{"id":30413,"date":"2025-11-11T14:44:37","date_gmt":"2025-11-11T09:14:37","guid":{"rendered":"https:\/\/carajput.com\/blog\/?p=30413"},"modified":"2025-11-11T14:45:26","modified_gmt":"2025-11-11T09:15:26","slug":"corporate-guarantee-under-rule-282-when-2-fictions-collide","status":"publish","type":"post","link":"https:\/\/carajput.com\/blog\/corporate-guarantee-under-rule-282-when-2-fictions-collide\/","title":{"rendered":"Corporate Guarantee under Rule 28(2) When 2 Fictions Collide"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_58 counter-hierarchy ez-toc-counter ez-toc-light-blue ez-toc-container-direction\">\n<p class=\"ez-toc-title\">Page Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69db59eb25556\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #000000;color:#000000\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #000000;color:#000000\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69db59eb25556\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/carajput.com\/blog\/corporate-guarantee-under-rule-282-when-2-fictions-collide\/#Corporate_Guarantees_under_GST_Rule_282_When_2_Fictions_Collide\" title=\"Corporate Guarantees under GST (Rule 28(2)) : When 2 Fictions Collide\">Corporate Guarantees under GST (Rule 28(2)) : When 2 Fictions Collide<\/a><ul class='ez-toc-list-level-3'><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/carajput.com\/blog\/corporate-guarantee-under-rule-282-when-2-fictions-collide\/#Background\" title=\"Background\">Background<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/carajput.com\/blog\/corporate-guarantee-under-rule-282-when-2-fictions-collide\/#Grounds_of_Writ\" title=\"Grounds of Writ\">Grounds of Writ<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/carajput.com\/blog\/corporate-guarantee-under-rule-282-when-2-fictions-collide\/#Text_of_Rule_28_of_the_CGST_Rules_2017\" title=\"Text of Rule 28 \u00a0of the CGST Rules, 2017:\">Text of Rule 28 \u00a0of the CGST Rules, 2017:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/carajput.com\/blog\/corporate-guarantee-under-rule-282-when-2-fictions-collide\/#%E2%80%9CFiction_of_Value%E2%80%9D_Rule_282\" title=\"\u201cFiction of Value\u201d : Rule 28(2)\u00a0\">\u201cFiction of Value\u201d : Rule 28(2)\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/carajput.com\/blog\/corporate-guarantee-under-rule-282-when-2-fictions-collide\/#The_%E2%80%9CFiction_of_Actuality%E2%80%9D_Proviso_to_Rule_28\" title=\"The \u201cFiction of Actuality\u201d : Proviso to Rule 28 \">The \u201cFiction of Actuality\u201d : Proviso to Rule 28 <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/carajput.com\/blog\/corporate-guarantee-under-rule-282-when-2-fictions-collide\/#When_the_Two_Fictions_Collide\" title=\"When the Two Fictions Collide : \">When the Two Fictions Collide : <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/carajput.com\/blog\/corporate-guarantee-under-rule-282-when-2-fictions-collide\/#Courts_Approach-_Conceptual_Resolution\" title=\"Court\u2019s Approach- Conceptual Resolution \">Court\u2019s Approach- Conceptual Resolution <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/carajput.com\/blog\/corporate-guarantee-under-rule-282-when-2-fictions-collide\/#In_summary_of_above_implication_of_above_rule_under_CGST_Rules_2017\" title=\"In summary of above implication of above rule under CGST Rules, 2017\u00a0\">In summary of above implication of above rule under CGST Rules, 2017\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/carajput.com\/blog\/corporate-guarantee-under-rule-282-when-2-fictions-collide\/#Practitioners_Takeaway_Conceptual_Summary\" title=\"Practitioner\u2019s Takeaway: Conceptual Summary\">Practitioner\u2019s Takeaway: Conceptual Summary<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-30414\" src=\"https:\/\/carajput.com\/blog\/wp-content\/uploads\/2025\/11\/1762485541012.jpg\" alt=\"Corporate Guarantees under GST (Rule 28(2)) \" width=\"1121\" height=\"1679\" srcset=\"https:\/\/carajput.com\/blog\/wp-content\/uploads\/2025\/11\/1762485541012.jpg 480w, https:\/\/carajput.com\/blog\/wp-content\/uploads\/2025\/11\/1762485541012-200x300.jpg 200w\" sizes=\"(max-width: 1121px) 100vw, 1121px\" \/><\/h2>\n<h2><span class=\"ez-toc-section\" id=\"Corporate_Guarantees_under_GST_Rule_282_When_2_Fictions_Collide\"><\/span><span style=\"color: #000080;\"><strong>Corporate Guarantees under GST (Rule 28(2)) : When 2 Fictions Collide<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The Madurai Bench of the Madras High Court (Order <em>W.P.(MD) No. 2021 of 2025<\/em>, decided on 06.10.2025) has reignited the debate over how Rule 28(2) and its Proviso interact when valuing corporate guarantees under GST.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Background\"><\/span><span style=\"color: #000080;\"><strong>Background<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>The Petitioner had extended a corporate guarantee to a related party without charging any fee. The Department invoked Rule 28(2) to impute an arm\u2019s-length value, treating it as a taxable supply between related parties \u00a0The GST Department treated the act of issuing the guarantee as a taxable supply under Rule 28(2) of the CGST Rules, 2017, imputing a notional value on an arm\u2019s-length basis.<\/p>\n<p>The Petitioner challenged this valuation before the High Court, arguing that no consideration was received and that CBIC\u2019s own clarifications supported the view that such transactions carry nil taxable value.<\/p>\n<p>Justice G.R. Swaminathan examined a key interpretative conflict : when the law itself creates two competing fictions, which one should prevail?\u00a0 <em>\u201ctwo fictions\u201d<\/em> that clash in Rule 28(2) of the CGST Rules, 2017 when applied to corporate guarantees or related party transactions.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Grounds_of_Writ\"><\/span><span style=\"color: #000080;\"><strong>Grounds of Writ<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>The Petitioner relied on the following key points:<\/p>\n<ol>\n<li>No consideration was received for issuing the corporate guarantee, hence there was no supply within the meaning of Section 7 of the CGST Act.<\/li>\n<li>CBIC Circular No. 199\/11\/2023-GST (17.07.2023) and Circular No. 210\/4\/2024-GST (26.06.2024) \u2014 both clarify that:\n<ul>\n<li>Corporate guarantees issued to related or group entities without consideration should be treated as having nil value, particularly when the recipient is eligible for full Input Tax Credit (ITC).<\/li>\n<\/ul>\n<\/li>\n<li>The assessing authority failed to consider these binding circulars and the Petitioner\u2019s written submissions, violating the principles of natural justice.<\/li>\n<\/ol>\n<p>Rule 28 of the CGST Rules, 2017: \u00a0Valuation of supply between distinct or related persons :\u00a0Rule 28 of the CGST Rules, 2017 governs how to determine the <em>value of supply<\/em> when goods or services are exchanged between related or distinct persons, even when no actual consideration (payment) exists : such as between holding and subsidiary companies.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Text_of_Rule_28_of_the_CGST_Rules_2017\"><\/span><span style=\"color: #000080;\"><strong>Text of Rule 28 \u00a0<\/strong>of the <strong>CGST Rules, 2017:<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>When goods\/services are supplied between related persons, the <strong>value<\/strong> shall be:<\/p>\n<ul>\n<li>(a) Open market value or<\/li>\n<li>(b) Value of like kind and quality, or<\/li>\n<li>(c) Cost + 10%, etc.<\/li>\n<\/ul>\n<p>Then comes the <strong>Proviso<\/strong>, which changes the picture completely.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"%E2%80%9CFiction_of_Value%E2%80%9D_Rule_282\"><\/span><span style=\"color: #000080;\"><strong>\u201cFiction of Value\u201d : Rule 28(2)<\/strong><strong>\u00a0<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Rule 28(2) of the CGST Rules, 2017 <em>creates a legal fiction<\/em> \u00a0it pretends there is an open-market value even if no such market value actually exists. Which says that in effect: \u201cEven if you haven\u2019t charged any price, we\u2019ll assume there <em>is<\/em> a price : and we\u2019ll impute it.\u201d So, if Company A gives a corporate guarantee to support the loan of its subsidiary B <em>without charging any fee<\/em>, Rule 28(2) of the CGST Rules, 2017 tells the officer to assign a notional value (say 1% of guaranteed amount, as per RBI norms or OECD comparables) and levy GST on that <em>imaginary consideration<\/em>. <em>This is the \u201cfiction of value\u201d \u00a0the law invents a value that doesn\u2019t exist in reality.<\/em><\/p>\n<h3><span class=\"ez-toc-section\" id=\"The_%E2%80%9CFiction_of_Actuality%E2%80%9D_Proviso_to_Rule_28\"><\/span><span style=\"color: #000080;\"><strong>The \u201cFiction of Actuality\u201d : Proviso to Rule 28 <\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Now the Proviso to Rule 28 of the CGST Rules, 2017 says: \u201c<em>Provided that where the recipient is eligible for full ITC, the value declared in the invoice shall be deemed to be the open market value of the goods or services supplied.<\/em>\u201d<\/p>\n<p>This creates the opposite fiction it <em>accepts whatever value the parties have declared<\/em> (even zero, in some interpretations) as deemed to be correct, as long as the recipient can fully claim Input Tax credit. <em>This is the \u201cfiction of actuality\u201d is the law pretends that the declared transaction value is real and acceptable.<\/em><\/p>\n<h3><span class=\"ez-toc-section\" id=\"When_the_Two_Fictions_Collide\"><\/span><span style=\"color: #000080;\"><strong>When the Two Fictions Collide : <\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>In corporate guarantee cases when The supplier (holding company) often charges no consideration. &amp; The Department invokes Rule 28(2) saying a <em>notional value<\/em> must be imputed (fiction of value). Then The taxpayer invokes the Proviso of above rule of the CGST Rules, 2017 saying since the subsidiary (recipient) can take full Input Tax credit, the declared value (even zero) should be <em>deemed<\/em> the correct value (fiction of actuality). Hence, two fictions collide:<\/p>\n<ul>\n<li>One creates a value that never existed (valuation fiction).<\/li>\n<li>The other accepts the declared value as if it were genuine (actuality fiction).<\/li>\n<\/ul>\n<p>The Madurai Bench (Justice G.R. Swaminathan) essentially examined: When both fictions apply, which one should prevail : valuation or actuality?<\/p>\n<p><span style=\"color: #000080;\"><strong>The Core Conflict<\/strong><\/span><\/p>\n<ul>\n<li>Rule 28(2) introduces a <em>fiction of value<\/em> : deeming a notional open-market value even when none exists.<\/li>\n<li>The Proviso introduces a <em>fiction of actuality<\/em> : deeming the declared value to be acceptable if the recipient is eligible for full Input Tax credit.<\/li>\n<\/ul>\n<p>The Court thus faced the jurisprudential question: <em>When valuation fiction and transactional actuality collide, which governs?<\/em><\/p>\n<h3><span class=\"ez-toc-section\" id=\"Courts_Approach-_Conceptual_Resolution\"><\/span><span style=\"color: #000080;\"><strong>Court\u2019s Approach- Conceptual Resolution <\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>\u201cIt is a well-settled principle of administrative law that when a defense raised by the noticee is not considered in the final order, the order is vulnerable on that ground.\u201d The Court underscored that quasi-judicial authorities must address all relevant submissions and circulars before reaching a conclusion particularly when departmental circulars are binding on tax officers under Section 168 of the CGST Act.<\/p>\n<p>The judgment underscores natural justice and legislative intent, preferring an interpretation that preserves commercial reality over mechanical application of deeming provisions.<\/p>\n<p>The High Court Set aside the impugned GST order, holding that the assessing authority had failed to consider the Petitioner\u2019s defense and the binding CBIC circulars. Remanded the matter back to the Department for fresh adjudication on merits, directing that the authority must duly consider The Petitioner\u2019s defense, CBIC Circulars Nos. 199\/11\/2023 and 210\/4\/2024, and The evidentiary record before passing any fresh order.<\/p>\n<p>The Court leaned toward the fiction that aligns with commercial reality and legislative intent, i.e., the Proviso. Because If the recipient can claim full ITC, there\u2019s no loss of revenue to the exchequer. So Therefore, there\u2019s no need to invent a fictitious value merely for the sake of form. Thus, the Proviso (fiction of actuality) <em>overrides<\/em> the deeming valuation rule when both can apply. It highlights that valuation under GST cannot disregard the substance of the transaction : especially when no consideration truly changes hands. (<em>W.P. (MD) No. 2021 of 2025<\/em> \u2014 Decided by Justice G.R. Swaminathan, Madurai Bench of the Madras High Court)<\/p>\n<h3><span class=\"ez-toc-section\" id=\"In_summary_of_above_implication_of_above_rule_under_CGST_Rules_2017\"><\/span><span style=\"color: #000080;\"><strong>In summary of above implication of above rule under CGST Rules, 2017<\/strong><strong>\u00a0<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<table>\n<thead>\n<tr>\n<td><strong>Aspect<\/strong><\/td>\n<td><strong>Fiction of Value (Rule 28(2))<\/strong><\/td>\n<td><strong>Fiction of Actuality (Proviso)<\/strong><\/td>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Nature<\/td>\n<td>Deems a notional open-market value even if no consideration exists<\/td>\n<td>Deems declared value (even nil) as acceptable if recipient gets full ITC<\/td>\n<\/tr>\n<tr>\n<td>Purpose<\/td>\n<td>Prevent undervaluation between related parties<\/td>\n<td>Avoid redundant valuation when revenue neutral<\/td>\n<\/tr>\n<tr>\n<td>Impact<\/td>\n<td>Creates artificial tax incidence<\/td>\n<td>Prioritizes commercial and legislative coherence<\/td>\n<\/tr>\n<tr>\n<td>Favoured by<\/td>\n<td>Tax department<\/td>\n<td>Taxpayer and courts (in revenue-neutral cases)<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><span style=\"color: #000080;\"><strong>Why It Matters<\/strong><\/span><\/p>\n<p>This ruling invites a rethink of corporate guarantee valuation under GST : moving beyond formulaic computation toward maintaining conceptual coherence within the GST framework. Key Takeaways for Practitioners<\/p>\n<ol>\n<li>Binding Nature of Circulars: CBIC circulars clarifying \u201cnil value\u201d for intra-group guarantees are binding on departmental officers, even if not favourable to revenue.<\/li>\n<li>Natural Justice: Failure to address the taxpayer\u2019s defense \u2014 especially reliance on departmental circulars \u2014 renders an order vulnerable to judicial review.<\/li>\n<li>Rule 28 Fictions: The case reinforces that the Proviso to Rule 28 (fiction of actuality) may override the main Rule 28(2) (fiction of value) in revenue-neutral situations where full ITC is available.<\/li>\n<li>Remand Implication: Adjudicating authorities must balance valuation fiction with commercial reality while ensuring procedural fairness.<\/li>\n<\/ol>\n<h3><span class=\"ez-toc-section\" id=\"Practitioners_Takeaway_Conceptual_Summary\"><\/span><span style=\"color: #000080;\"><strong>Practitioner\u2019s Takeaway: Conceptual Summary<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<table style=\"height: 370px;\" width=\"1055\">\n<thead>\n<tr>\n<td>Legal Principle<\/td>\n<td>Key Point<\/td>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Fiction of Value<\/td>\n<td>Imputed arm\u2019s-length value under Rule 28(2)<\/td>\n<\/tr>\n<tr>\n<td>Fiction of Actuality<\/td>\n<td>Deemed acceptance of declared value when full ITC available<\/td>\n<\/tr>\n<tr>\n<td>Judicial Preference<\/td>\n<td>Courts favour actuality over artificial valuation where revenue is neutral<\/td>\n<\/tr>\n<tr>\n<td>Administrative Principle<\/td>\n<td>Non-consideration of defense\/circulars = violation of natural justice<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Each corporate guarantee case now entails a three-layered approach:<\/p>\n<ul>\n<li>Procedural defence : notice validity, opportunity of hearing.<\/li>\n<li>Interpretative fiction : deciding which deeming provision governs.<\/li>\n<li>Evidentiary record : establishing absence or presence of commercial consideration.<\/li>\n<\/ul>\n<p>These are not mere valuation disputes anymore; they are tests of legislative coherence.<br \/>\nWhen this finally reaches the Tribunal, the question won\u2019t simply be \u201chow much tax is payable\u201d \u00a0it will be \u201cwhich legal fiction survives judicial scrutiny.\u201d<\/p>\n<p>This decision, while procedural in form, carries substantive implications: it reinforces that valuation under GST must be consistent with both legal coherence and administrative discipline. Corporate guarantees without consideration \u00a0where ITC neutralizes tax impact \u00a0cannot be artificially monetized merely through deeming provisions.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Corporate Guarantees under GST (Rule 28(2)) : When 2 Fictions Collide The Madurai Bench of the Madras High Court (Order W.P.(MD) No. 2021 of 2025, decided on 06.10.2025) has reignited the debate over how Rule 28(2) and its Proviso interact when valuing corporate guarantees under GST. Background The Petitioner had extended a corporate guarantee to &hellip;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[10020],"tags":[10361],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/posts\/30413"}],"collection":[{"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/comments?post=30413"}],"version-history":[{"count":2,"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/posts\/30413\/revisions"}],"predecessor-version":[{"id":30416,"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/posts\/30413\/revisions\/30416"}],"wp:attachment":[{"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/media?parent=30413"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/categories?post=30413"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/tags?post=30413"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}