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avail loan is given solely because the managing may not be considered necessary, banks should be
director is being paid remuneration and he is duty guided by the following broad considerations".
bound to give guarantee as per resolution of the Where personal guarantees of directors are
Board, in the capacity of the employee of the
warranted, they should bear reasonable proportion
company and not otherwise. Therefore, even if to the estimated worth of the person. The system of
guarantee given by the managing director to the obtaining guarantees should not be used by the
bank is considered as “supply of service”, the same
directors and other managerial personnel as a
was in the capacity as employee of the company source of income from the company. Banks should
hence GST will not be required to be paid by the obtain an undertaking from the borrowing company
company under Reverse Charge Mechanism.
as well as the guarantors that no consideration
1.3) The word “service” is a concept of willingness whether by way of commission, brokerage fees, or
wherein a person provides certain facility to another any other from would be paid by the former or
person willingly. In order to constitute a transaction received by the later, directly or indirectly. This
as a “service” there must be willingness to serve by requirement should be incorporated in the bank's
the service provider. Contrary to this, the guarantee Inspections and inspectors should verify that this
is provided by the Director under compulsion even stipulation has been complied with”.
though he is not willing as mandated by the Reserve Therefore, the show cause notice directing to pay
Bank of India vide Circular dated 01.07.2009. CGST/SGST under RCM on notional value of
Guarantee given to the bank is not voluntarily given
“deemed supply of services” by way of personal
hence there is no service, which cannot be said to guarantee given to the bank is invalid and against
have provided by the directors who are actually the intention of the Legislature.
involved in the day to day working of the business
1.5) The most important aspect which cannot be
and who are employees of the company. The
ignored is that the RBI in its above circular has
Managing Director/Director gives guarantee to avail
loans by his company only without any business specifically directed that the directors cannot take
any guarantee commission from the company to
intention in the mind. As the loans are given by the
which they stood as guarantor and they cannot use
bank to the company against security of all movable
and immovable assets (present and future), such loans it as a source of income from the company.
are not unsecured yet personal guarantees are given Even banks have been directed by RBI that they
by the managing director because he happens to be should obtain an undertaking from the company as
the managing director drawing remuneration from well as the guarantors that no consideration by way
the company. Therefore, there is NO supply of of commission would be paid by the company or
service as per Section 7 (1) of the Act. received by the director directly or indirectly. Thus,
there being specific statutory ban imposed by RBI
1.4) These guarantees are mandatorily required in
for payment of any such commission on personal
terms of Reserve Bank of India Circular No.
guarantee, any notional consideration for giving
RBI/2009-10/70 DBOD. No. Dir. BC. 14/13.03.
00/2009-10 dated July 1, 2009. The relevant portion guarantee cannot be determined under GST Act.
of the said circular at Para 2.2.9.1 is reproduced Once such commission cannot be paid by the
below :- company nor can be received as per the statutory
requirement of RBI, deeming fiction of law under
“2.2.9.1 Personal guarantees of directors :- Bank
should take personal guarantees of directors for the Schedule-I of the Act will not be applicable when
separate consideration for such personal guarantee
credit facilities, etc. granted to corporates, public of
is not given..
private, only when absolutely warranted, after a
careful examination of the circumstances of the case 1.6) Reference can be made to a order passed by
Custom, Excise and Service tax Appellate Tribunal in
and not as a matter of course. In order to identify the
DLF Cyber City Developers Ltd. Vs. Commissioner of
circumstances under which the guarantee may or

Any document one signs has every right to take a copy of it (SC). 73