Madras High Court Sets Aside GST Demand For Not Considering CBIC Circulars Cited By Taxpayer

The Madras High Court has set aside a GST demand on a corporate guarantee after finding that the tax department failed to consider CBIC circulars relied upon by the taxpayer while raising the assessment.

Allowing the writ petition, Justice G R Swaminathan held that an assessment order cannot survive if the tax department fails to consider the defence raised by the taxpayer.

The court held, “When a defense raised by the noticee is not considered in the final order, the order is vulnerable on that ground. On the ground of non-consideration of the contentions raised by the assessee, the impugned order is set aside.”

The petitioner, Amman Try Trading Company Private Limited, a Tiruchirappalli-based trader, had furnished a corporate guarantee in favour of its related party. The State Tax Officer treated the act of furnishing the corporate guarantee itself as a taxable service under GST and proceeded to levy tax at the rate of one percent of the corporate guarantee amount.

An assessment order in Form GST DRC-07 dated April 28, 2025 was passed against the company.

In its reply to the show cause notice, the company did not dispute that corporate guarantees could be examined under GST. Its case was on valuation. The company said it had not received any consideration for furnishing the guarantee and relied on CBIC Circular No.199/11/2023-GST dated July 17, 2023 and Circular No.210/4/2024-GST dated June 26, 2024, read with Rule 28 of the CGST Rules.

It contended that where a supply is made to a related party eligible for full input tax credit, the value declared in the invoice is deemed to be the open market value. Since no consideration was charged, the value of the service was taken as nil and no invoice was issued.

The High Court noted that while the tax officer had issued a show cause notice and received a reply, the final assessment order did not deal with the two CBIC circulars specifically relied upon by the taxpayer.

Finding that the taxpayer's defence had been ignored, the court set aside the assessment and sent the matter back for reconsideration. It directed the tax officer to go through all the arguments raised by the petitioner and pass a fresh, reasoned order in accordance with law.