Despite repeated reiterations by the Courts or the CBIC, not only the department executives but also the taxpayers somewhere forms an opinion that any activity undertaken between related parties is definitely as supply irrespective of the nature and purpose with which the same has been undertaken within the group.
The reason why such an opinion is formed is mainly on account of the introduction of the concept of levying GST on certain transactions even when the transaction is undertaken without consideration. Yes, Schedule I of the CGST law is what seems to be the source wherein transactions between related parties is one such entry.
Out of many, corporate guarantee is one such activity which has been picked up by the department and demands were raised. Here a group company guarantees a bank / creditor that in case of any default or non-payment by the other group entity, the former will compensate. This act of guaranteeing the creditor by the former for the latter is what seems to have been picked up as a transaction of supply even when the consideration is absent. Even many taxpayers also believed that GST is applicable in such cases.
Although, I am not commenting upon the correctness of the position i.e. GST is applicable or not, as per my personal view, the answer to the same may depend upon the facts of each case and not that straightforward.
Just imagine, a cash rich company making huge profits and carrying huge reserves and enjoying great market reputation, does it incur any cost if it extends a guarantee for the other group entity? In such a case, is it a transaction of supply in absence of any business profit or loss intended from the mere act of guaranteeing?? Nothing new, if a settled brother lends support to his growing brother.
In tax also and specifically, in transfer pricing, this is not a unique case. At times when the AO raises a tax demand on the imputed interest income when the group entity makes delayed payment for the services provided by its affiliate, such demands were quashed by the Courts whenever it was established that the entity is cash rich and it is not the case where the department can allege that the debtor earned something by delaying the payment to the creditor who in turn had to incur an additional costs by way of borrowed funds to run its business.
The other case could be where the settled brother is an investor in the other group company. This to me seems more clear and simple. Any such support extended to its affiliate could be seen as an activity undertaken to enhance the value of its own investment and may rarely have an intent of servicing the affiliate.
In view of above, what seems relevant is the purpose and impact one group entity will have while undertaking the proposed activity for its counterpart, is something which will determine if a transaction of supply has been affected or not. Schedule I per se has a limited scope.
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