Case Law Details
Manappuram Finance Ltd. Vs Union of India (Kerala High Court)
Summary: In the case of Manappuram Finance Ltd. v. Union of India, the Kerala High Court addressed whether GST applies to services provided by a company’s director in the form of a personal guarantee for loans or to intercompany loans extended by the company. Manappuram Finance received a show-cause notice demanding GST under the Reverse Charge Mechanism (RCM) for these transactions. The company argued that CBIC circulars, issued in October 2023 and June 2024, exempt these services from GST. The October circular states that no GST applies to directors’ personal guarantees, as these transactions lack direct monetary consideration. Similarly, the June circular exempts loans extended between related entities, where consideration is limited to interest or discount. The court upheld these CBIC guidelines, ruling that the GST demand was invalid. The decision aligns with the GST Council’s clarifications on related-party transactions, indicating that personal guarantees by directors and intercompany loans fall outside GST’s scope when no direct compensation is involved. Additionally, RBI guidelines discourage directors from receiving any form of commission or brokerage for personal guarantees. Consequently, the Kerala High Court quashed the show-cause notice, emphasizing adherence to CBIC circulars and RBI guidelines on these transactions.
The Hon’ble Kerala High Court in the case of M/s. Manappuram Finance Ltd. v. Union of India [Writ Petition (Civil) No. 24617 of 2022 dated July 29, 2024] wherein, M/s Manappuram Finance Ltd. (“the Petitioner”) was served the Show Cause Notice (“the Impugned SCN”) demanding the GST on the Reverse Charge Mechanism (“RCM”) for the services provided by the Managing Director concerning personal guarantee loans taken by the Petitioner and the GST payable for the services for extending the loans by the Petitioner to its subsidiary company.
Further, the Petitioner contended that, issues raised in the Impugned SCN had already addressed and clarified by the two circulars issued by the Central Board of Indirect Taxes and Customs (CBIC). However, as per the Circular No. 204/16/2023-GST dated October 27, 2023, no GST is payable for the services providing the personal guarantee loans by the Managing Director of the Petitioner. Further, as per the Circular No. 218/12/2024-GST dated June 26, 2024, GST is fully exempted for the services regarding the extension of loans in the case of related entities, in which the consideration is solely in the form of interest or discount.
Hence, the Hon’ble Kerala High Court, noted that the aforementioned Circulars issued by the CBIC are authoritative and must be adhered by the GST Authorities. Consequently, the Court quashed the Impugned SCN.
Our Comments:
The 52nd meeting of the GST Council was held on October 07, 2023 made the clarification regarding the taxability of the personal guarantee. Further, the Central Board of Indirect Taxes and Customs (CBIC) issued the Circular No. 204/16/2023-GST dated October 27, 202 which states that according to the Explanation (a) of the Section 15 of the Central Goods and Service Tax Act, 2017 (“the CGST Act”) the director and the company are to be treated as a related person. The supply of goods or services or both between related persons, when made in the course or furtherance of the business, should be treated as the supply even if made without consideration according to the Section 7(1)(c) of the CGST Act and the SI. No. 2 of the Schedule I of the CGST Act. Therefore, the activity of providing personal guarantee by the Director to the banks/ financial institutions for securing credit facilities for their companies is to be treated as a supply of service, even when made without consideration. Moreover, Rule 28 of the Central Goods and Service Tax Rules, 2017 (“the CGST Rules”) states the method for determining the value of supply of goods and services other than the supply is made through the agent. The taxable value of such supply of service will be treated as the open market value supply. Hence, the Reserve Bank of India (“RBI”), had issued the Circular No. RBI/2021-22/121 dated November 09, 2021 which stated that the Banks should take personal guarantee of promoters, directors, other managerial personnel or major shareholders or the credit facilities granted to corporate, public or private, only when absolutely warranted after a careful examination of the circumstances of the case and not as a matter of course. Where personal guarantees of directors are warranted, they should bear reasonable proportion to the estimated worth of the person. The system of obtaining guarantees should not be used by the directors and other managerial personnel as a source of income from the company. Banks should obtain an undertaking from the borrowing company as well as the guarantors that no consideration whether by way of commission, brokerage fees or any other form, would be paid by the former or received by the latter, directly or indirectly. This requirement should be incorporated in the bank’s terms and conditions for sanctioning of credit limits.
There shall be no consideration by way of commission, brokerage fees or any other form, can be paid to the director by the company, directly or indirectly, in lieu of providing personal guarantee to the bank for borrowing credit limits. When no consideration can be paid for the said transaction by the company to the director in any form, directly or indirectly, as per RBI mandate, there is no question of such supply/ transaction having any open market value. The open market value of the said transaction/ supply may be treated as zero and therefore, taxable value of such supply may be treated as zero. Hence, no tax is payable on such supply of service by the director to the company.
After, the 53rd meeting of the GST council held on June 22, 2024, the CBIC issued the Circular No. 218/12/2024-GST dated June 26, 2024 which had given the clarifications on the taxability of the transaction for providing a loan by an overseas affiliate to its Indian affiliate or a person to a related person that according to Section 7(c) of the CGST Act and Schedule I, any supply of goods or services between related persons, even without consideration, is considered a taxable supply under GST. Therefore, the provision of loans, credit, or advances by an entity to its related entity (whether overseas or domestic) is deemed as a supply under GST regulations. Further, the services involving the extensions of the deposits, loans, or advances where the consideration is represented by the way of interest or discount, are fully exempted under GST as per Entry 27(a) of Notification No.12/2017-Central Tax (Rate) dated June 28, 2017.
FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT
The issues raised in this writ petition appear to be covered in favour of the petitioner in the light of clarifications issued vide Circular No. 204/16/2023-GST dated October 27, 2023, and also by Circular No. 218/12/2024-GST dated June 26, 2024, issued by the GST Policy Wing, Central Board of Indirect Taxes and Customs, Department of Revenue, Ministry of Finance, Government of India. The questions raised are whether any GST is payable on reverse charge basis on supply of services by the Managing Director of the company by way of providing personal guarantee on loans taken by the company and whether any GST is payable on supply of services by way of extending loans by the petitioner-company to its subsidiary company. In Circular No. 204/16/2023-GST dated October 27, 2023, it was clarified as follows:
| Sl. No. | Issue | Clarification |
| 1 | Whether the activity of providing personal guarantee by the Director of a company to the bank/ financial institutions for sanctioning of credit facilities to the said company without any consideration will be treated as a supply of service or not and whether the same will attract GST or not. |
As per Explanation (a) to section 15 of CGST Act, the director and the company are to be treated as related persons. As per clause (c) of Sub-section (1) of section 7 of the CGST Act, 2017, read with S. No. 2 of Schedule I of CGST Act, supply of goods or services or both between related persons, when made in the course or furtherance of business, shall be treated as supply even if made without consideration. Accordingly, the activity of providing personal guarantee by the Director to the banks/ financial institutions for securing credit facilities for their companies is to be treated as a supply of service, even when made without consideration.Rule 28 of Central Goods and Services Tax Rules, 2017 (hereinafter referred to as “CGST Rules”) prescribes the method for determining the value of the supply of goods or services or both between related parties, other than where the supply is made through an agent. In terms of Rule 28 of CGST Rules, the taxable value of such supply of service shall be the open market value of such supply.RBI has provided guidelines for obtaining personal guarantee of promoters, directors and other managerial personnel of the borrowing concerns vide Para 2.2.9 of its Circular No. RBI/2021-22/121 dated 9th November, 2021, which is reproduced below:“2.2.9 Guidelines relating to obtaining of personal guarantees of promoters, directors, other managerial personnel, and shareholders of borrowing concernsBanks should take personal guarantees of promoters, directors, other managerial personnel or major shareholders for the credit facilities granted to corporates, public or private, only when absolutely warranted after a careful examination of the circumstances of the case and not as a matter of course. In order to identify the circumstances under which the guarantee may or may not be considered necessary, banks should be guided by the following broad considerations:………………………………….C. Worth of the guarantors, payment of guarantee commission, etc Where personal guarantees of directors Accordingly, as per mandate provided by Accordingly, the open market value of the said transaction/ supply may be treated as zero and therefore, taxable value of such supply may be treated as zero. In such a scenario, no tax is payable on such supply of service by the director to the company. There may, however, be cases where the director, who had provided the |
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The above Circular takes care of the first issue raised in this writ petition. The second issue is covered by the clarification given in Circular No.218/12/2024-GST dated 26-06-2024 where it was clarified as follows:
| Sl. No. | Issue | Clarification |
| Clarification regarding taxability of the transaction of providing loan by an overseas entity to its Indian related entity or by a person in India to a related person |
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| 1 | Whether the activity of providing loans by an overseas affiliate to its Indian affiliate or by a person to a related person, where there is no consideration in the nature of processing fee/ administrative charges/ loan granting charges etc., and the consideration represented only by way of interest or discount, will be treated as a taxable supply of service under GST or not. |
1. As per clause (c) of sub-section (1) of section 7 of the CGST Act, read with S. No. 2 and S. No. 4 of Schedule I of CGST Act, supply of goods or services or both between related persons, when made in the course or furtherance of business, shall be treated as supply, even if made without consideration. Therefore, it is evident that the service of granting loan/ credit/ advances by an entity to its related entity is a supply under GST.
2. Services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services) are exempted under sub entry (a) of entry 27 of Notification No. 12/2017-Central Tax (Rate). Therefore, it is clear that the supply of services of granting loans/ credit/ advances, in so far as the consideration is represented by way of interest or discount, is fully exempt under GST. 3. It is mentioned that overseas affiliates or domestic related persons are generally charging no consideration in the form of processing fee/ service fee, other than the consideration by way of interest or 4. It is significant to note that the processing/ service fee is generally 0. However, when an entity is extending a loan to a related entity, it may not require to follow such processes as are followed by an independent lender. For example, it may not need to go through the same process of information gathering about the borrower’s business, his financial standing and credibility and other details, as the required information may already be readily available within the group, or between related persons. The lender may not also take any collateral from the borrower. Accordingly, in case of loans provided between related parties, there may not be the activity of ‘processing’ the loan, and no administrative cost may be involved in granting such a loan. Therefore, it may not be desirable to place the services being provided for processing the loans by banks or independent lenders vis-a-vis the loans provided by a related party, on equal footing. 6. Even in case of loans provided between unrelated parties, there may not be any processing fee/ administrative charges/ loan granting charges etc., based on the relationship between the bank/ independent lender and the person taking the loan. The lender might waive off the administrative charges in full, based on the nature and amount of loan granted, as well as based on the relationship between the lender and the concerned person taking the loan. 7. Accordingly, in the cases, where no consideration is charged by the person from the related person, or by an overseas affiliate from its Indian party, for extending loan or credit, other than by way of interest or discount, it cannot be said that any supply of service is being provided between the said related persons in the form of processing/ facilitating/ administering the loan, by deeming the same as supply of services as per clause (c) of sub-section (1) of section 7 of the CGST Act, read with S. No. 2 and S. No. 4 of Schedule I of CGST Act. Accordingly, there is no question of levy of GST on the same by resorting to open market value for valuation of the same as per rule 28 of Central Goods and Services Tax Rules, 2017. 8. However, in cases of loans provided between related parties, wherever any fee in the nature of processing fee/ administrative charges/ service fee/ loan granting charges etc. is charged, over and above the amount charged by way of interest or discount, the same may be considered to be the consideration for the supply of services of processing/ facilitating/ administering of the loan, which will be liable to GST as supply of services by the lender to the related person availing the loan. |
The Circulars issued by the Central Board are binding on the authorities.
2. The learned Senior Standing Counsel appearing for the respondent department does not dispute that the issues raised are covered by virtue of the clarifications given in the Circulars referred to above. It is not disputed that the impugned show cause notice does not deal with any other issue.
In the light of the above and without going into the merits of any other contention taken in the writ petition, this writ petition is allowed and Ext.P1 show cause notice will stand quashed.
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