Author: Ashwarya Sharma, Advocate, Co-Founder & Legal Head, RB LawCorp
Published on: 22/05/2026
1. Introduction
The levy of GST on corporate guarantees has steadily emerged as one of the most commercially significant and legally contested issues under the indirect tax regime. Modern corporate groups, particularly in sectors such as infrastructure, energy, manufacturing, real estate and financing, frequently extend corporate guarantees in favour of banks and financial institutions on behalf of their subsidiaries or associate entities in order to facilitate credit arrangements, project financing and business continuity.
Traditionally, such guarantees were viewed as internal financial support mechanisms intended to protect group investments and preserve operational stability rather than as independent commercial services rendered for consideration. However, under GST, the department has increasingly sought to characterize such arrangements as taxable supplies of service, even in situations where no guarantee commission or monetary consideration was charged.
The controversy acquired far greater significance after the insertion of Rule 28(2) of the CGST Rules, 2017 prescribing a deemed valuation mechanism for corporate guarantees between related parties, coupled with the issuance of Circular No. 204/16/2023-GST and Circular No. 225/19/2024-GST. These developments triggered widespread investigations and substantial tax exposure for corporate groups across India, with authorities proceeding on the premise that every corporate guarantee furnished between related parties automatically constitutes a taxable supply under GST.
It is in this background that the decision of the Hon’ble Bombay High Court in D P Jain And Co. Infrastructure Pvt Ltd v. Union Of India [2026] 186 taxmann.com 392 (Bombay) assumes considerable significance. The Court has revisited the foundational architecture of “supply” under Section 7 of the CGST Act and delivered an important ruling reaffirming that valuation provisions and departmental circulars cannot independently create a taxable event where none exists under the charging provisions themselves.
The judgment therefore has implications extending far beyond corporate guarantees and touches upon larger principles governing consideration, related party transactions, delegated legislation and the limits of taxation under GST jurisprudence.
2. The Corporate Guarantee Controversy Under GST
Under the GST framework, the department has consistently maintained that where a holding company or related entity furnishes a corporate guarantee to a bank or financial institution for loans availed by its subsidiary or associate concern, such activity constitutes a supply of service between related persons.
The controversy intensified after insertion of Rule 28(2) of the CGST Rules which prescribed that the taxable value of a corporate guarantee would be deemed to be 1% of the guaranteed amount or the actual consideration charged, whichever is higher. Consequently, even in cases where no consideration whatsoever was charged, authorities sought to artificially compute taxable value and levy GST thereon.
At the heart of the dispute lies a much more fundamental issue:
Whether a corporate guarantee furnished without any fee, commission or monetary benefit can at all qualify as a “supply” under Section 7 of the CGST Act?
Taxpayers have consistently argued that such guarantees merely constitute shareholder functions or intra-group support arrangements intended to protect investments and facilitate financing for subsidiaries. According to this approach, absence of consideration strikes at the very root of taxability itself.
The department, however, attempted to invoke Schedule I of the CGST Act dealing with transactions between related persons to contend that even supplies made without consideration may still attract GST.
This conflict between the concepts of “supply”, consideration, related party transactions and valuation fiction has now generated extensive litigation before several High Courts across the country.
3. Factual Background
The Petitioner challenged proceedings initiated pursuant to Circular No. 204/16/2023-GST dated 27.10.2023 and Circular No. 225/19/2024-GST dated 11.07.2024 whereby corporate guarantees were sought to be treated as taxable supplies of service under GST.
The Petitioner had executed various corporate guarantee agreements on behalf of its associate companies for the purpose of enabling such entities to secure financial assistance from banks and financial institutions for execution of projects and business operations.
Importantly, although the guarantees were reflected in the books of account, admittedly no commission, fee or consideration was charged or received by the Petitioner for furnishing such guarantees.
Subsequently, show cause notices came to be issued proposing GST liability solely on the basis of amended Rule 28(2) and the aforesaid Board Circulars.
The Petitioner therefore challenged not merely the show cause proceedings but also sought quashing of Rule 28(2) itself on the ground that the Rule travelled beyond the scope of the charging provisions contained in the CGST Act.
4. Submissions on Behalf of the Petitioners
4.1 Circulars Cannot Create Tax Liability
The Petitioners argued that it is a settled principle of tax jurisprudence that no tax liability can be created merely through departmental circulars or delegated legislation.
According to the Petitioners, the impugned circulars effectively prejudged the issue by directing authorities to treat all corporate guarantees as taxable supplies of service, thereby rendering the adjudicatory process itself meaningless.
It was argued that the department proceeded purely on assumptions without first examining whether the foundational ingredients of “supply” under Section 7 were at all satisfied.
4.2 Taxability Must First Arise Under the Charging Section
The Petitioners emphasized that GST under Section 9 can be levied only upon taxable supplies of goods or services or both.
Further, “taxable supply” under Section 2(108) necessarily presupposes the existence of a valid supply which is otherwise leviable to tax under the Act.
Therefore, unless the activity itself qualifies as a legally recognizable supply, no question of valuation or taxation could arise.
4.3 Corporate Guarantees Are Not Independent Commercial Services
A central plank of the Petitioners’ argument was that the corporate guarantee agreements specifically recorded that no consideration, fee or commission was payable for issuance of such guarantees.
The guarantees were furnished merely to protect group investments and facilitate business continuity of associate entities.
Accordingly, the Petitioners contended that such arrangements lacked the essential commercial character necessary to qualify as taxable supplies.
4.4 Corporate Guarantees as Actionable Claims
The Petitioners further argued that corporate guarantees could, at best, fall within the realm of actionable claims.
Since actionable claims other than specified actionable claims are covered under Schedule III and treated neither as supply of goods nor supply of services, the activity itself fell outside the GST framework.
5. Submissions on Behalf of the Government
The Respondents defended the proceedings primarily on the basis of Rule 28(2) of the CGST Rules and the accompanying Circulars.
According to the department:
- Once a deemed valuation mechanism had been prescribed for corporate guarantees between related parties, GST liability automatically followed;
- The relationship between the parties itself attracted Schedule I;
- Actual consideration was irrelevant once the law deemed a value for such guarantees.
The Government therefore argued that furnishing of corporate guarantees between related entities constituted taxable supplies irrespective of whether any actual consideration was charged.
6. Discussion and Findings of the High Court
6.1 Scope of “Supply” Under Section 7
The High Court first examined the architecture of Section 7 of the CGST Act.
The Court observed that the concept of “supply” under GST cannot be interpreted in isolation from the statutory requirement of consideration except to the limited extent specifically contemplated under Schedule I.
Importantly, the Court reiterated that the charging framework under GST must first establish existence of a legally recognizable supply before any question of valuation can arise.
6.2 Nature and Meaning of Corporate Guarantee
The Court extensively examined the nature of guarantees with reference to Black’s Law Dictionary and Section 126 of the Indian Contract Act, 1872.
The Court observed that a guarantee fundamentally represents an assurance to discharge the liability of a third party in the event of default.
Further, a corporate guarantee is ordinarily furnished by a holding company or group entity in order to facilitate financial assistance for subsidiaries or associate concerns.
The Court noted that such guarantees are generally issued:
- Without charging consideration;
- To protect group investments;
- To ensure financial continuity of related entities.
6.3 Distinction Between Bank Guarantee and Corporate Guarantee
One of the most significant aspects of the judgment lies in the distinction drawn between bank guarantees and corporate guarantees.
The Court observed that:
- A bank guarantee is a commercial financial instrument issued by banks in the ordinary course of business for consideration;
- Such guarantees are typically backed by security arrangements and revenue generation objectives.
In contrast:
- Corporate guarantees are essentially intra-group support arrangements;
- They are not ordinarily issued as independent business activities;
- Their primary purpose is protection of investments and financial stability of related entities.
The Court therefore categorically held that corporate guarantees cannot automatically be equated with commercial guarantees issued by banks or financial institutions.
6.4 Reliance on Edelweiss Judgment
The High Court placed substantial reliance upon the decision of the Hon’ble Supreme Court in Commissioner of CGST and Central Excise v. Edelweiss Financial Services Ltd. [2023] 149 taxmann.com 76 (SC).
In Edelweiss, the Supreme Court had held under the service tax regime that corporate guarantees issued without consideration are not taxable services.
The Supreme Court specifically observed that for an activity to be taxable, there must exist:
- A service provider; and
- A flow of consideration for rendition of such service.
Applying the ratio of Edelweiss, the Bombay High Court held that issuance of corporate guarantees without consideration cannot be subjected to GST merely because the parties are related entities.
6.5 Absence of Consideration Defeats Taxability
The Court ultimately concluded that the corporate guarantees in question were contingent arrangements enforceable only upon default by the borrower.
More importantly, the agreements specifically recorded that:
- The Petitioner neither received nor was entitled to receive any commission or fee for furnishing the guarantees.
In the absence of consideration, the Court held that the very foundation of taxability collapsed.
Accordingly, the High Court unequivocally held that furnishing a corporate guarantee to a subsidiary or associate entity without consideration does not constitute a taxable supply under Section 9 of the CGST Act.
The show cause proceedings were therefore quashed.
7. Analysis and Broader Implications
The judgment in D P Jain marks an important judicial intervention in the continuing controversy surrounding GST on corporate guarantees.
7.1 Reaffirmation of Foundational Tax Principles
Perhaps the most important contribution of the judgment is its reaffirmation that valuation provisions cannot independently create tax liability.
The Court restored focus on a foundational principle:
There must first exist a taxable supply before any question of valuation can arise.
7.2 Commercial Reality Recognized
The ruling is also significant because it acknowledges the commercial realities of modern corporate structures.
Corporate guarantees are often furnished:
- To protect investments;
- To facilitate financing;
- To preserve operational continuity of group entities.
Treating every such arrangement as a taxable supply merely because parties are related would result in artificial taxation divorced from commercial substance.
7.3 Limits on Delegated Legislation
Equally important is the Court’s reiteration that delegated legislation and departmental circulars cannot travel beyond the parent statute.
The judgment therefore reinforces an important constitutional limitation upon administrative interpretation under tax laws.
7.4 Relief for Corporate Groups
At a practical level, the ruling is likely to provide substantial relief to corporate groups facing enormous GST exposure on historical guarantee transactions where no consideration was ever charged.
However, unless the controversy is conclusively settled by the Supreme Court under GST law itself or through legislative clarification, litigation on the issue is likely to continue across jurisdictions.
8. Conclusion
The decision in D P Jain is a significant reaffirmation of a basic but fundamental principle of indirect taxation:
In the absence of consideration and a legally recognizable supply, GST cannot be imposed merely through valuation fictions and circular-based assumptions.
At a time when authorities increasingly seek to expand the scope of taxation through delegated legislation and interpretative mechanisms, the Bombay High Court has restored focus on the statutory architecture of GST itself.
The judgment carefully balances commercial reality with statutory interpretation and correctly recognizes that corporate guarantees often function as internal support arrangements rather than independent commercial services.
Most importantly, the ruling reiterates that taxation under GST must ultimately remain anchored to the charging provisions enacted by Parliament and cannot be artificially created through subordinate legislation alone.
The decision therefore represents an important precedent not merely for disputes concerning corporate guarantees, but for the broader jurisprudence governing related party transactions, consideration, and the constitutional limits of taxation under GST law.
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📎 Full Published Version: https://www.taxmann.com/research/gst-new/top-story/105010000000028388/corporate-guarantees-under-gst-bombay-high-court-reasserts-that-no-tax-can-arise-without-consideration-opinion
(The author is a practicing advocate, Co-Founder and Legal Head of RB LawCorp.
He specializes in GST law. Suggestions or queries can be directed to
ashsharma@rblawcorp.in. The views expressed in this article are strictly
personal.)
