M/s. Sterlite Power Transmission Limited vs. Union of India

The Petitioner, Sterlite Power Transmission Limited, has challenged the imposition of GST on the activity of providing a corporate guarantee to a subsidiary company by the holding company on the premise that it does not fall within the ambit of supply of services.

Under Service Tax regime, corporate guarantees faced no taxes if no consideration was involved. It was also a view that corporate guarantees were akin to actionable claims and fell under Schedule III of the CGST Act, 2017 therefore it neither constituted the supply of goods nor services and accordingly not liable to GST. There was a lack of clarity on specific valuation mechanism in cases when a holding company provided a corporate guarantee to a subsidiary without receiving any consideration.

Based on the recommendation of the 52nd GST Council meeting, by Notification No. 52/2023-Central Tax dated 26.10.2023, Rule 28 of the Central Goods & Service Tax Act, 2017 was amended providing new valuation provision for corporate guarantees provided on behalf of a related person. CBIC has also issued Circular No. 204/16/2023-GST, dated 27-10-2023 clarifying that the activity of providing corporate guarantee to the bank/financial institutions for providing credit facility to the other company, where both the companies are related, is to be treated as supply of service. In case where no consideration is involved then also it is to be treated as a taxable supply of service as per provisions of Schedule I of CGST Act.

The petitioner has challenged the Circular, arguing that corporate guarantee is in the nature of a contingent contract which is not enforceable till the guarantee is enforced by the entity to which the guarantee is provided. The value of enforcement is not dependent on the value of the guarantee, and it is only where the guarantee is enforced that the issue of service may arise, if at all and as such fixing a value at 1% of the corporate guarantee provided would put onerous burden on the entity providing the corporate guarantee.

The Hon’ble Delhi High Court has issued a notice in the matter and directed that no coercive action should be taken against the petition where a final assessment is passed, or demand is created.

W&B Comments: The decision by the Hon’ble Delhi High Court to entertain the writ petition offers hope for clarity on GST implications for corporate guarantees. This could offer much-needed guidance, particularly after the ambiguity following the Supreme Court's ruling on non- applicability of service tax on corporate guarantee in the Edelweiss Financial Services Limited case. Despite the recent circular's attempt to address these issues, uncertainties persist regarding the timing and valuation of supplies.

Dated: May 18, 2024

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