GST Not Leviable on Corporate Guarantee Without Consideration: Bombay High Court's Landmark Ruling

Overview of the Judgment

In a significant ruling that reshapes the GST landscape around inter-corporate financial arrangements, the Bombay High Court, in D P Jain & Co. Infrastructure Private Limited vs Union of India & Ors., delivered a decisive verdict holding that a holding company's execution of a corporate guarantee in favour of its subsidiary — without receiving any consideration — does not constitute a "supply" or "supply of service" within the meaning of Section 9 of the Central Goods and Services Tax Act, 2017 (CGST Act). The Court quashed both the summons dated July 20, 2023 and Show Cause Notice No. 02/2025-GST dated January 28, 2025, offering significant relief to holding companies across India that routinely extend financial support to their group entities.

Background and Facts of the Case

M/s. D P Jain & Co. Infrastructure Private Limited (the Petitioner) is a company operating in the infrastructure sector, primarily engaged in the construction of National and State Highways. As part of its group structure, the Petitioner extended corporate guarantees to State Bank of India and Bank of Maharashtra on behalf of three subsidiary/group companies:

  • DPJ Pollachi HAM Project Private Limited — for a term loan of Rs. 310.63 crores
  • D P Jain Bangalore Chennai Expressways Private Limited — for a term loan of Rs. 507.36 crores
  • D P Jain TOT Toll Roads Private Limited — for a term loan of Rs. 1196 crores

A critical feature common to all three corporate guarantee deeds was an explicit contractual clause affirming that the Petitioner had not received, and would not receive, any security, fee, commission, or other form of consideration from the borrowing entities in exchange for providing the guarantee.

Despite this, the Union of India and GST Authorities (the Respondents) initiated enforcement action against the Petitioner, contending that GST was payable on the corporate guarantee "services" allegedly rendered. A summons was issued on July 20, 2023, followed by Show Cause Notice No. 02/2025-GST dated January 28, 2025, demanding GST on the value of the guarantees provided.

The Respondents anchored their proceedings on:

  • Notification No. 52/2023-Central Tax dated October 26, 2023, which inserted Rule 28(2) into the CGST Rules, 2017
  • Circular No. 204/16/2023-GST dated October 27, 2023, which clarified that corporate guarantees furnished by a holding company to its subsidiary — even absent consideration — would constitute a taxable supply of services

Petitioner's Contentions

The Petitioner challenged the GST proceedings on multiple grounds:

  • A corporate guarantee, by its very nature, is an actionable claim and falls squarely within Schedule III of the CGST Act, which explicitly excludes actionable claims from the ambit of GST
  • In the complete absence of consideration, no GST liability can be fastened upon the Petitioner, since Section 7 of the CGST Act mandates consideration as a foundational element of a taxable supply
  • A circular or notification cannot override the parent statute — the attempt to impose tax liability through Circular No. 204/16/2023-GST in the absence of statutory backing was legally impermissible
  • Rule 28(2) inserted vide Notification No. 52/2023-Central Tax and subsequently amended by Notification No. 12/2024-Central Tax was ultra vires the CGST Act, 2017, and deserved to be struck down

Respondents' Contentions

The Respondents defended their position by asserting:

  • Corporate guarantees extended between related persons constitute a taxable supply of services, and their value must be determined under Rule 28(1)(c) read with Rules 30 and 31 of the CGST Rules, 2017
  • Since corporate guarantee services are not available in an open market, the deeming valuation of 1% per annum on the guaranteed amount — as prescribed under Rule 28(2) — was a justified and legally sound approach
  • The insertion of Rule 28(2) was a valid exercise of delegated legislative power and could not be struck down on the ground of ultra vires

Issues Before the Court