HC Quashes GST Demand on Corporate Guarantee for Non-Consideration of Binding CBIC Circulars.

HC Quashes GST Demand on Corporate Guarantee for Non-Consideration of Binding CBIC Circulars.

Issue

Whether an assessment order levying GST on a corporate guarantee provided to a related entity (where full ITC is available) is legally sustainable if the assessing authority passes the order without applying their mind to the taxpayer’s submissions and in complete disregard of binding CBIC circulars that clarify the valuation of such transactions.

Facts

• The assessee provided a corporate guarantee to a related entity without receiving any consideration.
• The Revenue department treated this as a taxable supply and imposed GST at 1% of the total guarantee amount, invoking Rule 28(2) of the CGST Rules.
• The assessee contended that the transaction value should be deemed nil and no GST was payable.
• This argument was based on the fact that the recipient (the related entity) was eligible for full Input Tax Credit (ITC) on the supply.
• The assessee’s defense relied specifically on CBIC Circular Nos. 199/11/2023-GST and 210/4/2024-GST, which provide this exact clarification for related party transactions.
• The Assessing Officer ignored the assessee’s detailed submissions and the cited circulars, proceeding to confirm the tax demand.

Decision

• The High Court quashed the assessment order, finding it legally unsustainable due to a complete “non-application of mind” by the authority.
• It held that administrative and quasi-judicial authorities are bound to consider all material contentions and, most importantly, binding departmental circulars.
• An order passed in ignorance of a valid defense and binding clarifications is a clear violation of legal principles.
• The matter was remanded back to the assessing authority for a fresh (de novo) adjudication, with a specific direction to re-examine the assessee’s submissions in light of the cited CBIC circulars and pass a reasoned order on merits.

Key Takeaways

• CBIC Circulars are Binding: This ruling emphatically confirms that departmental circulars are binding on tax authorities. An order passed in contravention of a binding circular is invalid.
• Non-Application of Mind is a Fatal Flaw: An assessing authority cannot simply ignore a taxpayer’s primary defense, especially one that is backed by a specific legal provision or a binding circular. Doing so renders the order void.
• Valuation of Related Party Supplies (with Full ITC): The case highlights the crucial valuation rule (clarified in the circulars) that in a related party transaction, if the recipient is eligible for full Input Tax Credit, the value of the supply can be deemed nil.
• Remand as a Remedy: When an order is quashed for a procedural failure or non-application of mind, the standard judicial remedy is to remand the case, forcing the authority to re-adjudge the matter correctly and in accordance with the law.