This is a neutral professional article. The judgment is analysed in the context of its factual background, issues framed, and conclusions reached by the Court.

2026 (5) TMI 500 - BOMBAY HIGH COURT

At a Glance

• The existence of a taxable supply and the valuation of that supply are distinct questions.
• The Bombay High Court quashed GST proceedings concerning unremunerated corporate guarantees furnished for subsidiary borrowings, while rejecting the challenge to Rule 28(2).
• Section 7(1)(c), read with Entry 2 of Schedule I, expressly recognises certain supplies between related persons without consideration. The judgment must therefore be read in its factual setting, rather than as a general exemption for unpaid intra-group activities.
• The one per cent formula in Rule 28(2) determines taxable value; it is not the GST rate.

Background & Context

A corporate guarantee facilitates borrowing by placing the guarantor's financial standing behind the borrower's obligations. Within corporate groups, such support may be furnished without a fee or commission. The tax question is whether the absence of remuneration prevents the arrangement from constituting a taxable service, or whether the related-person deeming provisions bring it within GST.

In 2026 (5) TMI 500 - BOMBAY HIGH COURT, the taxpayer had furnished three corporate guarantees securing loans to subsidiary companies. Each guarantee excluded remuneration. All preceded the introduction of the specific corporate-guarantee valuation rule. The taxpayer challenged the resulting investigation and show cause notice, the administrative circulars treating corporate guarantees as taxable services, and Rule 28(2). The court granted transaction-specific relief but did not strike down the valuation framework.

Key Issues / Provisions

The guarantee obligation and the meaning of service

Section 126 of the Indian Contract Act, 1872 defines a contract of guarantee as a contract "to perform the promise, or discharge the liability, of a third person in case of his default". This explains the contingent repayment obligation undertaken by the guarantor. Whether undertaking that obligation constitutes a taxable supply remains a separate statutory inquiry.

Section 2(102) of the CGST Act defines services principally as "anything other than goods, money and securities". Section 2(108) defines taxable supply as a supply of goods or services or both "which is leviable to tax under this Act". Classification as a service does not, by itself, complete the inquiry into supply and chargeability.

Consideration, business and supplies without consideration

Section 7(1)(a) includes supplies made or agreed to be made "for a consideration by a person in the course or furtherance of business". However, Section 7(1)(c) separately includes "the activities specified in Schedule I, made or agreed to be made without a consideration". These are distinct statutory routes into the scope of supply.

Entry 2 of Schedule I 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". Under the Explanation to Section 15, related persons include persons where "one of them directly or indirectly controls the other". A holding-subsidiary relationship therefore requires examination under this framework.

Section 2(31) extends consideration beyond fees and commissions. It covers payments in money or otherwise, by the recipient or another person, "in respect of, in response to, or for the inducement of" a supply. It also includes the monetary value of an act or forbearance having that nexus. An assertion of no consideration must accordingly address more than the absence of cash receipts.

Section 2(17) includes business activity whether or not undertaken for pecuniary benefit, incidental or ancillary transactions, and qualifying activity "whether or not there is volume, frequency, continuity or regularity of such transaction". Consequently, absence of a regular guarantee business is not, standing alone, a complete statutory test.

Chargeability and valuation

Section 9(1) imposes central tax on intra-State supplies of goods or services or both, on the value determined under Section 15. Section 15(1) adopts the price actually paid or payable where the parties are unrelated and price is the sole consideration. Section 15(4) requires prescribed valuation where value cannot be determined under subsection (1). An unpaid related-party transaction cannot therefore be assigned nil taxable value merely by applying the unrelated-party transaction-value rule.

Detailed Analysis

The GST holding: substantive relief without invalidating Rule 28(2)

The Bombay High Court treated the guarantees as in-house financial support intended to secure subsidiary borrowings and protect associated enterprises. It distinguished them from guarantees supplied by banks in their ordinary business. The guarantee deeds expressly stated that the taxpayer "has not received and shall not receive any security, fee, commission or any other consideration".

The court recognised that assisting a principal debtor to obtain credit has an element of service. Nevertheless, relying substantially on the Supreme Court's service-tax reasoning concerning absence of consideration, it concluded that the guarantees before it were not supplies of services taxable under Section 9. The show cause notice and the proceedings initiated through the summons were quashed.

The relief was not equivalent to invalidation of the corporate-guarantee regime. The challenge to Rule 28(2) was rejected, and the circulars were not struck down. The distinction is material: a successful challenge to proceedings concerning particular guarantees does not erase the statutory valuation rule.

The Supreme Court foundation: consideration precedes valuation

In 2023 (4) TMI 170 - SC Order, the issue was whether corporate guarantees issued to group companies without consideration attracted service tax. Section 65B(44) of the Finance Act, 1994 defined service as an activity carried out by one person for another "for consideration". Section 66B charged tax on services provided or agreed to be provided by one person to another, subject to the negative-list exclusion.

The adjudicating authority and tribunal had concurrently found no monetary or non-monetary consideration. The Supreme Court declined to interfere because the department had not effectively challenged that finding or demonstrated a taxable service. The reasoning distinguished consideration establishing the taxable activity from assessable value measuring the levy: valuation must follow the existence of the taxable service, not manufacture it. This distinction furnished the central foundation for the High Court's GST reasoning, although the Supreme Court proceedings themselves concerned service tax.

Separate applications of the service-tax principle

In 2024 (9) TMI 1494 - CESTAT NEW DELHI, the taxpayer challenged a demand classifying unpaid guarantees to associated enterprises as banking and other financial services. The tribunal applied the requirement of a provider and consideration, distinguishing the existence of a service from its assessable value. It set aside the demand and dismissed the departmental cross-objection. Its relevance lies in rejecting a financial-service classification as sufficient to overcome an established absence of remuneration; that classification did not independently create the consideration required by the service-tax definition.

In 2024 (5) TMI 327 - CESTAT NEW DELHI, the corporate-guarantee dispute included reverse-charge liability. The notice and adjudicatory record consistently recorded absence of consideration. The tribunal held that hypothetical or notional consideration could not sustain service tax and dismissed the department's appeal. Once liability failed on merits, the ancillary questions of extended limitation, interest and penalty did not survive. The decision illustrates the importance of establishing the foundational facts before addressing consequential liabilities; it does not supply a substitute test for GST's Schedule I.

In 2023 (11) TMI 890 - CESTAT NEW DELHI, the show cause notice itself recorded that guarantees had been provided without commission, fee or other consideration. Following the relevant judicial principles, including the Supreme Court's treatment of unremunerated group guarantees, the tribunal dismissed the department's appeal. The significance is evidentiary as well as substantive: an admitted absence of consideration cannot be displaced merely by asserting that a group guarantee has commercial utility. The holding arose within the consideration-dependent service-tax regime.

In 2024 (3) TMI 1179 - CESTAT NEW DELHI, the department sought to tax a notional commission derived from prevailing bank-guarantee rates. The tribunal found that no consideration had actually been received and rejected the demand. A hypothetical bank commission could not be treated as a receipt of the corporate guarantor. The decision is particularly relevant to the distinction between proof of remuneration and benchmarking: a market comparison cannot, under that service-tax framework, establish consideration where the factual record establishes none.

In 2025 (11) TMI 1277 - CESTAT CHANDIGARH, the guarantee was furnished by an overseas parent for the taxpayer's bank borrowings. The department failed to establish either that the parent fell within the relevant banking and financial-service category or that remuneration had been paid to it. Commission accruing to bankers could not be equated with consideration paid to the overseas guarantor. The appeal was allowed. This authority highlights the need to identify the alleged supplier, the applicable classification and the actual recipient of any payment, rather than conflate separate financial arrangements.

The statutory qualification under GST

The service-tax authorities cannot be transposed mechanically to every GST transaction. The former definition expressly required consideration; Section 7(1)(c) and Schedule I expressly contemplate supplies without it. The High Court reproduced Section 7(1)(c), but did not separately work through Entry 2 of Schedule I when reaching its conclusion concerning these guarantees.

The judgment's relief must therefore be stated accurately alongside the deeming provision. It establishes non-taxability for the guarantees adjudicated, not invalidity of Schedule I or a universal rule excluding unpaid intra-group support. Similarly, the court's observations about an in-house arrangement and absence of regular guarantee activity describe its factual reasoning; they do not remove the breadth of Section 2(17).

The administrative position is different. Circular No. 204/16/2023-GST treats a related-party corporate guarantee as a service under Schedule I "even when made without any consideration". It identifies the supply as one by the guarantor to the related borrowing entity, notwithstanding that the guarantee is furnished to the bank. Circular No. 225/19/2024-GST describes the service as taking on default risk, independently of actual loan disbursement. These propositions explain why contingency and absence of a fee do not, under the administrative interpretation, conclude the GST inquiry.

Actionable claims: an argument, not a categorical classification holding

The taxpayer also argued that the guarantee belonged within actionable claims. Section 2(1) adopts the meaning assigned by Section 3 of the Transfer of Property Act, 1882, while Section 2(52) includes actionable claims within goods. Paragraph 6 of Schedule III excludes "Actionable claims, other than specified actionable claims"; Section 7(2) treats Schedule III transactions as neither supplies of goods nor services.

The operative relief rested on the absence-of-consideration reasoning. The judgment should not therefore be cited as conclusively classifying every corporate guarantee as an actionable claim excluded by Schedule III.

Valuation before and after the specific rule

Rule 28(1) ordinarily proceeds from open market value to goods or services of like kind and quality, and then to Rules 30 or 31. Rule 30 prescribes "one hundred and ten percent" of the relevant cost, including the cost of providing services. Rule 31 permits reasonable means consistent with Section 15 and the valuation chapter; for services, the supplier may opt for it while ignoring Rule 30.

The department sought to value the guarantees under the residual route using one per cent per annum of the guaranteed amount. The High Court rejected the underlying liability in the taxpayer's circumstances. The judgment does not establish that Rule 31 itself prescribes a universal one per cent formula.

Rule 28(2), introduced by Notification No. 52/2023-Central Tax dated 26 October 2023 and amended by Notification No. 12/2024-Central Tax dated 10 July 2024 with effect from 26 October 2023, specifically addresses guarantees furnished to banking companies or financial institutions for related recipients located in India. Value is deemed to be "one per cent of the amount of such guarantee offered per annum, or the actual consideration, whichever is higher".

Circular No. 225/19/2024-GST states that guarantees issued or renewed before 26 October 2023 fall under Rule 28 as it then existed, whereas issuances or renewals on or after that date attract Rule 28(2). It expressly characterises the new sub-rule as a valuation provision, not the source of taxability. That distinction prevents a valuation formula from answering the anterior supply question by itself.

Section 168(1) authorises directions "for the purpose of uniformity in the implementation of this Act" and requires implementing officers to follow them. Such directions implement the statute; they cannot independently create a charge beyond it.

Full input tax credit and reasoned adjudication

The proviso to Rule 28(2) states that where the recipient is eligible for full input tax credit, "the value declared in the invoice shall be deemed to be the value of said supply of services". Circular No. 225/19/2024-GST recognises this benefit. The earlier statement in Circular No. 204/16/2023-GST that the special valuation applied irrespective of full credit must be read with the amended rule and subsequent clarification.

Circular No. 199/11/2023-GST addresses services between distinct establishments. Where full credit is available, it recognises the invoice value under Rule 28(1), and permits a nil deemed value where no invoice was issued for the relevant services.

Circular No. 210/4/2024-GST extends the corresponding Rule 28(1) treatment to related-party imported services where full credit is available. These are valuation propositions, distinct from a finding that no taxable supply exists.

In 2025 (10) TMI 1178 - MADRAS HIGH COURT, the taxpayer relied on these circulars, full-credit eligibility and absence of an invoice to contend for nil value of a corporate guarantee. The assessing authority failed to consider that defence. The court set aside the order and remitted the matter for fresh adjudication. It did not finally declare the guarantee non-taxable or conclusively approve nil valuation. Its procedural importance is the requirement to address a material valuation defence through a reasoned decision.

Interim protection is not a merits determination

In 2024 (3) TMI 1311 - DELHI HIGH COURT, the challenge concerned the treatment of in-house guarantees, their contingent character and the administrative valuation approach. The court issued notice and restrained coercive action if an assessment order or demand was made. The substantive questions remained for adjudication. The protection concerned coercive measures; it was neither a final ruling against taxability nor an unrestricted prohibition on assessment proceedings.

In 2024 (10) TMI 1031 - DELHI HIGH COURT, the taxpayer disputed GST allegedly arising from guarantee commission and relied on restrictions concerning receipt of such commission. The court restrained the authority from ruling on that issue pending further orders, while permitting other show cause notice proceedings to continue. This was an issue-specific restraint on adjudication, different from protection against recovery. It did not finally determine whether the guarantee generated a taxable supply.

Practical Implications

• Transaction characterisation and valuation require separate treatment. A defence that no taxable supply exists is different from a contention that an existing supply has nil or otherwise reduced taxable value.
• Guarantee deeds, sanction conditions, accounting records and payment arrangements are material to establishing absence of fees, commissions and other monetary or non-monetary consideration. Bank charges must be distinguished from remuneration of the corporate guarantor.
• The related-person relationship and business nexus remain relevant because Schedule I expressly addresses supplies without consideration. Neither the label "in-house" nor absence of recurring guarantee activity is sufficient by itself.
• Issue and renewal timing determines the applicable valuation framework. An earlier guarantee cannot automatically be valued under the later specific formula merely because it remains in force.
• Full input tax credit is a distinct valuation issue requiring examination of the applicable proviso and factual eligibility. The nil-value clarification under Rule 28(1) should not be treated as an automatic result for every un-invoiced guarantee governed by Rule 28(2).
• Litigation outcomes must be described precisely: quashing on merits, remand for failure to consider a defence, restraint on adjudication and protection against coercive recovery have different legal consequences.

Key Takeaways

The Bombay High Court granted substantive relief for the unremunerated subsidiary guarantees before it, drawing upon the service-tax distinction between consideration and valuation. It nevertheless left Rule 28(2) intact. The resulting analysis is necessarily two-stage: first, determine whether the arrangement constitutes a taxable supply under Section 7, including Schedule I; only then determine its value under the applicable rules and credit-related provisos. The judgment is significant for comparable guarantees, but should not be enlarged into a blanket GST exemption for all corporate guarantees furnished without consideration.

Full Text:

2026 (5) TMI 500 - BOMBAY HIGH COURT