In case of corporate guarantee, “No consideration- no tax liability under GST” Bombay High court.
In the recent case of M/s. D P Jain & Co. Infrastructure Private Limited vs Union of India and others Bombay High Courtheld that, In case of corporate guarantee, There was no flow of consideration for the rendering of services, so taxability does not arise. However amendment to the Valuation rule of taxation of corporate guarantee are constitutionally valid.
Facts of the case
The Petitioner Company M/s D.P. Jain & Co. infrastructure Pvt. Ltd. is engaged in the business of Construction of National and State Highways. In respect of projects awarded by the National Highways Authorities and State Corporations under HAM model to the subsidiary companies, and terms of contract, a deed of Corporate Guarantee was executed between the Petitioner and Banking institutions for subsidiaries.
the Assistant Commissioner of State carried out the detailed investigation against the Petitioner Company for the year 2017-18 to 2022-23. Later investigation was carried out by Central authority without stating the nature and purpose of investigation and the period of investigation and under which provisions of law such investigation was initiated.
It is contended that, the activity of providing corporate guarantee by a person on behalf of another related person or by the holding Company for sanction of credit facilities to its subsidiary Company, to the bank/financial institutions, even when made without any consideration will be treated as a taxable supply of service and thereby initiated proceeding against the present Petitioner holding liable to pay tax for the said corporate guarantee.
Court observations
A corporate guarantee is an agreement between a borrower, lender and guarantor, whereby the guarantor takes on the responsibilities of debt repayment, if the borrower defaults. Corporate guarantees are often provided by holding or group companies without any charges or consideration. The primary objective of these guarantees is to facilitate the smooth operations of subsidiary or group companies.
The corporate guarantee is in the nature of contingent contract which becomes enforceable only at the instance of the bank/financial institution in the event of a default. What is executed by the Petitioner was a corporate guarantee in favour of banks i.e. State Bank of India and Bank of Maharashtra against the loan advanced in favour of borrowers.
the corporate guarantee is a guarantee of one corporate unit to keep itself responsible for the financial obligations or any other contractual obligations of the principal debtor to the creditor on behalf of principal debtor. Corporate guarantees are issued without any security, whereas bank guarantee mostly require security against offer of such guarantee. Corporate guarantees are meant to provide assurances to the beneficiaries with same thin line distinction. Corporate guarantee depends on the credit worthiness of the parent-company/guarantor.
Conclusion:- The show cause notice issued by the State office is quashed and set aside. The proceedings initiated by the central authority by issuing summons is also quashed and set aside by the court.
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