TaxTMI 
TaxTMI 
2026 (8) TMI 990
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.... Advocate With Ms Vaibhavi Parikh. SCA Nos.15076, 15082 & 15084 Of 2024 Mr Sujit Ghosh, Senior Advocate With Ms Mannat Waraich, Ms Anshika Agarwal, Ms Vidhi Chabbra, Mr Aditya Pandya & Mr Paritosh Gupta. SCA No.11560 Of 2024 Mr Bharat Raichandani With Mr Mahesh Raichandani, Ms Jasmine Dixit & Mr Rithik Jain. SCA No.6085 Of 2025 - Mr Aditya Pandya. SCA No.9622 Of 2025 - Mr Dhaval Shah. SCA No.764 Of 2026 - Mr Dhinal Shah. APPEARANCE FOR THE RESPONDENT(S) Mr N Venkatraman, Additional Solicitor General With Mr Ankit Shah, Mr Utkarsh R Sharma, Mr Tirth Nayak, Mr Shashvat Shukla, Ms Hetal Patel, Ms Hetvi Sancheti And Mr Deepak Khanchandani, Senior Standing Counsels Mr Raj Tanna, Ms Tanushree Shrimal, Ms Nimisha Parekh And Mr Parth Patel, AGPS. COMMON CAV JUDGMENT (PER : HONOURABLE MR. JUSTICE A.S. SUPEHIA) 1. In the present group of writ petitions, the petitioners, who have furnished corporate guarantees have challenged the vires of Rule 28(2) of Central Goods and Service Tax Rules, 2017 (for short, "CGST Rules") and Central Goods and Service Tax Act, 2017 (for short, "the CGST Act"). A declaration is sought from this Court to declare the provisions of Rule....
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....es no activity carried out for another with consideration, no cost incurred by the guarantor, and nothing is 'provided' unless and until the guarantee is invoked, and it is a contingent contract (Section 31 of Indian Contract Act, 1872), not in the course or furtherance of business. Hence not service at all. d) It is further submitted that if the Legislature intended to treat corporate guarantees as supplies, then it was required to enact an express provision to that effect. This is demonstrated by Section 7(1)(aa) of the CGST Act, introduced vide Finance Act, 2021 (with retrospective effect from 01.07.2017) where the Legislature, in order to overcome the principle of mutuality and treat transactions between a person and its members or constituents as taxable supplies, introduced an express deeming fiction under Section 7(1) (aa) of the CGST Act. In the absence of any analogous provision in relation to corporate guarantees, it is clear that such transactions cannot be treated as supplies merely by implication. e) Within the definition of the term Supply, Section 7(1)(c) of the CGST Act defines supply to mean "the activities specified in Schedule I, made or agreed ....
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.... services. Accordingly, the mere act of furnishing a corporate guarantee between related persons cannot, by itself, be presumed to constitute a supply merely by invoking Section 7(1)(c) read with Entry 2 of Schedule I to the CGST Act. The Revenue must first establish that there exists an identifiable supply of goods or services or both between the Holding Company and its Subsidiary and that such supply is made in the course or furtherance of business, as specifically required by Entry 2 of Schedule I to the CGST Act. h) The definition must be read with the charging architecture: there must be a 'supply'; an activity carried out for another and, per the decision of the Apex Court in the case of Directorate General of Goods and Services Tax Intelligence (HQS) Vs. Gameskraft Technologies (P.) Ltd., [2026] 186 taxmann.com 1232 (SC), the consideration must ordinarily exist. i) Schedule I to the CGST Act does not deem 'consideration' into existence; it deems certain supplies of goods or services made without consideration to be supplies whereby it pre-supposes (i) an existing subject-matter of supply (goods or services) and (ii) that the supply is 'made in the course or....
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....pression "supply" of Section 7(1) of the CGST Act, the Revenue cannot invoke the provisions of Entry 5(e) of Schedule II to the CGST Act. In any case, Entry 5(e) is part of Schedule II to the CGST Act, reaches only via Section 7(1)/(1A) of the CGST Act; with no supply and no consideration, it never comes into play. n) While referring to Article 2 of Schedule I, it is submitted that the expression "related persons" will not get attracted in the cases of corporate guarantees. It is submitted that in the cases of corporate guarantees, there is no such transaction i.e. the transaction of the guarantee is given by the Holding Companies to the lender banks and services, if at all, are being rendered to them and not to the subsidiaries. In this context, reference is made to Clause 93 of Section 2 of the CGST Act, which defines "recipient" of supply of goods or services or both, which indicates that it is the lender which is the recipient of services and not the subsidiary companies. 2.2 It is submitted that the valuation and the taxability depend on the time of supply of services under Section 13 of the CGST Act, and in cases of corporate guarantees, which are contingent in na....
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....n matters specifically preserved outside its ambit, including taxes on lands and buildings under Entry 49 of List II of the Seventh Schedule to the Constitution of India. 2.6 The expansive interpretation of "supply" recognized in the case of Gameskraft (supra) cannot be understood as dispensing with the requirement of first identifying a legally recognized economic supply. Rather, the expression "supply" remains wide enough to accommodate evolving commercial transactions once their character as an economic supply of goods or services is established. 2.7 In order to examine whether a corporate guarantee falls within the ambit of an economic supply of service, following submissions are made: a) The GST law does not explain what constitutes an "economic supply," nor does it prescribe an independent test for determining whether an activity undertaken between related corporate entities constitutes, in its commercial sense, an intra-group service. In the absence of specific statutory guidance under the GST law, it becomes necessary to examine international commercial and taxation jurisprudence, particularly the perspective of organizations specializing in fiscal and econom....
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....of the CGST Act. Thus, even assuming the existence of a service, the transaction would not constitute a taxable supply unless this independent statutory requirement is satisfied. b) In this context, reliance is also placed upon the meanings ascribed to the expressions "business" and "course of business" in Advanced Law Lexicon and Black's Law Dictionary. The expression "business" denotes the ordinary commercial business carried on by the person concerned, whereas "course of business" contemplates the usual, normal or regular course in which such business is carried on. An activity does not therefore become part of the business of a person merely because it produces an incidental economic benefit for an entity in which such person has an ownership interest. The relevant definitions on which reliance has been placed are reproduced hereinbelow: i. P. Ramanatha Aiyar's Advanced Law Lexicon - "course of business: The usual custom in business or a particular line of business." ii. Black's Law Dictionary: - "course of business: The normal routine in managing a trade or business. Also termed ordinary course of business; regular course of business; ordinary course....
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....nds that the preservation of the Subsidiary's business is itself the preservation of the Holding Company's business by reason of their common economic interest, it effectively collapses the separate identities of the two entities for this purpose. Such commonality of identity is fundamentally inconsistent with the simultaneous assertion that there is a supplier of a service and a recipient of service. The Revenue cannot, for establishing "furtherance of business", treat the Holding Company and its Subsidiary as one economic unit, while treating them as an independent service provider and service recipient for establishing a taxable supply. 2.9 It is contended that Shareholder / investment activity does not satisfy the expression 'in the course or furtherance of business'. Reliance is placed on the CBIC's Circular 196/08/2023-GST, GST dated 17.07.2023 specifying that the securities held by the Holding Company in the subsidiary company are neither goods nor services. Further, purchase or sale of shares or securities, in itself is neither a supply of goods nor a supply of services. For a transaction/activity to be treated as supply of services, there must be a supply as defined und....
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....e. 2.15 Reference is made to Section 126 of the Indian Contract Act, 1872. Reliance is placed on the decision of the Supreme Court in the case of Punjab National Bank Limited Vs. Shri Vikram Cotton Mills and Another (1970) 1 SCC 60, which holds that the contract of guarantee is a concurrent transaction requiring the concurrence of three persons, and the surety undertakes his obligation at the express or implied request of the principal debtor. 2.16 It is submitted that the request made by the subsidiary to the Holding Company for furnishing a corporate guarantee is an integral part of a single, indivisible transaction between both entities and the bank lender, under which the surety undertakes an obligation at the express or implied request of the subsidiary. 2.17 Hence, there is no distinct offer and acceptance or consensus ad idem between the Holding Company and the subsidiary for it to constitute a separate contract under the terms of the Contract Act. 2.18 The petitioners have invoked the doctrine of Ejusdem generis / noscitur a sociis and it is contended that Para 5(e) of Schedule II to the CGST Act 'agreeing to the obligation to refrain from an act, or to tolerate....
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....t is not otherwise ascertainable and assigning it a deemed valuation, must be rejected. Reliance is placed on the Australian GST ruling (GSTR 2006/1), which holds that even if a subsidiary were to make payments to the Holding Company in respect of a guarantee issued by the Holding Company, such payment would not represent consideration for an independent service between the Holding Company and the subsidiary. Instead, it would be treated as additional consideration for the underlying supply made by the Holding Company to the lender. 2.24 Reliance is also placed upon the judgment of the Court of Justice of the European Communities (First Chamber) in the case of Levob Verzekeringen BV and Another Vs. Staatssecretaris Van Financien (Case C-41/04), wherein it was held that a transaction constituting a single supply from an economic point of view cannot be artificially split. 2.25 The mere fact that the subsidiary obtains better credit terms, access to financing, or some other commercial advantage by reason of the financial standing of its Holding Company does not, without more, establish that the Holding Company has rendered any service to it. 2.26 It is submitted that Entry 5....
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....t'; Articles 292 & 293 of the Constitution of India likewise place the giving of guarantees within the borrowing/debt architecture of the State. Parliament has said the same statutorily, and under the Insolvency and Bankruptcy Code, 2016 (for short, "IBC"), 'debt' means 'a liability or obligation in respect of a claim which is due from any person' and 'claim' includes a right to payment 'whether or not ... fixed, disputed ... secured or unsecured' (Section 3(6) of IBC); and 'financial debt' includes 'the amount of any liability in respect of any of the guarantee or indemnity' for the enumerated items (Section 5(8)(i) of IBC). The other link canvassed is that a claim to a debt, even contingent, is an 'actionable claim'. In this regard reference is made to Section 2(1) of the CGST Act adopts Section 3 of the Transfer of Property Act, 1882, which defines 'actionable claim'. It is thus submitted that in Section 3, contingency is thus expressly stipulated within the definition. The guarantor's liability crystallizes only on default and demand. c) Further in continuation of the aforesaid submission, it is contended that actionable claims are outside the purview of 'supply' Secti....
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.... power on the Board to either effect administrative legislation or pre-determine adjudicatory facts. To the contrary, what the Impugned Circular seeks to do is nothing but pre-determine adjudicatory facts of whether or not a given transaction is taxable, and thereafter the valuation to be adopted. b) Reliance in this regard is placed upon the decision of the Supreme Court in the case of Union of India & Ors. Vs. Karvy Stock Broking Ltd., (2019) 11 SCC 631 wherein a circular was issued clarifying regarding the liability to pay service tax on the Commission received by distributors on mutual fund distribution. The Supreme Court upheld the judgment of the High Court, which set aside the Circular on the ground that it amounts to foreclosing discretion or judgment that may be exercised by the quasi-judicial authority while deciding a particular lis under particular circumstances. c) It is submitted that by declaring, as a matter of course, that the furnishing of a corporate guarantee by a Holding Company for its Subsidiary constitutes a taxable supply of service under Schedule I, the Impugned Circulars have travelled beyond the permissible scope of Section 168 of the CGST Act and,....
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....e may not continue for its prescribed life on account of the happening of one or more contingent events, such as liquidation process, prepayment of loan etc. Thus, when the services depend upon a contingent event, the alleged deemed consideration for the period during which the service is not provided cannot be levied, and such levy is arbitrary and requires to be struck down. In this regard, reliance is placed on the judgment of this Court in the case of Commissioner of Income Tax Vs. Winner Business Link (P) Ltd. (2015) 55 taxmann.com 468 (Gujarat). g) On behalf of the writ petitioners of Special Civil Application No. 14454 of 2024, with regard to levy of GST on the recipient, who is a foreign entity, it is submitted that Rule 28(2) of the CGST Rules, as retrospectively substituted by Notification 12/2024 w.e.f. 26.10.2023, applies only where the recipient is 'located in India', and since both beneficiaries are foreign subsidiaries, their case is directly covered by Circular No. 225/19/2024-GST dated 11/07/2024 answer to Issue No.8. It is also contended that the demand period pre-dates the rule. The demand covers July 2017-March 2020, wholly before insertion of Rule 28(2) of t....
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....ompetent: the recipients are foreign (outside Rule 28(2)), the demand period pre-dates the rule, and Circular dated 11.07.2024 confines 1% deeming prospectively. Separately, 1% p.a. deeming is manifestly arbitrary; a director's personal guarantee is valued at 'Nil' while the Holding Company's CG is deemed at 1% of the guaranteed sum for every year of its currency, divorced from cost (Nil). e) In this regard, it is submitted that in order for a levy of tax to be operative and valid, four essential components must be provided in the enacting statute creating the tax/impost i.e. (a) the taxable event attracting the levy, (b) the person on whom the levy is imposed i.e. who is obliged to pay the tax, (c) the rate at which the tax is imposed and (d) the measure or value to which the rate will be applied for computing the tax liability. The absence of any of the afore-stated components will render the levy as invalid. In this regard, reliance is placed upon the decision of the Supreme Court in the case of Govind Saran Ganga Saran Vs. Commissioner of Sales Taxand Ors., AIR 1985 SC 1041. f) The 1% valuation has no legislative or commerci....
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....ssions: a) The retrospective amendment to Rule 28(2) of the CGST Rules seeks to retrospectively alter the statutory machinery for valuation of the very same alleged supply. The petitioners have accordingly mounted a challenge to Section 164(3) of the CGST Act to the limited extent that it authorises retrospective rule making resulting in the creation of substantive fiscal liabilities carrying civil and evil consequences and therefore it is submitted that the said provision be read down in such cases. In this regard, reliance is placed upon the decision of the Supreme Court in State of Uttar Pradesh and Ors. Vs. Deepak Fertilizers & Petrochemical Corporation Ltd., (2007) 10 SCC 342. b) Reliance is placed on the Notification No. 14/2018 dated 26.07.2018, and it is contended that the levy of GST on the guaranteeing loans, by the Central Government, State Government, Union Territory to their undertakings or PSU's has been made exempt, hence the petitioners cannot be extended a discriminatory treatment, and are also entitled to exemption from tax. c) Finally, with reference to the impugned notices issued by the respondents under Section 74 of the CGST Act, it ....
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....ng the supply of services by the corporate guarantor-Holding Company to the Subsidiary through corporate guarantee, learned ASG has made the following submissions : a) Reference is made to Section 7(1) of the CGST Act, and it is contended that, under sub-clause (a), the element of consideration is sine-quo-non for the supply to be taxed. However, under sub-clause (c), the activities specified in Schedule I of the CGST Act can be subjected to the levy, even without a consideration. For these activities, the element of consideration has been dispensed with and is not a sine-quo-non requirement for it to be taxed. Consequently, the mandate of Parliament is that Section 7 of the CGST Act includes supplies made with or without consideration. b) A supply between a Holding Company and a subsidiary company would be deemed to be a supply between related persons under Explanation (a) to Section 15 of the CGST Act. Consequently, such a supply would fall within Item 2 of Schedule I to the CGST Act and would be liable to tax even if made without a consideration. c) The law mandates taxing transactions between related parties under Schedule I due to the lack of arm's l....
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....se falls under Section 7(1), the Revenue cannot take recourse to Section 7(1A) read with Schedule II to the CGST Act. The Revenue is not directly taking recourse to Item 5(e) of Schedule II read with Section 7(1A) of the CGST Act to establish a taxable supply. It is submitted that Section 7(1) includes Section 7(1)(c) of the CGST Act, which treats activities specified in Schedule I made or agreed to be made without a consideration, as a taxable supply. Item 2 of Schedule I to the CGST Act mandates the supply of goods or services or both between related persons when made in the course or furtherance of business to be treated as a taxable supply, and since a Holding Company and its subsidiary company are related persons, as per the Explanation to Section 15 of the CGST Act, the Holding Company providing corporate guarantee for the benefit of its subsidiary is treated as a taxable supply under Section 7(1)(c) read with Item 2 of Schedule I. Only after the supply is traceable to Section 7(1), does the Revenue take recourse to Section 7(1A) read with Item 5(e) of Schedule II of the CGST Act, merely for the purpose of classifying the supply as a supply of service since providing a corpor....
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....e, quantity and frequency of such a transaction or activity. Even one-time activities would constitute business under Section 2(17) of the CGST Act. As a sequel, it is submitted that extending corporate guarantee constitutes business and would squarely fall within the scope of supply under Section 7(1)(c) read with Section 7(1A) read with Item 5(e) of Schedule II to the CGST Act. 6. In response to the submissions of the petitioners, claiming corporate guarantee as an actionable claim under Section 2(1) of the CGST Act, following submissions are advanced: 6.1 As regards the argument under Article 366(8) of the Constitution of India, it must be borne in mind that Article 366 of the Constitution of India employs the expression "in this Constitution, unless the context otherwise requires". Therefore, the definition of "debt" under Article 366(8) must be restricted to interpret the expression "debt" employed elsewhere in the Constitution. It cannot be automatically quoted to interpret the Transfer of Property Act, 1882. 6.2 Other relevant Articles in the Constitution which employs the expression "debt" also support this proposition. Article 112 of the Constitution of India deal....
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....uarantor or the surety is to discharge the liability of a third person in case of default. The attempt of the petitioners to treat the guarantors as debtors, renders Section 128 otiose. In nutshell it is submitted that, the principal and primary liability is always that of the debtor and the debt is always vis-à-vis the debtor. There is no claim to a debt in the hands of the guarantor. The Guarantor discharges the liability incurred by the debtor in the event of a default. The liability is always of a third person. Since the relationship with the guarantor is not a claim to any debt, the definition of actionable claim does not trigger. Consequently, Schedule III read with Section 7(2)(a) of the CGST Act has no relevance to the present case. 7. In response to the contention raised with valuation of supply, following submissions are advanced by learned ASG: 7.1 Reference is made to Section 15 of the CGST Act which deals with the value of taxable supply. It is submitted that the provisions of Section 15(1) of the CGST Act stipulate is that that transaction value shall be the value of supply and the price actually paid or payable for the supply constitutes the transaction ....
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....s 3(ii) and 20 dealt with taxability of corporate guarantee provided for related persons including corporate guarantee provided by Holding Company to its subsidiary company. The agenda clearly explained the difficulties being faced by the field formations due to non-availability of open market values due to peculiar nature of the relationship between a holding and subsidiary company, it adopted the minimum acceptable commission/fee under the Income Tax Rules for such transactions, as value of supply of services in the GST regime. In the minutes 22 of 52nd GST Council meeting held on 07.10.2023, vide Paras 4.16 to 4.18, 23, the GST Council agreed with the recommendations of the Law Committee along with the circular. Therefore, Rule 28(2) of the CGST Rules had the recommendations of the GST Council and the Rule was inserted by exercising power under Section 164 of the CGST Act. The deliberations of the GST Council also reflected why the value was fixed at 1%. 9. In response to the argument of the petitioners while referring to Section 31 of the CGST Act, that even the GST Council accepts that banks charge different rates from 0.5% to 3% and in some cases there may be no commission....
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....uarantee but to record the liability it secures and its outstanding balance in each financial statement prepared during the currency of the guarantee. This is a continuing, recurring accounting obligation, not a one-time disclosure. 9.6 Therefore, time of supply is available to be determined in each year since the disclosure would be made by the subsidiary company in each year. 9.7 In this context, if Rule 28(2) of the CGST Rules is appreciated, the language employed in Rule 28(2) of the CGST Rules, which deems the value of the supply as "1% of the amount of such guarantee offered per annum". Since under Section 13(2)(c) of the CGST Act, a taxable supply triggers every year, Rule 28(2) of the CGST Rules can be judicially interpreted to mean that the expression "amount of such guarantee" will only mean the amount subsisting in each year. Rule 28(2) of the CGST Rules in its natural import permits such a construction. 9.8 For example, if a corporate guarantee is issued for 100 crores for a duration of ten years, instead of valuing the supply at 10% of 100 crores (1% of the amount of such guarantee offered per annum), the supply will be valued at 1% of the subsisting guarantee....
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....without the element of consideration. Since continuous supply of services mandate periodic payment obligations, it cannot be held that deemed supplies listed in Schedule can never amount to continuous supply of services. Therefore, Section 2(33) of the CGST Act and Schedule I will have to be harmoniously construed to ensure that both the provisions work in tandem. c. Since the value deemed under Rule 28(2) of the CGST Rules is also treated as the deemed consideration for the corporate guarantee transaction, the aspect of periodic payment obligations, a sine-qua-non for continuous supply of services under Section 2(33) of the CGST Act, gets established. This interpretation would also allow Schedule I transactions to fall within the scope of Section 2(33) of the CGST Act, which defines continuous supply of services. d. Therefore, as held by the Supreme Court in the case of Ashok Leyland Ltd., Vs State of Tamil Nadu and Anr., 2004 (3) SCC 1, a deeming fiction has to be taken to its logical end and the same proposition must be extended and applied to Rule 28(2) of the CGST Rules. Rule 28(2) of the CGST Rules which deems the value in a related party transaction, must a....
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....uting a pledge. As stated earlier, the GST law is not concerned with how the promise is secured. Once the guarantee is extended, the liability to tax arises. c) The petitioners sought to bring out a distinction between a security and a guarantee and sought to rely on the decisions of the Apex Court in the cases of Phoenix ARC and Maitreya Doshi (supra), does not bear any relevance to the present batch at hand. 13. It was argued that the Revenue is adopting a selective approach to OECD Commentary. It was suggested by the petitioners that under the OECD Commentary, corporate guarantee transactions are not taxable. This submission deserves to be rejected for the simple reason that CGST Act does not define the scope of "supply" in the context of OECD Commentaries. The CGST Act is a standalone statute enacted by Parliament. If the supply remains taxable under the provisions of the statute, it will remain uninfluenced by any conflicting material including OECD Commentaries. 14. While asserting the validity and legality of the impugned Circulars, it is contended that the Circulars merely reflect the position of law and is not contrary to the law, and they are issued in sync....
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.... the Bombay High Court decision in the case of D P Jain and Co.(supra), it is submitted that it does not lay down the correct law and it is urged that the views expressed therein do not warrant acceptance. 19. Responding to the challenge to the action taken under Section 74, it is contended that the petitioners can avail the alternative remedy of filing the appeals. ANALYSIS AND OPINION : 20. Learned Senior Advocates and learned advocates appearing for the respective parties have made extensive submissions and cited abundant case laws, some of them are repetitive. To avoid prolixity, we have confined our opinion to relevant pleadings. 21. At the outset, we may clarify that legislative intent behind promulgation of GST laws along with the scope of power of GST Council and its recommendations has been threadbare examined by the Supreme Court in case of Union of India and Another Vs. Mohit Minerals Pvt. Ltd. Through Director, 2022 (10) SCC 70, and recent decision in case of Gameskraft (supra). We may not reiterate the same. 22. The petitioners, are Holding Companies, have assailed the action of levying tax at the rate of 1% under Rule 28(2) of the CGST Rules on corporat....
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.... the Holding Company. Such an arrangement effectively encompasses three distinct yet interlocking contracts: A. Principal contract: a primary contract between the subsidiary company(principal debtor) and the creditor bank. B. Secondary contract: A collateral agreement between the creditor bank and the surety Holding Company, which forms the primary basis of the corporate guarantee. C. Implied contract: An implied agreement between the surety Holding Company and the subsidiary company, legally obligating the subsidiary to indemnify the surety if the surety is forced to perform or pay the debt. 26. It is asserted by the petitioners that corporate guarantee executed by the petitioners are without consideration, hence will not fall within the definition of "service" as defined under Section 2(102) of the CGST Act. The definition of service stems out of definition of "service" as defined under Article 366(26A) of the Constitution of India, which means anything other than goods. "Goods" as defined under Article 366(12) of the Constitution of India includes all materials, commodities, and articles. In this context, the provision of Section 7 of the CGST Act a....
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....specify, by notification, the transactions that are to be treated as - (a) a supply of goods and not as a supply of services; or (b) a supply of services and not as a supply of goods." 27.1 Section 7(1)(c) of the CGST Act mentions the activities specified in Schedule I. The Schedule I is incorporated as under: "SCHEDULE I [See Section 7 of the CGST Act] Activities to be treated as Supply even if made without consideration 1) Permanent transfer or disposal of business assets where input tax credit has been availed on such assets. 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: Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both. 3) Supply of goods- (a) by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or (b) by an agent to his principal where the agent undertakes to receive such goods on ....
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....nsignments and focuses on the taxing of supplies. The concept of a supply centric and destination-based tax runs through the scheme of the statutory provisions and the proposals issued by the GST Council. Thus, an amendment to the Constitution was introduced in the form of Article 366(12-A) to create a tax on the supply of goods, or services, or both. In the commercial reality of the times, the conceptual lines between goods and services wear thin. Hence, the focus is on the taxation of supply, as opposed to the creation of neat compartments between goods and services. Section 7(1)(c) of the CGST Act specifically characterises import of services for a consideration to constitute "supply". The only question that falls for determination is whether the imports of goods on a CIF basis would also constitute import of shipping services, by way of deeming fiction." 51.9. The GST regime therefore taxes supplies and not merely traditional transfers of title or conventional sale transactions. Consequently, once actionable claims are expressly included within the definition of "goods", the expression "supply" under Section 7 must necessarily receive a purposive and expansive interpre....
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....on to the principal debtor -Z in the form of the loan, in exchange, the promisor-X assumes the responsibility to fulfill that promise if the principal debtor defaults. This arraignment makes X and Z. as related parties, and the activity of securing loan to Y will be an activity during the course of business. Thus, within the core contract of guarantee, the subsidiary company technically acts as a third party, as the primary transaction occurs directly between the surety-Holding Company and the creditor bank, for the benefit of the subsidiary company. This structure aligns with the statutory definitions and rights under the Indian Contract Act, 1872. 31. In order to further understand the requirements arising from the corporate guarantee furnished by the Holding Company, we may refer to Section 140 and 145 of the Indian Contract Act, 1872 which reads as under: "Section 140 Rights of surety on payment or performance. Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had again....
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....xplicates that when a creditor-bank provides a loan facility to a subsidiary (principal debtor), that specific act constitutes the legal consideration transcending to the Holding Company (surety). Section 127 of the Indian Contract Act, 1872 establishes that the consideration for the guarantee flows directly from the creditor bank (promisor) to the subsidiary (promisee) by way of advancing the credit facility. The Holding Company provides the guarantee in exchange for this benefit being conferred upon its subsidiary, which might otherwise be ineligible for the loan. 35. Thus, an interweaving statutory intention of Section 126, 127, 140 and 145 of the Indian Contract Act, 1872, and on examination of the nature of corporate guarantee, it can be safely held that the petitioners - Holding Companies are "related persons" as per Explanation under Section 15 of the CGST Act, to their subsidiaries, and their execution of corporate guarantee without consideration will satisfy the expression "supply of services" in the course of business" as envisaged in Section 7(1)(a) of the CGST Act read with Schedule I, Article 2 of the CGST Act. We will be separately dealing with the expression "duri....
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....o sub-section 5(a)(i) to (v) of the CGST Act would encompass a Holding Company and its subsidiary company, which provides that persons shall be deemed to be "related persons" if one of them directly or indirectly controls the other. Thus, the nature of the corporate guarantee and the manner and method of its execution would satisfy the ingredients of Section 7(1)(c) of the CGST Act, read with Article 2 to Schedule I, Section 15, and Explanation 5(a)(i) to (v) of the CGST Act. FACET OF CORE OR MAIN BUSINESS OF HOLDING COMPANIES: 37. The petitioners have also asserted that since lending of money or loan is not their core or main business, the expression "in course or furtherance of business under Article 2 of Schedule, and definition of "business" will not get attracted. Before we examine the issue in context of definition of business as defined under Section 2(17), we may refer to the judgment of Apex Court in the case of Board of Trustees of the Port of Madras(supra), the Supreme Court while dealing with the pari materia definition of word "business" as defined in Section 2(d) of the Tamil Nadu Sales Tax Act, 1959, has held thus: "15. Now the definition of "business"....
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....ts main business was certainly not that of selling provisions. The issue related to 1967-68 after amendment of Sec. 2(d) of the Madras Act. The argument that there should be a "direct" connection between the main business and these sales of provisions was rejected by this Court and it was held that these sales were 'incidental' to the main business and covered by the amended definition of 'business' in Sec. 2(d). Bhagwati, J. (as he then was) adverted to the observations of Krishna Iyer, J. in Royal Talkies, Hyderabad Vs Employees State Insurance Corporation, 1978 4 SCC 204 : 1978 GLHEL_SC 24363, Hyderabad V/s. Employees State Insurance Corporation, (1978) 4 SCC 204, a decision under the ESI Act to the following effect : "a thing is incidental to another, if it merely pertain to something else as primary, surely, such work should not be extraneous or contrary to the purpose of the establishment but need not be integral to it either." It was pointed out that in the case relating to Royal Talkies, Hyderabad Vs Employees State Insurance Corporation, 1978 4 SCC 204 : 1978 GLHEL_SC 24363, it was held that it was impossible to hold that a canteen or cycle stand or cinem....
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....apers, print waste and cut waste and these sales were treated as 'incidental or ancillary' to the main business of printing and publishing of newspaper and liable to sales tax. These cases would be of help to the appellant, State of Tamil Nadu, if the main activity of the Port Trust amounted to 'business'." xxx xxx xxx 28. It will thus be noticed that in all these cases the main activity of the person or body was undoubtedly 'business' even though the motive of profit was excluded by statute and even though the connected, incidental or ancillary sales were statutorily included in the definition of business. The question in issue before us is whether the Port Trust was established by statute to 'carry on business'. 29. We now come to the second category of cases cited for the respondent, Port Trust where the main activity of the person or body does not amount to 'carrying on business'. If that be the case the activities will stand far removed from any business. Let us assume that such "non-business" activities might result (say) in some scrap or unwanted material which should be cleared so that accommodation could be saved. If the sales were then made with....
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....rove the exception would fall on the revenue. In our view, the Andhra Pradesh High Court did not, in the above passage, imply that even where the main activities were not business, the assessee must prove want of an intention to carry on business in the connected, incidental or ancillary activity which involved sales. It is possible, in exceptional cases that such latter sales could per se be business having been proved by the revenue to have been carried in with such an explicit intention. The burden, as already stated, would here lie on the revenue. xxx xxx xxx 44. From the above provisions, in our opinion, it is clear that the Port Trust is not involved in any activity of 'carrying on business' as has been clearly held in Aminchand Pyarelal's case (AIR 1975 SC 1935) (supra) and that unclaimed and unserviceable goods are sold in discharge of various statutory charges, items etc. and the sales of these items are also an infinitesimal part of the Port Trust's main activities or services. No doubt, the sales of goods are in connection with, or incidental or ancillary to the main "non-business" activities, but they cannot be treated as 'business' without any plea by....
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....ot 'business', then the connected, incidental (or) ancillary activities of sales would not normally amount to 'business' unless an independent intention to conduct 'business' in these connected, incidental or ancillary activities is established by the revenue, and it will then be necessary to find out whether the transactions which are connected, incidental or ancillary are only an infinitesimal or small part of the main activities, and the onus of proof of an independent intention to do 'business' in these connected, incidental and ancillary sales will rest on the Department. Ultimately, the Supreme court in the aforesaid case, on examination of the nature of activity carried out the Port Trust in discharge of its statutory duty in light of the decision of Supreme Court in the case of Trustees of the Port of Madras Vs. M/s. Aminchand Pyarelal & Ors. (AIR 1975 SC 1935 has held that it is not established for carrying on business and hence cannot be said to be involved in any activity of 'carrying on business. ANALYSIS OF CORPORATE GUARANTEE IN CONTEXT OF MAIN BUSINESS UNDER SECTION 2(17) : 39. Keeping in mind the foregoing observations, made by the Supreme Court in context of ....
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....ess". Thus, the activity of the Holding Company in giving the corporate guarantee to its subsidiary, which enables it to secure loan for its commercial activities will be an activity incidental to "similar activity" to trade, commerce etc., and hence qualifies "business". Such activity may be an activity without pecuniary (monetary) benefit. The frequency of activity is also irrelevant. There is no compulsion of volume, continuity, or frequency, and even single or isolated transactions still count as business. As held by us, corporate guarantee is a "supply of service" by the Holding Company to its subsidiary which is a beneficiary. The fate of business activity of the subsidiary hinges on the guarantee extended to it by the Holding Company making it eligible for loan, and reciprocally, the Holding Company is benefited by business expansion/activity. This activity will satisfy the ingredients of expression "during the course of business" of Article 2 of Schedule I, and definition of "business" under Section 2(17) of the CGST Act. SCOPE OF SUPPLY UNDER ARTICLE 5(e) of SCHEDULE-II OF THE CGST ACT: 41. It is contended by the petitioners that the corporate guarantee extended by t....
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....nnot be read in disjunction, but are part of one expression, and are supplementary to each other. The three expressions (ii to iv) are prefixed by expression "agreeing to the obligation to", and all of them commence with word "to" and are divided by "or". Thus, in literal sense Article 5(e) would mean, supply of services "agreeing to the obligation to refrain from an act", "agreeing to an obligation to tolerate an act or a situation" and "agreeing to an obligation to do an act". Thus, the word "obligation" assumes importance in deciding the issue whether the corporate guarantee will fall within Article 5(e) or not. 45. Black law dictionary 7th edition: defines Obligation as under: obligation, n. 1. A legal or moral duty to do or not do something. 2. A formal, binding agreement or acknowledgment of a liability to pay a certain amount or to do a certain thing for a particular person or set of persons. - Also termed legal obligation An obligation in law is a binding legal tie (vinculum juris) that compels one party to perform an act, make a payment, or refrain from doing something for another party. It creates an enforceable relationship where one person has a leg....
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....he surety, and that the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee. These provisions, read with Section 140 of the Contract Act, establish that, even though the subsidiary company may not be a party to the contract of corporate guarantee, the supply of services ultimately accrues to and is rendered for the benefit of the subsidiary company. Accordingly, the subsidiary company would be a "recipient" of the services under the corporate guarantee, thereby satisfying the requirements of Section 2(93) of the CGST Act. 49. The identity and purpose of the corporate guarantee are intrinsically connected with the subsidiary company, which approaches the creditor bank for financial assistance. The rendition of the service is triggered by the subsidiary's requirement for such financial assistance, resulting in the execution of the corporate guarantee by the Holding Company, particularly where the subsidiary is otherwise unable to secure the requisite financial assistance on its own. Thus, the supply of services through the corporate guarantee furnished by the Holding Company ultimately accrues to and terminates with the s....
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....eds upon an incorrect assumption that Articles 366(12) and 366(26A) create rigid compartments freezing every juristic category into either goods or services according to historical commercial law classifications. Neither Article 366(12) nor Article 366(26A) mandates such inflexible compartmentalisation. Article 366(26A), which defines "services" as "anything other than goods", cannot also be construed as constitutionalising pre-existing commercial law distinctions so as to denude Parliament of legislative flexibility within the GST framework enacted pursuant to Article 246A. 50.25. Even otherwise, actionable claims possess several attributes traditionally associated with movable proprietary interests capable of forming the subject matter of trade and commerce. Actionable claims are expressly recognised under the Transfer of Property Act, 1882 as transferable and assignable interests in movable property. Section 130 of the Transfer of Property Act itself contemplates assignment of actionable claims for value. Such interests are capable of transfer, assignment, valuation and commercial dealing and therefore possess characteristics traditionally associated with proprietary in....
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....stitution. The same reads as under: "366. Definitions In this Constitution, unless the context otherwise requires, the following expressions have, the meanings hereby respectively assigned to them, that is to say- 8. "debt" includes any liability in respect of any obligation to repay capital sums by way of annuity and any liability under any guarantee, and "debt charges" shall be construed accordingly;" 55. Article 366 begins with "In this Constitution, unless the context other wise requires". Thus, the definitions enumerated under Article 366 relates to understanding of the provisions of Constitution of India containing such words to which the meaning has been assigned. In GST Acts, the meaning of 'debt' which finds place in "actionable claim" is to understood from the Transfer of Property Act, and hence is to be interpreted and understood in the context of TP Act, 1882 keeping in mind the intention of GST laws, and not the IBC Code as claimed by the petitioners. The role of Holding Company (surety), its subsidiary (principal debtor) and the financial institution (lender) and the nature and purport of corporate guarantee under GST laws is required to ....
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....claim, through definition of 'debt' under Article 366(8) read with IBC code, but its legal entity in context of GST laws is established through the provisions of TP Act and Contract Act. Thus, corporate guarantee will remain outside the reach of Schedule III read with Section 7(2)(a) of CGST Act. WHETHER CORPORATE GUARANTEE IS A SHAREHOLDER ACTIVITY OR NOT: 56. In order to substantiate that the corporate guarantee is a share holding activity, the petitioners have placed reliance on the judgment of the Income Tax Appellate Tribunal (ITAT), Micro Ink Ltd (supra), wherein the Tribunal while examining the scope of CG under Income tax Act has held that corporate guarantees provided by a parent entity are prima facie in the nature of a "shareholder activity", since the action of giving CG is taken by the Holding Company to protect corporate investments and to compensate subsidiary's lack of independent credit strength to raise finance. The Tribunal clarified that "provision of service" and "shareholder activity" are mutually exclusive concepts. However, in our opinion, the doctrine of shareholder activity cannot be applied stricto senso to the GST regime, and it depends on the natu....
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....Pledge Agreement dated 10.01.2012 does not contain any contract that the promise which was made by the borrower in the Facility Agreement dated 12.05.2011 to discharge the liability of debt of Rs.40 crores is undertaken by the corporate debtor. It was the borrower who had promised to repay the loan of Rs.40 crores in Facility Agreement dated 12.05.2011 and it was borrower who had undertaken to discharge the liability towards lender. The Pledge Agreement dated 10.01.2012 does not contain any contract that corporate debtor has contracted to perform the promise, or discharge the liability of the third person. The Pledge Agreement is limited to pledge of 40,160 shares of GEL only. 27. We have noticed above that in the Facility Agreement there is a Security Creation by way of Schedule IV in which 100% equity shares of GEL were pledged by the borrower and second pari-passu charge on all current assets of the GEL was also created as security for loan. It transpires that since some shares of GEL were also with the corporate debtor who is subsidiary Company of Doshion Ltd. the same was also pledged with the lender as additional security by a subsequent agreement dated 10.01.2012. ....
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.... manifest that Supreme court has distinguished the same on the facet of discharge of liability emerging from the respective agreements. In light of the nature of agreement/contract between the parties in the aforesaid case, wherein the corporate debtor "has not" entered into a contract to perform the promise, or discharge the liability of borrower in case of his default, it is observed that the definition a contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default, whereas by pledging the shares the corporate debtor vide Pledge Agreement dated 10.01.2012 has never promised to discharge the liability of the third person. It is held that the key words in Section 126 of the Indian Contract Act, 1872 are contract "to perform the promise", or "discharge the liability", of a third person and both the expressions "perform the promise" or "discharge the liability" relate to "a third person". Similarly, in case of Maitreya Joshi (supra), the borrower had pledged the shares as security for repayment of his own debt. In order to bring the contract/agreement within the contours of corporate guarantee, it is essential to exa....
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....as stated in S. Chattanatha Karayalar v The Central Bank of India & Ors., 1965 (3) SCR 318 wherein this court held that: "The principle is well-established that if the transaction is contained in more than one document between the same parties they must be read and interpreted together and they have the same legal effect for all purposes as if they are one document. In Manks v. Whiteley, [1912] 1 Ch. 735 Moulton, L.J. stated : "Where several deeds form part of one transaction and are contemporaneously executed they have the same effect for all purposes such as are relevant to this case as if they were one deed. Each is executed on the faith of all the others being executed also and is intended to speak only as part of the one transaction, and if one is seeking to make equities apply to the parties they must be equities arising out of the transaction as a whole." 59. The Supreme court has held that the substance of a document, is discernible from its terms, rather than the label or its nomenclature, and where several deeds form part of one transaction and are contemporaneously executed they have the same effect for all purposes such as are relevant to this case ....
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.... Rule 28(2) of the CGST Rules. TIME OF SUPPLY AND TAXABLE EVENT: 62. As we have previously held that the execution of corporate guarantee is a service. We shall now make an endevour to determine the time of supply of services and point of taxable event, which is premised on Section 13 of the CGST Act, which reads as under: "Section 13 of the CGST Act governs the time of supply of services. The same is as under: Section 13. Time of Supply of Services.- (1) The liability to pay tax on services shall arise at the time of supply, as determined in accordance with the provisions of this section. (2) The time of supply of services shall be the earliest of the following dates, namely:- (a) the date of issue of invoice by the supplier, if the invoice is issued within the period prescribed under [****] section 31 or the date of receipt of payment, whichever is earlier; or (b) the date of provision of service, if the invoice is not issued within the period prescribed under [****] section 31 or the date of receipt of payment, whichever is earlier; or (c) the date on which the recipient shows the receipt of services in his boo....
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...., be the date on which the tax is paid. (6) The time of supply to the extent it relates to an addition in the value of supply by way of interest, late fee or penalty for delayed payment of any consideration shall be the date on which the supplier receives such addition in value. *Enforced w.e.f. 1st July, 2017. 63. Section 13 of the CGST Act determines the time of supply of services, which is linked to invoice date or payment date, which would not be linked to the actually ending of service. Generally, in GST laws, a service ends when the service agreed under a contract has been completely performed and the contractual obligations are discharged. The corporate guarantee is treated as a service provided by the guarantor (promisor) to the principal debtor/creditor. This service officially begins and fulfills its "time of supply" on the exact date the contract is signed (executed), not over time. The moment the contract is signed, the creditor gains the immediate right to demand payment if a default occurs. Because this legal right materializes instantly on day one, tax levy gets attracted on the execution date. If the borrower defaults down the road and the guara....
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....nder a contract, for a period exceeding three months with periodic payment obligations and includes supply of such services as the Government may, subject to such conditions, as it may, by notification, specify; 66. Does corporate guarantee satisfy the ingredients of continuous supply needs to be deliberated. The break of provisions of Section 2(33) of the CGST Act expose four facets. a) the supply of service is provided continuously or on a recurrent basis, b) Under a Contract, c) the contract extends for more than three months and d) there are periodic payment obligations." 67. In a corporate guarantee, the Holding Company undertakes a continuous obligation to support the subsidiary until the guarantee is invoked, revoked, expires or is discharged. The protection under the umbrella of promise or obligation or protection continuous throughout the validity of guarantee till the guarantee is revoked or invoked. However, the obligation of periodic payment by the Holding Company to subsidiary is absent, since the guarantor-Holding Company does not render supply of service continuously or on recurrent basis with periodic payment obligations, mo....
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....ted, other than where the supply is made through an agent, shall- (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 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 ^2[located in India], by way of providing corporate guarantee to any banking company or financial institution on behalf of the said reci....
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.... in the backdrop of the statutory framework governing delegated legislation and valuation under the CGST Act. The relevant provisions read as under: Section 15(4) "Where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed. Section 15(5) "Notwithstanding anything contained in sub-section (1) or sub-section (4), the value of such supplies as may be notified by the Government on the recommendations of the Council shall be determined in such manner as may be prescribed. Section 2(87) "prescribed" means prescribed by rules made under this Act on the recommendations of the GST Council. Section 164. Power of Government to make rules.- (1) The Government may, on the recommendations of the Council, by notification, make rules for carrying out the provisions of this Act. (2) Without prejudice to the generality of the provisions of sub-section (1), the Government may make rules for all or any of the matters which by this Act are required to be, or may be, prescribed or in respect of which provisions are t....
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....l. Such specially prescribed valuation methodologies prevail in respect of the notified class of supplies and do not operate in conflict with Sections 15(1) or 15(4), both of which continue to operate within their respective fields. Such valuation mechanisms constitute matters of legislative and fiscal policy and the legislature necessarily possesses considerable latitude in devising standards and methodologies for quantification of tax so long as a reasonable nexus exists with the underlying taxable event. The provisions of Sections 15(1), 15(4) and 15(5) must therefore be construed harmoniously so as to give full effect to the statutory valuation framework contemplated under the GST regime." 72. Before the Supreme court, the vires of Section 15(5) and Rule 31A of the CGST Act was also raised by the tax payers. The supreme court has upheld the validity of the provisions of Rule 31A and Section 15(5) of the CGST Act. It is held that the GST valuation framework under Section 15 of the CGST Act operates through a harmonious combination of ordinary transaction-value principles under Section 15(1) of the CGST Act and specialized valuation methodologies prescribed under Sections 15(4....
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....ule 31A merely effectuates and operationalises the valuation mechanism contemplated under Section 15, the Rule squarely falls within the ambit of Section 164. Therefore, even assuming arguendo that Section 15(4) were inapplicable, Rule 31A would nevertheless remain sustainable as a valid exercise of delegated legislation under Section 164. 62.1. It is equally well settled that where the parent enactment confers rulemaking authority together with power to bring such rules into force from a specified earlier date, delegated legislation may validly operate retrospectively. Section 164 of the CGST Act not only empowers the Government to frame rules for carrying out the provisions of the Act but also expressly authorises retrospective operation of such rules within the limits prescribed therein. Consequently, Rule 31A cannot be assailed merely on the ground that the valuation mechanism operates retrospectively. In this regard, reference may be made to the three-Judge Bench decision of this Court in State of Madhya Pradesh v. Tikamdas [(1975) 2 SCC 100], wherein it was held as follows: "5. Let us examine the rival contentions and test the soundness of each briefly. Firs....
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....ction 15(5) before introduction of the Rule is required to be examined. 63.1. The contention of the assessees cannot survive once Rule 31A is found independently traceable to Sections 15(4) and 164. In any event, the Rule is demonstrably founded upon recommendations of the GST Council and therefore satisfies the foundational statutory requirement common to Sections 15(4), 15(5) and 164 alike. Once substantive statutory requirements stand fulfilled and the Rule is otherwise traceable to statutory rule-making power, the precise statutory channel through which delegated authority was exercised cannot by itself invalidate the Rule." 74. As held by the Supreme Court the source of power of determination of valuation of supply of service of corporate guarantee is embedded in the statutory provisions of Section 15(5) read with definition of prescribed under Section 2(87) read with Section 164 of the CGST Act. The genesis of fixation of valuation of supply at 1% lies in 52nd GST Council meeting. The Apex Court has held that Section 15(5) of the CGST Act commences with a non-obstante clause enables the Government, on the recommendations of the Council, to prescribe special valuat....
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....ex Court rendered in case of Edelweiss Financial Services (supra), since the decision in the said case has been rendered under the erstwhile service tax regime where consideration was mandatory. Under Section 65B(44) of the Finance Act, 1994, the element of consideration was intrinsically ingrained into the definition of "service," meaning a corporate guarantee extended without consideration could not be taxed-a strict statutory context that does not apply to the current framework. Unlike the Finance Act, 1994, the CGST Act, which contains Section 7(1)(c) read with Schedule I to the CGST Act, a specific deeming fiction that taxes certain supplies between related persons even in the absence of consideration. 77. There can be no cavil on the proposition of law, as enunciated by the Supreme Court in the case of Arthur Paul Benthall (supra), whereby the Supreme Court has clarified the contextual construction of the meaning of two words in two consecutive provisions. However, such interpretation cannot be adopted in the statutory provisions of Section 7, since no such exigency arises. 78. In the case of Shri Vikram Cotton Mills and Another (supra), the Supreme Court, while examini....
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....rivate Limited (supra) will also not come to the rescue of the petitioners, as the Bombay High Court has examined the issue and the order/show-cause notice issued under Section 74(1) of the CGST Act, read with Rule 142(1) of the CGST Rules. While examining the dispute between the respective parties, which related to an adverse arbitral award and enforcement actions initiated against Tata Sons, and which ultimately ended in a settlement with Docomo, the Revenue sought to tax the same as an import of services by Tata Sons since Docomo agreed to tolerate the breach of contract by Tata Sons and agreed to do an act by withdrawing all enforcement actions. The Bombay High Court, while placing reliance on the Circular dated 03.08.2022 has clarified the taxability under Entry 5(e) of Section 7 of the CGST Act, examined the issue. The Bombay High Court has held that DOCOMO has rendered the supply vide its act of tolerance of the contractual defaults by TSPL, along with agreeing to the obligation to refrain from initiating any proceedings, and the same appears to squarely fall within the ambit of the definition of 'supply' as envisaged under section 7(1A) of the CGST Act, 2017, and the damage....
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....Delhi High Court, while examining the issue of the fee received by the Central Electricity Regulatory Commission under the Electricity Act, 2003 and the levy of tax under the GST Acts, after considering the provisions of Section 7, Schedule II, and Schedule III, as well as the definitions of "business" and "consideration" under Sections 2(17) and 2(31) of the CGST Act, has held that a power of regulation which stands statutorily vested in a commission cannot fall within the ambit of any of the activities enumerated in Section 2(17)(a) of the CGST Act. 86. The Delhi High Court has also considered the provisions of Section 2(17)(i) of the CGST Act, which encompass activities or transactions undertaken by the Central or State Governments or a local authority, and has concluded that the said clause would not have any application since a commission is constituted under the Electricity Act and cannot be equated with the Central or State Governments. 87. The Delhi High Court has also considered the definition of consideration and has held that the same speaks of payment made in response to or for the inducement of the supply of goods. In the cases before us, the corporate guarantees....
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....in Rule 2(l) of the Rules, 2004 (for short, "the Rules, 2004). The Bombay High Court has considered the guidelines issued by the OECD apropos VAT and has observed that though India is not a signatory to the OECD model, it adopts the same model of destination-based consumption tax, which is in line with international norms, and hence the OECD guidelines can be safely considered. We agree with the observations made by the Bombay High Court relating to the OECD guidelines; however, though the guidelines can be safely considered, the Revenue cannot be compelled to adopt the wisdom of the OECD guidelines, which would be against its interest and also would not apply to the taxing fabric of India. 91. In the case of Karvy Stock Broking Ltd. (supra), the Supreme Court, with regard to the Notifications, Circulars, Guidelines, and orders which are issued under sub-section (2) of Section 66 of the Finance Act, will not remotely apply to the case of the present writ petitioners. While assailing the authority and competence of the GST Council in issuing the circular, reliance is placed on the decision of the Delhi High Court in the case of Faridabad Iron and Steel Traders Association (supra)....
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....e CGST Act, and the said decision will not apply to corporate guarantees, which are made taxable under the GST regime. 93. The petitioners have also placed reliance on the decision of the Supreme Court in the case of Govind Saran Ganga Saran (supra). The Supreme Court has laid down the four essential components of a taxing statute: first, the taxable event; second, the person on whom the tax is levied; third, the measure of tax; and fourth, the rate of tax. These components must be clear and unambiguous in the statute itself, and any vagueness in the measure or the rate would make the levy unconstitutional and invalid. This principle has been consistently followed by the Supreme Court and other High Courts, and the same straightjacket formula applies to the present case, wherein the corporate guarantee without consideration is being taxed under the impugned circular and the rules, which are ultra vires the provisions of the CGST Act itself. We find that the observations of the Supreme Court will squarely apply to the tax liability and taxability of corporate guarantees, which have been subjected to a threadbare examination of the various provisions of the statutes, as mentioned ....
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.... Court of Appeal and also Australian GST Rulings. It is a settled principle of law that while foreign judgments can guide courts and aid in resolving constitutional or statutory impasses, their ratio decidendi cannot be adopted if it overshadows the fundamental principles enshrined in the Indian Constitution. The practice of judicial borrowing demands careful scrutiny to ensure that foreign legal doctrines align seamlessly with domestic principles and India's diverse social fabric. We agree with the submissions advanced by learned ASG in this regard. The decision of the United States Court of Appeals, Seventh Circuit in the case of Centel Communications Company will not apply to the statutory scheme of GST Regime more particularly the corporate guarantees, but pertains to pertains to taxability of employees stock ownership plan provided by an employer to an employee. 99. Similarly, the ruling issued by the Australian GST authorities cannot come to the rescue of the petitioners, since the GST Regime promulgated and adopted by India operates in different realm, and it encompasses various services including corporate guarantee within taxably reach. Hence a taxing policy adopted by ....
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....abour and services. Sections 14 and 15 of the Central Sales Tax Act would also be applicable to the deemed sales resulting from transfer of property in goods involved in the execution of a works contract. The absence of any amendment in the definition of sale contained in Section 2(g) of the Central Sales Tax Act, 1956 so as to include transfer of property in goods involved in execution of a works contract, therefore, does not in any way affect the applicability of Sections 3, 4 and 5 and Sections 14 and 15 of the Central Sales Tax Act to such transfers. 67. In State of Bombay v. Pandurang Vinayak [(1953) 1 SCC 425 : AIR 1953 SC 244 : 1953 Cri LJ 1094] at para 5 it was held: (AIR p. 246) "5. When a statute enacts that something shall be deemed to have been done, which in fact and truth was not done, the Court is entitled and bound to ascertain for what purposes and between what persons the statutory fiction is to be resorted to and full effect must be given to the statutory fiction and it should be carried to its logical conclusion." 68. A legal fiction can be utilised in several ways wherein the word "deemed" is used. However, the mere use of the word "d....
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....e India Ltd. v. CCE [(2004) 3 SCC 48 : (2003) 9 Scale 720] Scale : SCC para 58.) 71. These decisions, therefore, show that whenever a legal fiction is created by a statute, the same shall be given full effect." 103. The noteworthy observation to be applied, is that "A deeming provision might be made to include what is obvious or what is uncertain or to impose for the purpose of a statute an artificial construction of a word or phrase that would not otherwise prevail, but in each case, it would be a question as to with what object the legislature has made such a deeming provision", and that "whenever a legal fiction is created by a statute, the same shall be given full effect. Thus, the quintessential feature for applying or supplying a deeming fiction in statute is the element of uncertainty involved in effective working of the statute. The underlying object behind supplying the deeming fiction of 1% is required to be examined keeping in mind the factum of un-ascertainable value of corporate guarantee. 104. As previously held by us the valuation under Rule 28(2) of the CGST Rules of corporate guarantee emanates from the provisions of Section 15(5) read with definitio....
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....ng the transaction revenue-neutral, which is akin to proviso to Rule 28(2) of the CGST Rules. 105. However, Rule 28(2) of the CGST Rules, which begins with non-obstante clause completely bypasses this flexibility of stipulated under Rule 28(1) of the CGST Rules, and the taxable value for a corporate guarantee is mandated to be deemed at 1% of the total guarantee amount offered, or the actual consideration, whichever is higher. This flat 1% GST valuation of corporate guarantee stands in stark contrast to Rule 10TD of the Safe Harbour provisions of Income Tax Rules, 1962, which albeit, mandates a minimum 1% commission on the guaranteed amount for eligible international corporate guarantees, but is completely optional for taxpayers, since they serve as a simplification mechanism designed to provide tax certainty and avoid Transfer Pricing (TP) litigation. To the contrary, the same mechanism or option does not exist under Rule 28(2) of the CGST Rules. 106. The GST Council in its meeting has acknowledged that an arm's-length corporate guarantee fee ranges between '0.5% and 3%'. Rule 28 contains the sentence "shall be deemed to be one per cent of the amount of such guarantee offere....
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....insofar as loading, unloading and handling charges are concerned. The proviso now stipulates 1% of the free on board value of the goods irrespective of the fact whether actual cost is ascertainable or not. Having referred to the scheme of Section 14 of the Rules in detail above, this cannot be countenanced. This proviso, introduces fiction as far as addition of cost of loading, unloading and handling charges is concerned even in those cases where actual cost paid on such an account is available and ascertainable. Obviously, it is contrary to the provisions of Section 14 and would clearly be ultravires this provision. We are also of the opinion that when the actual charges paid are available and ascertainable, introducing a fiction for arriving at the purported cost of loading, unloading and handling charges is clearly arbitrary with no nexus with the objectives sought to be achieved. On the contrary, it goes against the objective behind Section 14 namely to accept the actual cost paid or payable and even in the absence thereof to arrive at the cost which is most proximate to the actual cost. Addition of 1% of free on board value is thus, in the circumstance, clearly arbitrary and i....
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.... No.11/2017 dated 28.06.2017, prescribing such liability by providing standard rate of deduction, has held that the deeming fiction ordered the Paragraph No. 2 of Notification dated 28.06.2017 and the parallel State Tax Notification to be read down to the effect that the deeming fiction of 1/3rd will not be mandatory in nature, and it will only be available at the option of the taxable person in cases where the actual value of land or undivided share in land is not ascertainable. The directions issued by the Division Bench are premised on the following observations. "109 Thus, the prescription under Section 15(5) of the CGST Act has to be by rules and not by notification. Be that as it may, wherever a delegated legislation is challenged as being ultra-vires the provisions of the CGST Act as well as violating Article 14 of the Constitution of India, the same cannot be defended merely on the ground that the Government had competence to issue such delegated piece of legislation. Even if it is presumed that the Government had the competence to fix a deemed value for supplies, if the deeming fiction is found to be arbitrary and contrary to the scheme of the statute, then it can....
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....1 reply of the GST Rules are relevant and read as under: "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. 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: Provided that in the case of supply of services, the supplier may opt for this rule, ignoring rule 30." xxx xxx 115. Thus, the revenue is not remediless even in a case where it doubts the correctness of the value assigned in the contract towards construction. If it is established that such value was not the sole consideration for the service, then resort can be had to the valuati....
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....ult to arrive at the open market value for supply of services of corporate guarantees, and in order to arrive at fixed rate of 1%, the range of commission/charge between 0.5% to 3% is considered by adopting safe harbour rule. The GST has also taken into account that there may be cases, where due to long standing relationship of the banks/financial institutions with the company, there would be absence of any charge. Thus, the GST council was conscious of the facts about the uncertain/absence of nature/rate of charges on guarantee, and accordingly has fixed the minimum acceptable commission/fee at 1%, which has been introduced in Rule 28(2) of the CGST Rules. In the provision of Rule 28(2) of the CGST Rules, after deeming fiction of one per cent per annum, expression "actual consideration" is separated by word "or", and followed by "whichever is higher". The fixation of benchmark of value of corporate guarantee at 1 per cent, even if the "actual consideration" may be lower than 1 per cent appears to be unreasonable and arbitrary. The Supreme Court in the case of Wipro Limited (supra), has clarified that if the actual values are not ascertainable, a uniform charge can be applied. This....
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....ichever is higher" is arbitrary and hit by Article 14 and 19(1)(g), the issue which falls for further deliberation is as to whether the entire Rule 28(2) of the CGST Rules or "valuation of 1%" or expression "whichever is higher needs to be struck down or read down. In this context, reference to the decision of the Supreme Court full bench decision in case of Authorised Officer, Central Bank Of India Versus Shanmugavelu 2024 (6) SCC 641, is necessitated: "93. The principle of "reading down" a provision refers to a legal interpretation approach where a court, while examining the validity of a statute, attempts to give a narrowed or restricted meaning to a particular provision in order to uphold its constitutionality. This principle is rooted in the idea that courts should make every effort to preserve the validity of legislation and should only declare a law invalid as a last resort. 94. When a court encounters a provision that, if interpreted according to its plain and literal meaning, might lead to constitutional or legal issues, the court may opt to read down the provision. Reading down involves construing the language of the provision in a manner that limits its....
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.... equally helps to save an Act but also the cause of attack on the Act. Here the courts have to play a cautious role of weeding out the wild from the crop, of course, without infringing the Constitution. For doing this, the courts have taken help from the Preamble, Objects, the scheme of the Act, its historical background, the purpose for enacting such a provision, the mischief, if any which existed, which is sought to be eliminated." (Emphasis supplied) 98. A similar view was reiterated by this Court in its decision in Calcutta Gujarati Education Society & Anr. v. Calcutta Municipal Corpn. & Ors. reported in (2003) 10 SCC 533, wherein this Court observed that the rule of "Reading Down" is only for the limited purpose of making a provision workable so as to fulfil the purpose and object of the statute. The relevant observations read as under: - "35. The rule of "reading down " a provision of law is now well recognised. It is a rule of harmonious construction in a different name. It is resorted to smoothen the crudities or ironing out the creases found in a statute to make it workable. In the garb of "reading down", however, it is not open to read words and....
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....ACTIVE EFFECT OF RULE 28(2) OF THE CGST RULES: 111. In the present batch of petitions, it is noticed by us that the corporate guarantees are executed ranging from the year 2012 to 2023, thus before the GST regime. Rule 28(2) of the CGST Rules was introduced on 26.10.2023 vide Notification No.52/2023 dated 26.10.2023, whereas the word "per annum" was introduced vide Notification dated 10.07.2024 w.e.f. 26.10.2023. The revenue has also imposed the levy by adopting the valuation of 1% retroactively on the corporate guarantees which were executed prior to GST regime, and also prior to 26.10.2023. In order to test the effect of prescription of 1%, is retrospective or retroactive, we may refer to the decision of full bench of the Supreme Court in case of M/s. Newtech Promoters And Developers Pvt. Ltd. Vs. State of Uttar Pradesh and Ors., 2021 (18) SCC 1, wherein the Apex Court has elucidated the distinction of retrospective and retroactive nature of a statute. "48 The distinction between retrospective and retroactive has been explained by this Court in Jay Mahakali Rolling Mills Vs. Union of India and Others, 2007(12) SCC 198 which reads as under:- "8. "Retrospective....
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....is clear that the statute is not retrospective merely because it affects existing rights or its retrospection because a part of the requisites for its action is drawn from a time antecedent to its passing, at the same time, retroactive statute means a statute which creates a new obligation on transactions or considerations already passed or destroys or impairs vested rights." 112. Thus, as per the decision of the Apex Court the introduction of Rule 28(2) of the CGST Rules w.e.f 26.10.2023 is retroactive, as it applies to those corporate guarantees which are executed prior to its introduction. "Nova constitutio futuris formam imponere debet, non praeteritis", which means a new law should be prospective, regulating future conduct rather than altering past transactions. It is a foundational principle of statutory interpretation and jurisprudence that laws should apply prospectively rather than retroactively, ensuring fairness and legal predictability so that citizens can plan actions securely, trusting that the law today governs today. However, the retroactive and retrospective framing a law though occasionally becomes indispensable. The Constitution Bench of Supreme Court in the c....
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....ts, the court is duty-bound to examine the issue by taking into account the entire matrix of surrounding facts, circumstances, and the specific context of the tax levy. Rule 28(2) imposes a retrospective levy of a new tax for the period during which no levy existed as per the law. The taxable event as previously discussed resulting into in levy travels back to pre-GST era. The retroactive effect impinges the fundamental rights under Article 14 and 19(1)(g), since the levy is unduly harsh and unfair, as taxpayers arrange their financial affairs based on the prevailing law. It imposes an unexpected financial burden without any fault on the assessee, disrupts settled legal and financial implication, more particularly when the corporate guarantee, may stretch for long period of time. Thus, the imposition of levy of GST on 1% valuation per annum to the corporate guarantee prior to the introduction of Rule 28(2) of the CGST Rules w.e.f 26.10.2023 is harsh and unfair to the tax payers. The collection of tax for the period prior to introduction of Rule 28(2), will also be hit by the doctrine of unjust enrichment, since the revenue had no legal basis or authority to levy GST on corporate gu....
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....the enactment. The challenge to the same is misconceived." 117. As explicated by us, the source of levy is imbued in the statutory provisions, and as held by the Apex Court the Circulars merely operationalise and clarify the statutory framework, and FAQ incorporated there is only a guide to understand the provisions and would not confer any independent right contrary to the enactment. Since, we have explained the working of the statutory provisions, by adopting the rule of harmonious constructions, and have read down the expression "whichever is higher", the same would alter the FAQs of the Circulars. CHALLENGE ON DISCRIMINATION IN REFERENCE TO CIRCULARS : 118. The petitioners have also attempted to carve out a case of discrimination apropos exemption granted to services supplied by Central Government, State Government, Union Territory to their undertakings or PSU's by way of guaranteeing loans taken by such undertakings vide Notification No. 14/2018 dated 26.07.2018. Section 11 of the CGST Act, empowers the government to grant exemption from tax. This power is applied to the ensure that public sector financing remains cost-effective. The law recognizes permissible differe....
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....part of Section 74 of the Act is extracted as under: "SECTION 74 : Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any wilful-misstatement or suppression of facts (1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice. Xxxx xxxx Explanation 2.-For the purposes of this Act, the expression "suppression" shall mean non-declaration of facts or information which a taxable person is required to declare in the return, statement, report or any othe....
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....berately to evade payment of duty. When facts were known to both the parties, the omission by one to do what he might have done and not that he must have done, would not render it suppression. It is settled law that mere failure to declare does not amount to willful suppression. There must be some positive act from the side of the assessee to find willful suppression. Therefore, in view of our findings made herein above that there was no deliberate intention on the part of the appellant not to disclose the correct information or to evade payment of duty, it was not open to the Central Excise Officer to proceed to recover duties in the manner indicated in the proviso to Section 11A of the Act". 16 In Collector of Central Excise V/s. H.M.M. Ltd., 1995 Supp (3) SCC 322, this Court held that mere non-disclosure of certain items assessable to duty does not tantamount to the mala fides elucidated in the proviso to Section 11A(1) of the Central Excise Act, 1944. It enunciated the principle in the following way: - "The mere non-declaration of the waste/by-product in their classification list cannot establish any wilful withholding of vital information for the purpose of e....