Bombay High Court on GST and Corporate Guarantees: No Tax Without Consideration

Background of the Writ Petition

The Bombay High Court, in D P Jain & Co. Infrastructure Private Limited Vs Union of India, examined whether corporate guarantees issued by a holding company for loans granted to its subsidiaries and related entities attract GST, especially when no consideration is charged. The Court also considered the constitutional validity of Rule 28(2) of the CGST Rules and the legality of two key GST circulars that sought to tax such guarantees.

The assessee, M/s D.P. Jain & Co. Infrastructure Pvt. Ltd., is in the business of constructing National and State Highways under projects awarded by authorities such as the National Highways Authority of India and State corporations. To facilitate project financing for its group entities, the assessee provided corporate guarantees to banks.

Between 2020 and 2022, the assessee executed three corporate guarantees in favour of State Bank of India and Bank of Maharashtra for substantial loan facilities granted to its related companies. Each of these guarantees specifically recorded that the assessee:

  • had not received any fee, security, commission, or consideration from the borrowers; and
  • would not receive any such amount in future for providing the guarantees.

These guarantees later became the subject of investigation and demand proceedings under GST, culminating in summons and a show cause notice alleging non-payment of GST on “corporate guarantee services”.

Details of the Corporate Guarantees

First Guarantee – State Bank of India (DPJ Pollachi HAM Project Private Limited)

  • Sanction Letter: Dated 10.09.2020
  • Facility: Term loan of Rs. 310.63 crores
  • Borrower: DPJ Pollachi HAM Project Private Limited
  • Project: Upgradation of road from Madathukulam to Pollachi in Tamil Nadu under NHAI HAM model
  • Condition: Clause 33 of the sanction required a corporate guarantee from the assessee to meet cost overrun or shortfall for the full tenure of the loan.
  • Security Structure: A Security Trustee Agreement dated 03.11.2020 was executed appointing SBICAP Trustee Company Ltd. as Security Trustee for the lender.
  • Corporate Guarantee Deed: Executed 03.11.2020 between the assessee, State Bank of India, and SBICAP Trustee Company Ltd.
  • Key Clause: Clause 13 explicitly stated that the corporate guarantor (the assessee) “has not received and shall not receive any security, fee, commission, or any other consideration from the borrower.”

Second Guarantee – Bank of Maharashtra (D P Jain Bangalore Chennai Expressways Private Limited)

  • Sanction Letter: Dated 29.07.2022
  • Facility: Term loan of Rs. 507.36 crores
  • Borrower: D P Jain Bangalore Chennai Expressways Private Limited
  • Project: Four-lane road from Arrakonam to Kanchipuram, Tamil Nadu, under NHAI HAM model
  • Security Structure: Catalyst Trusteeship Ltd. appointed as Security Trustee under Clause 43 of the sanction letter, to hold security including the corporate guarantee.
  • Corporate Guarantee Deed: Executed 08.08.2022
  • Key Clause: Clause 9 reiterated that the assessee “has not received and shall not receive any security, fee, commission, or any other consideration from the borrower for giving this Guarantee.”

Third Guarantee – Bank of Maharashtra (D P Jain TOT Toll Roads Private Limited)

  • Sanction Letter: Dated 24.09.2021
  • Facility: Term loan of Rs. 1196 crores
  • Borrower: D P Jain TOT Toll Roads Private Limited
  • Project: Tolling, Operation, Maintenance and Transfer of Palanpur-Radhanpur-Samkhiyali section of NH-27 in Gujarat under TOT model
  • Condition: Clause (g) mandated a corporate guarantee from the assessee.
  • Security Structure: Security Trustee Agreement dated 28.12.2021 with Catalyst Trusteeship Ltd. as Security Trustee.
  • Corporate Guarantee Deed: Executed 28.12.2021
  • Key Clause: Clause 9 again confirmed that the assessee “has not received and shall not receive any security, fee, commission, or any other consideration from the borrower for giving the Guarantee.”

All three guarantees were executed only to support the borrowing capacity and financial viability of the assessee’s group entities; the assessee was not charging any price for these guarantees.

Prior State GST Investigation and Subsequent Central Action

The Assistant Commissioner of State Tax (Respondent No. 5) had already conducted a detailed investigation covering FY 2017-18 to 2022-23. During this exercise:

  • The assessee produced financial statements, concession agreements, GST annual returns and related records.
  • The legal and documentation expenses for executing corporate guarantees were duly reflected in the accounts.
  • Despite full scrutiny of books and balance sheets, no GST demand was raised on the corporate guarantees by the State authorities.

Subsequently, the Directorate General of GST Intelligence (DGGI) (Respondent No. 2) issued a summons dated 20.07.2023, alleging non-payment of GST, without specifying:

  • the precise nature of investigation,
  • the period involved, or
  • the specific legal provisions invoked.

The assessee responded vide letter dated 25.09.2023, pointing out that Respondent No. 5 had already undertaken an investigation for the same period.