Gujarat High Court Upholds GST on Corporate Guarantees but Restricts Its Valuation and Retrospective Application

Introduction

The Gujarat High Court’s decision in Torrent Power Ltd. v. Union of India is a landmark judgment on the GST implications of corporate guarantees issued by holding companies for their subsidiaries.

The Court did not accept the broad contention that a corporate guarantee given without consideration falls completely outside GST. It held that such a guarantee constitutes a supply of service between related persons under Section 7(1)(c), read with Entry 2 of Schedule I to the Central Goods and Services Tax Act, 2017.

At the same time, the Court granted substantial relief to taxpayers by:

• prohibiting the application of Rule 28(2) for periods before 26 October 2023;

• reading down the expression “whichever is higher” appearing in Rule 28(2);

• recognising actual guarantee commission as a permissible basis of valuation;

• quashing proceedings initiated under Section 74;

• directing the refund or adjustment of excess GST already deposited; and

• setting aside the relevant CBIC circulars to the extent they were inconsistent with the judgment.

The decision, therefore, validates the levy in principle but significantly restricts its valuation and retrospective enforcement.

1. Background of the dispute

A group of petitions was filed before the Gujarat High Court by holding companies that had issued corporate guarantees in favour of banks and financial institutions to secure loans or credit facilities granted to their subsidiaries.

In several cases:

• no guarantee commission was charged by the holding company;

• guarantees had been executed before the introduction of GST;

• certain guarantees had been issued as far back as 2010, 2011 or 2012;

• the guarantees continued after the introduction of GST;

• the department sought to value the guarantee service at 1% of the guaranteed amount per annum; and

• notices and orders were issued under Section 74 by alleging suppression of facts or an intention to evade tax.

The petitioners challenged:

• the taxability of corporate guarantees without consideration;

• the constitutional validity of Rule 28(2);

• the validity of Section 15(4);

• the 1% per annum valuation mechanism;

• the application of Rule 28(2) to guarantees executed before 26 October 2023;

• CBIC Circular No. 204/16/2023-GST dated 27 October 2023;

• CBIC Circular No. 225/19/2024-GST dated 11 July 2024; and

• the invocation of the extended limitation provisions under Section 74.

2. Relevant GST provisions

Section 7: Scope of supply

Section 7(1)(a) generally covers supplies made for consideration in the course or furtherance of business.

Section 7(1)(c), however, includes activities specified in Schedule I even where they are undertaken without consideration.

Entry 2 of Schedule I

Entry 2 covers:

Supply of goods or services or both between related persons or distinct persons, as specified in Section 25, when made in the course or furtherance of business.

Thus, where a holding company and subsidiary are related persons, the absence of consideration does not, by itself, exclude the transaction from GST.

Section 15(4)

Where the value of a supply cannot be determined under Section 15(1), it must be determined in the prescribed manner.

Rule 28(2)

Rule 28(2), introduced with effect from 26 October 2023, provided a specific valuation mechanism for corporate guarantees supplied by a person to a related person.

Broadly, the value was deemed to be:

• 1% of the amount of the guarantee offered per annum; or

• the actual consideration,

whichever was higher.

Where the recipient was eligible for full input tax credit, the value declared in the invoice was deemed to be the value of the supply.

3. What is a corporate guarantee?

A corporate guarantee is an assurance given by one company, usually a holding company, to a bank or financial institution in respect of the repayment obligations of another company, usually its subsidiary.

The High Court described it as a tripartite arrangement involving:

• the subsidiary or principal debtor;

• the creditor bank or financial institution; and

• the holding company acting as guarantor or surety.

According to the Court, the arrangement contains three interconnected contracts:

• a principal contract between the subsidiary and the lender;

• a collateral contract between the lender and the holding company; and

• an implied contract between the holding company and the subsidiary, under which the subsidiary must indemnify the guarantor if the guarantor is required to discharge the debt.

The guarantee improves the subsidiary’s ability to obtain finance and transfers a degree of credit risk to the holding company.

Arguments advanced by the petitioners

4. Corporate guarantee is not a supply of service

The petitioners contended that GST under Section 9 can be imposed only when there is a “supply” of goods or services.

According to them, a corporate guarantee given without a fee did not satisfy the essential ingredients of a taxable supply because:

• no consideration was received;

• no independent activity was performed for the subsidiary;

• no cost was incurred merely by issuing the guarantee;

• nothing was actually provided unless the guarantee was invoked;

• the guarantee was only a contingent contract under Section 31 of the Indian Contract Act, 1872; and

• it was a shareholder activity undertaken to protect the holding company’s investment.

The petitioners argued that the terms “activity” and “supply” could not be treated as interchangeable. Entry 2 of Schedule I applies only when there is first an identifiable supply between related persons. It does not convert every act between related parties into a supply.

5. No service is supplied to the subsidiary

It was argued that a corporate guarantee is executed in favour of the bank and not in favour of the subsidiary.

The beneficiary of the contractual promise is the lender. Therefore, the petitioners contended that no service was supplied by the holding company to the subsidiary.

Any incidental benefit received by the subsidiary, such as better access to finance or lower borrowing costs, could not by itself amount to a taxable supply of service.

6. Guarantee is a shareholder activity

The petitioners argued that the holding company issued the guarantee to protect and enhance the value of its investment in the subsidiary.

Such an act was in the capacity of a shareholder and not in the course of a separate business of providing guarantees. It was therefore contended that the transaction was neither in the course nor in furtherance of the holding company’s business.

7. Reliance on the Edelweiss judgment

The petitioners relied heavily on the Supreme Court’s decision in Commissioner of CGST and Central Excise v. Edelweiss Financial Services Ltd.

In that case, the Supreme Court affirmed that, under the service tax regime, no service tax was payable on a corporate guarantee issued without consideration.

The petitioners submitted that the essential nature of a corporate guarantee had not changed under GST and that the absence of consideration continued to be fatal to the levy.

8. Rules cannot create a taxable event

The petitioners contended that Rule 28(2) was merely a valuation provision. It could apply only after a taxable supply had independently been established under the CGST Act.

A subordinate rule could not:

• create a new taxable supply;

• impose tax on a transaction not covered by Section 7;

• enlarge the charging provision; or

• cure the absence of a taxable event.

Therefore, according to the petitioners, Rule 28(2) could not be used as the source of the levy.

9. Challenge to the 1% valuation

The petitioners argued that the valuation of 1% per annum was arbitrary because it:

• had no necessary relationship with the actual value of the service;

• applied even where no commission was charged;

• ignored the creditworthiness of the subsidiary;

• ignored whether any borrowing benefit was actually obtained;

• ignored the probability of invocation;

• ignored the nature, duration and risk of the guarantee;

• could exceed the amount of actual commission;

• could produce an excessive liability over a long guarantee period; and

• converted a valuation fiction into a charging provision.

It was also argued that corporate guarantee commission under income-tax transfer pricing rules generally involved a fact-specific determination. The 1% safe-harbour benchmark under the Income-tax Rules was optional, whereas the GST rule made it mandatory.

10. Objection to the expression “whichever is higher”

The petitioners particularly challenged the requirement to adopt 1% of the guaranteed amount or the actual consideration, whichever was higher.

For example, if the actual guarantee commission was 0.25% or 0.30%, Rule 28(2) still required valuation at 1%.

According to the petitioners, once the actual consideration was available and ascertainable, the Government could not disregard it and impose an artificial value merely because it was higher.

11. Retrospective and retroactive operation

Rule 28(2) was introduced on 26 October 2023. The words “per annum” were subsequently inserted through a notification dated 10 July 2024, with effect from 26 October 2023.

The petitioners contended that the rule could not be applied to corporate guarantees executed before 26 October 2023.

Applying the rule to old guarantees would impose an unforeseen burden on completed transactions. It would also disturb financial arrangements entered into when no specific valuation provision existed.

Some guarantees had even been executed before the introduction of GST on 1 July 2017. The petitioners argued that a post-2023 rule could not be used to tax such guarantees for earlier periods.

12. Section 74 was wrongly invoked

The petitioners challenged the invocation of Section 74, which at the relevant time applied to cases involving fraud, wilful misstatement or suppression of facts with an intention to evade tax.

They argued that:

• the transactions were disclosed in financial statements and books of account;

• corporate guarantees were often disclosed under contingent liabilities;

• the legal position was genuinely disputed;

• there was no specific valuation provision before 26 October 2023;

• different judicial and administrative views existed; and

• failure to pay tax in such circumstances could not constitute wilful suppression.

Arguments advanced by the Revenue

13. Schedule I expressly taxes related-party transactions without consideration

The Revenue argued that the GST framework is fundamentally different from the service tax regime.

Under Section 7(1)(c), read with Entry 2 of Schedule I, a supply between related persons in the course or furtherance of business is taxable even without consideration.

A holding company and its subsidiary are related persons. Therefore, the absence of a guarantee commission does not prevent the transaction from being treated as a supply.

14. Corporate guarantee provides a real economic benefit

The Revenue contended that the subsidiary receives a direct and identifiable economic benefit from the guarantee.

The corporate guarantee may:

• enable the subsidiary to obtain a loan;

• increase its borrowing capacity;

• reduce the lender’s credit risk;

• improve the terms of finance;

• reduce the interest rate;

• substitute or supplement collateral; and

• ensure the subsidiary’s financial and commercial continuity.

The guarantee is therefore not an empty promise. The benefit becomes available immediately upon the execution of the guarantee and does not depend on its subsequent invocation.

15. The activity is in furtherance of business

The Revenue argued that the holding company issues the guarantee to facilitate the subsidiary’s business, strengthen the group’s financial position and protect its investment.

The expression “in the course or furtherance of business” is broad. The holding company need not be regularly engaged in the business of providing guarantees for the activity to have a business nexus.

16. Rule 28(2) is only a valuation provision

According to the Revenue, the taxable supply already arises under Section 7(1)(c), read with Schedule I.

Rule 28(2) merely provides a uniform mechanism for valuing the supply where no consideration is charged or the value is difficult to ascertain.

The 1% benchmark was recommended by the GST Council after considering the practical difficulty faced by taxpayers and field formations in determining the open-market value of corporate guarantees.

17. Guarantee operates during its subsistence

The Revenue argued that a corporate guarantee continues to confer a benefit as long as it remains in force.

Accordingly, the outstanding guaranteed amount can be considered annually. The words “per annum” only clarify the recurring valuation of the guarantee during its subsistence.

18. Revenue neutrality does not destroy the levy

It was also contended that the recipient subsidiary may be eligible to claim input tax credit. However, revenue neutrality cannot determine whether the supply is taxable.

The availability of ITC may be relevant to valuation, penalty or intention to evade tax, but it cannot extinguish the taxable event.

Findings and reasoning of the Gujarat High Court

19. Corporate guarantee is a supply of service

The High Court rejected the petitioners’ fundamental contention that a corporate guarantee issued without consideration is not a supply.

It held that a corporate guarantee creates a legally enforceable obligation and provides an immediate commercial benefit to the subsidiary. It enables the subsidiary to access finance and strengthens the lender’s security.

The corporate guarantee is therefore an “activity” and a “service” for GST purposes.

Since the holding company and subsidiary are related persons, the absence of consideration is overcome by Section 7(1)(c), read with Entry 2 of Schedule I.

The Court consequently held that GST is leviable on corporate guarantees issued without consideration between related persons.

20. The guarantee is in furtherance of business

The Court found a clear business nexus.

A holding company issues a guarantee to facilitate the financial functioning of its subsidiary and to support its credit requirements. The guarantee protects and promotes the commercial interest of the corporate group as well as the holding company’s investment.

Therefore, the activity is undertaken in the course or furtherance of business.

21. Why Edelweiss did not govern the GST position

The Court distinguished the Supreme Court’s decision in Edelweiss Financial Services.

Under the former service tax law, an activity generally required consideration before it could be taxed as a service. There was no equivalent deeming provision taxing supplies between related persons without consideration.

GST contains a specific statutory framework under Section 7(1)(c) and Schedule I. Consequently, the absence of consideration that prevented the levy under service tax does not produce the same result under GST.

The Court therefore held that Edelweiss remained relevant to the pre-GST regime but did not determine the taxability of corporate guarantees under GST.

22. Guarantee and pledge documents must be read together

In Torrent Power’s case, the Court examined not only the corporate guarantee but also the agreement for the pledge of shares dated 20 March 2019.

The pledge arrangement permitted the security trustee, upon default, to enforce the collateral and sell or appropriate the pledged shares.

Reading the connected documents together, the Court held that Torrent Power intended to secure the obligations of its subsidiary, Jodhpur Wind Farms Pvt. Ltd., towards the lender, IDBI Bank.

The arrangement satisfied the legal characteristics of a guarantee and pledge under the Indian Contract Act, 1872. The Court therefore concluded that the guarantee, read with the pledge agreement, constituted a supply of service.

23. When does the taxable event arise?

The Court held that the benefit of the guarantee arises when the guarantee is executed. The lender immediately acquires the right to proceed against the guarantor if the borrower defaults.

A subsequent invocation of the guarantee does not create a new service. It is merely the enforcement or performance of the pre-existing contractual obligation.

The judgment nevertheless linked the time of supply to Section 13(2)(c), namely, the date on which the recipient records receipt of the service in its books of account.

The Court further observed that where the guarantee and the outstanding debt continue to be reflected in the subsidiary’s books each year, the valuation can arise annually with reference to the outstanding guaranteed amount.

Thus, the judgment treats:

• execution as the point at which the guarantee service crystallises; and

• annual book recognition and outstanding exposure as relevant to recurring valuation.

24. Is a corporate guarantee a continuous supply?

The Court observed that a corporate guarantee may not satisfy every technical condition of “continuous supply of services” under Section 2(33), particularly where there is no periodic payment obligation.

However, the economic and legal operation of the guarantee continues during its tenure. Therefore, the value can be determined annually on the outstanding guaranteed amount under Rule 28(2).

This distinction is important: the Court did not make taxability dependent entirely on the technical definition of continuous supply. It instead relied on the continuing subsistence of the guarantee and annual accounting recognition.

25. Validity of Section 15(4)

The Court upheld Section 15(4) as constitutionally valid.

Section 15(4) authorises the prescription of valuation methods where the value cannot be determined under Section 15(1). The Court found no excessive delegation or constitutional infirmity in Parliament authorising the Government to prescribe valuation rules.

26. Validity of Rule 28(2)

The Court upheld Rule 28(2) in principle.

It accepted that corporate guarantees are highly specialised, entity-specific financial instruments. Finding an identical or comparable open-market service may be difficult because the risk, financial position, creditworthiness and group relationship differ from one case to another.

A deemed valuation mechanism can therefore be prescribed to overcome valuation uncertainty.

The Court held that:

• the levy arises from the CGST Act and Schedule I;

• Rule 28(2) does not independently create the levy;

• the rule merely provides the valuation mechanism; and

• prescribing 1% as a deemed value, particularly where there is no ascertainable consideration, is not inherently invalid.

27. “Whichever is higher” held arbitrary and read down

This is one of the most important parts of the judgment.

The Court noted that the GST Council had considered guarantee commission rates generally ranging between 0.5% and 3%. However, in the cases before the Court, actual guarantee commission in some instances ranged between 0.25% and 0.30%.

If actual consideration was available and ascertainable, forcing the taxpayer to adopt 1% merely because it was higher was arbitrary.

The Court relied on the principle recognised by the Supreme Court in Wipro Ltd. that where actual value is available and ascertainable, an artificial valuation should not ordinarily replace the actual value. A fictional or uniform valuation is more defensible where the actual value cannot be determined.

Accordingly, the Court held the expression “whichever is higher” to be arbitrary and violative of Articles 14 and 19(1)(g).

Instead of striking down the entire rule, the Court read down that expression to preserve the rule’s validity.

Practical effect of reading down

After the judgment:

• where an actual guarantee commission is charged and is ascertainable, the taxpayer should be able to pay GST on that actual commission;

• the department should not mechanically substitute 1% merely because the actual commission is lower;

• where no consideration or commission is charged, the deemed valuation of 1% per annum may continue to apply; and

• where the recipient is eligible for full ITC, the proviso concerning the invoice value must also be considered.

The Court stated that taxpayers must have an option between actual consideration and the 1% deemed value. This aspect may, however, require a fresh CBIC clarification because the precise mechanics after reading down are not expressed with complete clarity.

28. No levy under Rule 28(2) before 26 October 2023

The Court held that Rule 28(2), introduced through Notification No. 52/2023-Central Tax dated 26 October 2023, could not be applied to earlier periods.

Applying the 1% per annum mechanism to guarantees executed before the rule was introduced would impose an unexpected burden and disturb settled commercial arrangements.

The Court held such pre-26 October 2023 application to be harsh, unfair and violative of Articles 14 and 19(1)(g).

Therefore:

• no GST can be demanded under Rule 28(2) for a period before 26 October 2023;

• the rule cannot be used to value past periods merely because the guarantee was originally executed before that date; but

• if an old guarantee continued after 26 October 2023, GST may apply for the period commencing from that date.

Thus, the Court drew a distinction between:

• taxing the period before 26 October 2023—which is impermissible under Rule 28(2); and

• taxing the post-26 October 2023 continuation of an earlier guarantee—which is permissible.

29. Relief for guarantees issued to foreign subsidiaries

In one of the connected petitions, corporate guarantees had been issued during FY 2010-11 and FY 2011-12 to subsidiaries located outside India.

The department demanded IGST for the period July 2017 to March 2020 by applying the 1% deemed valuation.

The Court noted that the case was covered by Circular No. 225/19/2024-GST dated 11 July 2024 and held that the deemed valuation under Rule 28(2) could not be applied to that guaranteed amount for the disputed period.

The show-cause notice was consequently set aside.

The export-of-service implications must nevertheless be examined separately in each case, particularly with reference to the location of the recipient, place of supply, receipt of consideration and the relationship between the establishments.

30. Section 74 proceedings quashed

The High Court found no justification for invoking Section 74.

According to the Court, the department had not established:

• fraud;

• collusion;

• wilful misstatement;

• deliberate suppression; or

• a specific intention to evade tax.

The existence of corporate guarantees was generally ascertainable from the accounts and financial disclosures. Further, the legal position was complex and disputed, and the specific valuation provision was introduced only on 26 October 2023.

The Court observed that mere failure to declare or pay tax does not automatically constitute wilful suppression. A positive act of withholding material information with an intention to evade tax is required.

It particularly criticised the issuance of a Section 74 notice in respect of a guarantee executed in 2012, before the introduction of GST, as arbitrary and reflecting non-application of mind.

Accordingly, the impugned notices and orders under Section 74 were quashed.

31. Validity of the CBIC circulars

The Court recognised that circulars cannot independently create a tax levy. They can only explain or operationalise the statutory provisions.

Since the Court had:

• read down the expression “whichever is higher”;

• restricted the operation of Rule 28(2) to the period from 26 October 2023; and

• clarified the treatment of actual consideration,

the circulars dated 27 October 2023 and 11 July 2024 were set aside to the extent they were inconsistent with the judgment.

The Revenue was permitted to issue fresh circulars or administrative instructions in conformity with the ruling.

Final judgment of the High Court

The Gujarat High Court issued the following operative directions:

• Rule 28(2) upheld: Rule 28(2) was held to be intra vires the CGST Act and Articles 14, 19(1)(g) and 265, except that the expression “whichever is higher” was read down.

• No pre-26 October 2023 application: GST on corporate guarantees under Rule 28(2) cannot be imposed for the period before 26 October 2023.

• Old continuing guarantees: Where a guarantee issued earlier continued after 26 October 2023, GST could apply from 26 October 2023 onwards.

• Section 15(4) upheld: The provision authorising prescribed valuation methods was held constitutionally valid.

• Section 74 proceedings quashed: Notices and orders issued under Section 74 against the petitioners were set aside.

• Refund or adjustment: Excess GST deposited by the petitioners must be refunded. The parties may alternatively adjust the excess amount.

• Circulars restricted: The CBIC circulars were set aside to the extent they were contrary to the Court’s findings.

• Implementation: The directions were required to be implemented within three months.

The petitions were consequently allowed in part.

What does the judgment mean for taxpayers?

32. Position for different periods and situations

Situation	Likely position after the judgment
Guarantee expired before 26 October 2023	Rule 28(2) cannot be applied
Guarantee issued before 26 October 2023 but continued thereafter	GST may apply from 26 October 2023 onwards
Guarantee issued on or after 26 October 2023 without commission	Valuation at 1% per annum may apply
Actual commission charged below 1%	GST should be payable on the actual ascertainable commission; 1% cannot be imposed merely because it is higher
Actual commission charged above 1%	Actual consideration would ordinarily remain relevant; fresh clarification may be required regarding the precise option created by reading down
Recipient eligible for full ITC	Invoice-value proviso under Rule 28(2) must be examined
Personal guarantee by a director without consideration	Governed separately by the CBIC clarification on personal guarantees; this judgment primarily concerns corporate guarantees
Guarantee for foreign subsidiary	Export-of-service conditions and Circular No. 225/19/2024-GST must be independently examined
Demand invoking Section 74 solely because GST was not paid	Sustainable only if fraud, wilful misstatement or intentional suppression is proved through positive evidence

 

What happens next?

Possibility of appeal before the Supreme Court

The judgment involves important questions concerning:

• the meaning of “supply” under Schedule I;

• the constitutional limits of deemed valuation;

• annual taxation of a guarantee executed on a single date;

• application of Rule 28(2) to continuing guarantees;

• the effect of reading down “whichever is higher”; and

• the relationship between actual consideration and the 1% deemed value.

It is therefore possible that either the Revenue or the taxpayers may challenge parts of the judgment before the Supreme Court.

The Revenue may dispute:

• the exclusion of the period before 26 October 2023;

• the reading down of “whichever is higher”;

• the right to adopt a commission below 1%;

• the quashing of Section 74 proceedings; and

• the refund directions.

Taxpayers may dispute:

• the finding that a corporate guarantee without consideration is a supply;

• the annual or recurring valuation of an already executed guarantee;

• the Court’s approach to time of supply; and

• the validity of 1% valuation where no consideration is charged.

Until any stay or contrary decision is issued, the Gujarat High Court judgment remains binding on authorities within its territorial jurisdiction.

Fresh CBIC clarification is expected

The High Court expressly permitted the Revenue to issue fresh circulars or administrative instructions consistent with the judgment.

A fresh clarification will be particularly necessary on:

• the meaning of Rule 28(2) after reading down “whichever is higher”;

• whether the taxpayer can freely choose between 1% and actual consideration;

• treatment where actual consideration exceeds 1%;

• valuation of guarantees continuing from earlier years;

• the outstanding amount on which 1% must be calculated;

• treatment of partial repayment during the year;

• renewal, extension and modification of guarantees;

• guarantees not recorded by the subsidiary;

• full-ITC cases; and

• procedural adjustment of GST already paid.

Areas where uncertainty continues

Although the judgment settles several major issues, some questions remain open.

A. Execution date versus annual time of supply

The Court stated that the guarantee service crystallises on execution, but also held that time of supply may arise annually when the recipient records the guarantee and outstanding amount in its books.

This creates a possible tension between a one-time taxable event and recurring annual valuation.

B. Meaning of the option after reading down

The Court removed “whichever is higher” and recognised actual consideration. It also observed that an option remains between actual consideration and 1%.

The precise operation of this option, particularly where the actual commission exceeds 1%, requires further clarification.

C. Outstanding amount versus original guarantee amount

The judgment indicates that the outstanding debt reflected in the subsidiary’s books should have a bearing on annual valuation. This may support valuation on the outstanding exposure rather than the original sanctioned guarantee amount.

However, Rule 28(2) refers to the “amount of such guarantee offered.” The difference may lead to further disputes.

D. Full ITC cases

The proviso treats the invoice value as the value of supply where the recipient is eligible for full ITC. The interaction between this proviso and the principal 1% rule must be applied carefully, particularly after the judgment’s reading down of “whichever is higher.”

Conclusion

The Gujarat High Court has adopted a middle path.

It has upheld the GST levy on corporate guarantees between related persons even where no consideration is charged. In doing so, it has confirmed that the GST framework is materially different from the former service tax regime because Schedule I expressly taxes certain related-party supplies without consideration.

However, the Court has also placed meaningful constitutional limits on the levy. Rule 28(2) cannot be used for periods before 26 October 2023. Actual and ascertainable guarantee commission cannot be automatically replaced with a higher artificial value of 1%. Section 74 cannot be invoked merely because a taxpayer adopted a debatable legal position, and excess GST collected under an impermissible interpretation must be refunded or adjusted.

Disclaimer : This article is for informational purposes only and should not be construed as legal or professional advice. Taxpayers should consult their tax advisor based on the facts of their specific case before taking any action.