2018 (11) TMI 884 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA – 2018 (19) G. S. T. L. 298 (A. A. R. – GST) – Levy of GST – Penal interest – Taxable supply or not – activity of collecting penal interest by the Applicant – default in repayment of EMI – tolerate an act or a situation of default – penal 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-State Tax (Rate) dated 29.06.2017, and Sr. No. 28 of Notification No. 9/2017 Integrated Tax (Rate) dated 28.06.2017.
–
Held that:- The Applicant, a non-banking financial company are providing various types of loan 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
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
icant has agreed to do an act (the act of tolerating, of delayed payment of EMIs by their customers) and such act, by the applicant, squarely falls under clause 5(e) of the Schedule II mentioned above and therefore the amounts received by the applicant for having agreed to do such an act, would attract tax liability under GST laws – The receipt of penal charges on delayed payment of EMIS would be receipt of amounts for tolerating the act of their customers for having delayed/defaulted on their EMI payments within due dates In view thereof, the same would definitely be a ‘supply’ under the GST Act and therefore, there arises an occasion to levy tax under the GST Act on the impugned transactions.
–
There is a clear understanding or agreement between the parties to foresee and tolerate an act or a situation of default on the part of loanees for a monetary consideration which is actually a consideration received by the applicant, though in the agreement they may be giving this consider
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
l 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.
–
Ruling:- The Penal Interest will not be treated as interest for the purpose of exemption under Sr. No. 27 of Notification No. 12/2017Central Tax (Rate) dated 28.06.2017, Sr, No. 27 of Maharashtra State Notification No. 12/2017-State Tax (Rate) dated 29.06.2017, and sr. No. 28 of Notification No. 9/20171ntegrated Tax (Rate) dated 28.06.2017.
–
The activity of collecting penal interest by the Applicant would amount to a taxable supply under the GST regime – The said activity squarely falls under clause 5(e) of the Schedule II of the GST Act, 2018 and therefore such amounts received, would attract tax liability under GST laws. – GST-ARA-22/2018-19/B-85 Dated:- 6-8-2018 – SHRI B.V. BORHADE AND SHRI PANKAJ KUMAR, MEMBER PROCEEDINGS (under section 98 of the Central
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under the MGST Act. Further to the earlier, henceforth for the purposes of this Advance Ruling, a reference to such a similar provision under the CGST Act / MGST Act would be mentioned as being under the GST Act . 02. FACTS AND CONTENTION – AS PER THE APPLICANT The submissions, as reproduced verbatim could be seen thus- 1. The Applicant is a non-banking financial company and is inter alia engaged in providing 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 Month
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
erest varies from customer to customer, and generally ranges between 2% to 4% per month depending on the product. The illustrative copies of customer account statement reflecting the penal interest collected by the Applicant are collectively enclosed as Annexure-2. 5. The relevant extract of clauses of a sample auto loan agreement in respect of penal interest is reproduced below for ease of reference: 1. DEFINITIONS AND ABBREVIATIONS, r. penal Charges shall mean and include overdue charges on non payment of installment on the due date. ……….. II. TERMS OF THE LOAN: 3. The Borrower agrees and confirms that: (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 t
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
/2017-State Tax (Rate) dated 29.06.2017, and Sr. No. 28 of Notification No. 9/2017-lntegrated Tax (Rate) dated 28.06.2017? ii) If the answer to the above is negative, whether the activity of collecting penal interest by the Applicant would amount to a taxable supply under the GST regime? 3. Applicant s Interpretation 3.1 With respect to the questions framed above, the Applicant has analyzed the relevant legal provisions in the ensuing paras. A. Penal Interest is an additional interest on the overdue loan installment and therefore would be exempt from GST. To further emphasis. penal interest should be treated as part of 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
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
rest involved in credit card services): Nil Nil A.3 Similar exemption has been granted by the respective State Governments in respect of the State Goods and Services Tax (SGST ) leviable on intra-state supplies. The Serial No. 27 of Maharashtra State Notification No. 12/ 2017-State Tax (Rate) dated 29.06.2017 provides for the exemption to the above said services provided in the State of Maharashtra. Further, similar exemption has been granted by the Central Government vide Serial No. 28 of Notification No. 9/2017-lntegrated Tax (Rate) dated 28.06.2017, in respect of the Integrated Goods and Services 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 def
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
e paid on time. However, in case, there is any delay in payment of the installments, the interest for the period of delay is not included in the EMI / installment amount, and is therefore charged separately from the customers as penal interest. It is therefore submitted that the penal interest collected by the Applicant, which represents the time value of money for the period of delay in making payment of installment, is nothing but additional interest on loan. Therefore, the penal interest shall be given similar treatment as that of the principal interest which is factored in EMI / installment amount, and 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 g
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
ngth by various Courts holding that interest is the return or compensation for the use or retention by one person, of a sum of money belonging to or owed to another. In this regard, reliance is placed on the Supreme Court judgment in the case of Central Bank of India vs. Ravindra, reported at 2002 (1) SCC 367 = 2001 (10) TMI 1065 – SUPREME COURT OF INDIA. A.10 Reliance is this regard is also placed on the following judgments of the Hon ble Madras High Court, wherein it was held that any amount paid over and above the principal amount was interest: Edupuganti Pitchayya and Ors. vs. Gonuguntla Venkata 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 t
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
penal interest , the same would not change its nature from being interest . A.13 In view of the above, it is submitted that the Penal Interest collected by the Applicant, which represents the consideration for time value of money, is interest only, and therefore, shall be exempt from GST under the Exemption Notifications referred to in para A.2 & A.3 above. A.14 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. 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, i
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
or the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government: B2 Since the above definition is an inclusive one, the meaning of the term 'consideration will have to be understood from various external aids, including the natural meaning given in various dictionaries, meaning given to the term in rulings by various forums, etc. B.3 It is submitted that the concept of consideration has been derived from the Latin phrase quid pro quo which means 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 d
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
t be at the desire of the other person. B.7 In the present case, the penal interest is collected by the Applicant on account of default committed by the customers in making repayment of overdue loan installments in time. Therefore, it is submitted that the penal interest is not recovered by the Applicant in lieu of, or, in return for any activity performed by the Applicant. B.8 The Applicant would like to bring your attention to clause (d) of sub-section (1) of Section 7 of the CGST Act, which states that the expression supply also includes the activities to be 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 clau
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
arty. B.11 It is further submitted that the word obligation used in Clause (e), Entry 5 of Schedule II of the CGST Act, indicates the need for the existence of the desire in the person for whom the activity is done. In other words, when the service recipient requests the service provider to tolerate an act/situation and the service provider obliges to tolerate for a consideration, then such a contractual relationship will get covered by the said clause of Schedule II of the CGST Act. In such situation, the service provider binds himself to act in a particular 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
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
e of liquidated damages/penalty. C.1 Without prejudice to the above submissions, it is further submitted that the penal interest collected by the Applicant is merely in the nature of penalty/ liquidated damages for default in loan repayments by the customers, which would not be subjected to GST levy. C.2 Its Submitted in this regard that liquidated damages/ penalty are merely compensation 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 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. Compe
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
t the damages received in compensation for termination or breach of a contract cannot be treated as a supply and therefore not subjected to GST /VAT. C.6 In this regard, reference is made to GSTR 2001/4, issued by the Australian Tax Office (ATO),explains the GST treatment of court orders and out-of-court settlements. In the said ruling at Para 73, it has been clarified that the damages are the most common form of remedy arising out of the termination or breach of contract. The damage, loss or injury, being the substance of 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 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 defaul
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
non-statutory fine or penalty on a member for a breach of the association s membership rules. The said GSTD clarifies that there is no supply made by an association when it imposes a fine or penalty on its member for a breach of its membership rules, and the payment of the fine or penalty is therefore not a consideration for a supply and hence not subjected to GST. It has been clarified in the above GSTD that if the true nature of fine or penalty is a punishment and/or to act as a deterrent, it does not accord with that nature to suggest that there 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
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
uidated damages. Such liquidated damages/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. C.11 In view of the above, it is submitted that the penal interest collected by the Applicant, is in the nature of liquidated damages/ penalty received from the borrowers/customers for defaults/ breach committed by them by defaulting in loan repayments. C.12 Hence, in view of the above submissions, 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. 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 in
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
09.2004 upto 18.04.2006- Interest on loans was excluded from Value of Taxable Service under Section 67 of the Finance Act, 1994 A.2 Lending as a service was first time brought into the ambit of Service Tax, with effect from 10.09.2004, by an amendment in the definition of banking and other financial services under Section 65(12) of the Finance Act, 1994, The amended definition read as under: *(12) banking and other financial service means – (a) the following services provided by a banking company or a financial institution including 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,
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
ellip;…Emphasis Supplied From 19.04.2006 upto 30.06.2012 – Interest on loans excluded from Value of Taxable Service under Rule 6(2)(iv) of the Service Tax (Determination of Value) Rules, 2006 A.4 With effect from the valuation provisions contained in the Finance Act, 1994 were shifted to the Service Tax (Determination of Value) Rules, 2006. Accordingly, with effect from 19.04.2006, the interest on loans was excluded from the value of taxable service under clause (iv) of Rule 6(2) of the said Rules. The said provision is extracted herein below for reference: *6 Cases in which the commission costs etc. will be 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 Nega
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
e pre-GST regime. Position under the GST regime A.7 Under the GST regime, interest on loans are exempted from payment of CGST under Serial No. 27 of the Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017. Similar exemption has been granted by the respective State Governments for the SGST leviable on intra-state supplies (refer Serial No. 27 of Maharashtra State Notification No. 12/2017 State Tax (Rate) dated 29.06.2017. The relevant portion of the said Exemption Notification is reproduced herein below: Sl.No. Chapter, Section, Heading, Group or Service Code (Tariff) Description of Services Rate (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 t
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
gaged in the business of lending/ financing. As a consideration for lending/ financing, the Applicant charges interest from the customers at a particular rate, for the period for which such loan is granted. The principal and interest amount on such loan is repaid by the customers by way of equated monthly installments (hereinafter referred to as EMI ) over the tenure of loan. Accordingly, while computing the EMI, the Applicant charges and factors pro-rata interest payable on each due date, on the underlying assumption that the customers would not default in payment of the EMI on the due dates. 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 t
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
e 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 it is nothing but the time value 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 Ed
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
is entry would not cover investments by way of equity or any other manner where the investor is entitled to a share of profit. Illustrations of such services are – ……… Providing a loan or overdraft facility or a credit limit facility in consideration for payment of interest. Mortgages or loans with a collateral security to the extent that the consideration for advancing such loans or advances are represented by way of interest. ……… ………..Emphasis Supplied A.15 The above said negative list clause (n) of Section 660 of the Finance 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
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
goods or services. Alternatively, where you agree to defer payment beyond the time of supply and make an additional charge for doing so. such a charge will be consideration for an exempt supply or credit. ……Emphasis Supplied A.18. In view of the above, it is submitted that even internationally, the Charges for deferment of payment are treated as consideration for exempt supply of credit, and therefore, the penal interest charged in the present case for deferment of the loan instalment should be treated as a consideration for exempt supply of loan, and hence, shall not be leviable 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
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
of such exempt supply. It would be incorrect to say that the provisions of Section 15(2) are not applicable for exempt supplies, in as much as, the valuation of exempt supplies is equally important as that of taxable supplies, as the quantum of reversal of input tax credit under Section 17(2) of the CGST Act is determined on the basis of the value of exempt supplies. Hence, the provisions of Section 15(2) are applicable to determine the value of exempt supplies as well. B.4 In View of Section 15(2)(d) of the Act, any treatment given to the main consideration of supply shall also be equally 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 Exem
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
racted herein below for reference: *73. Compensation for 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. 74 Compensation for breach of contract where penalty stipulated for. When a contract has been broken, if a sum is named 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 st
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
particular stipulation in a contract, is in the nature of penalty has to be determined by the court against the background of various relevant factors, such as the character of the transaction and its special nature. C.6 It is relevant to note that the Explanation to Section 74 (supra), clearly states that a stipulation for increased interest from the date of default may be a stipulation by way of penalty. C.7 In the present case, the Applicant lends money to the customers with one of the conditions in the loan agreement that the customers shall make timely repayment of loan installments 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 w
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
y damages for the breach of contract. C.11 It is a settled position in law that the stipulation for payment of damages upon breach of contract does not constitute a separate contract. It is only a part of the original contract. The payment of damages arises only on account of the primary contract, and it would be an incorrect interpretation to say that the payment is a consideration for any other contract. In the present case, there is only one contract between the Applicant and the borrower, which is the agreement for loan, for which consideration is payable by the, borrower the 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 t
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
ation to do an act D.2 Therefore, to attract the above said clause, there must be an agreement to the obligation in respect of any of the three entries. In absence of any such agreement, there cannot be a service. For a valid agreement, there has to be a consideration between the promisor and the promisee. However, as submitted above, the penal interest levied by the Applicant in the present case are merely damages for the breach of contract of loan, and are not consideration for any contract per se, and therefore, in the absence of any consideration, there can be no agreement 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
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
over any other enforceable duty under any statute. • Black s Law Dictionary: • * *Obligation, 1. A legal or moral duty to do or not do something. The word has many wide and varied meanings. It may refer to anything that a person is bound to do or for bear from doing, whether the duty is imposed by law, contract, promise, social relations, courtesy, kindness, or morality 2. A formal. binding agreement or acknowledgement of a liability to pay a certain amount or to do a certain thing for a particular person or set of persons: esp.. a duty arising by contract. 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 obl
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
s the Applicant not to take any legal action against the borrower, nor the borrower gains any right to sue the Applicant for any legal action taken by the Applicant. On the contrary, the borrower is under the contractual obligation to make timely repayment of the loan to the Applicant, and upon the breach of such obligation, the Applicant is legally entitled to recover damages for such breach and also sue the borrower for such breach. D.6 It is further submitted that a sum which is payable in pursuance of a contractual obligation is different from a sum payable on a breach 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 borr
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
es any of these; (g) an entry into, or release from, an obligation: (i) to do anything; or (ii) to refrain from an act; or (iii) to tolerate an act or situation. E.3 In the above context, reference is made to GSTR 2001/4, issued by the Australian Tax Office (ATO), which explains the GST treatment of court orders and out-of-court settlements. In para 73 Of the said ruling, it has been clarified that the damages are the most common form of remedy arising out of the termination or breach of contract. The damage, loss or injury, being the substance of 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 l
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
t 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. E.6 Further, in a decision of the Court of Appeal (U .K.) in case of M/s. Vehicle Control Services Limited reported at (2013) EWCA Civ 186, it has been observed that payment in the form of damages/penalty for parking in wrong places/wrong manner is not a consideration for service as the same arises out of breach of contract with the parking manager. E.7 In view of the above discussed rulings, 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 pa
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
as fallows. BRIFF HISTROY: M/s. BAJAJ FINANCE LIMITED is a Non-Banking Financial Company and inter alia engaged in providing various types of loan to the customers such as auto loans, loans against the property, personal loans, consumer durable goods loans etc. All these loans are interest bearing loans. The applicant inter alia enters into agreements with borrower/ customers for providing loans to them. The loan agreements provide for repayment of the Loano are equated monthly instalments (*EMI) through ECS i.e. Electronic Clearing 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 t
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
r to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government; 3) Value of Supply: As per sub-section 1 or section 15 the value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the 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 de
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
e National Head Taxation appeared and reiterated their submissions and contentions as per their submissions in case of GST ARA no.21 in their own case. Jurisdictional Officer Sh. Vinit Thite, State Tax Officer (VAT-C-707) Pune appeared and stated that they have already made written submissions earlier. 05. OBSERVATIONS We have gone through the facts of the case, submissions made by the applicant and the documents on record. The Applicant, a non-banking financial company are providing various types of loan 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
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
the due date. …….. II. TERMS OF THE LOAN: 3. The Borrower agrees and confirms that: (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. A perusal of the above extract reproduced by the applicant from a sample auto loan agreement (submitted by them in support of their argument that Penal Charges, 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
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
ying payment of such EMI. It is therefore seen that the transaction is about the receipt by the applicant, of certain sums towards – a. Compensation in the form of penal charges for delayed payment of EMIs by their customers. Section 9 of the GST Act says that there shall be levied a tax on supplies of goods or services or both. So we need to understand as to whether the aforesaid receipt of penal charges/penalty amounts would be for a supply made by the applicant. A supply defined under 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) N
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
rtakes to supply such goods on behalf of the principal; or (b) by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal. 4. Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business. SCH. II [See sec.7] ACTIVITIES TO BE TREATED AS SUPPLY OF GOODS OR SUPPLY OF SERVICES 1. Transfer (a) any transfer of the title in goods is a supply of goods; (b) any transfer 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)……&helli
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
or categorization as given in Schedule II appended to the GST Act as to which activities should be treated as supply of goods and which activities to be treated as supply of services . The clause does not define supply but classifies the supply into either supply of goods or supply of services . [Clause (e) of Schedule Il defines agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act as a Supply of Services]. Further, Sub-section (2) of section 7 states that certain, specified or notified activities shall be treated neither as a supply of goods 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 in
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
he applicant has reproduced Sr.No. 27 of Notification No. 12/2017-CentraI Tax (Rate) dated 28.06.2017, and has submitted that the said Serial No. 27, grants exemption to the services by way of extending loans, in so far as the consideration is represented by way of interest. Sl.No. Chapter, Section, Heading, Group or Service Code (Tariff) Description of Services Rate (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 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 EMI
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
d that the default charges is for the period of delay not included in the EMI/installment amount. They have also submitted that the amount of overdue loan an installment is virtually a new loan transaction, the consideration for which is the penal interest charged on such overdue loan installment. This assumption by the applicant that the EMI is nothing but a new loan amount advanced to the applicant is not only fallacious but also devoid of merit because from the agreements it is seen that the rate of interest on the loan advanced and 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 t
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
ns. Thus we find clearly from the above discussions and as per the terms and conditions of the agreement submitted by them that there is clearly an agreement that the applicant, in the case of default of payment of EMI by their customer, the applicant would tolerate such act of default or a situation and the defaulting party i.e their customer was required to compensate the applicant by way of payment of extra amounts in addition to principal and interest as per the terms and conditions of the Agreement. It is also very clear as to 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 n
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =
ould clearly be taxable for the supply of services as per Sr.No. 5(e) of Schedule Il of the CGST Act, 2018. We find that the exemption for financial transactions under GST laws is only in respect of the interest/discount earned or paid for loans, deposits or advances. If the transaction, as in the subject case deviates from the above the same fails the test of being a loan , deposit or advance , or the consideration is not an interest or discount, the exemption is not admissible. In the subject case the amount of 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
= = = = = = = =
Plain text (Extract) only
For full text:-Visit the Source
= = = = = = = =