HC stays coercive action on GST demand for corporate guarantees.

HC stays coercive action on GST demand for corporate guarantees.

The Delhi High Court has granted interim relief to GAIL India Ltd., restraining the Revenue from taking any coercive action pursuant to a show cause notice (SCN) that proposed a GST demand on corporate guarantees furnished by the company.

Issue

Can the GST department take coercive action on a demand related to corporate guarantees when the fundamental legal question of its taxability, and the jurisdiction of the officer issuing the notice, are both already under consideration by the High Court?]

Facts

• GAIL India Ltd. received a show cause notice (SCN) under Section 74 of the CGST Act, proposing a GST demand on corporate guarantees it had provided for its joint venture/subsidiary.]
• GAIL filed a writ petition challenging the SCN on two primary grounds:
  1. Lack of Jurisdiction: It argued that the Adjudicating Authority who issued the SCN was not empowered to do so as per the relevant government notification.]
  2. Sub-Judice Issue: The substantive legal issue of whether GST is even leviable on corporate guarantees is already being considered by the same Bench in a batch of other pending matters.]

Decision

The High Court passed an interim order in favour of the assessee.

• It allowed the adjudication proceedings on the SCN to continue but restrained the Revenue from taking any coercive action against GAIL.]
• The court directed that if a final order is passed by the adjudicating authority, it shall not be given effect to until the High Court finally decides the writ petition.]
• Recognizing the overlapping legal questions, the court tagged GAIL’s petition to be heard along with the other related cases on the same issue.]

Key Takeways

• Courts Can Grant Interim Protection on Sub-Judice Matters: When a fundamental legal question, like the taxability of corporate guarantees, is pending before a court, it may grant interim relief to taxpayers facing similar demands to prevent coercive action until a final judgment is delivered.
• Adjudication Can Continue: The court’s order balances the interests of both parties by allowing the departmental adjudication process to continue but neutralizing its adverse consequences by staying the final order’s implementation.
• Jurisdictional Challenge is a Strong Ground: A challenge to the basic jurisdiction of the officer issuing a notice is a strong ground for a High Court to entertain a writ petition, even at the show-cause notice stage.
• The Issue of GST on Corporate Guarantees is Unsettled: This case confirms that the taxability of corporate guarantees under GST is a highly contentious issue that is currently being litigated before the High Courts, and its legal position is not yet settled.