In a significant ruling with far-reaching implications for group entities and infrastructure companies, the Nagpur Bench of the Bombay High Court in M/s D.P. Jain & Co. Infrastructure Pvt. Ltd. v. Union of India examined the contentious issue of GST applicability on corporate guarantees issued by holding companies in favour of subsidiaries. The judgment, delivered on 6 May 2026, addresses the validity of departmental proceedings initiated pursuant to CBIC Circular No. 204/16/2023 and Rule 28(2) of the CGST Rules.
Background of the Dispute
The petitioner, D.P. Jain & Co. Infrastructure Pvt. Ltd., had furnished corporate guarantees to banks on behalf of its subsidiary and group companies for securing large infrastructure project loans. The guarantees were issued in connection with highway and toll road projects under HAM and TOT models. Importantly, the guarantee deeds expressly recorded that the petitioner neither received nor would receive any commission, fee, or consideration for issuing such guarantees.
Subsequently, the Directorate General of GST Intelligence initiated proceedings alleging non-payment of GST on the corporate guarantees. The proceedings were founded on CBIC Circular No. 204/16/2023 dated 27 October 2023, which clarified that provision of corporate guarantees by holding companies to subsidiaries constitutes a taxable supply of service, even if made without consideration. The petitioner challenged both the circular and the consequential proceedings.
Key Legal Issue
The central issue before the Court was whether issuance of a corporate guarantee by a holding company to secure loans for its subsidiaries, without any consideration, amounts to a “supply of service” liable to GST under the CGST Act.
The petitioner argued that corporate guarantees are in the nature of actionable claims and contingent contracts, and therefore fall outside the scope of taxable supply. It was further contended that tax liability cannot be created merely through a circular and that, in absence of consideration, the essential ingredients of “supply” under Section 7 of the CGST Act were not satisfied.
Court’s Analysis
The Court undertook an elaborate examination of the concepts of “consideration”, “service”, “supply”, and “related persons” under the CGST framework. It observed that a corporate guarantee is essentially an in-house financial support arrangement intended to safeguard the financial health of associate enterprises and facilitate funding for subsidiaries. Unlike bank guarantees, corporate guarantees are not ordinarily issued in the course of business to customers at large.
A crucial aspect noted by the Court was the absence of any consideration flowing to the guarantor company. The guarantee deeds specifically declared that no fee, commission, or remuneration was payable for furnishing the guarantees.
The Court placed substantial reliance on the Supreme Court’s decision in Commissioner of CGST & Central Excise v. Edelweiss Financial Services Ltd., where it was held under the service tax regime that issuance of corporate guarantees without consideration does not constitute a taxable service. The Supreme Court had emphasized that taxability requires both the existence of a service provider and a flow of consideration.
Applying the same principle, the Bombay High Court held that in absence of consideration, the issuance of corporate guarantees by the petitioner could not be treated as a taxable supply of service under GST. The Court categorically observed that the guarantees were merely contingent arrangements enforceable only upon default by the borrower and did not involve any commercial supply.
Treatment of Rule 28(2)
While the Court accepted the petitioner’s challenge to the taxability of the impugned guarantees, it declined to strike down Rule 28(2) of the CGST Rules on constitutional grounds. The Court reiterated settled jurisprudence that fiscal legislation enjoys a strong presumption of constitutionality and courts ordinarily exercise restraint in matters involving economic and tax policy.
Thus, although the Court quashed the proceedings and show cause notice issued against the petitioner, it stopped short of declaring Rule 28(2) ultra vires.
Implications of the Judgment
The ruling provides substantial relief to corporate groups that had issued guarantees to subsidiaries without charging consideration, particularly for periods prior to the insertion of Rule 28(2). The judgment reinforces the principle that GST cannot be levied in absence of consideration unless specifically covered within Schedule I deeming provisions.
At the same time, the Court’s refusal to invalidate Rule 28(2) indicates that the controversy may continue for guarantees issued after 26 October 2023, especially where valuation provisions now deem a taxable value of 1% per annum of the guaranteed amount.
Given the divergence emerging across jurisdictions and the substantial revenue implications, the issue appears poised for eventual authoritative determination by the Supreme Court under the GST regime.
