TaxTMI 
TaxTMI 
2026 (5) TMI 500
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.... challenging the proceedings initiated by the impugned Circular No. 204/16/2023 dated 27.10.2023 and Circular No. 225/19/2024-GST dated 11.07.2024 issued by the Respondent No. 1/Ministry of Finance Department of Revenue by which it is declared that Corporate Guarantee will be treated as taxable supply of service and proceedings initiated by the Respondent No. 2 by issuing the impugned Summons dated 20.07.2023. 4. The Petitioner Company M/s D.P. Jain & Co. infrastructure Pvt. Ltd., is engaged in the business of Construction of National and State Highways in respect of projects awarded by the National Highways Authorities and State Corporations. 5. As per the contention of the Petitioner the State Bank of India by its letter dated 10.09.2020, sanctioned a term loan of Rs. 310.63 crores in favour of DPJ Pollachi HAM Project Private Limited for construction of two to four lane of road from Madathukulam to Pollachi in the State of Tamil Nadu under NHAI HAM Model. As per Clause/Condition No. 33 of the said sanctioned letter, there was a pre-condition to furnish corporate guarantee of the Petitioner to meet any cost overturn or shortfall during the entire tenure of the loan. A Secur....
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.... The Petitioner has executed a Corporate Guarantee dated 28.12.2021 and in view of Clause 9 declared that that corporate guarantor i.e. the Petitioner has not received and shall not receive any security, fee, commission, or any other consideration from the borrower for giving the Guarantee. 8. As per the contention of the Petitioner, the Assistant Commissioner of State Tax/Respondent No. 5 carried out the detailed investigation against the Petitioner Company for the year 2017-18 to 2022-23. As per the requirement the Petitioner has supplied all the documents to the Respondent No. 5 including financial statement, concession agreements and GST annual return. The three Corporate Guarantees were shown in book of accounts mentioning the expenses for corporate guarantee deed. The Respondent No. 5 though verified books of accounts, balance sheet, and all documents, no action was raised against the Petitioner as to the said Corporate Guarantees. 9. Subsequently, the Respondent No. 2 has initiated the investigation against the Petitioner by issuing a summons dated 20.07.2023 alleging non-payment of GST without stating the nature and purpose of investigation and the period of investiga....
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....se notice by treating the same as service. The Respondents, have completely ignored the provisions of law, that goods and services are two different terms and expression defined under the law and a transaction which is actionable claim and specified covered within the definition of 'goods' under the CGST Act, 2017/MGST Act, 2017, cannot be treated as 'service' either by issuing Circular. No notification has been issued to specify that transaction of actionable claim will be treated as service and not as goods, whereas Schedule-III specifically excluded transaction is actionable claim [other than specified actionable claim as defined in Section 2(102A)]. Therefore, the Respondents have acted illegally and contrary to the provisions of the Act, and therefore, these notifications are not valid and contrary to the law, and therefore, be declared as ultra vires and be quashed and set aside. 13. Petitioner also seeks quashing and setting aside the impugned Sub-Rule (2) of Rule 28 of the Central Goods and Services Tax Rule, 2017 as inserted by the Notification No. 52/2023-Central Tax, dated 26.10.2023 and further amended by Notification No. 12/2024 Central Tax, dated 10.07.2024, issued....
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....mmodity or service which is available or supplied in open market, hence, open market value of such supplies as prescribed in clause 'a' of Rule 28 and open market value of supply of goods or services of like kind and quality as prescribed in clause 'b' of Rule 28 cannot be determined and therefore, valuation cannot be done as per clause 'a' or 'b' of Rule 28. Accordingly, it is to be done by clause 'c' of Rule 28 of CGST Rules 2017, and therefore, the action of the present Respondent No. 2 initiating the proceeding for recovery of the GST on corporate guarantee is proper and legal one and Writ Petition deserves to be dismissed. 17. The Respondent Nos. 5 and 6 also clarified in their reply that, the investigation visit and DRC proceedings which was initiated by the Respondent No.5 did not cover the corporate guarantee issue. Therefore, it is crystal clear that subject of corporate guarantee issue is different and not covered in the investigation by the Respondent No. 2, and therefore, the Petition deserves to be dismissed. 18. Heard Mr. Raichandani, learned Counsel for the Petitioner, who submitted that these corporate guarantees are executed by the Petitioner for the security....
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....essment made and demand determined were paid and there cannot be two assessments for the same period and entire exercise done by Respondent No. 2 is illegal and without jurisdiction. 20. It is further submitted by the learned Counsel for the Petitioner that, Respondent No. 1, without examining any legal provisions of CGST Act and at its own assumption by the impugned Circulars declared that providing "corporate guarantee" is a "taxable supply of service" under the CGST Act, 2017, whereas as per Section 9 of the CGST Act, GST is leviable on supplies of "goods" or "services" or both. Whereas, "goods" has been defined under Section 2(52) of the Act, which includes "actionable claim". However, as per Schedule-III of the Act, "actionable claims" (other than specified actionable claim as defined in Section 2(102A) like gambling) are the activity or transactions which shall be treated neither as a supply or goods nor a supply of service. Taxable supply is defined under Section 2(108) of the CGST Act, 2017 means a supply of goods or services or both which is leviable to tax under GCST Act. Firstly, providing Corporate Guarantee is not a taxable supply under CGST Act/MGST Act, 2017 and s....
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....ame except for certain provisions. Therefore, unless it is specifically mentioned to such dissimilar provision or reference to the CGST Act, 2017, Rules made thereunder or Notification issued under the CGST Act, 2017 would also be a reference to the same provisions under the MGST Act, 2017 and Rules made thereunder and Notification issued under MGST Act, 2017 and vice versa. 25. It is the contention of the Respondents that, the Petitioner Company is liable to pay GST on corporate guarantee in view of the amendment in Rule 28(2) of the CGST Act. It is further contention of the Respondents that, in view of Circulars issued on 11.07.2024 it has been clarified that the valuation may be done on a proportionate basis. Three corporate guarantees were provided by the Petitioner which commenced on 03.11.2020, 28.12.2021 and 08.08.2022, and therefore, the Petitioner is liable to pay the GST in view of Section 28(1)(c). 26. Before entering into the merits of the issue involved, it is necessary to refer some definitions. Here in the present Writ Petition, the entire issue revolves around initiation of proceeding of non-payment of GST on corporate guarantees. 27. The definition of "con....
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.... a third person; (vii) together they directly or indirectly control a third person; or (viii) they are members of the same family; (b) the term "person" also includes legal persons; (c) persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related." 30. The term "supply" is defined under Section 7 of the CGST Act, 2017 which includes all forms of supply such as sale, transfer, barter, exchange, licence, rental, lease or disposal of goods or services or both, made or agreed to be made in the course or furtherance of business and for a consideration and includes activities mentioned in Schedule I to the Act which are made or agreed to be made without a consideration. 31. The term "Guarantee" has been defined in Black's law Dictionary as "The assurance that a contract or legal act will be duly carried out"; "To assume a suretyship obligation; to agree to answer for a debt or default". 32. In simple language, a guarantee means the promise for doing of something or a promise to make payment of certain debt or ....
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.... services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. When such supply is between related persons, its value will be determined by the valuation rules as prescribed. 38. Thus, the term "services" means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination to another form, currency or denomination for which a separate consideration is charged. By providing guarantee against any loan /credit facility, the guarantor basically assists the principal debtor in availing such facility, which has an element of service. 39. Reverting back to the facts of the present case, the Petitioner had challenged the initiation of the proceedings by the Respondent Nos. 1 and 2 against the Petitioner for non-payment of the GST on corporate guarantees. Undisputedly, the Petitioner has executed the corporate guarantee against the sanctioned term loan of Rs. 310.63 crores vide sanction letter dated 10.09.2020 by State Bank of India in favour of DPJ Pollachi HAM Project Private Limite....
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....rried out by the Respondent No.5 this proceeding was initiated in view of the amendment by Notifications dated 26.10.2023 and 10.07.2024. The Respondent No. 1 through its Board issued Circular No. 204/16/2023 dated 27.10.2023 including the corporate guarantee in GST and stated that activity of providing corporate guarantee will be treated as taxable supply of service. It is specifically stated that, activity of proceeding corporate guarantee by a person on behalf of another related person or by holding of company for the sanction of credit facilities to its subsidiary Company, to the bank/financial institutions, even when made without any consideration will be treated as a taxable supply of service. 41. It is submitted that, the Respondent No. 1 without examining any legal provisions of the CGST Act, 2017 and at its own assumption by the impugned circulars declared that providing corporate guarantee is a taxable supply of service under CGST Act, 2017, whereas as per Section 9 of the CGST Act, GST is leviable on supplies of "goods" or "services" or both. Whereas, "goods" has been defined under Section 2(52) of the Act, which includes "actionable claim". But as per para 6 of Sched....
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....elated persons, in respect of corporate guarantee issued or renewed before 26.10.2023, the valuation of the said supply is to be done in accordance with Rule 28, as it existed during that time. 46. He submitted that, Rule 28 of CGST Rules, 2017 deals with value of supply of goods or services or both between distinct or related persons, other than through an agent. Sub-Rule 1(c) specifically states that, 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 that where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person. It is submitted that, the execution of the corporate guarantee is neither supply nor a service, and therefore, GST is not leviable against the said corporate guarantee. 47. Per contra, it is the contention of the Respondent Nos. 2 to 4 that, Rule 28(2) of the, CGST Rules, 2017 has been inserted vide Notification No. 52/2023-Central Ta....
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....under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order: Provided that where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person: 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. (2) Notwithstanding anything contained in sub-rule (1), the value of supply of services by a supplier to a recipient who is a related person located in India, 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 per annum, or the actual consideration, whichever is higher: Provided 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 sa....
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.... the BOs can then avail the ITC for the same or whether is it mandatory for the HO to follow the Input Service Distributor (hereinafter referred to as 'ISD') mechanism for distribution of ITC in respect of common input services procured by them from a third party but attributable to both HO and Bos or exclusively to one or more BOs? It is clarified that in respect of common input services procured by the HO from a third party but attributable to both HO and BOs or exclusively to one or more BOs, HO has an option to distribute ITC in respect of such common input services by following ISD mechanism laid down in Section 20 of CGST Act read with rule 39 of the Central Goods and Services Tax Rules, 2017 (hereinafter referred to as 'the CGST Rules'). However, as per the present provisions of the CGST Act and CGST Rules, it is not mandatory for the HO to distribute such input tax credit by ISD mechanism. HO can also issue tax invoices under section 31 of CGST Act to the concerned BOs in respect of common input services procured from a third party by HO but attributable to the said BOs and the BOs can then avail ITC o....
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....vides 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. Accordingly, in respect of supply of services by HO to BOs, the value of the said supply of services declared in the invoice by HO shall be deemed to be open market value of such services, if the recipient BO is eligible for full input tax credit. Accordingly, in cases where full input tax credit is available to a BO, the value declared on the invoice by HO to the said BO in respect of a supply of services shall be deemed to be the open market value of such services, irrespective of the fact whether cost of any particular component of such services, like employee cost etc., has been included or not in the value of the services in the invoice. Further, in such cases where full input tax credit is available to the recipient, if HO has not issued a tax invoice to the BO in respect of any particular services being rendered by HO to the said BO, the value of such services may be deemed to be declared as Nil by HO to BO, and may be deemed as open market value in terms of second proviso ....
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....espect of certain activities undertaken by their related persons based outside India, by considering the said activities as import of services by the registered person in India, based on an expansive interpretation of the deeming fiction in S.No. 4 of Schedule I of CGST Act, though no consideration is involved in the said activities and the same are not considered as supplies by the said related person in India. It has been represented that the same treatment, which is being given to domestic related parties/ distinct persons as per clarification provided by Circular No. 199/11/2023-GST dated 17.07.2023, may also be provided in cases where a foreign entity is providing service to its related party located in India, in cases where full ITC is available to the said recipient located in India. 3.1 In order to clarify the issue and to ensure uniformity in the implementation of the provisions of law across the field formations, the Board, in exercise of its powers conferred by section 168 (1) of the CGST Act, hereby clarifies the issues as under: 3.2 Rule 28 of Central Goods and Services Tax Rules, 2017 (hereinafte....
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....es where full input tax credit is available to the recipient, if HO has not issued a tax invoice to the BO in respect of any particular services being rendered by HO to the said BO, the value of such services may be deemed to be declared as Nil by HO to BO, and may be deemed as open market value in terms of second proviso to Rule 28(1) of CGST Rules. 3.5 The second proviso to Rule 28 (1) of CGST Rules, is applicable in all the cases involving supply of goods or services or both between the distinct persons as well as the related persons, in cases where full ITC is available to the recipient. Accordingly, it is evident that the clarification which has been issued vide Circular No. 199/11/2023-GST dated 17.07.2023 in respect of supplies of services between distinct persons in cases where full ITC is available to the recipient, is equally applicable in respect of import of services between related persons. 3.6 In case of import of services by a registered person in India from a related person located outside India, the tax is required to be paid by the registered person in India under reverse charge mechanism. In such cases, th....
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....r is only for the limited purpose of securing the loans to its subsidiaries. Corporate guarantees are issued in order to safeguard the financial health of their associate enterprises and to provide it support. For banks, providing bank guarantee is part of their regular course of business and they charge rate on the higher side. Further, these are fool proof instruments of security of the customer and failure to honour the guarantee is treated as a deficiency of services of the bank under banking laws. Corporate guarantee is actually an in-house guarantee and is not issued to customers generally. 53. While considering whether the corporate guarantee is taxable one has to look the issue in view of Section 15 of the CGST Act, 2017. 54. Section 15 deals with value of taxable supply, which reads as under: "15. Value of taxable supply. (1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. (2) The value of supp....
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....o be "related persons" if- (i) such persons are officers or directors of one another's businesses; (ii) such persons are legally recognised partners in business; (iii) such persons are employer and employee; (iv) any person directly or indirectly owns, controls or holds twenty-five per cent. or more of the outstanding voting stock or shares of both of them; (v) one of them directly or indirectly controls the other; (vi) both of them are directly or indirectly controlled by a third person; (vii) together they directly or indirectly control a third person; or (viii) they are members of the same family; (b) the term "person" also includes legal persons; (c) persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related." 55. For the purposes of this Section the related person is defined in the explanation. This Section provides for value of taxable supply. The value of a supply of goods or services shall be the transaction value, which is the price actually paid....
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....r of CGST & Central Excise Vs. Edelweiss Financial Services Ltd., MANU/SC/0648/2023, wherein, the challenge was to the concurrent finding in favour of the Assessee recorded by the Principal Commissioner GST which was upheld by the CGST Tribunal. The Hon'ble Apex Court has considered the observation of the Tribunal in para 8 and 9, which are reproduced as under: "8. The criticality of 'consideration' for determination of service, as defined in Section 65B(44) of Finance Act, 1994, for the disputed period after introduction of 'negative list' regime of taxation has been rightly construed by the adjudicating authority. 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 under Section 66B of Finance Act, 1994 will not arise. It is clear that there is no consideration insofar as 'corporate guarantee' issued by respondent on behalf of their subsidiary companies is concerned. 9. The reliance placed by Learned Authorised Representative on the 'non-monetary benefits' which may....
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....e term, "supply" as above would indicate that the meaning attributed to the term is that of wide amplitude, but, yet is an inclusive one. On a perusal of the definition it can be seen that the essential ingredients required for an activity/transaction to come within the meaning and scope of supply as defined above. 62. Similarly, Section 2(102) defines "service" as meaning anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged. 63. In view of clause (a) of Sub-Section (1) of Section 7 of the CGST Act, 2017, a supply of services such as sale, transfer, license, rental or lease made for consideration is a supply. As per the Respondents the activity of providing corporate guarantee covered under "supply of service", hence taxable. The meaning and scope of supply under the GST as defined can be understood in terms of following 6 parameters which can be adopted to characterized a transaction as supply: (i) Supply of goods or services. Supply of anyth....
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....t the activity of providing corporate guarantee by a person on behalf of another related person, or by the holding company for sanction of credit facilities to its subsidiary company, to the bank/financial institutions, even when made without any consideration will be treated as a taxable supply of service. It is further clarified by the said circular that the supply of service of providing corporate guarantee to any banking company or financial institution by a supplier to a related recipient, on behalf of the said recipient, was taxable even before the insertion of Sub-Rule (2) in Rule 28 of CGST Rules, 2017 with effect from 26.10.2023, whereas the aforesaid impugned circulars were issued by the Respondent No. 1 through its board in exercise of powers conferred by Section 168(1) of the CGST Act, 2017. 68. However, now the issue is covered under the judgment of the Hon'ble Apex Court in the case of Commissioner of CGST & Central Excise Vs. Edelweiss Financial Services Ltd., (supra), wherein in specific words the Hon'ble Apex Court has observed that, issuance of corporate guarantee to group companies without any consideration would not fall within the ambit of taxable service. T....
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....t is well settled that there is a minimal scope for challenge to constitutional validity. The law is very clear that Legislature should be allowed some play in the joints because it has to deal with complex problems which do not admit of a solution through any doctrine or straitjacket formula. 74. It is observed by the Hon'ble Apex Court in the case of R.K. Garg vs. Union of India, MANU/SC/0074/1981, that every legislation particularly in economic matters is essentially empiric and it is based on experimentation. There may be crudities, inequities and even possibilities of abuse but on that account alone it cannot be struck down as invalid. These can always be set right by the Legislature by passing amendments. The Court must therefore adjudge the constitutionality of such legislation by the generality of its provisions. Laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion, etc. Moreover, there is always a presumption in favour of the constitutionality of a statute and the burden is upon he who attacks it to show that there has been a clear transgression of the constitutional principles. T....