The Karnataka High Court has stayed further proceedings arising out of a GST adjudication order that sought to levy tax on an interest-free loan transaction between a company and its Managing Director by invoking Rule 28 of the CGST Rules, 2017.
The bench of Justice B.M. Shyam Prasad observed that the petitioner’s case required consideration in light of the CBIC Circular dated June 26, 2024, which clarifies that GST is not leviable on such transactions where no consideration is charged for processing, facilitating, or administering the loan.
The petitioner challenged the adjudication order dated December 2, 2023, and the appellate order dated November 14, 2025, passed under Section 73(9) of the Karnataka Goods and Services Tax Act, 2017 and the Central Goods and Services Tax Act, 2017.
The GST department had treated an interest-free loan transaction between the company and its Managing Director as a taxable supply of services. Invoking Rule 28 of the CGST Rules, 2017, the department assessed 1% of the value of the loan transaction as the taxable value towards alleged processing and other related services.
According to the department, the transaction between related parties attracted GST despite the absence of any explicit consideration.
Appearing for the petitioner, counsel B.G. Chidananda Urs argued that irrespective of the various legal grounds challenging the initiation of proceedings, the dispute stood substantially covered by CBIC Circular No. 218/12/2024-GST dated June 26, 2024.
The petitioner contended that the Circular categorically clarifies that GST cannot be levied on loans between related parties where there is no consideration received for processing, facilitating, or administering the loan. It was further submitted that there was no dispute regarding the nature of the transaction, which was admittedly a loan between related parties.
The Karnataka High Court issued notice to the respondents and directed the State to obtain instructions on whether the writ petition could be disposed of on the basis of the CBIC Circular itself.
Pending further consideration, the Court granted an interim stay on all further proceedings pursuant to the adjudication order. The stay will continue until the next date of hearing.
The matter has been listed for further hearing on July 8, 2026.
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