Gujarat HC Restrains GST Order on Corporate Guarantee Dispute Pending Constitutional Challenge

Torrent Investment Pvt. Ltd. Vs Union of India & Ors. (Gujarat High Court)

Gujarat High Court Restrains Final GST Order on Corporate Guarantee Dispute Due to Pending Constitutional Challenge

The Gujarat High Court heard a writ petition challenging Rule 28(2) of the CGST/GGST Rules, 2017 and Circulars dated 27.10.2023 and 11.07.2024 relating to levy of GST on corporate guarantees issued by a holding company on behalf of its subsidiaries. The petitioner initially sought to challenge Section 7(1)(c) of the GST Acts read with Schedule I as ultra vires Article 246A of the Constitution but stated that this prayer was not being pressed at the current stage. The petitioner contended that it had not charged any fee or commission from its subsidiary for furnishing the corporate guarantee and therefore there was no consideration involved in the transaction.

It was argued that, in absence of consideration, the transaction should fall within the clarification provided in the Circular dated 27.10.2023 regarding personal guarantees by directors, where the open market value of such supply could be treated as zero, resulting in no GST liability. The petitioner also challenged the deemed valuation mechanism under Rule 28(2), which prescribes valuation of corporate guarantees at 1% per annum, alleging that it was arbitrary, confiscatory, discriminatory, and contrary to the GST scheme.

The petitioner informed the Court that similar issues concerning levy of GST on corporate guarantees valued at 1% were already under consideration before the Delhi High Court and the Punjab & Haryana High Court. It was further stated, on instructions, that the petitioner would continue to pay GST under protest in accordance with Rule 28(2) and the impugned circular from 01.08.2024, subject to the outcome of the petition.

Considering these submissions, the Gujarat High Court issued notice returnable on 11.09.2024. The Court permitted proceedings pursuant to the show-cause notice to continue but directed that no final order should be passed by the respondent authorities without the Court’s permission during the pendency of the petition.

FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT

By this petition under Article 226 of the Constitution of India, the petitioner has prayed for the following reliefs.

“A. This Hon’ble Court may be pleased to strike down and declare Section 7(1)(c) of the GST Acts read with Schedule 1 to the GST Acts as being ultra-vires Article 246A of the Constitution of India;

B. In any case this Hon’ble Court may be pleased to strike down and declare the impugned rule 28(2) of the GST Rules as well as circular dated 27.10.2023 (annexed at Annexure C) and circular dated 11.7.2024 (annexed at Annexure J) to be ultra-vires Articles 246A and 265 of the Constitution of India read with Section 9 and 7 of the GST Acts;

C. This Hon’ble Court may be pleased to declare that issuance of corporate guarantee without consideration to enable subsidiaries to avail credit facilities is not a taxable supply under the GST Acts;

D. Without prejudice to the above and in the alternative, this Hon’ble Court may be pleased to declare that impugned rule and circular providing deemed value of 1% per annum and the total tax calculated for all years is to be paid at the time of issuance of corporate guarantee is manifestly arbitrary, confiscatory, discriminatory and violating Article 14 of the Constitution of India as well as contrary to the scheme, object and purpose of the GST Acts;

E. This Hon’ble Court may be pleased to issue a writ of mandamus or writ in the nature of mandamus or any other appropriate writ or order directing the Respondents to forthwith refund the amount of tax paid by the Petitioner through Form GST DRC-03 along with statutory interest on such refund;

F. Pending notice, admission and final hearing of this petition, this Hon’ble Court may be pleased to stay further proceedings against the Petitioner pursuant to impugned rule and circulars and the Petitioner may be permitted to deposit tax under protest on the basis of the impugned rule and circular which may be treated as refundable subject to final outcome of the present petition;”

2. At the outset, learned senior advocate Mr.Soparkar submitted that so far as prayer (A) is concerned, the petitioner is not pressing the same at this juncture. With regard to other prayers to challenge Rule 28(2) of the Central/Gujarat Service Tax Rules, 2017 as well as Circular dated 27^th October, 2023 and Circular dated 11^th July, 2024 (Annexure-C & Annexure-P respectively), it was submitted that the Hon’ble High Court of Delhi in case of Sterlite Power Transmission Ltd. v. Union of India being W.P. (C) No.2966 of 2024 and Hon’ble Punjab & Haryana High Court in case of M/s. Acme Cleantech Solutions Pvt. Ltd. v. Union of India being WPC-10249-2024 are examining the similar issue of charging GST on 1% value of the corporate guarantee. It was submitted that the petitioner has made categorical statement in para-9 of the petition to the effect that petitioner is not charging any fee or commission from its subsidiary for providing corporate guarantee.

2.1 It was further submitted that in absence of any consideration, the case of the petitioner would also fall within the Issue No.1 like personal guarantee given by the Director as explained in Circular dated 27^th October, 2023 by treating the open market value of the transaction/supply to be treated as zero and therefore, taxable value of such supply to be treated as zero and no tax is payable on supply of service by the petitioner for furnishing the corporate guarantee on behalf of its subsidiary.

2.2 Learned senior advocate Mr.Soparkar submitted, upon instructions, that the petitioner shall pay GST as per the impugned Rule 28(2) of the CGST/GGST Rules, 2017 read with Circular dated 27^th October, 2023 from 01^st August, 2024 under protest, subject to outcome of this petition.

3. Considering the above submissions, issue Notice, returnable on 11^th September, 2024.

4. In the meanwhile, proceedings pursuant to show-cause notice may continue, however no final order shall be passed by the respondent authority without the permission of this Court during the pendency of this petition.

Direct service, through e-mail, is permitted.