The Madras High Court has quashed a GST demand against City Union Bank Limited on bank guarantee commission, holding that the Revenue proceeded to issue a show cause notice without first conducting any inspection, investigation or audit — a procedural shortcut that rendered the entire proceeding unsustainable. The ruling, by Justice C. Saravanan in W.P.(MD) No. 8200 of 2026, addresses a question that has arisen with increasing frequency since the 2023 amendment to Rule 28 of the CGST Rules extended the corporate guarantee valuation framework to the banking sector.
City Union Bank had been discharging GST on commission actually received for issuing bank guarantees to its customers. The Revenue entertained a doubt that these were in substance corporate guarantees and that the bank was therefore liable under Rule 28(2) — inserted by Notification No. 52/2023-Central Tax dated 26.10.2023 — to pay GST at 1% of the total guaranteed amount, regardless of the commission actually received. Without conducting any scrutiny of the bank's records, inspecting its guarantee agreements, or invoking the mechanisms available under Sections 65, 66 or 67 of the GST enactments, the Revenue proceeded directly to issue a pre-SCN intimation under Rule 142(1A) and, within days, a formal show cause notice under Section 73.
The bank's reply was detailed — it took the position that it had provided bank guarantees and not corporate guarantees, that Rule 28(2) was not triggered, and that it had correctly reported its taxable turnover in GSTR-1, GSTR-3B and GSTR-9C. The adjudicating authority rejected the reply and confirmed the demand. The bank's writ petition before Justice Saravanan succeeded on a fundamental procedural ground: once a registered person files a self-assessment return under Section 59, the Revenue's prescribed pathway to challenging that return is through scrutiny under Section 61 and thereafter, if warranted, audit under Section 65, inspection under Section 67, or other investigation mechanisms. These tools exist precisely to ascertain whether any revenue leakage has occurred before an SCN is issued.
The court found that the Revenue had bypassed this entire process, jumping from suspicion directly to a show cause notice without any factual verification of whether the guarantees in question were bank guarantees or corporate guarantees — a distinction that required examination of the underlying guarantee agreements and the bank's business model. The demand was set aside and the Revenue directed to conduct an inspection or investigation under Section 67 within six months, and only thereafter determine whether an SCN is warranted. The period from the issuance of the original intimation to the date of the order is excluded for limitation purposes. This ruling should serve as a procedural guardrail for the growing number of SCNs being issued to banks on corporate guarantee commissions without proper prior investigation.
-2026-juristway.com-2112-HC(Madras)-GST | High Court of Madras (Madurai Bench) | 28.07.2026