Introduction
In Torrent Power Ltd. v. Union of India & Ors. Decided on 14 August 2026 (SCA/12175/2024), the Gujarat High Court examined the GST treatment of corporate guarantees furnished between related persons without consideration. The Court held that such guarantees can constitute a taxable supply under Schedule I of the CGST Act even where no consideration is charged.
The Court also upheld the 1% valuation mechanism under Rule 28(2) but found the words “whichever is higher” to be arbitrary and read them down. Thus, while GST on corporate guarantees remains valid, the valuation mechanism cannot automatically impose the higher of the actual consideration and 1% of the guaranteed amount.
Factual Matrix
The petitions before the Court were filed principally by holding companies which had furnished corporate guarantees in favour of their subsidiaries. These guarantees were provided to financial institutions as collateral security to enable subsidiaries to obtain or maintain credit facilities. The petitioners contended that these were standard intra-group arrangements and, importantly, were often furnished without consideration.
The legal position became complicated following the introduction of Rule 28(2) of the CGST Rules through Notification No. 52/2023 dated 26 October 2023. The provision prescribed that the value of a corporate guarantee supplied by a supplier to a related person located in India would be deemed to be one per cent of the amount of the guarantee offered per annum, or the actual consideration, whichever was higher. The expression “per annum” was subsequently inserted with effect from 26 October 2023 through Notification No. 12/2024 dated 10 July 2024. Before this amendment, the GST framework did not contain a specific valuation mechanism for non-monetary corporate guarantees.
The difficulty was not merely prospective. Several corporate guarantees considered by the Court had been executed much before Rule 28(2) came into existence, with some dating between 2012 and 2023. The Revenue nevertheless sought to apply the one-per-cent valuation to such guarantees, including those which continued beyond the introduction of Rule 28(2).
The petitioners consequently challenged the constitutional validity of Rule 28(2), the relevant provisions of Section 15 of the CGST Act and the CBIC circulars issued in relation to corporate guarantees. They also questioned the validity of demands raised against them, particularly where the Revenue had proceeded on the basis of the one-per-cent deemed valuation.
Issues Before The Court
The controversy essentially revolved around four questions:
- Can a corporate guarantee furnished without consideration constitute a taxable supply under GST?
- Does Rule 28(2) validly prescribe one per cent of the guarantee value as the taxable value?
- Is the expression “whichever is higher” constitutionally sustainable where actual consideration is lower than one per cent?
- Can Rule 28(2) be used to impose GST on guarantees issued before 26 October 2023?
The Court’s answers to these questions produced a carefully calibrated judgment rather than an all-or-nothing outcome.
Holding By The Court
The Hon’ble Gujarat High Court held that a corporate guarantee furnished between related persons constitutes a taxable supply under GST even where no consideration is received, as Section 7(1)(c) read with Schedule I specifically covers certain related-party transactions without consideration. The Court distinguished the Supreme Court’s decision in Edelweiss Financial Services Ltd., which arose under the erstwhile service tax regime where consideration was an essential requirement for taxation.
On valuation, the Court upheld the constitutional validity of Rule 28(2) and the Government’s authority to prescribe a deemed value of 1% of the amount guaranteed per annum for corporate guarantees. However, it found the requirement to adopt “whichever is higher” between the actual consideration and the 1% deemed value to be arbitrary, particularly where the actual commercial commission may be substantially lower than 1%. The Court therefore read down these words, holding that taxpayers cannot be compelled to adopt the higher value merely because the prescribed benchmark exceeds the actual consideration.
The Court further held that Rule 28(2) cannot operate retrospectively. Since the provision came into force only on 26 October 2023, the 1% valuation mechanism cannot be applied to corporate guarantees for periods preceding that date. Where a guarantee continued beyond 26 October 2023, however, the rule could apply prospectively from that date.
Accordingly, the Court upheld the levy of GST on corporate guarantees and the 1% valuation framework, while placing constitutional limits on its application by reading down “whichever is higher” and rejecting retrospective application. The relevant portions of the impugned circulars and consequential proceedings were set aside, with refund or adjustment of excess amounts to follow wherever applicable.
AMLEGALS Remarks
The Hon’ble Gujarat High Court’s decision in Torrent Power Ltd. v. Union of India & Ors. is significant as it clearly distinguishes taxability from valuation under GST. While corporate guarantees between related persons may constitute taxable supplies even without consideration, the valuation mechanism prescribed for such supplies must independently satisfy constitutional standards.
The judgment is particularly relevant for corporate groups where guarantees are commonly furnished without a separate fee. Taxpayers will need to consider the date of the guarantee, its period of continuation and the actual consideration, if any, while determining the applicable GST valuation. The Court’s decision to read down “whichever is higher” preserves Rule 28(2) and its legislative objective while preventing an inflexible valuation from creating an arbitrary or excessive tax burden.
The ruling therefore does not remove corporate guarantees from the GST framework; rather, it places a meaningful limitation on their valuation. It reinforces the broader principle that while the legislature may create a deeming fiction for taxability, the machinery for quantifying the resulting tax liability must remain reasonable, proportionate and constitutionally sustainable.
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