Bombay HC Stays GST Demand on Corporate Guarantees

Schloss HMA Pvt Ltd Vs Union of India & Ors (Bombay High Court)

Schloss HMA Pvt Ltd filed a writ petition before the Bombay High Court, challenging the GST applicability on corporate guarantees issued to its subsidiaries. The petitioner argued that such guarantees do not constitute a “supply” under Section 7 of the CGST Act, 2017, and therefore should not be subject to tax under Section 9. Additionally, the petition sought to invalidate certain circulars, rules, and notifications issued in 2023 and 2024, claiming they were arbitrary and violated constitutional provisions. The petitioner also contested an adjudication order and a show cause notice issued in 2024, arguing that even if corporate guarantees were deemed taxable, they should fall under interstate supply and be governed by IGST, rather than CGST and State GST laws.

During the hearing, the court granted the State’s request for time to file an affidavit in response to the petitioner’s claims regarding IGST applicability. Pending further proceedings, the High Court issued an interim stay on the impugned adjudication order and show cause notice, preserving the petitioner’s position. The matter has been scheduled for a further hearing on February 18, 2025.

FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT

1. The above Writ Petition is filed seeking a declaration that the activity of the Petitioner issuing a corporate guarantee on behalf of its subsidiaries or related entities is not a “supply” under Section 7 of the Central Goods and Services Tax Act, 2017 (“CGST Act”) and is not leviable to tax under Section 9 of the CGST A further direction is sought that the impugned Circulars dated 27^th October 2023 and 11^th July 2024 as well as the impugned Rule 28 (2) of the CGST Rules and the impugned Notifications dated 26^th October 2023 and 10^th July 2024 are arbitrary and passed without the authority of law and violative of Articles 14 and 265 of the Constitution of India.

2. What is also assailed in the present Petition is the impugned/ adjudication order dated 29^th August 2024 issued by Respondent 5 as well as the subsequent show cause notice dated 11^th November 2024 also issued by Respondent No.5.

3. The first objection taken to the impugned order as well as the show cause notice is that in the present case, even assuming for the sake of argument that the activity of providing a corporate guarantee by the Petitioner to its subsidiaries or related parties is a supply of service, it is not a intrastate supply attracting the provisions of the State and the Central GST laws, but is an interstate supply which would attract the provisions of IGST It is the case of the Petitioner that in the facts of the present case though this is an interstate supply if at all the provisions of the State GST laws as well as the Central GST laws have been invoked. This is the first objection to the impugned order dated 29^th August 2024 and the subsequent show cause notice dated 18^th November 2024. We must add here that, it is also the case of the Petitioner that the providing of the corporate guarantee on behalf of its subsidiary is not a supply of service at all under Section 7 of the CGST Act, and is, therefore, not leviable to tax under Section 9 of the CGST Act.

4. Ms. Chavan, the learned AGP appearing on behalf of the State sought time to file an affidavit in reply to the above Writ Petition and more particularly to the first objection raised in relation to whether in the facts of the present case the provisions of the IGST, Act would apply or the provisions of the CGST Act would apply. Acceding to her request, we direct that the affidavit in reply, if any, shall be filed within a period of four weeks from today and a copy of the same shall be served on the advocates for the Petitioner. If the Petitioner wants to file any affidavit in rejoinder, they may do so within a period of two weeks from the date of service of the affidavit in reply.

5. In the meanwhile and without prejudice to the rights an contentions of the parties, and until further orders, the operation and effect of the impugned order dated 29^th August 2024 and the impugned show cause notice dated 18^th November 2024 are hereby stayed.

6. Stand over to 18^th February 2025.

7. This order will be digitally signed by the Private Secretary/ Personal Assistant of this All concerned will act on production by fax or email of a digitally signed copy of this order.