2018 (12) TMI 1154 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA – TMI – Levy of GST – penalty/ liquidated damages – supply of service or not – Whether the Bounce Charges collected by the Applicant should be treated as a supply under the GST regime? – Held that:- The receipt of bounce charges would be receipt of amounts for tolerating the act of their customers for having bounced the cheque or any other mode of payment. 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 – the receipt of bounce charges on dishonor of cheques, etc, would be receipt of amounts for tolerating the act of their customers for having dishonored or where the client could not honour the said cheques and the same, would definitely be a ‘supply’ under the GST Act and therefore, there clearly arises an occasion to levy tax under the GST Act on the impugned transactions.
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There is clearly an
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n of default on the part of the client for a monetary consideration which is actually a consideration received by the applicant, though in the agreement they may be giving this consideration, other names such as ‘penal charges’, penalty, Bounce Charges, etc, as thought proper by them, but these different nomenclatures in their Agreement would in no way change the actual nature of monetary “‘consideration” which would clearly be taxable for the supply of services as per Sr.No. 5(e) of Sch. II of the CGST Act, 2018.
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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, i.e. the consideration not being an interest or discount, the exemption is not available – Dishonour of cheques i.e. a mode of repayment to the applicant by their customers, is an act which results in delay of receipt of repayments to the applicant. This del
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ited, the applicant, seeking an advance ruling in respect of the following question : Whether the Bounce Charges collected by the Applicant should be treated as a supply under the GST regime? At the outset, we would like to make it clear that the provisions of both the CGST 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, loans against the property, p
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of bounce charges is reproduced below for ease of reference: 1. DEFINITIONS AND ABBREVIATIONS: r. Bounce Charges shall lean, dishonor of post-dated cheque/ ECS ADM/ entrusted by the borrower/co-applicant/co borrower for clearance of EMI (monthly installments) or non-payment of installment on or before respective due date for other modes. II. TERMS OF THE LOAN: 3. The Borrower agrees and confirms that: (iv) BFL is entitled to levy penalty as follows on default: (a) Bounce Charges of up to ₹ 350/- on each Bounce as per clause B of the schedule. …..Emphasis Supplied 5. 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. 6. Under the GST (implemented from July 01, 2017), the Applicant is of the view that bounce charges collected from the customers (for the breach of the terms and conditions of the loan) are in the nature of penalty/liquidated damages and therefore
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des 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. The said Section 7 is reproduced herein below for reference: 7 (1) For the purposes of this Act, the expression supply includes (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; (b) import of services for a consideration whether or not in the course or furtherance of business; (c) the activities specified in Schedule 1, 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 Schedu
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not include any subsidy given by the Central Government or a State Government: (b) the monetary value of any act or forbearance, 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 Ora State Government. A.4 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. A.5 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 . A.6 Reference in this regard is made to the definition of the term consideration provided in Section 2(d) of the Indian Contract Act, 1
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ned for between the parties, and is essential reason for a party entering into a contract. Further, the consideration for an activity must be at the desire of the other person. A.9 In the present case, the Bounce Charges are collected by the Applicant on account of failure of the borrower/ customer in fulfilling its obligation to ensure that the funds were available to honour a cheque or meet a direct debit request presented by the Applicant for the loan installment. Therefore, it is submitted that the Bounce Charges are not recovered by the Applicant in lieu of, or, in return for any activity performed by the Applicant. A.10 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
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penalty is charged by a party for defaults/ breach committed by other party under the contract. In fact, the very intention of such penal clauses is to create a deterrent effect and ensure that the defaults/violations are not repeated by the erring party. A.13 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 provided a consideration is paid, 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. A.14 Contrary to the above, the Bounce Charges a
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ate the act of the default in payment of loan installments by the customer/borrower. A.15 Therefore, the activity of collecting penal/bounce charges does not even fall under the ambit of the deemed supply under Clause (e), Entry 5 of Schedule II of the CGST Act. Hence, the penal/ bounce charges collected for the default in payment of loan installment cannot be treated as consideration for any supply, and accordingly, is not taxable under the GST regime. B. Bounce Charges are in nature of liquidated damages/penalty B.1 It is further submitted that the penal charges collected by the Applicant by way Bounce Charges are merely in the nature of penalty/ liquidated damages for default in loan repayments by the customers, which should not be subject to GST levy. B.2 Thus, liquidated damages/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 o
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gal consequences of the defaulting party, and therefore, the said amount shall not be treated as consideration for any activity. It is further submitted that the consideration for breach of contract, in the form of liquidated damages, cannot be treated as the consideration for the contract per se, hence, would not be taxable under the GST regime. B.5 It is submitted that even internationally, it is a settled position that the damages received by way of compensation for termination or breach of a contract cannot be treated as a supply and therefore not subject to GST/VAT levy. B.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 char
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nate. Thus, in the above Ruling issued under Australian GST, it has been clarified that mere payment of an amount under a damages claim is not a supply and hence, GST is not payable on such supplies. B.8 Further, GST Determination No. 200516 has been issued to answer the question as to whether a club, association, trade union, society or co-operative (referred to as association in the Determination) makes a supply when it imposes a non-statutory line 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 leviable 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 suppl
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, the loss incurred by a person because of a default, non-compliance, etc. of the other person. Such liquidated damages/ 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/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. B.11 It may be noted that there is a similar kind of taxability provisions or exactly same provisions under the above referred countries with respect to taxability of penal/ bounce charge and hence, the ratio laid down by the above judicial precedents should equally apply in the current fact scenario. B.12 In view of the above, it is humbly submitted that the penal charges collec
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s an attempt to make a payment for the underlying supply by way of the supplier presenting a cheque or the supplier attempting a direct debit on the recipient s bank account in accordance with the authority it has from the recipient; the attempted payment is dishonoured or declined and the supplier s financial institution imposes an inward dishonour fee on the supplier: the supplier and recipient have agreed or would be taken to have agreed that in utilising direct debit or cheque payment methods the recipient will have available funds to make the payment of the initial consideration amount for the underlying supply (we accept that this would be the case in the absence of contrary arrangements between the supplier und recipient); the supplier and the recipient have agreed that if the payment fails the recipient will be liable to pay a fee (failed payment fee ). The obligation to pay the failed payment fee may be included in the agreement or contract for the underlying supply, or in the
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o in the above GSTD, in as much as, there is an attempt to make a payment for the loan installment by way of the Applicant presenting a cheque or the Applicant attempting a direct debit on the borrower/customer s bank account in accordance with the ECS or NACH or any Other electronic or clearing mandate obtained from the borrower/customer: the borrower/ customer has agreed that it will have funds available to make the payment of the loan installment; the borrower/customer has agreed that if the payment fails, it will be liable to pay the bounce charges as per the terms of the loan agreement; the liability to pay bounce charges arise because the borrower/customer has failed to fulfil its obligation to ensure that the funds were available to honour a cheque, or meet a direct debit request; the borrower/ customer s failure to fulfil its payment obligations causes the Applicant to incur additional costs, such that the bounce charges is characterised as compensation for the additional costs
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charges levied for delayed payment of loan dues/EMI is to be included in the value of loans, and would be treated at par with interest. D.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, penalty for delayed payment of consideration for a supply would be included in the value of that supply. The said provision is extracted herein below for reference: (2) The value of supply shall include (d) interest or late fee or penalty for delayed payment of any consideration for any Supply; and D.2 In view of the above provision, the bounce charges levied for delayed payment of loan dues/EMI, being in the nature of penalty, is to be included in the value of loans, which is nothing but interest only. Therefore, the bounce charges so levied by the Applicant would be treated at par with interest, and any treatment given to the main consideration (i.e. interest) shall also be equally applicable to such amount (i.e. penalty).
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penalty for breach of contract, which does not amount to consideration for any contract, and therefore, there cannot be any supply of service. A.1 The Applicant lends money to the customers/borrowers with one of the conditions in the loan agreement that the customers/borrowers shall make timely repayment of loan installments on the due dates as per the repayment schedule, through cheque/ Electronic Clearing System ( ECS)/ National Automated Clearing House ( NACH ) or any other electronic or clearing mandate. A.2 However, in case of dishonour of cheque/ ECS/ NACH or any other electronic or clearing mandate due to the customers failure to maintain funds in his account for clearance of the EMI on the due date, the Applicant collects penal/bounce charges from the defaulting customers. The bounce charges are generally a fixed amount per default committed by the customer, for e.g. ₹ 350/- for each dishonour of cheque/ECS (refer page no. 31,45 of the submissions made on 09.05.2018). The
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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 stipulated for. ………Emphasis Supplied A.5 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 Sec. 73, the amount of compensation may exceed the su
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e borrower is under a contractual obligation to ensure that sufficient funds are available in his account on the due dates of the EMI. However, in case, the borrower fails to maintain funds in his account on the due date, the cheque/ECS/ NACH presented by the Applicant gets dishonoured, resulting into default in payment of loan installments. This is a clear case of breach of contract by the customer/borrower, and therefore, upon default in payment of the installments, the Applicant shall be entitled to receive damages in accordance with Section 73 and 74 of the Indian Contract Act, 1872. A.8 The damages in the present case are liquidated in the loan agreement, wherein the parties agree in advance that upon dishonour of cheque/ECS/NACH, the customer/borrower shall be liable to pay a fixed amount to the Applicant as stipulated in the agreement. This amount is named in the agreement as Bounce/Penal charges. It is therefore submitted that such bounce/penal charges are clearly in the nature
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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 in the form of interest. The bounce charges are 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 bounce charges by the borrower cannot be treated as a consideration either for the primary contract of loan, or for any other contract. A.12 Hence, in the absence of any consideration, the bounce charges collected by Applicant in 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. B. Bounce Charges collected by the Applicant for the breach of contract by the cust
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ice. For a valid agreement, there has to be a consideration between the promisor and the promisee. However, as submitted above, the bounce charges 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. B.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, Pollock & Mulla at Pg. No. 1837 of Volume II, 14th Edition, r
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ing 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 pay a certain amount or to do a certain thing for a particular person or set of persons; esp., a dury 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. an act or course of action to which a person is morally or legally bound. the condition of being so bound. 2. a debt of gratitude for a service or favour. …………Emphasis Supplied B.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 per
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tual 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. B.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 bounce charges 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. B.7 In view of the above discussion, it is submitted that in the absence of an agreement by Applicant to any obligation to tolerate the act of non-payment or delayed payment of loan installments by the borrowers, the mere recovery of bounce charges for breach of the contract does not constitute a service by Applicant to the borrower. B.8 Hence, in view of the above submissions, as bounce charges is not a consideration for
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erence 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. C.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 towards 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 co
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Appeal (U.K.) in case of M/s. Vehicle Control Services Limited reported at (2013) EVVCA 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. C.7 In view of 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 separate consideration & would be subject to certain terms & 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 b
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as the fee charged by the supplier to the recipient in respect of the failed payment. Para 3 of the said GSTD states that in the circumstances described in para 2, which is reproduced herein below, the payment of failed payment fee does not amount to consideration for either a financial supply or another supply (for example, a supply of administrative services): 2. This Determination applies where: there is an attempt to make a payment for the underlying supply by way of the supplier presenting a cheque or the supplier attempting a direct debit on the recipient's bank account in accordance with the authority it has from the recipient; the attempted payment is dishonoured or declined and the supplier's financial institution imposes an 'inward dishonour fee' on the supplier; the supplier and recipient have agreed or would be taken to have agreed that in utilising direct debit or cheque payment methods the recipient will have available funds to make the payment of the init
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e failed payment fee is characterised as compensatory for the additional costs or loss incurred; and there is nothing in the agreement between supplier and recipient that describes the failed payment fee as part of the consideration for anything supplied by the supplier. ….Emphasis Supplied D.2 Para 21 of the above said GSTD explains the reasoning based on which it is held that the payment of failed payment fee does not amount to consideration for supply. The Said para is extracted herein below for reference: 21. In the circumstances covered by this Determination, the failed payment fee does not have sufficient nexus to any supply. The following matters, in combination, arc relevant to this conclusion: (a) The failed payment fee relates to losses suffered by the supplier when the recipient fails to meet its obligations to have funds available. (b) The failed payment fee is not an intended consequence of the underlying supply, but arises because the recipient failed to have suffi
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hat Such payment is not a consideration for any supply. D.4 It is submitted that the Bounce Charges collected by the Applicant in the present case are identical to the failed payment fee referred to in the above GSTD, in as much as, there is an attempt to make a payment for the loan installment by way of the Applicant presenting a cheque, or the Applicant attempting a direct debit on the borrower/ customer s bank account in accordance with the ECS or NACH or any other electronic or clearing mandate obtained from the borrower/ customer; the borrower/ customer has agreed that it will have funds available to make the payment of the loan installment; the borrower/ customer has agreed that if the payment fails, it will be liable to pay the bounce charges as per the terms of the loan agreement; the liability to pay bounce charges arise because the borrower/customer has failed to fulfill its obligation to ensure that the funds were available to honour a cheque, or meet a direct the borrower/
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nsideration, the bounce charges collected/levied by the Applicant shall not be subjected to GST. E. Without prejudice to the above, Applicant being primarily engaged in the business of financing/lending, any amount recovered by the Applicant in respect of granting loans is in the nature of interest only. E.1 Without prejudice to the above, the Applicant being primarily engaged in the business of financing/lending, any amount recovered by the Applicant in respect of granting loans is in the nature of interest only. E.2 Hence, the bounce charges collected by the Applicant in the present case for the delayed payment of loan installments by the customer is to be treated at par with interest, and accordingly, the same shall be exempt from GST under Serial No. 27 of the Notification No. 12/2017-central Tax (Rate) dated 28.06.2017, read with Maharashtra State Notification No. 12/2017-State Tax (Rate) dated 29.06.2017. F. Without prejudice the above. penalty for delayed payment of consideratio
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y , either taxable or exempt. Therefore, even if the main supply is exempt by way of any exemption notification, still, the provisions of Section 15(2) shall be applicable to determine the value 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. F.4 In view of Section 15(2)(d) of the Act, the bounce charges levied for delayed payment of loan dues/ EMI, being in the nature of penalty, is to be included in the value of loans, which is nothing but interest only. Therefore, the bounce charges so levied by the Applicant would be treated at par with interest, and any treatmen
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loans to them. The loan agreements provide for repayment of the o are equated monthly through ECS i. e. Electronic Clearing System/ N ACH 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 applicant collects penal/bounce charges which is in line with the agreed terms and conditions. The bounce charges are generally a fixed amount per default committed 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. Questions asked by the applicant for advance ruling Whether the Bounce Charges collected by the Applicant should be treated as a supply under the GST regime? Submission and view of jurisdictional officer – Name of
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or supply of services as referred in the schedule 2. As per schedule 2 para 5 clause (e) agreeing to the obligation to refrain front an act, or to tolerate an act or a situation, or to do an act 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. 2) Definition :- 31) Consideration in relation to the supply of goods or services or both includes a) any payment made or 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 of section 15 the value of a supply of goods or services or bo
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aring in the matter was held on 27.06.2018, Sh. Sandeep Sachdeva, Advocate along with Sh. Chaitanya Bhatt, C.A. and Sh. Arpit Chaturvedi, Advocate appeared and made contentions for admission of application as per their ARA. Sh. Sandeep Sachdeva, Advocate specifically mentioned that the same issue is pending for adjudication at Commissioner, Pune under Service Tax. Jurisdictional Officer Sh. Vinit Thite, State Tax Officer (VAT-C-707) Pune appeared and made written submissions. The final hearing was held on 18.07.2018, She Sandeep Sachdeva, Advocate along with Sh. Arpit Chaturvedi, Advocate and Sh. Ganesh Mandhane National Head Taxation appeared and made oral and written submissions. 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 fina
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customer, for e.g. ₹ 350/- for each dishonour of cheque/ ECS. The Applicant is of the view that such bounce charges collected, are in the nature of penalty/ liquidated damages and therefore, the same is not a consideration for supply of service and hence, not be subjected to GST levy. While submitting that 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, the applicant has reproduced the relevant extract of clauses of a sample auto loan agreement in respect of penal interest which is as follows: The relevant extract of clauses of a sample auto loan agreement in respect of bounce charges is reproduced below for ease of reference: 1. DEFINITIONS AND ABBREVIATIONS: r. Bounce Charges Shall mean, dishonor of post-dated cheque/ ECS ADM/ entrusted by the borrower/co-applicant/co borrower for clearance of EMI (monthly installments) or non-payment of installment on or
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n in the fornz of bounce charges for dishonor of EMI cheques 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 bounce charges 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 Schd. II. (2) Notwithstanding anything contained in sub-section (1),- (a) activities or transactions specified in Schedule Ill; or (b) such activities or transactions un
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. Supply of goods- (a) by a principal to his agent where the agent undertakes 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. SCHEDULE II [See section 71 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. S
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ally mentioned in the clause, if we look at Schedule l, as reproduced above, the supply herein would be in the course or furtherance of business. Supply as per clause (d) is the enumeration or categorization as given in Sch. II appended to the GST Act as to which activities should be treated as supply of goods & 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 Sch. II 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 state 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
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reements entered into by them with their clients which very clearly provide that in case of any such breach as notified in Agreement, the applicant would tolerate the same subject to receipt of consideration in the form of Bounce Charges in return 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. However the applicant has argued that the bounce charges shall not be covered by clause (e) of Entry 5 of Schedule II to the CGST Act, because according to the applicant, agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. It is submitted that the expression agreeing to the obligation implies that 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. We observe herein th
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me, would definitely be a supply under the GST Act and therefore, there clearly arises an occasion to levy tax under the GST Act on the impugned transactions. Thus we find clearly from the above discussions and as per the terms and conditions of the agreement submitted by them, there is clearly an agreement that the applicant, in the case of bouncing of cheques, etc 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 bounce charges 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 they have clearly foreseen that such situation can be there and have, in their agre
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but these different nomenclatures in their Agreement would in no way change the actual nature of monetary consideration which would clearly be taxable for the supply of services as per Sr.No. 5(e) of Sch. II of the CGST Act, 2018. To summarise, 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, i.e. the consideration not being an interest or discount, the exemption is not available. In the subject case the amount of bounce charges cannot be said to be penalty imposed on by the applicant. It is recovered/ imposed only because the client has dishonoured the cheques issued by them towards payment of EMI. Dishonour of cheques i.e. a mode of repayment to the applicant by their customers, is an act which results in delay of receipt of repayments to the applicant. This delay is an act done by their customers which is tolerated by
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