The Bombay High Court ruled that corporate guarantees issued by a parent company to its subsidiaries without any fee or consideration cannot be treated as a taxable supply. The case involved D.P. Jain & Co. Infrastructure Pvt. Ltd., which provided guarantees to banks for loans to its subsidiaries in Tamil Nadu and Gujarat without receiving any fee. Although the Maharashtra State Tax authorities had previously investigated and found no GST liability, the Directorate General of GST Intelligence initiated new proceedings, arguing that such guarantees should be taxed based on a Circular dated 27.10.2023 and Rule 28(2) of the CGST Rules.
The central issue was whether these guarantees could be considered a taxable supply of service under the CGST Act. The Court determined that GST could only be levied when there is a "supply" of goods or services for consideration. Since the guarantees were issued without any consideration, the transaction did not qualify as taxable. The Court highlighted that corporate guarantees are typically internal financial support mechanisms, unlike bank guarantees issued for profit, and thus differ in commercial character.
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Referring to a Supreme Court judgment, the Court concluded that issuing corporate guarantees without consideration does not constitute a taxable service. Nevertheless, the Court upheld Rule 28(2) of the CGST Rules, asserting that fiscal legislation is presumed valid, and courts should limit interference in taxation policy unless there's a clear constitutional breach.
Order Date - 06 May 2026
Parties: D.P. Jain & Co. Infrastructure Pvt. Ltd. Vs Union of India, Directorate General of GST Intelligence, Coimbatore Zonal Unit, CGST & Central Excise Nagpur-I Commissionerate and State Tax Authorities, Maharashtra
Facts -
- D.P. Jain & Co. Infrastructure Pvt. Ltd. was engaged in highway construction projects and issued corporate guarantees to banks for loans granted to its subsidiary companies executing infrastructure projects in Tamil Nadu and Gujarat.
- The guarantees were given to secure huge project loans from State Bank of India and Bank of Maharashtra, but the guarantee deeds specifically stated that the petitioner would not receive any fee, commission, security, or consideration for issuing such guarantees.
- Earlier, Maharashtra State Tax authorities had already investigated the petitioner’s records from 2017–18 to 2022–23 and did not raise any GST liability on these corporate guarantees. Later, however, DGGI initiated fresh proceedings alleging non-payment of GST on the guarantees.
- The GST department relied upon Circular dated 27.10.2023 and Rule 28(2) of the CGST Rules to argue that even guarantees issued without consideration between related parties amount to taxable supply of services and attract GST valuation at 1% of the guaranteed amount.
Issue -
- Whether a corporate guarantee issued by a holding company to banks on behalf of its subsidiaries, without any consideration, can be treated as a taxable supply of service under the CGST Act.
Order -
- The Court observed that GST can be levied only when there is a “supply” of goods or services for consideration. Since the petitioner had expressly declared in all guarantee deeds that it neither received nor would receive any commission or fee, the essential element of consideration was absent. Therefore, the transaction could not automatically qualify as a taxable service.
- The Court explained that corporate guarantees issued by parent companies are generally in-house financial support mechanisms meant to safeguard subsidiaries and group concerns. Unlike bank guarantees, such guarantees are not issued in the ordinary course of business to customers for profit and are therefore fundamentally different in commercial character.
- Relying heavily on the Supreme Court judgment in Commissioner of CGST & Central Excise v. Edelweiss Financial Services Ltd., the Court held that issuance of corporate guarantees without consideration does not amount to a taxable service. The Court emphasized that both “service” and “consideration” must coexist for taxability to arise under GST law.
- However, the Court refused to strike down Rule 28(2) of the CGST Rules as unconstitutional. It held that fiscal legislation enjoys a strong presumption of validity and courts should exercise limited interference in taxation policy matters unless there is a clear constitutional violation.
