2024 (10) TMI 943 - HC - GST

Liability of appellant to pay GST on reverse charge basis - supply of services by the Managing Director of the company by way of providing personal guarantee on loans taken by the company - supply of services by way of extending loans by the petitioner-company to its subsidiary company - HELD THAT - Circular No.204/16/2023-GST dated 27-10-2023 and Circular No.218/12/2024-GST dated 26-06-2024 issued by the Central Board are binding on the authorities. The learned Senior Standing Counsel appearing for the respondent department does not dispute that the issues raised are covered by virtue of the clarifications given in the Circulars referred. It is not disputed that the impugned show cause notice does not deal with any other issue. This writ petition is allowed and Ext.P1 show cause notice will stand quashed.

Summary

Issues:
1. Whether GST is payable on reverse charge basis on supply of services by the Managing Director of the company by providing personal guarantee on loans taken by the company.
2. Whether GST is payable on supply of services by extending loans by the petitioner-company to its subsidiary company.

Analysis:

Issue 1:
The first issue pertains to the GST liability on the supply of services by the Managing Director of a company through providing personal guarantees on loans taken by the company. The Circular No.204/16/2023-GST dated 27-10-2023 clarifies that such activity is considered a supply of service under the CGST Act, even if made without consideration, due to the relationship between the director and the company. However, if no consideration is paid to the director as per RBI guidelines, the open market value of the supply may be treated as zero, resulting in no GST liability. The Circular further states that in exceptional cases where remuneration is paid to the guarantor, the taxable value shall be the remuneration provided. Therefore, in the absence of consideration, no tax is payable on such supply of service.

Issue 2:
The second issue revolves around the taxability of transactions involving the provision of loans by an overseas entity to its Indian affiliate or by a person to a related entity. Circular No.218/12/2024-GST dated 26-06-2024 clarifies that the service of granting loans to related entities is a taxable supply under GST, even if no consideration other than interest or discount is involved. However, services represented by processing fees or administrative charges are taxable under GST. The Circular distinguishes between loans provided by related parties and independent lenders, stating that related party loans may not involve processing costs. In cases where no consideration is charged for the loan, no GST is levied. However, if processing fees are charged, they are considered taxable consideration for the supply of services. The Circular emphasizes that the absence of processing fees in related party loans does not attract GST, unless additional charges are imposed.

In conclusion, the High Court ruled in favor of the petitioner, quashing the show cause notice, as the issues raised were covered by the clarifications provided in the Circulars. The respondent did not dispute the coverage of the issues by the Circulars, leading to the dismissal of the show cause notice without delving into other contentions raised in the writ petition.