P & H HC stays the operation of Circular clarifying taxability of corporate guarantee

This Tax Alert summarizes a recent interim order^[1]  passed by the Punjab & Haryana High Court (HC) staying the effect and operation of the Circular^[2]  on taxability of corporate guarantee.

Vide Circular, the Central Board of Indirect Taxes and Customs (CBIC), inter alia, clarified that the activity of providing corporate guarantee by an entity to banks/ financial institutions for providing credit facilities to other related entity, even when made without any consideration, is to be treated as a supply of service between related parties as per Schedule I of the Central Goods and Services Tax Act, 2017 (CGST Act).

It also clarified that post insertion of Rule 28(2) in the Central Goods and Services Tax Rules, 2017 (CGST Rules), such service will have to be valued basis Rule 28(2).

Assessee filed a writ petition before the HC on the ground that the impugned Circular seeks to take away the adjudicatory powers of the Assessing Authority as well as the Appellate Authority by clarifying provisions in the nature of adjudication. Assessee relied on the decision of SC^[3]  in this regard.

HC stayed the effect and operation of the impugned Circular with respect to the aforesaid clarification and directed the Appellate Authority to decide the case of the assessee without being influenced by the clarification.

Comments:

Businesses who have received Show Cause Notice basis the Circular may rely on the HC order and request the authority for adjudication without taking cognizance of the clarification. In the alternate, possibility of preferring writ petition may be explored. 

Further, it seems that the valuation aspect has not been challenged in this writ petition.

[1] CWP-10249-2024
[2] Circular No. 204/16/2023-GST dated 27 October 2023
[3] 2015-VIL-80-SC-ST