Corporate guarantees within a group raise separate questions that should not be collapsed into a single issue: whether the guarantee is a supply at all; whether it is supplied in the course or furtherance of business; who is the recipient; how an uncharged or low-charged guarantee is to be valued; and whether Rule 28(2) of Central Goods and Services Tax Rules, 2017 may apply to guarantees executed before its introduction. The decisions reveal a material divergence on the taxability of gratuitous intra-group guarantees. The Gujarat High Court has treated a holding-company guarantee for its subsidiary as a related-party supply under Section 7(1)(c) read with Entry 2 of Schedule I of the Central Goods and Services Tax Act, 2017 (CGST Act). The Bombay High Court, on materially particular facts involving express contractual exclusion of consideration and in-house guarantees, held that no taxable supply arose. The terms of the guarantee, the parties’ relationship, the commercial setting and the relevant period therefore remain central.

Taxability begins with the character of the guarantee transaction

In Torrent Power Ltd. v. Union of India and Ors., (2026) taxcode.in 1333 HC, the Gujarat High Court addressed guarantees furnished by holding companies, without consideration, to financial institutions for their subsidiaries’ borrowing and credit requirements. The Court held that the holding company and subsidiary were related persons and that the guarantees fell within Section 7(1)(c), read with Entry 2 of Schedule I. That route was significant: Section 7(1)(c) includes activities specified in Schedule I even when made without consideration, while Entry 2 concerns supplies between related or distinct persons made in the course or furtherance of business.

The Court rejected the proposition that the absence of a separately charged guarantee commission necessarily ends the enquiry. It analysed the guarantee as an arrangement consisting of the principal borrower-creditor contract, the collateral contract between creditor and surety, and the implied arrangement under which the subsidiary indemnifies the surety if the surety discharges the borrower’s obligation. In that analysis, the facility advanced to the subsidiary was sufficient consideration for the guarantee under Section 127 of the Indian Contract Act, 1872. More fundamentally for GST purposes, the Court treated the related-party deeming structure in Schedule I as applicable even to an uncharged guarantee.

The Gujarat High Court also held that a holding company’s guarantee enabling its subsidiary to obtain finance is made in the course or furtherance of business. The guarantee protects the holding company’s financial interest in the subsidiary and supports the subsidiary’s commercial activity; it is therefore connected with, incidental or ancillary to the holding company’s business interest. The Court did not accept the characterization of the arrangement as merely a shareholder or investment activity outside business. Nor did it regard the absence of regularity, frequency or direct pecuniary benefit as determinative under its reading of Section 2(17).

Once the transaction had been found to be a supply under Section 7(1)(c) and Schedule I, the Court classified it as a supply of services under Entry 5(e) of Schedule II: “agreeing to the obligation … to do an act.” Schedule II did not independently create the supply; its role was classificatory after the threshold requirement of supply had been met. The subsidiary, rather than the lending bank, was held to be the recipient. Although the guarantor’s express undertaking runs to the lender, the subsidiary is the entity whose financing need is addressed, which obtains the commercial benefit, and which must indemnify the surety if the guarantee is invoked.

The competing approach where the guarantee is expressly unremunerated

A different conclusion was reached on the facts in D P Jain & Co. Infrastructure Pvt. Ltd. v. Union of India and Ors., (2026) taxcode.in 1020 HC. The petitioner had executed three corporate guarantees for credit facilities extended to subsidiary or associate enterprises. Each deed expressly declared that the petitioner had neither received nor would receive security, a fee, commission or any other consideration from the borrower. It was also not the Revenue’s case that the petitioner regularly carried on the business of providing corporate guarantees.

The Bombay High Court treated these as in-house guarantees intended to safeguard the financial health of associate enterprises and facilitate their borrowing, rather than guarantees supplied generally to customers in a commercial guarantee business. It distinguished that setting from bank guarantees issued in the ordinary course of banking. Referring to the disposition in Commissioner of CGST and Central Excise v. Edelweiss Financial Services Ltd. as discussed in Canara Bank (Formerly Syndicate Bank) v. Union of India and Ors., (2026) taxcode.in 1104 HC, the Court regarded the absence of consideration as decisive on the facts before it.

The Supreme Court disposition in Edelweiss Financial Services concerned guarantees issued for group or subsidiary companies where the concurrent forums had found that no consideration was received. Revenue had neither challenged that factual finding nor demonstrated that the issuance of such guarantees without consideration was taxable under the service-tax framework in issue. The Civil Appeal was dismissed at the admission stage. That disposition does not itself decide GST valuation under Rule 28(2), but it informed the Bombay High Court’s conclusion that no service for consideration had been rendered in the particular guarantee arrangements before it.

The Bombay High Court held that the petitioner’s guarantees were not supplies or taxable supplies of services under Section 9 because there was no consideration. It quashed the show-cause notice and the proceedings initiated through summons. The ruling is tightly connected to the express no-consideration clauses, the in-house nature of the guarantees, the related borrowers and the absence of any allegation that the petitioner was in the regular business of furnishing guarantees. It does not determine the GST outcome for a guarantee involving an actual fee, commission, security or other consideration, or for a guarantee furnished commercially to customers.

The two approaches cannot be reconciled merely by asking whether a fee was charged. Torrent Power treats the statutory related-party mechanism as bringing the gratuitous holding-company guarantee within supply, while D P Jain treated express absence of consideration in its in-house factual setting as preventing taxability. A taxpayer facing a demand must therefore identify the precise statutory basis advanced by the Department and address the relationship, purpose, contractual terms and business context of the guarantee rather than assume that a description of the arrangement as “corporate” is conclusive.

Guarantee, actionable claim and pledge

In Torrent Power, the Gujarat High Court rejected the argument that a corporate guarantee is an actionable claim excluded by Section 7(2) read with Schedule III. The Court distinguished an actionable claim a direct claim to an unsecured debt or beneficial interest in movable property from a surety’s contingent and secondary obligation to discharge another person’s liability on default. A guarantor is not the primary debtor. The guarantee was accordingly held not to fall within the actionable-claim exclusion relied on by the petitioners.

The Court also drew a distinction between a pledge and a guarantee. A pledge is bailment of goods as security for payment of a debt or performance of a promise; a guarantee is an undertaking to perform the promise or discharge the liability of a third person upon default. Yet labels do not control the analysis. Where the share-pledge documentation and related corporate-guarantee documents showed that the holding company had secured the subsidiary’s obligations and permitted appropriation upon default, the Court held that the arrangement could possess features of both pledge and guarantee. That conclusion was document-specific and does not mean that every pledge of shares is a corporate guarantee or a taxable supply.

Rule 28(2): validity and the valuation consequence

Rule 28(2) addresses services supplied by a supplier to a related recipient located in India by providing a corporate guarantee to a banking company or financial institution on the recipient’s behalf. It deems the value to be one per cent per annum of the guaranteed amount or actual consideration, whichever is higher, subject to the proviso concerning a recipient eligible for full input tax credit.

In Torrent Power, the Gujarat High Court upheld Rule 28(2) and Section 15(4). It rejected the contention that the rule, framed as a valuation provision, independently created a levy. The Court’s reasoning proceeded on the basis that the guarantee was already a taxable supply under Section 7(1)(c) and Schedule I; Rule 28(2) then supplied a specialised valuation methodology. The Court accepted that Sections 15(4), 15(5), 164 and Section 2(87), as considered by it, supported prescribed valuation mechanisms for identified supplies.

However, the Court read down the words “whichever is higher.” It held that a compulsory higher-of formula is arbitrary where an actual commission or charge is ascertainable but lower than one per cent. A fictional benchmark may have a role where actual value is not ascertainable, but it cannot necessarily displace an ascertainable actual charge. The one per cent figure itself was not invalidated. The clear operative consequence is that the rule cannot compel valuation at one per cent merely because the actual charge is lower; the judgment also contains some tension as to whether taxpayers retain an option between actual consideration and one per cent after the read-down.

The Bombay High Court in D P Jain separately rejected the challenge seeking a declaration that Rule 28(2) was ultra vires. That rejection did not make Rule 28(2) the basis of taxability for the guarantees before it. All three guarantees predated 26 October 2023, and the show-cause notice was quashed because the Court held that the guarantees, on their facts, were not taxable supplies in the absence of consideration. Competing submissions on valuation under Rule 28(1) for the earlier period were recorded, but the operative result did not adopt Revenue’s proposed one per cent valuation.

Temporal operation and continuing guarantees

The Gujarat High Court held in Torrent Power that GST could not be imposed under Rule 28(2) on guarantees furnished before 26 October 2023. Applying the rule to an earlier guarantee was held to be impermissibly retroactive and violative of Articles 14 and 19(1)(g). The Court reasoned that the subsequently introduced valuation rule could not impose an unexpected burden upon financial arrangements made under the prior legal position.

That temporal protection was not absolute for every guarantee executed before the rule’s introduction. The Court expressly held that levy under Rule 28(2) is attracted from 26 October 2023 if the earlier guarantee continues beyond that date. The decision therefore distinguishes between levy under the rule for the period before its introduction and liability in the later period during which an earlier guarantee remains operative.

For guarantees involving foreign subsidiaries, Torrent Power also dealt with a petition concerning the period from July 2017 to March 2020. The Court held that Circular No. 225/19/2024-GST dated 11 July 2024 covered that case and that the deemed one per cent annual valuation under Rule 28(2) did not apply. That conclusion was connected to the foreign-recipient facts and the Court’s account of the condition that the recipient be located in India.

Time of supply and the nature of the continuing obligation

Torrent Power treats execution of the guarantee deed as the point at which the guarantee service crystallises. The creditor obtains an immediate contractual right to require payment if default occurs; a later payment by the surety is performance of the pre-existing undertaking, not a newly created service. The Court nevertheless held that, where no actual consideration exists and Section 13(2)(a) and (b) do not apply, Section 13(2)(c) fixes time of supply by reference to the date on which the subsidiary records receipt of the service in its accounts.

The Court linked that accounting treatment to the annual “per annum” valuation mechanism in Rule 28(2), holding that the outstanding guaranteed amount reflected in the subsidiary’s accounts is relevant for each financial year during which the underlying liability subsists. At the same time, it held that a gratuitous corporate guarantee is not a continuous supply of services under Section 2(33). The guarantee may create a continuing protective obligation, but it lacks the periodic payment obligations required by that definition. The annual valuation analysis therefore does not rest on treating every continuing guarantee as a continuous supply of services.

Procedure remains significant where liability is disputed

Several decisions are procedural rather than substantive, but they illustrate the need for an adjudication founded on the actual transaction and the taxpayer’s case. In The Ramco Cements Ltd. v. The Deputy Commissioner, (2024) taxcode.in 633 HC, the Madras High Court declined to decide the merits of a demand concerning 2019–20 corporate guarantees. The petitioner had argued, relying on Circular No. 204/16/2023-GST dated 27 October 2023, that the guarantees became taxable only from that date. The Court left the issue to the statutory appellate authority and dismissed the writ petition with liberty to pursue that remedy. The decision determines neither taxability nor the temporal effect of the circular.

Similarly, Biocon Ltd. v. State of Karnataka and Ors., (2026) taxcode.in 1049 HC, set aside and remanded the corporate-guarantee component of an adjudication order because the authority had not considered the relevant provisions, circulars, notifications, judgments and the taxpayer’s submissions. It was not a ruling that GST was or was not payable on the guarantee.

In City Union Bank Ltd. v. Commercial Tax Officer and Anr., (2026) taxcode.in 1311 HC, the Department treated guarantees issued by a bank to customers as corporate guarantees and sought to apply a one per cent valuation. The bank maintained that it issued ordinary bank guarantees in the course of business and had paid GST on the commission received. The Court did not decide the characterization or the applicability of Rule 28(2). It quashed the demand because the Department had proceeded directly to notice without the scrutiny and investigative exercise which the Court considered necessary, and remitted the matter for investigation under Section 67.

Conclusion

GST on corporate guarantees turns on more than the existence of a guarantee deed. Torrent Power supports GST treatment of gratuitous holding-company guarantees for subsidiaries as related-party supplies, subject to its holdings on Rule 28(2), valuation and temporal operation. D P Jain reaches the contrary result for expressly unremunerated, in-house guarantees on its particular facts. Rule 28(2) has been upheld, but its compulsory “whichever is higher” formula has been read down by the Gujarat High Court, and the rule cannot be applied to impose levy for the period before 26 October 2023, although a continuing earlier guarantee may attract levy from that date. The decisive exercise remains a transaction-specific one: identify the true nature of the undertaking, the relationship and recipient, the business nexus, the existence and amount of actual consideration, the period of operation, and the procedural basis on which any demand is made.