GST treatment of Corporate Guarantees Between related party

summarizes an important Gujarat High Court judgment in Torrent Investment Pvt. Ltd. v. Union of India (R/SCA/12175/2024) regarding the GST treatment of corporate guarantees provided between related parties.

What is a corporate guarantee?

A corporate guarantee is a guarantee provided by a holding company, parent company, or group company to a bank/financial institution on behalf of its subsidiary or related entity to help it obtain loans or credit facilities. Example: Holding Company A gives a guarantee to a bank for a loan taken by Subsidiary B. and The question under GST was whether such a guarantee constitutes a taxable supply and how its value should be determined.

Background

The government inserted Rule 28(2) of the CGST Rules with effect from 26 October 2023. Rule 28(2) prescribed a special valuation mechanism for corporate guarantees provided between related parties. The tax department attempted to apply this rule even to guarantees furnished before 26.10.2023. The Gujarat High Court examined whether this was legally permissible.

Key Findings of the Gujarat High Court

1. Rule 28(2) is Constitutionally Valid

• The Court upheld the constitutional validity of Section 15(4) of the CGST Act and Rule 28(2) of the CGST Rules
• Therefore, the rule itself remains valid. It was not struck down. The Court only restricted its application.

2. Rule 28(2) Cannot Be Applied Retrospectively

• The Court held that:  Rule 28(2) is effective only from 26 October 2023.  It cannot be applied to corporate guarantees furnished before 26 October 2023.
• Applying the rule to earlier guarantees would amount to retrospective taxation, which the Court considered impermissible. Practical Impact

3. Court Read Down the Expression “Whichever is Higher”

The Court found that using the phrase:

“whichever is higher”

under the valuation mechanism could result in arbitrary or unreasonable valuation of corporate guarantee services.

Accordingly, the Court “read down” this expression to prevent unconstitutional valuation outcomes.

Meaning of Read Down

The provision remains valid, but its interpretation is restricted to ensure fairness and constitutional compliance.

4. GST Demands Were Quashed

The Court quashed proceedings initiated under:

Section 74 of the CGST Act

where the GST department sought to levy GST contrary to the principles laid down in the judgment.

Additionally, GST amounts already deposited may be refundable subject to permitted adjustments.

5. GST Circulars Partly Set Aside

The Court set aside the following circulars to the extent they conflicted with the judgment:

• Circular No. 204/16/2023-GST dated 27.10.2023
• Circular No. 225/19/2024-GST dated 11.07.2024

The Government may issue fresh instructions consistent with the Court’s ruling.

Key Takeaway

• Before 26 October 2023 :  No GST under Rule 28(2) on corporate guarantees furnished before 26.10.2023.
• After 26 October 2023 : Rule 28(2) applies. And corporate guarantees between related parties may attract GST based on the prescribed valuation rules.

Why This Judgment Matters

For many corporate groups, promoters, and holding companies Past GST demands on corporate guarantees issued before 26.10.2023 may not survive. Pending assessments and notices need to be re-evaluated. and Taxpayers may explore refund claims where GST was paid solely because of retrospective application of Rule 28(2).

One-Line Summary

The Gujarat High Court held that while Rule 28(2) governing GST valuation of corporate guarantees is valid, it cannot be applied retrospectively to guarantees furnished before 26 October 2023, and GST demands based on such retrospective application were quashed.