1. Definitions:
1.1. A Corporate Guarantee is a guarantee in which any corporation agrees to be responsible for the financial obligations of, or the performance of, contractual obligations by the principal debtor to the creditor, in the event the principal debtor fails to discharge his obligation to the creditor. These transactions usually include inter-group corporate guarantees, which are given to facilitate a smoother financial functioning to the ‘Related’ or ‘Associated’ persons.
1.2. Corporate Guarantees without consideration are quite generic transaction among companies wherein holding or parent companies issues corporate guarantee to various Banks or other Financial Institutions as a collateral security for the credit facilities availed by its subsidiaries. Also, corporate guarantee, is unsecured, which means it is not secured by or tied to any specific asset of the surety. Corporate guarantee to related parties without consideration are based on the business needs and for group synergy.
1.3. Personal Guarantee is a promise made by an individual being in a capacity of an executive or partner of a business which has taken any debt and the promisor assumes a personal responsibility of repayment upon default by the business.
2. GST Applicability:
2.1. Section 7(1)(c) CGST Act provides that the activities specified in Schedule I, made or agreed to be made without a consideration will be covered within the scope of term ‘supply’. Section 7(2)(a) of CGST Act stated that activities mentioned under Schedule III of the act shall neither be treated as supply of Goods nor supply of services.
2.2. Schedule I states activities to be treated as supply even if made without consideration which includes:
“2. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:
Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both”
2.3. From the above, when it comes to supply without consideration, clause (c) of section 7(1) of CGST Act provides that the activities specified in Schedule I, made or agreed to be made without a consideration will be covered within the scope of the term ‘supply’ which include supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business.
2.4. Therefore, the definition of supply covers Schedule I which deems certain activities without consideration also as supply and it includes supply of goods/services between related persons made in the course or furtherance of business. Accordingly, it cannot be said that corporate guarantees are issued without consideration and not leviable to GST due to aforesaid entry in Schedule I.
2.5. Circular No.34/8/201/-GST dated 01.03.2018 clarifies that service provided by central or state government to any business entity including PSUs by way of guaranteeing the loan taken from financial institutions against consideration shall be taxable. This supports the view that transaction of guaranteeing the loan with consideration qualifies as supply and therefore, is leviable to GST.
3. Why corporate guarantee is not leviable to GST?
3.1. According to Schedule III, the activities or transactions which shall be treated neither as supply of goods nor a supply of services include: `
“6. Actionable claims, other than lottery, betting, and gambling.”
3.2. According to Transfer of Property Act, 1882 actionable claim to mean claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the civil courts recognize as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent.
3.3. From the above, actionable claims are primarily claims that arise with respect to unsecured debts or a beneficial interest in movable property, regardless of whether such debt or beneficial interest be existent, accruing, conditional or contingent.
3.4. Considering the above, corporate guarantee can be an actionable claim as there is no underlying supply of goods or services involved in it.
3.5. Also, RBI vide Circular DBOD. No. Dir. BC. 14 /13.03.00/2009-10 dated 1st July 2009, in paragraph 2.2.9.1 (C), it has been clarified that banks should obtain an undertaking from the borrowing company as well as the guarantors that no consideration whether by way of commission, brokerage fees or any other form, would be paid by the former or received by the latter, directly or indirectly. Also clarified, this requirement should be incorporated in the bank's terms and conditions for sanctioning of credit limits and during the periodic inspections, the bank's inspectors should verify that this stipulation has been complied with.
3.6. Therefore, in view of the above circular, charging commission for issuing corporate guarantee by companies and personal guarantees by directors is against RBI guidelines and accordingly gst cannot be levied as we cannot raise a tax invoice on the same.
3.7. The above view is supported by the decision of the Tribunal in the case of Service Tax. The Hon’ble Tribunal in the case of DLF Cyber City Developers Limited Vs CST, Delhi-IV [2019(9) TMI 1123-Cestat Mumbai] held that the appellant-assessee has not received any consideration from either from the financial institutions or from their associates for providing corporate guarantee, in that circumstance, no service tax is payable by the appellant-assessee. Moreover, the demand raised in the show cause notices are on the basis of assumption and presumption presuming that their associates have received the loan facilities from the financial institution at lower rate, therefore, the differential amount of interest is consideration, but there is no such evidence produced by the revenue on that behalf. In that circumstance, it is held that the appellant-assessee are not liable to pay any service tax on corporate guarantee provided by them to various banks/financial institutions on behalf of their holding company/ associate enterprises for their loan or over-draft facility under Banking and Financial Institutions after or before 01.07.2012.
3.8. The above can be disputed by the department, as a contrary view was taken by the Hon’ble Tribunal in the case of Olam Agro India Ltd Vs CCE, Delhi-II [2018(8) TMI 102-Cestat New Delhi].
3.9. We accordingly opine that GST is not required to be paid on the commission deemed to have been charged.
3.10. However, to avoid litigation, if anyone want to pay GST and pass on the credit to the recipient, the valuation of deemed consideration on provision of guarantee is discussed hereunder:
4. Valuation of Corporate Guarantee if it is leviable to GST:
4.1. There is no standardized basis for valuation for corporate guarantees. Also, commission charged by the banks for issuing bank guarantee to unrelated parties cannot be taken as the basis for discharging GST liability on issuing corporate guarantees.
4.2. Rule 28 of CGST Rules, 2017 deals with valuation of supplies between related or distinct person. Rule 28 provides for open market value or value of supplies of like kind and quality. Otherwise, Rule 30 or Rule 31 can be resorted. Rule 31 provides that where the value of supply of goods or services or both cannot be determined under rules 27 to 30, the same shall be determined using reasonable means consistent with the principles and the general provisions of section 15 and the provisions of this Chapter. Further, it explicitly provides that in the case of supply of services, the supplier may opt for this rule, ignoring rule 30.
4.3. The issue pertaining to the commission on corporate guarantee between the related parties, have been raised to determine arm’s length price in ‘transfer pricing’ matters under Income tax. In this regard, reference may be made as under the Income Tax Act on this subject, though they refer to international transactions.
4.4. Further, CBDT has also issued Safe Harbor Rules which provides that in case of corporate guarantee provided to wholly owned subsidiary, the commission or fees will be at the not less than rate of 1% per annum on the amount guaranteed. Notification No 46/2017 dt 07.06.2017
4.5. In the case of the Commissioner of Income Tax vs Everest Kanto Cylinders Ltd. reported at [2015 (5) TMI 395 – Bombay High Court], the assessee computed corporate guarantee commission @ 0.5% of the loan amount. The department rejected and argued that the commission on corporate guarantee shall be determined by considering the commission rates charged by banks for giving bank guarantee. The High Court observed that the bank guarantees are different from the corporate guarantees and rejected the contentions of department. The rate of commission @ 0.5% of the loan amount was accepted.
Note: The same principles are applicable to personal guarantees given by directors to the company or body corporate, however subject to RCM provisions.
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