Facts of the case:

The Petitioner executed corporate guarantees in favour of the lending banks and security trustees for projects executed by its subsidiary/special purpose vehicle companies during the period from 2020 to 2022. The guarantee deeds specifically provided that the petitioner had neither received nor would receive any security, fee, commission, or consideration from the borrower entities for furnishing such guarantees.

The State GST authorities had earlier conducted investigation proceedings for the financial years 2017-18 to 2022-23 and examined the petitioner’s books of accounts, balance sheets, GST returns, and related documents, including the corporate guarantees. No GST liability was raised in relation to such guarantees during those proceedings. Subsequently, the Directorate General of GST Intelligence (DGGI) initiated separate proceedings by issuing summons alleging non-payment of GST on corporate guarantees.

During the pendency of such investigation, the Central Government issued Notification No. 52/2023-Central Tax dated 26.10.2023 inserting Rule 28(2) in the CGST Rules, prescribing a deemed valuation mechanism for corporate guarantees provided between related persons. Circular No. 204/16/2023-GST dated 27.10.2023 and Circular No. 225/19/2024-GST dated 11.07.2024 further clarified that furnishing corporate guarantees by a holding company for its subsidiary, even without consideration, would constitute taxable supply of services under GST.

Based on these circulars and amendments, the department issued a show cause notice seeking to levy GST on the petitioner’s corporate guarantees by treating them as taxable supplies of services. The petitioner challenged the constitutional validity of the circulars and Rule 28(2), and also sought quashing of the summons and show cause notice.

Issue:

Whether furnishing a corporate guarantee by a holding/group company to banks or financial institutions on behalf of its subsidiary or related entity, without any consideration, constitutes a “supply of service” taxable under the CGST Act, 2017. Whether the impugned Circular No. 204/16/2023-GST and related circulars could validly declare corporate guarantees without consideration as taxable supplies. Whether Rule 28(2) of the CGST Rules, inserted vide Notification No. 52/2023-Central Tax dated 26.10.2023, was ultra vires the provisions of the CGST Act. Whether proceedings initiated by DGGI for levy of GST on such corporate guarantees were legally sustainable.

Held that:

The Court held that the corporate guarantees furnished by the petitioner in favour of banks for loans sanctioned to its subsidiaries were executed without any consideration whatsoever, as expressly recorded in the guarantee agreements themselves. In absence of any consideration, the essential ingredient of “supply” under Section 7 of the CGST Act was absent.

The Court observed that a corporate guarantee is essentially an in-house financial support mechanism provided by a holding or group company to safeguard the financial interests of its associate enterprise and cannot be equated with commercial bank guarantees issued in the ordinary course of business. The petitioner was not engaged in the business of providing guarantees commercially, and the guarantees were furnished only to secure loans for its subsidiaries.

Relying heavily upon the Supreme Court decision in Commissioner of CGST and Central Excise v. Edelweiss Financial Services Ltd., the High Court reiterated that for an activity to qualify as a taxable service, there must exist both a provider-recipient relationship; and a flow of consideration for rendering the service.

The Supreme Court had already held under the service tax regime that issuance of corporate guarantees without consideration to group companies was not taxable. Applying the same principle under GST, the Court held that in absence of consideration, the activity could not be treated as taxable supply of service.

The Court further held that the impugned circulars could not create a tax liability contrary to the statutory scheme. Merely by issuing a circular, the department could not declare an activity taxable when the fundamental requirements of supply under Section 7 were not satisfied. However, insofar as the constitutional validity of Rule 28(2) of the CGST Rules was concerned, the Court declined to strike down the provision. The Court observed that fiscal legislation and delegated legislation in taxation matters enjoy a strong presumption of constitutionality, and judicial interference is limited unless there is clear arbitrariness or constitutional violation. Accordingly, the challenge to the vires of Rule 28(2) and the circulars was rejected.

The Bombay High Court partly allowed the writ petition and quashed the show cause notice and summons issued against the petitioner.

Case Name: D P Jain & Co. Infrastructure (P.) Ltd. v. Union of India dated 06.05.2026

To read the complete judgement 2026 Taxo.online 1215