In Re: M/s. Bajaj Finance Limited
GST
2018 (11) TMI 884 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA – 2018 (19) G. S. T. L. 298 (A. A. R. – GST)
AUTHORITY FOR ADVANCE RULING, MAHARASHTRA – AAR
Dated:- 6-8-2018
GST-ARA-22/2018-19/B-85
GST
SHRI B.V. BORHADE AND SHRI PANKAJ KUMAR, MEMBER
PROCEEDINGS
(under section 98 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017)
The present application has been filed under section 97 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and MGST Act”] by Bajaj Finance Limited, the applicant, seeking an advance ruling in respect of the following questions:
i) Whether the Penal Interest is to be treated as interest for the purpose of exemption under Sr. No. 27 of Notification No. 12/2017 Central Tax (Rate) dated 28.06.2017, Sr. No. 27 of Maharashtra State Notification No. 12/2017-S
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viding various types of loan to the customers such as auto loans, loan against the property, personal loans, consumer durable goods loans, etc. All these loans are interest bearing loans.
2. The Applicant inter alia enters into agreements with borrower/customers for providing loans to them. The loan agreements provide for repayment of the outstanding dues/Equated Monthly Installments (EMI) through Cheque/ Electronic Clearing System (ECS) National Automated Clearing House ('NACH) or any other electronic or clearing mandate. The illustrative copies of loan agreement entered into between the Applicant and the customers are collectively enclosed as Annexure-1.
3. The installment of a loan is computed taking into consideration the amount of loan, duration of the loan and the amount of EMI that would be payable by the customer to the Applicant. EMI paid by the customer is a fixed amount payable at a specified date. EMI are used to pay-off both interest and principal amount.
4. In case of
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at:
(iv) BFL is entitled to levy penalty as follows on default
(a) for continuing non payment of amount due, a penalty not exceeding 3% per month on amount due calculated on pro-rata basis from due date till actually paid as per clause B of the schedule.
……..Emphasis Supplied
6. The amount of penal interest collected from the customers are accounted by the Applicant in its core accounting platform i.e. SAP under General Ledger Code 60000150.
7. Under the GST (implemented from July 01, 2017), the Applicant is of the view that penal interest collected from the customer is in the nature of additional interest, and therefore, the same is not subjected to GST levy. However, given the ambiguity on taxability of penal interest under the GST law, as an abundant caution, the Applicant is filing the present application for Advance Ruling.
Statement containing the Applicant's interpretation of law and/or facts, as the case may be, in respect of question(s) on which Advance Ruling is sou
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interest, and therefore, would be exempt from GST.
A.1 Under the GST regime, the taxable event shall be the supply of goods or services. The scope of the term 'supply' is provided under Section 7 of the CGST Act, which includes all forms of Supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration in the course or furtherance of business and importation of services. It also includes activities specified in Schedule I made or agreed to be made without a consideration.
A.2 Vide Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, the Central Government, in view of powers conferred by Section 11 of the CGST Act, has notified various intra-state supply of services which are exempt from CGST. The Serial No. 27 of the said Notification, inter alia, grants exemption to the services by way of extending loans, in so far as the consideration is represented by way of interest. The relevant
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s Tax (“IGST') leviable on inter-state supply of the above said services.
A.4 In view of the above, it is submitted that services of providing loans is exempt under the GST regime, in so far as the consideration of the said services is represented by way of interest. In other words, interest on loans is not subjected to GST levy.
A.5 In this regard, attention is kindly brought towards the definition of the term 'interest provided under clause (zk) of para 2 of the above said Exemption Notifications, which reads as under:
“(zk) “interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) but does not include any service fee or other charge in respect of the moneys borrowed or debt incurred Orin respect of any credit facility which has not been utilised;”
…………Emphasis Supplied
A.6 The above definition clearly states that interest' means interest payable in any manner in re
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hence, the same Shall also be covered under the definition of interest.
A.7 It is further submitted that the amount of overdue loan installment is virtually a new loan transaction given to the borrower/ customer for the period of delay, the consideration for which is the penal interest charged on such overdue loan installment. It is submitted in this regard that where the Applicant grants loan to a customer for a specified duration of time, it earns interest on such loan, which represents consideration for use of money for that specified period of time. Similarly, when the customer delays the payment of installment of loan beyond the due date as provided in the agreement, the Applicant levies additional interest (which is termed as “Penal Interest') for use of the money beyond the stipulated period of time by the borrowers/customers. The manner of calculation of such Penal Interest substantiates that the penal interest is the time value of money, in as much as the same is calculated a
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a Ranga Row, AIR 1944 (Mad) 243 = 1943 (10) TMI 18 – MADRAS HIGH COURT
* V. Srinivasachariar vs. Conjeevaram Hodgsonpet Dharamarakshaka Nidhi Ltd, 1940 APR (Mad) 937 = 1940 (8) TMI 32 – MADRAS HIGH COURT
A.11 From the above judgments, it comes out clearly that any consideration received for money is nothing but interest only. In the present case, the Penal Interest charged by the Applicant is the additional interest for usage of the amount of overdue loan installment by the borrowers/ customers for additional time beyond the stipulated time period. This additional interest received is therefore in the nature of interest' only. Therefore, the above said judgments explaining the meaning of the term interest' would be applicable in the present case as well.
A.12 It is further submitted that the nomenclature given to a particular, object/ transaction would not affect its taxability. It is a settled principle of law that nomenclature alone would not determine the nature of transaction.
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ld be included in the value of that supply, which is interest. Therefore, any treatment given to the main consideration (i.e. interest) shall also be equally applicable to such amount (i.e. penal interest). Hence, even by applying the said provision in the present case, the penal interest so collected by the Applicant would be having the same tax treatment as in the case of interest, and therefore, it would be exempt from GST under the Exemption Notifications referred to in para A .2 & A.3 above.
B. Without prejudice to the above, assuming without accepting that Penal Interest is not interest, the same shall not be treated as a consideration for any supply.
B.1 Without prejudice to the above, assuming without accepting that Penal interest is not interest, the same shall not be treated as consideration for any supply. It is submitted that the term 'consideration is defined under Section 2 (31) the CGST Act as under:
(31) “consideration” in relation to the supply of goods or services
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s “something for something”. It is a well settled principle that “where there is no consideration, there is no contract”.
B.4 Reference in this regard is made to the definition of the term 'consideration provided in Section 2(d) of the Indian Contract Act, 1872 (hereinafter referred to as 'the Contract Act), which reads as under:
“When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.”
B.5 Furthermore, it is submitted that various dictionaries define the term 'consideration as follows:
BLACK LAW DICTIONARY
Consideration means something which is of value in the eye of liv, moving from the plaintiff., either of benefit to the plaintiff or of detriment 10 the defendant.
WEBSTER DICTIONARY
Something of value given or done in exchange for something of value g
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treated as supply of goods or supply of services as referred to in Schedule II. Entry 5 of Schedule II specifies the list of activities to be treated as supply of services, which inter alia contains clause (e), which 'reads as agreeing to the obligation to refrain from an act, or to tolerate an act or situation, or to do an act'..
B.9 It is submitted in this regard that the expression to tolerate an act' used in the above clause. should be understood to cover instances where the consideration is being charged by one person. in order to allow another person to undertake any particular activity. These are the cases, where it is clear at the very inception that the intention of one party is to undertake an activity and the other party shall allow the same without any hindrance. Such a contract is entered with an intention to allow the other person to carry out an activity, and not as a penalty/ line to deter such person to repeat the act in future. Even if such activity is repeated
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icular manner as desired by the service recipient and there is consensus ad idem between the contracting parties to this effect.
B.12 Contrary to the above, the penal interest is collected only on happening of any event of default by the customers in making the payment of loan installments. It is submitted in this regard that the intention of the parties entering into loan agreement is to grant/ avail loan and not to tolerate non-payment of loan dues. Therefore, it would be erroneous to assume that the party granting loan (i.e. the Applicant) are entering the loan agreement to tolerate the default of the borrowers/ customers. Therefore, merely because of existence of the clause of penal interest in the contract for breach of the performance of the contract, it does not mean that the parties have entered into the contract for the penal interest. Hence, it is submitted that there is no obligation on the Applicant to tolerate the act of the delay in payment of loan installments by the cu
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nder the main contract of supply of service, in return for the liquidated damages.
C.3 Attention in this regard is brought towards Section 73 of the Contract Act, which statutorily allows the aggrieved party to recover damages from the defaulting party in case of default or breach of terms of the contract by such party to the contract. Relevant portion of Section 73 of the said Act is extracted hereunder for ready reference:
Section 73. Compensation of loss or damage caused by breach of Contract-
When a contract has been broken; the party who suffers by such breach is entitled to receive from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.”
… …Emphasis Supplied
C.4 In view of the above, it is submitted that the liquidated damages / penalty charged for breach
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lf be characterized as a supply made by the aggrieved party. This is because the damage, loss or injury in itself does not constitute a supply under the provision Of Australian GST
C.7 Reference is further made to GSTR 2003/11, pertaining to “payment on early termination of a lease of goods. It has been clarified therein that a payment received to compensate the lessor for damage or loss flowing from early termination as a result of a default by the lessee is not consideration for a supply, even though the lessor brings the lease to an end by exercising the right to terminate the lease. The Ruling further provides that in such cases, there Will be no taxable supply because a payment for genuine damages, which is not consideration for any earlier or current supply, cannot be said to be made in connection with any supply. The lessor merely exercises his right to terminate and the payment is in the nature of damages for the lessee's breach of the lease which gave rise to the lessor's rig
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ere is a supply to the member in return for its payment.
C.9 Further, in New Zealand case S65 (1996) 17 NZTC 7408, the Determination stated that an association, in accepting the payment of fine or penalty, does not enter into an obligation with the particular member to tolerate the misconduct, but rather is fulfilling its obligation to all members to enforce the rules. The member does not gain rights additional to those which are already enjoyed by virtue of being a member. That is, upon payment of the fine or penalty, the member continues to enjoy the same rights and privileges and it follows that the association is required to continue to provide the benefits of membership. In this sense, it cannot be said that the association 'makes' a supply where it already has a pre-existing obligation to continue to provide the benefits of membership
C.10 In view of the above discussed rulings, the Applicant would like to submit that the very purpose of liquidated damages / penalty is to resti
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penal interest collected by the Applicant, is not interest on loans, then, the same being in the nature of liquidated damages/penalty, would not be treated as a consideration for any supply, and therefore, will be outside the levy of GST.
Conclusion
3.2. Based on the above provisions and discussions, the Applicant is convinced that the activity of collecting the penaI interest will not be Subjected to GST, in as much as the same is in the nature of interest on loans, which is exempt from GST. Further, even if it is assumed that the penal interest collected by the Applicant, is not interest on loans, then, the same being in the nature of liquidated damages/ penalty, would not be treated as a consideration for any supply, and therefore, will be outside the levy of GST.
Additional submissions on 06.08-2018
Synopsis of submissions made in Appln. dt 09.05.2018 & during personal hearing held on 27.06.2018 & 18.07.2018.
A. The Applicant is only engaged in the business of lending/financin
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a non-banking financial company or any other body corporate or any other person. namely:
(i) financial leasing Services including equipment leasing and hire-purchase;
……….
……….
(ix) other financial services, namely, lending issue of pay order, demand draft, cheque, letter of credit and bill of exchange, transfer of money including telegraphic transfer, mail transfer and electronic transfer, providing bank guarantee, overdraft facility, bill discounting facility, safe deposit locker, safe vaults, operation of bank accounts;”
……..Emphasis Supplied
A.3 At the same time, with effect from 10.09.2004, an amendment was carried out in the Service Tax Valuation provisions to exclude interest on loans' from the value of taxable service under clause (viii) of Explanation I to Section 67 of the Finance Act, 1994. The relevant provision as inserted with effect from 10.09.2004 is extracted herein below:
SECTION 67. Valuation of taxable services for charging service tax. – For
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e included or excluded. –
(1) Subject to the provisions of section 67, the value of the taxable services shall include, –
(2) Subject to the provisions contained in sub-rule (1), the value of any taxable servicer as the case may be, does not include –
(iv) interest on loans.”
….Emphasis Supplied
Front 01.07.2012 upto 30.06.2017 – Interest on loans was exempted under Negative List clause (n) of Section 660 of the Finance Act 1994,
A.5 With effect from 01.07.2012, the Negative List regime was introduced, wherein all services, except those covered in the negative list or exemption notification, were taxed. The interest on loans was exempted under Negative List clause (n) of Section 66D of the Finance Act, 1994, which read as under;
“SECTION 66D. Negative list of services. – The negative list shall comprise of the following services, namely: –
(n) services by way of –
(i) extending deposits loans or advances in so far as the consideration is represented by way of interest or dis
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e (per cent.)
Condition
(1)
(2)
(3)
(4)
(5)
27
Heading 9971
Services by way of (a) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services):
Nil
Nil
A.8 In view of the above, it is submitted that even under the GST regime, services of providing loans are exempt, in so far as the consideration of the said services is represented by way of interest.
A.9 In this regard, attention is kindly brought towards the definition of the term interest provided under clause (zk) of para 2 of the above said Exemption Notifications, which reads as under:
***(zk) “interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) but does not include any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not
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s. However, in case of any default, the Applicant Charges additional interest for the number of days of default. This interest is commonly known as penal/ default interest. The sample working of computing the penal interest is enclosed as Annexure-3 to the application submitted on 0905.2018 (refer page no. 81, along with page no. 71 to 76). For ease Of reference, the following illustration is made to explain the manner of charging penal interest:
S. No.
Particulars
Amount
A.
EMI Amount
Rs. 10,000/-
B.
EMI Due Date
10th of every month
C.
Due Date for the month of June 2018
10th June 2018
D.
Interest factored in EMI upto due date
Rs. 3,000/-
E.
Actual Date of Payment
30th June 2018
F.
Period of Delay/ Default
20 days
G.
Penal Interest rate
2% p.m.
H.
Penal Interest for the period of delay (Rs. 10000 * 2% * 20/30)
Rs. 133/-
A.12 It is submitted that the amount of overdue loan installment is virtually a new loan given to the borrower/ customer for the
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of money, in as much as the same is calculated at a fixed rate per annum on the overdue loan installments for the period of delay.
A.14 It is relevant to note that the position in the GST regime is similar to the position in the pre GST regime. Therefore, reference is made to the Revised Education Guide on Taxation of Services dated 20.06.2012 issued by the CBEC in erstwhile Service Tax regime. Para 4.14.2 of the said Education Guide, clarifies that the negative list clause (n) in Section 66D of the Finance Act, 1994, shall include any facility by which an amount of money is lent or allowed to be used or retained on payment of what is commonly called the time value of money which could be in the form of an interest or a discount. The relevant portion of the said Education Guide is reproduced herein below:
“4.14.2 What are the “services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount”?
The negative list ent
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e Act, 1994, is pari materia to Serial No. 27 of the Notification No. 12/2017-Central Tax (Rate) dated read with Maharashtra State Notification No. 12/2017-State Tax (Rate) dated 29.06-2017. Therefore, the Explanation given in CBEC Education Guide in respect of the said negative clause shall also be equally applicable to the present GST Exemption Notifications. Hence, the Penal Interest charged by the Applicant, which represents the consideration for time value of money (as explained above) would fall under the ambit of the GST Exemption Notifications, and accordingly, shall be exempt from GST.
A.16 In view of the above, it is submitted that the Penal Interest is nothing but interest on loans. Hence, the same shall be exempted from payment of GST under the Exemption Notifications.
A.17 Further, even under UK VAT law, the charges levied for deferment of payment beyond the time of supply have been treated as consideration for an exempt supply of credit. In this regard, reference is mad
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le to GST.
B. In any case, penal interest is liable to be included in the value of main supply under Section 15(2)(d) of the CGST Act. and therefore. any treatment given to the main supply shall be given to the penal interest, and hence. shall be exempt from GST.
B.1 Without prejudice to the above, it is submitted that in view of clause (d) of sub-section (2) of Section 15 of the CGST Act, the penal interest being an interest/ penalty for delayed payment of any consideration for a supply would be included in the value of that supply, which is interest. The said provision is extracted herein below for reference:
“15. Value of taxable supply.
(2) The value of supply shall include
(d) interest or late fee or penal v for delayed payment of any consideration for any supply;”
……..Emphasis Supplied
B.2 In view of the above provision, any interest or late fee or penalty charged/levied or collected for delayed payment of any consideration for a supply, shall be includible in the va
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applicable to the amount of interest or late fee or penalty charged/levied or collected for delayed payment of any consideration for a supply. Hence, by applying the said provision, the penal interest so collected by the Applicant in the present case, would be having the same tax treatment as that of the main consideration, i.e. interest, and therefore, it would also be exempt from GST under the Exemption Notifications.
C. In any case. the penal interest charged by the Applicant in the nature of penalty or liquidated damages for breach of contract, which does not amount to consideration for an contract and therefore there cannot be any supply of service.
C.1 In any case, if the penal interest is not treated as interest on loan, then, the same shall be treated either as penalty or as liquidated damages for the default committed by the customers.
C.2 It is submitted that upon breach of contract, the aggrieved party is entitled to claim compensation for breach of contract. Such compen
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ed in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.
Explanation: A stipulation for increased interest from the date of default may be a stipulation by way of penalty.”
……..Emphasis Supplied
C.4 Both, Section 73 and 74, provide for reasonable compensation, but Section 74 contemplates that the maximum reasonable compensation may be the amount which may be named in the contract, but not more, even though, according to Section 7), the amount of compensation may exceed the sum named. In other words, Section 74 is narrower in scope and limits the compensation to the extent provided for, or stipulated in the contract.
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nts on the due dates as per the repayment schedule, and in case of any default, the Applicant shall be entitled to charge penal/ default interest for the period of default at the specified rate (Refer Pg. No. 23, 26, 36 of the submissions made on 09.05.2018). Therefore, upon default in payment of the installments, the Applicant shall be entitled to receive damages stipulated in the contract in accordance with Section 74 of the Indian Contract Act, 1872.
C.8 The Explanation to Section 74 (supra) directly covers the case of penal interest, wherein, higher rate of interest is charged from the customers from the date of default, so as to deter the customers from making such default in future. Therefore, looking from this angle, the penal interest charged by the Applicant may be treated as penalty for the breach of the contract. In any case, if it is held to be not penalty, then, the same Shall be treated as liquidated damages.
C.9 Therefore, in view of the above discussions, it is submit
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form of interest. The penal interest is payable by the borrower, only upon the breach of such contract, and therefore, such payment does not constitute a second contract. Therefore, the payment of penal interest by the borrower cannot be treated as a consideration either for the primary contract of loan, or for any other contract.
C.12 Hence, in the absence of any consideration, the penal interest charged in the present case does not amount to a supply under Section 7 of the CGST Act, and therefore, the same shall not be leviable to GST.
D. Penal Interest charged by the Applicant for the breach of contract by the customer. is not covered under the ambit of Deemed Services under clause (e) of Entry 5 of Schedule II to the CGST Act.
D.1 It is further submitted that the penal interest shall not be covered by clause (e) of Entry 5 of Schedule (l to the CGST Act, which reads as agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. It is
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eement to tolerate.
D.3 Further, the above said clause uses the word 'obligation', therefore, it is important to understand the meaning of the said term to give correct interpretation to the entry. The said term has not been defined in the Finance Act, 1994, or the Rules made thereunder, therefore, reference is being made to the meaning given to it in other Statutes, and its dictionary meaning, as under:
* Section 2(a) of the Specific Relief Act, 1963:
“Obligation” includes every duty enforceable by law.
* Commentary on Section 2(a) of the Specific Relief Act, 1963, by Pollock & Mulla, at Pg. No. 1837 of Volume II, 14th Edition, reads as under:
“Clause (a): Obligation
An obligation is a bond or tie, which constrains a person to do or suffer something; it implies a right in another person which it is correlated. and it restricts the freedom of the obligee with reference to definite acts and forbearances; but in Order to be enforceable, it must be an Obligation recognised by law;
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t.
3. Civil law. A legal relationship in which one person, the Obligor, is bound to render a performance in favor of another, the Obligee.'
* Oxford Dictionary:
obligation n.
1. act or course of action to which a person is morally or legally bound. I the condition of being so bound.
2. a debt of gratitude for a service or favour.
……Emphasis Supplied
D.4 In view of the above, it is submitted that the word “obligation can be understood to be an act or course of action to which a person is morally or legally bound. It is a bond or tie, which constrains a person to do or suffer something and it implies a right in another person to which it is correlated. As defined in the Specific Relief Act, 1963, obligation includes every duty enforceable by law, so that when a legal duty is imposed on the person in respect to another, the other is invested with a corresponding legal right. Therefore, an obligation comes into existence, only when there is a duty or a liability on the person m
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reach of contractual obligation. Therefore, the penal interest payable by the borrower on breach of its contractual obligation cannot be treated as a payment for any obligation on the Applicant towards the borrower.
D.7 In view of the above discussion, it is submitted that in the absence of an agreement by the Applicant to any obligation to tolerate the act of non-payment or delayed payment of loan installments by the borrowers, the mere recovery of penal interest for breach of the contract does not constitute a service by the Applicant to the borrower.
D.8 Hence, in view of the above submissions, as penal interest is not a consideration for any supply, no GST shall be levied on such penal interest.
E. Even internationally, the damages for breach of contract are not taxed.
E.1 It is further submitted that internationally, the damages received by way of compensation for termination or breach of a contract are not treated as a supply and therefore not subjected to GST/VAT levy.
E.2
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f the dispute, cannot in itself be Characterized as a supply made by the aggrieved party. This is because the damage, loss or injury in itself does not constitute a supply under the provision of Australian GST.
E.4 It is pertinent to bear in mind that the definition of supply” under the Australian GST legislation includes within its ambit an obligation to tolerate an act”. Thus, when the aforesaid GSTR namely GSTR 2001/4 states that payment of liquidated damages is not toward's, any supply, it is reasonable to conclude that the GSTR has also considered the clause “an obligation to tolerate an act”. In other words, the GSTR impliedly concludes that the acceptance of liquidated damages does not amount to tolerating an act and hence would not fall within the ambit of “supply” for the purposes of GST.
E.5 Further, in New Zealand case S65 (1996) 17 NZTC 7408, the Determination stated that an association, in accepting the payment of fine or penalty, does not enter into an obligation with t
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ngs, it is submitted that the very purpose of liquidated damages or penalty is to restitute or make good the loss incurred by a person because of a default, non-compliance, etc., by the other person. Such liquidated damages or penalty may be in relation to some other supply of service or goods which would have a separate consideration and would be subject to certain terms and conditions. When such terms and conditions are not fulfilled, the defaulting party is obligated to make good the loss by paying liquidated damages. Such liquidated damages or penalty cannot itself become consideration for continuing with the main supply of service/ goods by terming the same as towards tolerating the acts of the defaulting party –
E.8 Thus, liquidated damages. or penalty are merely for making good the loss suffered by a contracting party due to breach of terms of the contract by other contracting party. There is no additional benefit given under the main contract of supply of service, in return fo
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aring System/NACH i.e. National Automated Clearing House/Cheque/any other electronic or clearing mandate.
In case of dishonour of Cheque/ECS/NACH or any other electronic or clearing mandate by the customers, the applicants collects penal/bounce charges which is in line with the agreed terms and conditions. The bounce charges are generally a fixed amount per default commited by the customer for e.g.Rs.350/- for each dishonour of cheque/ECS for the breach of the terms and conditions of the loan.
The amount of bounce charges collected from the customers are accounted by the Applicant in its core accounting platform i.e. SAP under General Ledger Code 60000150.
3. Scope of Supply
Section 7 of the Central Goods and Services Tax Act 2017 (CGST 2017) defines scope of supply.
As per Sec 7(1) (d) the activities to be treated us a supply of good or supply of services as referred in the schedule 2. As per schedule 2 para 5 clause (e) “agreeing to the obligation to refrain from an act, or to t
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supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.
As per sub-section 2 of section 15 The value of supply shall include-
a) any taxes, duties, cesses fees and charges levied under any law for the time being in force other than this Act, the Central Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier;
d) interest or late fee or penalty for delayed payment of any consideration for any supply
As per above provision Bounce Charges on Non-performance of a contract is an activity or transaction which is treated as a supply of service and the Applicant is deemed to have received the consideration in the form of charges, liquidated Damages and is accordingly, required to pay tax on such amount.
04. HEARING
The Preliminary hearing in the matter was held on 27.06.2018, Sh. Sandeep Sachdeva, Advocate along with Sh. Chaitanya Bhatt, C.A. and Sh. Arpit Chat
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n such as auto loans, loan against the property, personal loans, consumer durable goods loans, etc, to their customers and charge interest on such loans disbursed, for which they enter into agreements with borrower/customers. The agreements provide for repayment of the loan in the form of Equated Monthly Installments (EMI) vide cheque/ Electronic Clearing System (ECS), etc. The installment of the loan is computed taking into consideration the amount of loan, duration of the loan and the amount of EMI that would be payable. The EMI paid by the customers is a fixed amount payable at a specified date, which includes both interest and the principal amount. In cases of delay in repayment of such EMI by the customers, the Applicant collects penal/default interest (hereinafter referred to as “penal interest'), in terms of the agreements executed by the customers. The same is calculated at a percentage not exceeding a fixed percentage, on the overdue loan amounts of the customer. The percentag
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es, collected by them is in the nature of additional interest) reveals that while drafting the agreement they themselves have defined 'Penal Charges” as 'overdue charges' for non-payment of installment on due dates. The definition nowhere mentions that the said charges are additional interest costs to be incurred by their customers. Further as per their extract the applicant 'is entitled to levy penalty for continuing non-payment of amount due, a penalty not exceeding 3% per month on amount due calculated on pro-rata basis from due date till actually paid as per clause B of the schedule'. It is very clear by a reading of this clause that the applicant themselves are treating the Penal Charges collected by them as “Penalty: It is also seen that such penal charges/ penalty collected by them would be “not exceeding 3% per month on amount due calculated on pro-rata basis from due date till actually paid'. It would be pertinent to mention here that interest charges in general course of busi
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Section 7 of the GST Act is as follows:-
7. (1) For the purposes of this Act, the expression “supply” includes
(a) all forms of supply of goods or services or both…………..;
(b) import of services for a consideration whether or not in the course or furtherance of business;
(c) the activities specified in Schedule I, made or agreed to be made without a consideration; and
(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.
(2) Notwithstanding anything contained in sub-section (1),
(a) activities or transactions specified in Schedule III; or
(b) such activities or transactions undertaken by the Central Government………..,
shall be treated neither as a supply of goods nor a supply of services.
(3) Subject to the provisions of sub-sections (1), and (2), the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as-
(a) a supply of goods and not as
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ansfer of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services;
(c) any transfer of title in goods under an agreement which stipulates that property in goods shall pass at a future date upon payment of full consideration as agreed, is a supply of goods.
2……….
3……….
4……….
5. Supply of services
The following shall be treated as supply of services, namely:-
(a)…………;
(b)………;
(c) ………;
(d)………;
(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; and
(f) ………;.
6………..
7……….
From the above, we find that under sub-section (1) of Section 7
* Supply' as per clause (a) is for supply of goods or services or both. It is for a consideration AND has to be in the course or furtherance of business.
* 'as per clause (b) is for import of services. It is for a consideration AND may or may not be in the course or fur
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nor a supply of services.
We also find that Sub-section (3) of section 7 states
* that certain activities would be notified as being –
(a) a supply of goods and not as a supply of services; or
(b) a supply of services and not as a supply of goods.
In the case before us we find that:-
* The applicant has given loans to their customers.
* The said loans were repayable by way of payment of EMI, which includes principal amount and interest.
* The EMIS are to be paid within due dates.
* Failure to repay EMIs by their customers result in penalty/penal charges being levied by the applicant on the amount of EMI default. They are contending that the said charges, which is a percentage of the EMI amount, are in the nature of interest. Thus what they are effectively submitting is that they are charging penal interest on the original interest amount also.
* In the process the applicant has agreed to do an act (tolerating the delayed payment of EMIs of their customers) in lieu of
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discount (other than interest involved in credit card services):
Nil
Nil
It is very clearly seen from a reading of the said Sr. No. 27 that Services by way of (a) extending deposits, loans or advances is exempted in so far as the consideration is represented by way of interest or discount.
In this particular matter the amount of default charges are received by the applicant only because their customer/s have defaulted in making the due EMIs. This amount is over and above the interest amount received by them on account of extending deposits, loans, etc.
The applicant has further in A5 of their submissions stated that “interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred… ..and therefore the word interest includes interest payable in any manner in respect of any moneys borrowed or debt incurred. They have further submitted that the Penal Charges collected by them is an additional interest for the delay in payment of loan instal
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the rate at which penal charges are collected on the so called new loan amount (i.e. the defaulted EMI) are also different. Further from their submissions it would seem that the penal charges, which are termed by them as additional interest, such so called additional interest is also levied on interest component of the EMI. Another important point is that the applicant themselves have submitted that the percentage of penal interest varies from customer to customer, and generally ranges between 2% to 4% per month depending on the product. This clearly shows that such amount collected by them in case of default by their customers does not have a fixed rate as in the case of interest on advances of loans, etc. In their copy of agreement at page 19 of their submissions, with Punya Nath Mishra, in respect of an auto loan it is seen that the rate of interest on the loan is a flat rate i.e. 7.99%. At point no. q of the said Auto-Loan Agreement it is mentioned that “Penal Charges shall mean a
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o the amount or quantum which is consideration in the form of penal charges being additional interest to be received by the applicant if these are suitable compensation only for tolerating the act of default or situation of default by their customers and are not additional interest as claimed by the applicant. We see from the definition of 'Additional Interest' is given in the referred agreement which clearly indicate that the additional interest is not in the nature of interest but is penal charges.
Thus we find that the consideration if any as received by the applicant would clearly qualify as 'supply' as per Sr. No. 5(e) of Schedule II of the CGST Act which reads as under:-
(5) Supply of Services : The following shall be treated as supply of services:-
“(e) Agreeing to the obligation to refrain from an act or to tolerate an act or a situation or to do an act.
In the present case as per details presented before us, we clearly find that there is a clear understanding or agreement
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penal charges cannot be said to form a part of interest on “loan”, “deposit or “advance”. It is recovered/imposed only because the loanee has delayed the payment of EMI (which consists of the principal amount and interest amount). This recovery of penal charges is made in view of toleration of the act of the loanee by the applicant and therefore construes as 'supply' as per as per Sr. No. 5(e) of Schedule II of the CGST Act and is therefore taxable under the GST Act.
06. In view of the deliberations as held hereinabove, we pass an order as follows:
ORDER
(under section 98 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017)
NO.GST-ARA-22/2018-19/B-85
Mumbai, dt. 06.08.2018
For reasons as discussed in the body of the order, the questions are answered thus –
Question 1:- Whether the Penal Interest is to be treated as interest for the purpose of exemption under Sr. No. 27 of Notification No. 12/2017Central Tax (Rate) dated 28.
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