GST show cause notice quashed for reverse charge liability on Managing Director's personal guarantee services

Kerala HC quashed GST show cause notice regarding reverse charge liability on services provided by Managing Director through personal guarantee on company loans and inter-company loans to subsidiary. Court held that Central Board Circulars No.204/16/2023-GST and No.218/12/2024-GST were binding on authorities. Department's counsel acknowledged the issues were covered by circular clarifications. Since notice addressed no other matters, writ petition was allowed and show cause notice was quashed.

---

---

Issues:
1. Whether GST is payable on reverse charge basis on supply of services by the Managing Director of the company by providing personal guarantee on loans taken by the company.
2. Whether GST is payable on supply of services by extending loans by the petitioner-company to its subsidiary company.

Analysis:

Issue 1:
The first issue pertains to the GST liability on the supply of services by the Managing Director of a company through providing personal guarantees on loans taken by the company. The Circular No.204/16/2023-GST dated 27-10-2023 clarifies that such activity is considered a supply of service under the CGST Act, even if made without consideration, due to the relationship between the director and the company. However, if no consideration is paid to the director as per RBI guidelines, the open market value of the supply may be treated as zero, resulting in no GST liability. The Circular further states that in exceptional cases where remuneration is paid to the guarantor, the taxable value shall be the remuneration provided. Therefore, in the absence of consideration, no tax is payable on such supply of service.

Issue 2:
The second issue revolves around the taxability of transactions involving the provision of loans by an overseas entity to its Indian affiliate or by a person to a related entity. Circular No.218/12/2024-GST dated 26-06-2024 clarifies that the service of granting loans to related entities is a taxable supply under GST, even if no consideration other than interest or discount is involved. However, services represented by processing fees or administrative charges are taxable under GST. The Circular distinguishes between loans provided by related parties and independent lenders, stating that related party loans may not involve processing costs. In cases where no consideration is charged for the loan, no GST is levied. However, if processing fees are charged, they are considered taxable consideration for the supply of services. The Circular emphasizes that the absence of processing fees in related party loans does not attract GST, unless additional charges are imposed.

In conclusion, the High Court ruled in favor of the petitioner, quashing the show cause notice, as the issues raised were covered by the clarifications provided in the Circulars. The respondent did not dispute the coverage of the issues by the Circulars, leading to the dismissal of the show cause notice without delving into other contentions raised in the writ petition.

---