principle of legal certainty and fairness as taxpayers could not have anticipated the future tax liability. The retroactive levy for extended periods is harsh and unfair particularly when corporate guarantees may span several years resulting in annual tax liabilities. The imposition of such levy also invokes the doctrine of unjust enrichment as Revenue had no legal basis to levy GST on corporate guarantees prior to introduction of Rule 28(2) – The levy of GST on corporate guarantees executed prior to 26 October 2023 is struck down as violative of Article 14 and 19(1)(g) of the Constitution on ground of excessive retroactive application. Levy is permissible from 26 October 2023 onwards only for the period during which guarantees continue to remain in force - GST - Invocation of Section 74 - Fraud and Suppression - Matter of Interpretation of Statutory Provisions – Revenue issued show cause notices under Section 74 of CGST Act alleging fraud and wilful suppression on ground that petitioners had not declared GST liability on corporate guarantees in their monthly returns – Whether invocation of Section 74 provisions for matters involving bonafide interpretation of complex statutory provisions of GST law is justified - HELD - The Section 74 requires strict showing of malafide intent such as fraud, willful misstatement or suppression with deliberate intention to evade tax. The Supreme Court in Uniworth Textiles has held that suppression of facts must mean correct information not deliberately disclosed to evade payment of duty. When facts are known to both parties omission by one to do what he might have done does not render it suppression - Mere failure to declare does not amount to willful suppression and there must be some positive act from side of assessee to find willful suppression. In the instant case both the petitioners and Revenue had contested the working of statutory provisions relating to taxability of corporate guarantees. This involved disputed interpretation of complex provisions of CGST Act read with Indian Contract Act and Transfer of Property Act. A bonafide legal position cannot automatically constitute fraud or suppression. While taxpayers cannot claim immunity by taking shelter under legal complexities they also cannot be held guilty of suppression when they take a position on complex statutory provisions which is later disputed by Revenue – The invocation of Section 74 of CGST Act against petitioners for not declaring GST on corporate guarantees is quashed as the matter involved disputed interpreta
Download File
show more Judgements  

Quick Search

/

Advance Search

GST Resources

/

Gst Rate Finder

Tax Vista

Your Weekly Tax Recap

By Kasi Viswanathan V

Weekly Summary

VIL Video

GST Critical issues: ITC on...
By CA Vivek Jalan

Create Account

Security-Code
New Code?

Log In

New User ? Forgot Password ?

Forgot Password

Security-Code
New Code?
Please Note: This facility is only for Subscribing Members.

Email this page

Security-Code
New Code?

Feedback this page

Schedule a Demo

Schedule a demo to know the features and advantages of VILGST portal. Get to know the tips to find the desired results in faster way.

Security-Code
New Code?

Caselaw Request Form (CRF)

Didn’t find what you are searching for? No worries, please give us the following details and VIL will email you the desired Caselaws at the earliest:

Security-Code
New Code?