The Punjab and Haryana High Court has stayed the circular issued by the Central Board of Indirect Taxes and Customs (CBIC) concerning the taxability of corporate guarantees. The circular was stayed to the extent that it clarifies that the provision of corporate guarantee (CG) between related persons, even when made without any consideration, is to be treated as a supply of service between related parties as per the provisions of Schedule I of the CGST Act, 2017.
Acme Cleantech Solutions Pvt Ltd , the petitioner/assessee has filed a Writ Petition challenging the legality and validity of Rule 28(2) of the CGST Rules, 2017, which lay down the scheme of valuation in the case of the supply of corporate guarantees provided between related persons as 1% of the amount of such guarantees offered or the actual consideration, whichever is higher.
The petitioner has challenged the rule as being arbitrary, discriminatory, and violative of Article 14 of the Constitution due to its infirmities, such as creating class legislation where the provision of corporate guarantees and any other supply between related persons are treated differently. There is an absence of a discerning principle that emanates from fixing the measure of tax at 1%. The transaction being declared a supply of goods or a service through delegation legislation such as a rule and the measure of tax not having a rational nexus with the taxable event, i.e., the provision of a corporate guarantee.
The petitioner has also challenged the circular as being ultra vires Section 168, as the discretion of the adjudicating authority and the appellate authority is sought to be interfered with by the executive by predetermining the adjudicatory fact of whether or not a transaction qualifies as a supply of service.
The petitioner relied upon the decision of the Apex Court in the case of Union of India v. Karvy Stock Broking Ltd., in which it was held that a circular was issued clarifying the liability to pay service tax on the commission received by distributors on mutual fund distribution. The Apex Court upheld the judgment of the High Court, which set aside the Circular on the ground that it amounts to foreclosing discretion or judgment that may be exercised by the quasi-judicial authority while deciding a particular law under particular circumstances.
The division bench of Justice Sanjeev Prakash Sharma and Justice Sukhvinder Kaur, stayed CBIC Circular dated October 27, 2023, to the extent that it clarifies that the provision of corporate guarantee (CG) between related persons, even when made without any consideration, is to be treated as a supply of service between related parties as per the provisions of Schedule I of the CGST Act, 2017.
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