Ranjeet Mahtani: Gujarat HC Ruling on GST Corporate Guarantees a Mixed Bag for Taxpayers

Bilkul Bazaar

Ahmedabad

Gujarat High Court Upholds GST Levy on Corporate Guarantees, Offers Relief on Valuation and Retrospective Demands

The Gujarat High Court’s recent ruling on the GST treatment of corporate guarantees is a mixed bag of outcomes for taxpayers, according to Ranjeet Mahtani, Partner, Dhurva Advisors.

“The challenge to the provisions concerning levy of GST and valuation of corporate guarantees before the Gujarat High Court enabled it to undertake a deep-dive analysis covering branches of contract law, transfer pricing principles and the Constitutional aspects. The resultant judgment in Torrent Power is a mixed bag of outcomes.

Firstly, the Court rebuffed the challenge, instead affirmed that corporate guarantees constitutes a taxable ‘supply of service’ under the GST law, treating the borrowing subsidiary/group entity as the recipient. Expectedly, the judgement distinguishes the Supreme Court’s ruling in Edelweiss by applying the deeming fiction qua supply, which provision allows for taxation of certain transactions sans consideration. The Court declined to adopt the OECD transfer pricing principles with respect to shareholder activity, instead concluded that providing corporate guarantees should be regarded as a transaction undertaken in the course and furtherance of business. Second, the constitutional validity of valuation provisions in Section 15(4) and Rule 28(2) was upheld.

The first silver lining for the taxpayer is that the Court, by applying the Wipro principle, read down Rule 28(2)’s mandatory 1% floor value, wherever actual consideration exists. This creates the plank for businesses to benchmark transactions and charge actual consideration, where such benchmark value is lower than the 1% prescribed in law. It is equally crucial that Rule 28(2) is declared as prospective in nature; this implies GST demands on corporate guarantees given prior to October 26, 2023, are legally unsustainable, at this point in time.

This battle will likely move to the Supreme Court, given the footprint of this topic across India as also variety of sectors it covers, pending writ petitions in various High Courts, and the verdict from the Bombay High Court in D.P. Jain’s case. Nonetheless, taxpayers, especially in the infrastructure, real estate, utilities space will heave a sigh of relief with the pair of favourable outcomes.”

According to Mahtani, the ruling therefore provides important relief on the valuation and retrospective application of the GST provisions, even as the Gujarat High Court has upheld the fundamental levy of GST on corporate guarantees. The issue is likely to see further judicial scrutiny, with the possibility of the matter reaching the Supreme Court.