Background
Pursuant to the 52nd GST Council meeting, Rule 28(2) of the CGST Rules, 2017 was inserted from October 26, 2023 to provide for taxable value of supply of corporate guarantee extended on behalf of related parties as 1% of the amount of such guarantee offered or actual consideration (whichever is higher).
Close on the heels, Circular No.204/16/2023-GST dated October 27, 2023 (item no.2 therein) was issued to clarify that corporate guarantee extended to banks / financial institutions on behalf of related parties, even when made without consideration, is a taxable supply. Further, to overcome the benefit of the 2nd proviso under Rule 28(1) ibid, it was clarified that valuation shall be governed by Rule 28(2) ibid in such cases as aforesaid, irrespective of whether the recipient is eligible to avail the full ITC or not.
Brief facts
Being an interim order with minimal facts, it appears the petitioner filed an appeal against a demand order seeking tax on provision of corporate guarantee.
Petitioner's contentions
The aforesaid circular impinges on the powers of the adjudicating and appellate authorities by clarifying provisions in the nature of adjudication. This negates the very purpose of filing an appeal. That is, the said circular forecloses discretion or judgment that may be exercised by the quasi-judicial authorities while deciding a particular dispute under particular circumstances. Reliance was placed on order dated July 23, 2015 of the Supreme Court in 2015 (39) S.T.R. 705 (S.C.).
Reliance was also placed on an interim order of the High Court of Delhi in [2024] 160 taxmann.com 381 (Delhi), wherein directions were issued to ensure no coercive action against the petitioner in the said citation. Therein, certain decisions in the service tax era were relied upon to contend non-taxability of corporate guarantee. The following aspects were also contended:
- Without amending the rule / statute, corporate guarantee has been taxed vide the aforesaid circular.
- Provision of corporate guarantee is in the nature of a contingent contract which is not enforceable until the guarantee is invoked.
- Value of enforcement is not dependent on the value of guarantee.
- Only when guarantee is enforced, supply of service may be said to take place.
- Fixing value of taxable supply as 1% of corporate guarantee places an onerous burden on the entity providing it.
Interim order of the High Court of Punjab & Haryana
[dated May 03, 2024 from CWP No. 10249 of 2024]
The Court stayed the effect and operation of Item No.2 of the said circular. However, the appellate authority shall be free to decide the petitioner's case without being influenced by the clarification.
Analysis / Comments
While the pre-negative list service tax era decisions stand on a different footing, inability to tax in the absence of consideration in the negative list era prior to the GST regime provided a silver lining. Unlike service tax, Schedule I under the CGST Act, 2017 explicitly brings supply of services between related parties (even without consideration) under the tax net.
Further, Section 7 ibid defined the term "supply" widely. While invocation of a corporate guarantee is contingent, can the provision of a corporate guarantee be termed as contingent since the entity (on whose behalf such guarantee is extended) immediately stands to benefit by sanction of credit facilities?
That being said, 200+ circulars have been issued to clarify numerous aspects of GST law within seven years of its promulgation, under the refuge of ensuring uniformity in implementation. This speaks volumes about the Executive enforcing its interpretation on laws drafted by the Legislature which should ideally be done by the judiciary. Nevertheless, it will be interesting to watch how jurisprudence unfolds on this litigation!
