Providing Guarantee - Whether Supply

[Ethirajan Parthasarathy]

Holding Company gives corporate guarantee to it’s Subsidiary.

A director gives personal guarantee to Bank for loan given to company in which he is a director.

In both the cases no fee is charged.

Is such service a taxable supply.

[Himansu Sekhar]

Please go through id 114051. It may be helpful to you.

[Himansu Sekhar]

Regarding Personal Guarantee it appears the same is a service. Please refer to the following decision:

Controls & Switchgear Contactors Limited vs. DCIT = 2014 (6) TMI 46 - DELHI HIGH COURT.

"The Directors to whom the commission had been paid are, admittedly, employees of the assessee and are entitled to remuneration for their services as employees. The assessee has passed the requisite resolution confirming the remuneration payable to the Directors. The assessee has also passed a resolution resolving that the Directors be paid the commission on account of providing their personal guarantees for the financial assistance availed by the assessee from the State Bank of India. This act of the Directors in providing their personal guarantees and undertaking the attendant risks is clearly beyond the scope of their services as employees of the assessee. In this view, it can hardly be disputed that the transactions in consideration for which commissions were paid by the assessee to its Directors are real. Undisputedly, the Directors having provided their personal guarantee have acted beyond the call of duty as employees of the assessee. The fact that the assessee in its commercial wisdom has agreed to pay a commission for the furnishing of such guarantees cannot be flawed, as it is well settled that it is assessee's discretion as to which expenditure is necessary and to what extent. And, it is not within the jurisdiction of the Assessing Officer to impose his views with regard to the necessity or the quantum of the expenditure undertaken by an assessee. XXX"

[Himansu Sekhar]

As per Schedule-I , the provsions as mentioned below the supply without any consideration is taxable even if they are devoid of any consideration:

"2. 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:"

Regarding Corporate Guarantee for imposition of Service tax. a different view has been taken by the Hon'ble Tribunal in the case of Sterlite Industries = 2019 (2) TMI 1249 - CESTAT CHENNAI.

[KASTURI SETHI]

Query-wise reply is as under:-

1. Corporate guarantee to subsidiary company is a transaction between related persons. It is in the course of business or furtherance of business. Such transaction is a supply of service in terms of Section 7 of CGST Act. Holding and subsidiary company are covered in the definition of related person. It clearly qualifies for the definition of a 'related person' in terms of Section 15 of CGST Act. Hence as per Schedule-I such service/transaction is taxable service even without consideration. This service is classifiable under ' Financial Services and related services' .SAC 9971 attracting GST @ 18%. Serial No.15 (vii) of Notification 11/17-CT (R) dated 28.6.17 as amended up to 30.9.19.

2. Yes.Such transaction/service is also taxable as detailed above.

[Alkesh Jani]

Dear Experts,

The views are acceptable, but what will be the value on which GST is to be paid. The Query raised states that no fees are collected in this regards.

Thanks

[KASTURI SETHI]

Valuation Rules have to be resorted to.

[KASTURI SETHI]

Sh.Alkesh Jani Ji,

There are following ways to determine value. In this situation, value would be determined under Rule 28 of CGST Rules, 2017 which is extracted below :-

(a) be the open market value of such supply;

(b) if the open market value is not available, be the value of supply of goods or services of like kind and quality;

(c) if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order :

Provided further that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services.

RULE 30. Value of supply of goods or services or both based on cost. - Where the value of a supply of goods or services or both is not determinable by any of the preceding rules of this Chapter, the value shall be one hundred and ten percent of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services.

RULE 31. Residual method for determination of value of supply of goods or services or both. - Where the value of supply of goods or services or both cannot be determined under rules 27 to 30, the same shall be determined using reasonable means consistent with the principles and the general provisions of section 15 and the provisions of this Chapter :

If the party is eligible for full ITC, the value declared in the invoice shall be open market value.

Thus the querist is to see where to determine value in this scenario.

[Alkesh Jani]

Dear Shri Kasturiji Sir,

Thanks for the reply, Your reply is perfect as always. The open market value may be the bank charging for bank guarantee, in the instant case, where querist is holding an account.

With Due regards

[KASTURI SETHI]

Sh.Alkesh Jani Ji,

I agree with you.

AI Summary

Corporate & Personal Guarantees: Taxable Under GST Even Without Fees, As Per Schedule-I & Rule 28 of CGST Act. A discussion on whether providing a corporate or personal guarantee without charging a fee constitutes a taxable supply under GST. A holding company providing a corporate guarantee to its subsidiary and a director providing a personal guarantee to a bank are considered. Responses indicate that such guarantees are taxable services, even without consideration, as per Schedule-I of the CGST Act. The valuation for GST purposes can follow Rule 28 of the CGST Rules, using open market value or other methods if necessary. The discussion includes references to relevant legal cases and GST notifications.