Stay order on the operation of Circular No. 204/16/2023-GST, which levied tax on corporate guarantees.

Summary in Key Points:

Issue: Whether providing a corporate guarantee by a holding company to its subsidiary company constitutes a supply of services liable for GST.
Facts: The revenue department issued a notice to the petitioner seeking information regarding corporate guarantees provided to its subsidiary company. Subsequently, a demand order was passed levying GST on these guarantees. The petitioner challenged the demand order, arguing that providing a guarantee is not a supply of service and that Circular No. 204/16/2023-GST, which levies GST on such guarantees, is unconstitutional.
Decision: The High Court stayed the operation of Circular No. 204/16/2023-GST and remanded the matter to the GST Appellate Tribunal for reconsideration.

Decision:

The High Court partially allowed the petitioner’s plea, staying the operation of Circular No. 204/16/2023-GST and remanding the matter to the GST Appellate Tribunal for reconsideration. The court recognized that the issue of levying GST on corporate guarantees is a recurring one and is pending before various high courts. The court also noted that the petitioner’s challenge to the circular was based on constitutional grounds and required further examination by the Tribunal.

Important Note: This case highlights the ongoing debate surrounding the applicability of GST to corporate guarantees. While the High Court has stayed the operation of the circular and remanded the matter for reconsideration, the final outcome of the case will determine the legal position on this issue. This case serves as a reminder to taxpayers and tax authorities that the applicability of GST to certain transactions is still evolving, and further judicial pronouncements are expected to provide clarity on this complex matter.

HIGH COURT OF BOMBAY

Vedanta Ltd.

Union of India

B.P. COLABAWALLA and FIRDOSH P. POONIWALLA, JJ.

WRIT PETITION NO.4519 OF 2024

JANUARY 8, 2025

Rohan Shah, Sr. Adv., Kumar Visalaksh, Ajitesh Dayal Singh, Ginita Bodani, Rahul Khurana and Mohammed Anajwalla, Advs. for the Petitioner. Y.R. Mishra and Sangeeta Yadav, Advs. for the Respondent.

ORDER

1. The above Writ Petition is filed by the Petitioner seeking a declaration that the activity of a holding company providing a corporate guarantee to its subsidiary is not in the nature of “supply” and/or “supply of service” taxable under Section 9 of the Central Goods and Services Tax Act, 2017 (for short “the CGST Act”). A further declaration is sought that the Respondents be restrained from collecting tax under Section 9 of the CGST Act on the activity of providing corporate guarantees to subsidiary companies. A challenge is also laid to the impugned circular dated 27th October 2023 under which the tax is sought to be levied and collected as unconstitutional, ultra vires and violative of Articles 14, 19(1)(g), 246A, 265 and 300A of the Constitution of India. Since the notice dated 1st February 2024 has been issued to the Petitioner seeking certain information from the Petitioner for the period 1 st July 2017 till March 2021 in relation to corporate guarantees given by the Petitioner, the said notice is also challenged.

2. The learned advocate appearing on behalf of the Respondents submitted that since the Final Audit Report [of the audit conducted] has been issued, the office of the Assistant Commissioner (Circle-VI), CGST Audit-I Commissionerate Pune is not pursuing the matter arising out of the letter dated 1st February 2024 and which is impugned in the said Writ Petition. He submitted that since the Respondents are not pursuing the matter further, nothing would survive in the above Writ Petition.

3. We record the statement made by the learned counsel, and which is made on instructions, that the Respondents are not pursuing the matter any further arising out of the letter dated 1st February 2024. However, we find that the issue involved in the present Petition is a recurring issue. This issue is pending before the several High Courts. The Delhi High Court has in fact granted a stay that no coercive action shall be taken against the Petitioner in case a final assessment order is passed or a demand is created. The Telangana High Court has stayed the effect and operation of the circular dated 27th October 2023. Even the Punjab and Haryana High Court has stayed the effect and operation of the impugned circular 27th October 2023.

4. Considering that this is an important issue, we grant time to the Respondents to file their affidavit-in-reply to the above Writ Petition in so far as it lays a challenge to the circular dated 27th October 2023 and also to the extent that the Petitioner seeks a declaration that the activity of a holding company providing a corporate guarantee to a subsidiary is not in the nature of “supply” and/or “supply of service” taxable under Section 9 of the CGST Act. The reply shall be filed within a period of 6 weeks from today.

5. In the meanwhile and until further orders, the effect and operation of the impugned circular dated 27th October 2023, in so far as it relates to Item No.2 thereof, is hereby stayed.

6. This order will be digitally signed by the Private Secretary/ Personal Assistant of this Court. All concerned will act on production by fax or email of a digitally signed copy of this order.