Facts of the Case:

In this case, a batch of writ petitions was filed by several companies belonging to different corporate groups that had furnished corporate guarantees in favour of banks and financial institutions for securing credit facilities availed by their subsidiary or related companies. The petitioners challenged the constitutional validity of Rule 28(2) of the CGST Rules, 2017, Section 15(4) of the CGST Act, 2017 and the CBIC Circulars dated 27.10.2023 and 11.07.2024 relating to valuation and taxation of corporate guarantees.

The principal grievance of the petitioners was that the mere act of a holding company furnishing a corporate guarantee on behalf of its subsidiary, without charging any fee, commission or consideration, could not be treated as a taxable supply under the GST law. The petitioners asserted that such guarantees were extended solely to protect their investments in subsidiaries and were in the nature of shareholder functions rather than commercial supplies. They therefore contended that GST could not be imposed merely because the parties were related persons.

The challenge gained significance after the insertion of Rule 28(2) by Notification No. 52/2023-Central Tax dated 26.10.2023, which prescribed a specific valuation mechanism for corporate guarantees provided between related parties. Under the amended provision, the value of the supply was deemed to be one per cent of the amount guaranteed or the actual consideration charged, whichever was higher. The CBIC subsequently issued Circulars dated 27.10.2023 and 11.07.2024 clarifying the taxability and valuation methodology for such guarantees. The petitioners argued that the amendment artificially created a taxable value even where no consideration existed and thereby exceeded the scope of the parent statute. They further contended that the valuation rule effectively created a tax liability where none existed under the charging provisions of the CGST Act.

The Revenue contended that the GST is a supply-based tax and that transactions between related parties specified in Schedule I are taxable even in the absence of consideration. Since a holding company and its subsidiary are related persons, the furnishing of a corporate guarantee constituted a supply of service falling within the scope of Section 7 read with Schedule I. According to the Revenue, Rule 28(2) merely prescribed a valuation mechanism for an already taxable supply and did not create a new levy. The Revenue further emphasized that a corporate guarantee conferred a tangible economic benefit upon the subsidiary by enhancing its creditworthiness and enabling access to finance on more favourable terms.

The Court, therefore, was called upon to examine the interplay between the charging provisions under Sections 7 and 9 of the CGST Act, the valuation provisions under Section 15 and Rule 28, the concept of related-party transactions under Schedule I, and the constitutional validity of the impugned provisions and circulars.

Issue:

The following substantial questions of law:

1. Whether furnishing a corporate guarantee by a holding company to a subsidiary or related entity constitutes a “supply” under Section 7 of the CGST Act, 2017.
2. Whether GST can be levied on a corporate guarantee furnished without any consideration solely because the transaction is between related persons.
3. Whether Rule 28(2) of the CGST Rules prescribing a deemed valuation of corporate guarantees is ultra vires the CGST Act and the Constitution of India.
4. Whether Section 15(4) of the CGST Act, empowering prescription of valuation rules for related-party transactions, is constitutionally valid.
5. Whether GST can be levied on corporate guarantees furnished before 26.10.2023 when Rule 28(2) was not in force.
6. Whether proceedings initiated under Section 74 of the CGST Act alleging suppression and intent to evade tax were sustainable in the facts of the case.
7. Whether the CBIC Circulars dated 27.10.2023 and 11.07.2024 were legally valid.

Held That:

The Gujarat High Court delivered an elaborate judgment analysing the nature of corporate guarantees, the statutory framework governing supply and valuation, and the constitutional challenges raised by the petitioners.

The Court held that Parliament has consciously expanded the concept of taxable supply under Section 7 of the CGST Act by including certain transactions between related persons under Schedule I even where no consideration is involved. Consequently, the absence of consideration does not automatically take a transaction outside the ambit of GST where the legislature has specifically deemed such transactions to be supplies. The Court accepted the Revenue’s contention that supplies between holding companies and subsidiaries fall within the framework of related-party transactions contemplated by Schedule I.

While examining the challenge to Rule 28(2), the Court held that the rule was a valuation provision and not a charging provision. Since Section 15(4) expressly authorises prescription of valuation rules for supplies between related parties, Rule 28(2) could not be said to be beyond the rule-making power. The Court therefore upheld the constitutional validity of Rule 28(2) and Section 15(4). However, it found that the expression “whichever is higher” contained in Rule 28(2) could lead to arbitrary results and therefore read down that expression to save the provision from constitutional infirmity.

A significant relief was granted with respect to guarantees furnished before 26.10.2023. The Court held that the valuation mechanism introduced through Rule 28(2) could not be retrospectively applied to corporate guarantees executed before its introduction. Consequently, the levy of GST on corporate guarantees furnished prior to 26.10.2023 was declared violative of Articles 14 and 19(1)(g) of the Constitution. Nevertheless, the Court clarified that where such guarantees continued to remain operative after 26.10.2023, GST liability would arise prospectively from that date onwards.

The Court also examined whether corporate guarantees could be regarded as “continuous supply of services” under Section 2(33) of the CGST Act. It concluded that a corporate guarantee does not satisfy the essential requirement of periodic payment obligations and therefore cannot be categorised as a continuous supply of services. Although the guarantee imposes a continuing obligation upon the guarantor, the absence of recurring consideration and periodic payment obligations takes it outside the ambit of Section 2(33).

On the issue of proceedings initiated under Section 74 of the CGST Act, the Court found that the Revenue had failed to establish fraud, wilful suppression, collusion, or intent to evade tax. The Court observed that the controversy surrounding taxability of corporate guarantees involved substantial legal debate and conflicting interpretations. Therefore, invocation of the extended period and penal provisions under Section 74 was unjustified. In one of the matters, the Revenue had even issued a show cause notice under Section 74 in respect of a corporate guarantee executed during the pre-GST regime. The Court characterised such action as arbitrary and reflective of non-application of mind. Accordingly, all proceedings initiated under Section 74 were quashed and set aside.

The Court further directed that any excess GST collected pursuant to the impugned proceedings should be refunded or adjusted in accordance with law. It also set aside the CBIC Circulars dated 27.10.2023 and 11.07.2024 to the extent they were inconsistent with the principles laid down in the judgment, while granting liberty to the Government to issue fresh circulars in conformity with the Court’s findings.

Takeaway –  The Courtheld that Rule 28(2) and Section 15(4) are constitutionally valid, subject to reading down the phrase “whichever is higher”; GST cannot be levied on corporate guarantees furnished prior to 26.10.2023; all Section 74 proceedings were liable to be quashed; excess GST, if any, must be refunded or adjusted; and the impugned circulars would operate only to the extent they are consistent with the judgment. The writ petitions were accordingly allowed in part.

This judgment is likely to become the leading precedent on GST implications of corporate guarantees. While the Court has upheld the legislative competence to tax related-party corporate guarantees and validated Rule 28(2), it has simultaneously protected taxpayers from retrospective application of the valuation mechanism and from coercive proceedings under Section 74 in the absence of demonstrable tax evasion. The ruling therefore strikes a balance between safeguarding the GST framework and preventing arbitrary taxation of historical transactions.

Case name: TORRENT POWER LTD. Versus UNION OF INDIA & ORS. dated 14.08.2026