No Consideration, No GST: The Bombay High Court's Ruling in D.P. Jain and the Survival of Rule 28(2) - A Split Verdict That Changes Everything

1. The Problem: A Circular That Taxed What the Supreme Court Said Was Non-Taxable

On 7 May 2026, the Nagpur Bench of the Bombay High Court delivered a judgment in M/s. D.P. Jain & Co. Infrastructure Private Limited. Versus Union of India, Ministry of Finance Department of Revenue New Delhi, Senior Intelligence Officer/Assistant Commissioner Directorate General of GST Intelligence, Coimbatore, Joint Director/Additional Director Directorate General of GST Intelligence, Coimbatore, Additional/Joint Commissioner of CGST & Central Excise Nagpur-I, Assistant Commissioner of State Tax (Investigation) Mumbai, State of Maharashtra, Thr. Its Additional Chief Secretary (Finance) Mumbai. - 2026 (5) TMI 500 - BOMBAY HIGH COURT  that will reorient the GST treatment of corporate guarantees across India. Justice Urmila Joshi Phalke and Justice Nivedita P. Mehta held that a corporate guarantee issued by a holding company to banks and financial institutions on behalf of its subsidiary or associated entities, without any fee, commission, or other consideration, does not constitute a 'supply' within the meaning of Section 7 of the Central Goods and Services Tax Act, 2017 ('CGST Act'). The demand initiated by the Directorate General of GST Intelligence ('DGGI') was quashed. The summons and show-cause notice ('SCN') were set aside.

The ruling arrives at a moment of acute regulatory tension. In October 2023, the CBIC had issued Circular No. 204/16/2023-GST dated 27 October 2023, purporting to clarify that corporate guarantees provided by a holding company to its subsidiary - even without consideration - are taxable supplies under Schedule I of the CGST Act read with the deemed valuation under Rule 28(2) of the CGST Rules (inserted by Notification No. 52/2023-Central Tax dated 26 October 2023). The Circular had triggered a nationwide wave of DGGI investigations, SCNs, and demands against infrastructure companies, conglomerates, and PE-funded groups. It had also triggered a parallel wave of writ petitions before the Delhi High Court (Sterlite Power Transmission Limited & Ors. Versus Union Of India & Ors. - 2024 (3) TMI 1311 - DELHI HIGH COURT), the Punjab & Haryana High Court (M/s. Acme Cleantech Solutions Pvt. Ltd. Versus Union Of India And Others - 2024 (5) TMI 467 - PUNJAB AND HARYANA HIGH COURT), and other forums.

The D.P. Jain ruling is not a complete resolution. In a carefully calibrated split verdict, the Bombay HC quashed the demand but declined to strike down Rule 28(2) itself. The Court held that the valuation mechanism under Rule 28(2) - which deems the value of a corporate guarantee supply at 1% per annum of the guaranteed amount or actual consideration, whichever is higher - is a valid legislative/executive provision, even though it cannot be invoked in the absence of the foundational requirement of a 'supply.' The implications of this split verdict are profound, and they are the subject of this article.

2. Statutory Architecture - Section 7, Schedule I, and Rule 28(2)

2.1 The Scope of 'Supply' Under Section 7

Section 7(1) of the CGST Act defines 'supply' to include '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.' The central requirement - consideration - is thus the gateway to taxability for ordinary business transactions. Section 7(1)(c) creates an exception: activities specified in Schedule I are treated as supply 'made or agreed to be made without a consideration.' Entry 2 of Schedule I specifically covers 'supply of goods or services or both between related persons or between distinct persons as specified in Section 25, when made in the course or furtherance of business.'

Holding and subsidiary companies are 'related persons' under the explanation to Section 15 of the CGST Act - specifically because the holding company owns more than 25% of the outstanding voting stock of the subsidiary. It was precisely on this basis that CBIC Circular No. 204 took the position that a corporate guarantee from a holding company to its subsidiary's lender is a supply under Schedule I Entry 2, taxable without consideration. The Supreme Court's earlier decision in Commissioner of CGST And Central Excise Versus M/s Edelweiss Financial Services Ltd. - 2023 (4) TMI 170 - SC Order had held - in the service tax context - that no consideration, no taxable service. The CBIC Circular had attempted to circumvent that ratio by relying on Schedule I's deemed-supply-without-consideration mechanism.

2.2 Rule 28(2) - The Valuation Mechanism

Rule 28(2) of the CGST Rules, inserted with effect from 26 October 2023 by Notification No. 52/2023-Central Tax, provides: 'Notwithstanding anything contained in sub-rule (1), the value of supply of services by a supplier to a recipient who is a related person, 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, or the actual consideration, whichever is higher.' A proviso was later added stating that where the recipient is eligible for full ITC, the value declared in the invoice shall be deemed to be the open market value.

Rule 28(2) is purely a valuation provision - it tells you how to compute the taxable value once a supply is established. It cannot, by itself, create a supply where none exists under Section 7. This structural point - that valuation rules presuppose a taxable supply, not the reverse - was the Bombay HC's critical analytical move.

3. The Facts - D.P. Jain & Co. Infrastructure Private Limited

The petitioner, D.P. Jain & Co. Infrastructure Private Limited, is engaged in highway and road construction projects under the Hybrid Annuity Model ('HAM') and Toll-Operate-Transfer ('TOT') model. The company had executed corporate guarantees in favour of State Bank of India and Bank of Maharashtra for credit facilities extended to its subsidiary and associated project entities. The guaranteed amounts were substantial: a Rs. 310.63 crore loan for a Tamil Nadu highway project, a Rs. 507.36 crore facility for an expressway project, and a Rs. 1,196 crore loan for toll road operations in Gujarat. The cumulative guaranteed amount exceeded Rs. 2,000 crore.

Critically, all corporate guarantee deeds expressly recorded that the petitioner had neither received nor would receive any fee, commission, security deposit, or other consideration for issuing the guarantees. The guarantees were issued purely to facilitate the group's infrastructure projects - an exercise of shareholder/parent obligation, not a commercial service transaction. The DGGI, Coimbatore Zonal Unit, nonetheless issued summons and SCN alleging non-payment of GST on the basis that the guarantees, being transactions between related persons, were deemed supplies under Schedule I Entry 2, to be valued at 1% per annum under Rule 28(2).

4. The Three Holdings of the Bombay High Court

4.1 Holding I: Absence of Consideration is Fatal to Taxability - Edelweiss Applied

The Court's first and foundational holding is that for a corporate guarantee to constitute a 'supply' under GST, the Edelweiss ratio - that there must be consideration flowing from the service recipient - applies in the GST context as much as it did under service tax. The Bombay HC expressly reproduced the Supreme Court's observation in Edelweiss that 'any activity must, for the purpose of taxability under Finance Act, 1994, not only, in relation to another, reveal a provider, but also the flow of consideration for rendering of the service. In the absence of any of these two elements, taxability will not arise.' The Court held this principle applies with equal force to Section 7 of the CGST Act: no consideration, no supply, no GST.

The critical question was whether Schedule I Entry 2 overrides this principle by deeming related-party transactions as supply even without consideration. The Court rejected this argument. Schedule I Entry 2, read with Section 7(1)(c), does treat related-party transactions as supply without consideration - but only those that are 'in the course or furtherance of business.' A corporate guarantee by a holding company to its subsidiary's lender is, the Court held, a shareholder act - an activity ancillary to the holding company's ownership function - not a 'service in the course or furtherance of business' in the commercial sense. The guarantee becomes enforceable only upon the borrower's default; until then, it is a contingent, non-commercial arrangement.

4.2 Holding II: CBIC Circular No. 204 Cannot Create Taxability - Ultra Vires in Application

The second holding is that CBIC Circular No. 204/16/2023-GST, to the extent it creates tax liability on corporate guarantees without consideration, travels beyond the statute. A circular under Section 168 of the CGST Act is an administrative instruction to field officers - it can clarify and operationalise the law, but it cannot expand the scope of 'supply' beyond what Section 7 and Schedule I provide. The Bombay HC held that the Circular's instruction to treat consideration-free corporate guarantees as taxable supplies was contrary to the law laid down by the Supreme Court in Edelweiss and could not be sustained. The summons and SCN were therefore without legal foundation.

This is a significant constitutional holding. The Court is saying that even where a Rule (Rule 28(2)) validly provides for valuation of a category of transaction, and even where a Circular purports to clarify that category's taxability, the Circular cannot bootstrap taxability from a valuation rule. The sequence is irreversible: first, establish a supply under Section 7 or Schedule I; only then apply the valuation mechanism of Rule 28. The Circular had reversed this sequence, and the Bombay HC corrected it.

4.3 Holding III: Rule 28(2) Survives - It Is Not Ultra Vires, but It Cannot Be Invoked Here

The third holding - and the most nuanced - is the Court's refusal to strike down Rule 28(2) itself. The petitioner had challenged Rule 28(2) as ultra vires the CGST Act on the ground that a valuation rule cannot independently create a taxable supply. The Court declined to go that far. Rule 28(2), it held, is a valid valuation provision for cases where a corporate guarantee does constitute a supply - for example, where consideration is charged (even below open market value), or where the guarantee falls within a specific Schedule I Entry on independent grounds. In those cases, Rule 28(2) provides a workable deemed-value mechanism. The rule itself is not the problem; the problem is its misapplication to consideration-free guarantees. Courts generally do not interfere with tax policy and valuation provisions unless they are clearly unconstitutional, and Rule 28(2) is not - it simply has no operation in the absence of a supply.

5. A Comparative Table - Before and After D.P. Jain

The following table maps the key changes in the legal position on corporate guarantees post the D.P. Jain ruling:

6. Three Unresolved Questions After D.P. Jain

6.1 Does Schedule I Entry 2 Apply Independently of Consideration for Guarantees?

The Bombay HC held that a consideration-free corporate guarantee is not a supply because it is not rendered 'in the course or furtherance of business' in the commercial sense. But Schedule I Entry 2 explicitly covers related-party transactions 'in the course or furtherance of business' without consideration. The question is whether the Court's reading - that a shareholder/parent act is not a 'business' act - is consistent with Schedule I, which makes no such distinction. The Madras HC's view in similar proceedings (pre-D.P. Jain) had been that Schedule I Entry 2 does capture related-party guarantees as supply. This tension between the Bombay HC's reasoning and the plain language of Schedule I Entry 2 will require resolution, either by the Supreme Court or by a larger bench of the Bombay HC itself.

6.2 What Is the Status of Pre-Oct 2023 DGGI Demands?

DGGI investigations for periods before 26 October 2023 (when Rule 28(2) was inserted) are on even weaker footing than post-Oct 2023 demands, because there was no specific valuation provision at all for that period. The D.P. Jain ruling is decisive: no supply, no demand. Taxpayers facing DGGI SCNs for pre-October 2023 corporate guarantees should file their replies specifically citing D.P. Jain and seeking closure of proceedings. The position for post-October 2023 periods is governed by the three-part analysis - supply question under Section 7/Schedule I, valuation under Rule 28(2), and application of the ITC proviso.

6.3 The ITC Proviso and the Nil-Value Argument

The proviso to Rule 28(2) - which deems the invoice value as the OMV where the recipient is eligible for full ITC - creates a pathway to nil-value taxation where no invoice is raised and the subsidiary is a fully ITC-registered dealer. This proviso was not disturbed by D.P. Jain. The question is: if a court subsequently holds (contrary to D.P. Jain) that Schedule I Entry 2 does make corporate guarantees a supply, does the proviso automatically bring the value to nil? If so, the entire Rule 28(2) edifice collapses into a zero-tax outcome in most group company structures, making the CBIC Circular 204 doubly futile.

7. A Five-Point Practitioner Framework

(i) File Applications for Quashing All Pending DGGI SCNs on Consideration-Free Guarantees: Where a DGGI show-cause notice or summons has been issued demanding GST on corporate guarantees for which no fee, commission, or consideration was charged, file an application for closure of proceedings before the adjudicating officer, citing D.P. Jain & Co. Infrastructure Pvt. Ltd. v. UOI - 2026 (5) TMI 500 - BOMBAY HIGH COURT and Commissioner of CGST And Central Excise Versus M/s Edelweiss Financial Services Ltd. - 2023 (4) TMI 170 - SC Order. The Circular 204 has been held ultra vires in application; the foundational supply requirement is not met in the absence of consideration.

(ii) Distinguish Cases Where Consideration Was Charged: D.P. Jain applies only to guarantees issued without consideration. Where a guarantee fee - even a token 0.5% - was charged, the supply question is answered affirmatively, and Rule 28(2) may apply to assess whether the actual consideration meets the 1% per annum minimum. Practitioners must carefully segregate their clients' guarantee portfolios between consideration-bearing and consideration-free guarantees, with separate compliance strategies for each.

(iii) In Pending Writ Petitions - Cite D.P. Jain as Additional Ground: Petitioners before the Delhi HC (Sterlite Power Transmission Limited & Ors. Versus Union Of India & Ors. - 2024 (3) TMI 1311 - DELHI HIGH COURT) and the P&H HC (M/s. Acme Cleantech Solutions Pvt. Ltd. Versus Union Of India And Others - 2024 (5) TMI 467 - PUNJAB AND HARYANA HIGH COURT) should file additional submissions citing D.P. Jain. The Bombay HC has now provided a High Court-level merits ruling in favour of taxpayers - not merely an interim stay. This strengthens the case for a final order in those pending writs and may accelerate their disposal.

(iv) Evaluate the ITC Proviso for Post-Oct 2023 Period: For group structures where a guarantee is identified as a supply on independent grounds (e.g., some consideration exists), the proviso to Rule 28(2) must be evaluated. If the recipient-subsidiary is eligible for full ITC and no invoice was raised, the value is nil and no tax is payable. This requires affirmative documentation: confirmation that the subsidiary's ITC eligibility is intact, a note recording that no invoice was raised, and a register entry treating the transaction value as nil on the basis of the proviso.

(v) Engage with CBIC for a Post-D.P. Jain Circular: The D.P. Jain ruling creates a direct conflict with CBIC Circular No. 204/16/2023. The CBIC should issue a fresh Circular acknowledging the Bombay HC ruling, withdrawing the portion of Circular 204 that requires treatment of consideration-free guarantees as taxable supplies, and providing clarity on the residual operation of Rule 28(2). Industry associations - particularly those representing infrastructure companies, PE funds, and large corporate groups - should file representations to the CBIC requesting this clarification urgently. Until the Circular is withdrawn or modified, DGGI field officers may continue to rely on it in defiance of the judicial precedent, creating unnecessary litigation.

8. Conclusion - The Circular Falls, the Rule Survives

The Bombay High Court's ruling in D.P. Jain is a carefully calibrated intervention. It does not deliver a wholesale invalidation of the GST framework on corporate guarantees. It does not strike down Rule 28(2). It does not even hold that Schedule I Entry 2 is inapplicable to all related-party transactions. What it holds is more precise and more powerful: a corporate guarantee issued without consideration by a parent company to facilitate its subsidiary's borrowings is not a commercial service - it is a shareholder act - and the deeming mechanism of Schedule I cannot manufacture a taxable supply where none exists in commercial reality.

The Supreme Court's Edelweiss ratio, delivered in the service tax era, has now been transposed into GST by the Bombay HC. The CBIC's Circular No. 204, which had tried to leapfrog that ratio using Schedule I and Rule 28(2), has been held inapplicable to consideration-free guarantees. For the tens of thousands of DGGI investigations, SCNs, and demands that followed Circular 204, D.P. Jain provides direct and authoritative relief.

Three questions remain open: the Schedule I Entry 2 scope question, the pre-October 2023 period demand position, and the ITC proviso's interaction with Rule 28(2) in cases where supply is found. Until the Supreme Court resolves these, the D.P. Jain ruling provides the practitioner with a powerful, verified authority to challenge demands on consideration-free corporate guarantees. The circular has fallen. The rule survives. And for most holding company guarantors - the practical result is the same.