No GST on Corporate Guarantees to Group Companies? Bombay High Court Says Yes, but Ruling Faces Criticism

Facts of the Case

The petitioner issued Corporate Guarantees (CGs) to banks to secure loans obtained by its group companies. The guarantee deeds explicitly stated that no consideration would be received from the group companies for providing these guarantees. The GST authorities, however, demanded tax on the CGs. In response, the petitioner challenged both the levy of GST and the constitutional validity of an amendment to Rule 28(2) of the CGST Rules, which prescribes the valuation methodology for such guarantees.

High Court Ruling

The Bombay High Court ruled in favor of the petitioner, holding that GST is not leviable on corporate guarantees issued to group companies without consideration. Key observations included:

• CGs are issued to protect the financial exposure of group companies and are not comparable to bank guarantees issued by banks in the ordinary course of business.

• These are in-house guarantees, and the petitioner was not engaged in the business of issuing guarantees to customers on a regular basis.

• Relying on the Supreme Court’s decision in Edelweiss Financial Services Limited (holding that service tax does not apply to CGs issued without consideration), the Court concluded that in the absence of consideration, the transaction does not qualify as a taxable supply under GST.

• Notably, the Court upheld Rule 28(2) as intra vires (valid).

*Case reference: D P Jain & Co. Infrastructure Private Limited v. UOI, 2026-VIL-474-BOM*

Why This Ruling May Be Incorrect

Despite the High Court’s decision, legal commentators argue that the ruling is flawed for two key reasons:

1. Misplaced Reliance on Pre-GST Law – The Court’s reliance on the Supreme Court’s Edelweiss decision is misplaced. Unlike the service tax regime, the GST law explicitly deems transactions between related persons (including group companies) as taxable supplies even when made without consideration, under Serial No. 2 of Schedule I to the CGST Act.

2. Overly Narrow Interpretation of ‘Business’ – The definition of ‘business’ under GST is exceptionally broad and covers transactions regardless of their volume, frequency, or continuity. The Court failed to adequately consider this aspect, instead emphasizing that the petitioner was not regularly issuing guarantees to customers.

For these reasons, many experts believe the ruling overlooks critical provisions of GST law and may not be sustainable in further appeals.