The Gujarat High Court upheld the GST on corporate guarantees but struck down the ‘whichever is higher’ condition.
The Gujarat High Court has kept the GST on corporate guarantees furnished via holding companies to their subsidiaries, but has quashed the requirement to pay tax on whichever is higher: 1% of the guarantee amount or the actual consideration.
A division bench of Justices A.S. Supehia and Vaibhavi D. Nanavati gave the judgment on August 14 in Torrent Power Ltd. v. Union of India & Ors., while hearing a batch of petitions contesting Rule 28(2) of the CGST Rules, Section 15(4) of the CGST Act and related CBIC circulars.
Torrent Power was one of the applicants contesting the GST treatment of corporate guarantees provided to its subsidiaries.
Corporate Guarantee
A corporate guarantee is provided via a parent company to a lender to back a loan taken by its subsidiary. These guarantees are furnished within corporate groups without the parent levying a separate fee.
Under GST, the way of levying tax has been revised. Previously, the service tax regime required consideration or a fee was necessary for a service to be taxable; Section 7(1)(c) read with Schedule I of the CGST Act allows certain transactions between related parties to be treated as supplies even without consideration.
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In October 2023, the government rolled out Rule 28(2), specifying a deemed value of 1% of the amount of the corporate guarantee per annum. Thereafter, the rule was revised to require 1% of the guarantee amount or the actual consideration, whichever was higher.
Court Upholds GST Charge
As per the applicants, a corporate guarantee provided without consideration must not be considered as a taxable supply. They put reliance on the ruling of the Apex Court in Edelweiss Financial Services, which had decided under the earlier service tax regime that service tax could not be levied on corporate guarantees where there was no acknowledgement.
The Gujarat High Court expressed that the ruling applied to the earlier law and did not regulate the GST structure.
“Unlike the Finance Act, 1994, the CGST Act… contains Section 7(1)(c) read with Schedule I to the CGST Act, a specific deeming fiction that taxes certain supplies between related persons even in the absence of consideration,” the court stated.
Thus, the court upheld the constitutional validity of Rule 28(2) and Section 15(4). Section 15(4) authorises the government to specify the norms for deciding the supply values where the normal transaction value cannot be determined. The government relied on the same provision to form Rule 28(2), which specifies the valuation procedure for corporate guarantees between related parties.
The ruling brings clarity for companies issuing corporate guarantees to subsidiaries. “The High Court has upheld Rule 28(2), holding it to be valid. In effect, the charging of GST on a corporate guarantee is a valid taxable event,” a tax expert expressed.
Court reads down ‘whichever is higher’
The court discovered the valuation formula uncertain where actual consideration is involved.
The court added, “The expression ‘whichever is higher’ is arbitrary,” the court held, saying the provision did not give the corporate guarantor the option to pay GST on the actual commission or charge. “Actual consideration is the indispensable factor which makes the levy and Rule workable.”
The court did not quash the entire rule; instead, it read down the words whichever is higher. It specifies that the 1% valuation method continues, especially when no actual consideration is there; however, the government cannot assert the higher of the two values where an actual charge exists.
On valuation, Joshi stated the 1% rule shall be applicable where no commission is levied, and GST on guarantees that have an actual commission will be liable to be paid on the amount levied.
No retrospective application of 1% valuation
The court expressed that the 1% valuation mentioned under Rule 28(2) could not be applied to periods before October 26, 2023.
On October 26, 2023, the rules were rolled out, and the corporate guarantees involved in the batch dated as far back as 2012. The court said that the revenue had levied the 1% valuation on guarantees issued before the rule and even before the GST regime.
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It is crucial for companies encountering demands concerning older corporate guarantees, as the new valuation procedure cannot be applicable to the period before the rule was incepted. “The ruling provides relief for the period before October 26, 2023, when Rule 28(2) came into force. If a guarantee continues beyond 26.10.2023, GST will apply from that date onwards,” it mentioned.
| Case Title | Torrent Power Ltd. v. Union of India & Ors. |
| For Petitioner | Mr S N Soparkar, Senior Advocate with Mr Uchit N Sheth |
| Gujarat High Court | Read Order |
