Recently, in a litigation concerning the taxability of corporate guarantees, the P&H High Court issued notice and stayed CBIC Circular dated 27.10.2023, to the extent it clarifies that the provision of corporate guarantee (CG) between related persons, even when made without any consideration, is to be treated as a supply of service between related parties as per provisions of Schedule I of CGST Act, 2017.
The issue that attained quietus under the service tax regime with the judgment by Supreme Court in the case of Edelweiss Financial Services Ltd., resurfaced with the inception of GST with deliberations by the GST Council on the valuation mechanism, subsequent insertion of rules by the Central Government and clarification issued by CBIC regarding taxability and valuation.
In the aforesaid case, the Petitioner has filed the Writ Petition challenging the legality and validity of the Rule 28(2) of the CGST Rules, 2017 which lay down the scheme of valuation in case of supply of corporate guarantee provided between related persons, as 1 per cent of the amount of such guarantee offered, or the actual consideration, whichever is higher; and the legality of Circular dated 27.10.2023, issued pursuant to 52nd GST Council meeting (held on 07.10.2023) to the extent it clarified that CG provided by a company to a bank/financial institutions providing credit facilities to the other company, where both companies are related, even when made without any consideration, is to be treated as a supply of service between related parties under the CGST Act, 2017.
The Petitioner has challenged the rule as being arbitrary, discriminatory and violative of Article 14 of the Constitution due to its infirmities, such as creating class legislation where the provision of corporate guarantees and any other supply between related persons are treated differently. Additionally, there is an absence of a discerning principle that emanates for fixing the measure of tax as 1 per cent; the transaction being declared supply of goods or a service through delegation legislation such as a rule and the measure of tax not having rational nexus with the taxable event i.e., provision of corporate guarantee. Further, the Petitioner has also challenged the Circular as being ultra vires Section 168 as the discretion of Adjudicating Authority and Appellate Authority is sought to be interfered by the executive by predetermining adjudicatory fact of whether or not a transaction qualifies as a supply of service. The matter is now listed on 20.08.2024.
The Petitioner had relied upon the decision of the Apex Court in the case of Union of India v. Karvy Stock Broking Ltd., (2019) 11 SCC 631 wherein a circular was issued clarifying the liability to pay service tax on the Commission received by distributors on mutual fund distribution. The Apex Court upheld the judgment of the High Court which set aside the Circular on the ground that it amounts to foreclosing discretion or judgment that may be exercised by the quasi-judicial authority while deciding a particular lis under particular circumstances. The Bench while issuing notice relied upon the said judgment and stayed the Circular dated 27.10.2023. The Bench also directed the Appellate Authority to decide the case of the Petitioner without being influenced by the clarification.
The order has been passed by Justice Sanjeev Prakash Sharma and Justice Sukhvinder Kaur of the Punjab and Haryana High Court.
Advocates for the Petitioner – Sr. Adv. Sujit Ghosh alongwith Advocates Mannat Waraich, Anshika Agarwal (from CSG Legal) and Abhinav Sood.
Advocates for the Respondent – Adv. Rishabh Kapoor, Sr. Standing Counsel and Adv. RKS, Brar, Addl. A.G. Punjab
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