Corporate guarantees issued to subsidiaries without consideration are not taxable supplies of services under GST.

The Petitioner, an infrastructure company, executed corporate guarantees in favor of banks (SBI and Bank of Maharashtra) to secure loans for its subsidiary companies/Special Purpose Vehicles (SPVs) for various highway projects

The guarantee deeds specifically stipulated that the Petitioner would not receive any security, fee, or commission for providing the guarantee

Respondent No. 5 (State Tax) conducted an investigation for the period 2017-18 to 2022-23 but raised no demand regarding these guarantees

Subsequently, Respondent No. 2 (DGGI) initiated fresh proceedings via summons based on Circular No. 204/16/2023 and Notification No. 52/2023, which deemed corporate guarantees between related persons as a "taxable supply of service" even without consideration

A Show Cause Notice was issued demanding GST at 1% of the guaranteed amount

1. Whether the activity of providing a corporate guarantee to a related person without consideration constitutes a "taxable supply of service" under the CGST Act

2. Whether Sub-Rule (2) of Rule 28 of the CGST Rules, 2017, and related circulars are ultra vires the parent Act

3. Whether the investigation by central authorities was barred under Section 6(2)(b) of the CGST Act due to prior state investigation

The court primarily applied Section 7 of the CGST Act, defining "supply" as necessitating "consideration" unless falling under Schedule I

It invoked Section 2(102), which defines "services" as activities for which a "separate consideration" is charged

It further relied on the Supreme Court precedent in Commissioner of CGST & Central Excise v. Edelweiss Financial Services Ltd., which held that providing a corporate guarantee without consideration does not attract tax as it lacks the essential element of a "flow of consideration"

Regarding the challenge to the vires of Rule 28(2), the court applied the "minimal scope" doctrine from R.K. Garg v. Union of India, asserting that legislative experiments in economic matters enjoy a presumption of constitutionality

The court reasoned that for an activity to be taxable under GST, it must involve a "provider," a "recipient," and a "flow of consideration"

While the Revenue argued that providing a guarantee is a service between "related persons" valued under Rule 28, the court noted that the Petitioner’s guarantee deeds explicitly prohibited the receipt of any fee or commission

Following Edelweiss, the court observed that corporate guarantees are "in-house" arrangements to safeguard group financial health and differ from bank guarantees issued as a regular business

Since there was no consideration, the transaction fell outside the scope of Section 9 and Section 7 of the CGST Act

However, the court refused to strike down Rule 28(2) as ultra vires, stating that the legislature has wide latitude to classify economic activities and that the rule may have valid administrative or economic objectives

Consequently, the court quashed the Show Cause Notice dated 28.01.2025 and the summons dated 20.07.2023. However, it rejected the prayer to declare Rule 28(2) of the CGST Rules and the impugned Circulars as ultra vires, maintaining the validity of the legislative provision while granting relief on the specific facts of the case