TaxTMI 
TaxTMI 
31 Aug 2026 
The taxability of a corporate guarantee given by a holding company for the benefit of its subsidiary has become an important controversy under GST. The issue becomes particularly difficult where the holding company charges no fee or commission for issuing the guarantee.
Two recent judgments-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, and Torrent Power Ltd Versus Union Of India & Ors. - 2026 (8) TMI 990 - GUJARAT HIGH COURT -have approached the issue differently. The divergence is important because it concerns the very foundation of the levy: whether a corporate guarantee without consideration is itself a taxable supply.
The statutory background
Rule 28(2) of the CGST Rules was introduced by Notification No. 52/2023-Central Tax dated 26 October 2023. It prescribed a special valuation mechanism for corporate guarantees provided between related persons. CBIC thereafter issued Circular No. 204/16/2023-GST dated 27 October 2023 and subsequent clarification dealing with such guarantees.
The controversy, however, goes beyond valuation. A valuation rule can operate only when there is first a taxable supply. The real question therefore is whether the act of a parent company standing guarantee for the borrowing of its subsidiary constitutes a "supply of service" under Section 7 of the CGST Act.
Bombay High Court - absence of consideration goes to the root
In D.P. Jain & Co. Infrastructure Pvt. Ltd., the holding company had executed corporate guarantees in favour of banks enabling its subsidiaries to obtain substantial credit facilities. Significantly, the guarantee deeds expressly stated that the guarantor had neither received nor would receive any security, fee, commission or other consideration from the borrower.
The Bombay High Court relied substantially upon the Supreme Court judgment in Commissioner of CGST & Central Excise v. Edelweiss Financial Services Ltd., rendered in the service-tax context.
The Court treated the absence of consideration as fundamental. A corporate guarantee is essentially a contingent arrangement. The guarantor's liability becomes enforceable when the principal debtor defaults. Where the parent company receives nothing for giving such guarantee, the Court found no taxable service.
The Court consequently held that execution of the corporate guarantee to the subsidiaries in the circumstances before it was not a supply of service taxable under Section 9 of the CGST Act and quashed the proceedings.
The importance of D.P. Jain is therefore simple but substantial:
No consideration no taxable supply of corporate-guarantee service.
It places the character of the underlying transaction ahead of the valuation machinery. Rule 28 cannot, by itself, transform a transaction which is otherwise outside the charging provision into a taxable supply.
Gujarat High Court - Schedule I changes the position
The Gujarat High Court in Torrent Power Ltd.travelled by a substantially different route.
It held that execution of a corporate guarantee by a holding company for its subsidiary constitutes a supply of service under Section 7(1)(c) read with Schedule I, where the entities are related persons.
This is the crucial distinction drawn from the service-tax position.
Under GST, Schedule I specifically recognises certain supplies between related persons made in the course or furtherance of business even when made without consideration. Thus, according to the Gujarat High Court, absence of consideration does not necessarily end the inquiry.
The Court also rejected the contention that issuing a guarantee was merely a shareholder activity. The definition of "business" under Section 2(17) is sufficiently wide to include an activity incidental or ancillary to the holding company's business.
The subsidiary was treated as the recipient of the service because the guarantee facilitates its borrowing and is ultimately rendered for its benefit.
The Court further considered the contractual relationship between guarantor, principal debtor and creditor under Sections 126, 140 and 145 of the Contract Act. It regarded the legal obligations created by that relationship as sufficient to support the conclusion that a service was supplied.
Thus, the Gujarat approach may be stated as:
Related persons + corporate guarantee in furtherance of business taxable supply even without consideration.
Rule 28(2): valid, but not entirely
The Gujarat High Court upheld the basic validity of Rule 28(2), holding that the statutory valuation provisions permit the prescription of a special mechanism for valuing corporate-guarantee services.
But the Court did not accept the Rule in its full rigour.
It read down the expression "whichever is higher"in the valuation provision. Where an actual or reasonable value of the guarantee can be established, compelling the taxpayer to adopt a higher artificial value was considered arbitrary.
This part of the judgment is important. Even though the Gujarat High Court upheld taxability, it restrained an inflexible application of the deemed valuation mechanism.
Pre-26 October 2023 guarantees
Another important protection granted by the Gujarat High Court concerns retrospectivity.
Rule 28(2) came into existence only on 26 October 2023. The Court held that the special valuation provision could not be retroactively imposed upon corporate guarantees furnished before that date so as to create an unexpected liability for completed past transactions.
For guarantees continuing after 26 October 2023, however, the Court held that liability could arise prospectively in relation to the outstanding guaranteed amount.
Where exactly do the two judgments differ?
The conflict is essentially at the charging stage, not merely at valuation.
The Bombay High Court asks whether there is consideration for the guarantee and, relying upon Edelweiss, concludes that a guarantee without consideration does not give rise to taxable service.
The Gujarat High Court asks an additional GST-specific question: even though there is no consideration, does Schedule I expressly treat the transaction between related persons as supply?Its answer is yes.
This makes the Gujarat reasoning structurally different from the service-tax reasoning in Edelweiss.
The real question which may ultimately require determination by the Supreme Court is therefore:
Does Schedule I merely dispense with consideration after the existence of a "supply" is independently established, or can Schedule I itself bring a gratuitous corporate guarantee within the concept of supply?
That is the heart of the controversy.
Conclusion
The two judgments represent two different conceptions of GST.
D.P. Jain concentrates on the underlying transaction: without consideration, a gratuitous corporate guarantee does not become a taxable service merely because a valuation rule subsequently assigns a value to it.
Torrent Power, on the other hand, gives greater effect to the special architecture of GST. Since transactions between related persons can be supplies even without consideration under Schedule I, the absence of a guarantee commission is not decisive.
There is considerable force in the proposition that a machinery provision for valuation cannot create a charge where the charging provision itself does not operate. But the Revenue can equally contend that Schedule I forms part of the charging architecture of Section 7 and expressly removes consideration as a prerequisite in transactions between related persons.
The controversy has therefore moved beyond the question of whether 1% is the correct value. The more fundamental question is whether an intra-group act of financial support, undertaken without consideration, is a "supply" at all.
With two High Courts approaching that question differently, a final authoritative pronouncement from the Supreme Court now appears necessary. Until then, D.P. Jain provides a substantial defence to taxpayers, particularly for guarantees issued without consideration, while Torrent Power provides the Revenue with a detailed GST-specific basis for asserting the levy-though with significant restrictions regarding valuation and retrospective application.
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By Adv. G. Jayaprakash Former Superintendent of Central Excise