In Re: M/s. Bajaj Finance Limited
GST
2018 (12) TMI 1154 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA – 2019 (27) G. S. T. L. 458 (A. A. R. – GST)
AUTHORITY FOR ADVANCE RULING, MAHARASHTRA – AAR
Dated:- 6-8-2018
GST-ARA-21/2018-19/B-84
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 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 fo
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e/ 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. 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.
4. 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 “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 re
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Applicant's interpretation of law and/or facts, as the Case may be, in respect of Question(s) on which advance Ruling is sought.
2. Question requiring advance ruling
2.1. This advance ruling is sought to ascertain whether the Bounce Charges collected by the Applicant should be treated as a supply under the GST Regime?
3. Applicant's Interpretation
3.1. In this context, the Applicant has analyzed the relevant legal provisions in the ensuing paras.
A. Bounce Charges do not fall within the ambit of 'supply under the GST regime
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 Schedul
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GST. Further, the Bounce Charges collected by the Applicant are not covered under the list of activities specified in Schedule I of the CGST Act. Therefore, in this case, analysis is required to know whether the penal charges collected as Bounce Charges would qualify as a consideration towards Supply of service.
A.3 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 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:
(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
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something, such act or abstinence or promise is called a consideration for the promise.”
A.7 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 law, moving from the plaintiff, either of benefit to the plaintiff or of detriment to the defendant.
WEBSTER DICTIONARY
Something of value given or done in exchange for something of value given or done by another, in order to make binding contract; inducement for a contract.
A.8 From the above discussed meaning of the term 'consideration', it can be said that consideration would necessarily mean “quid pro quo”, i.e. something in return. It is a benefit which must be bargained 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
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n 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/ fine to deter such person to repeat the act in future. Even if such activity is repeated in future, there is no intention to deter the happening of the same.
A.12 The expression agreeing to tolerate an act' cannot be construed to include situations wherein liquidated damages/ 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 repeat
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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. 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. Therefore, merely because of existence of the clause of penal/ bounce charges 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/bounce charges. It is only a deterrent for the customer/borrower not to commit default. Hence, it is submitted that there is no obligation on the Applicant to tolerate 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
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n 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 – Men a contract has been broken, the party who suffers by such breach is entitled 10 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
B.4 In view of the above, it is submitted that the liquidated damages / penalty charged for breach of contract are legal 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
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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 any 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 less or 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 right to terminate. 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 Determinat
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n 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.
B.10 In view of the above discussed rulings, the Applicant would like to submit that the very purpose of liquidated damages / penalty is to restitute or make good, 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 consi
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, the Bounce Charges would not be treated as a consideration for any supply, and therefore, will be outside the levy of GST.
C. The present issue is squarely covered by the Australian GSTD 2013/1
C.1 It is further Submitted that the present issue is squarely covered by the Australian GSTD 2013/1 which holds that the payment of a 'failed payment fee' is not consideration for a supply. In para 5 of the said GSTD, it has been clarified that a 'failed payment' means a dishonored cheque or a declined direct debit request, and the 'failed payment fee' means the fee charged by the supplier to the recipient in respect of the failed payment.
The relevant facts and circumstances as stated in para 2 of the said GSTD are extracted herein below:
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 author
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ause the recipient of the underlying supply has not fulfilled its obligation to ensure funds were available to honour a cheque, or meet a direct debit request,
* the recipient's failure to fulfil its payment obligations causes the supplier to incur additional costs, such as the inward dishonour fee charged by the supplier's financier, or to suffer other loss, such that the 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
C.2 It is submitted that the Bounce Charges collected by the Applicant in the present case is 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
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f the consideration for anything supplied by the Applicant.
C.3 In view of the above facts and circumstances, it is submitted that the GSTD 2013/1 holding that the failed payment fee is not a consideration for supply, shall be equally applicable to the bounce charges being collected by the Applicant in the present case.
C.4 It is therefore submitted that the Bounce Charges collected by the Applicant in the present Case does not amount to consideration for any supply, in as much as it is merely compensatory in nature and does not have any connection with any supply of service. Hence, the bounce charges shall not be subjected to GST.
D. Without prejudice to the above, penalty for delayed payment of consideration is to included in the value of the supply in view of clause (d) of sub-section (2) of Section 15 of the CGST Act, therefore, the bounce 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.
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, 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-lntegrated Tax (Rate) dated 28.06.2017.
Conclusion
3.2. Based on the above provisions and discussions, the Applicant is convinced that the activity of collecting the Bounce Charges do not amount to supply of services under the GST Regime and therefore would not be taxable. In any case, the bounce charges being in the nature of penalty for delayed payment of consideration would be included in the value of supply of loans and therefore, would be treated at par with interest, hence, the same shall be exempt from GST.
Additional submissions on 01.08.2018
Synopsis Of submissions made in Appln. dt 09.05.2018 during personal hearing held on 27.06.2018 & 18.07.2018.
A. Bounce Charges are in the nature of liquidated damages or penalty for breach of contract, which does not amount to consideration for any contract, and therefore, there cannot be any suppl
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tted that upon breach of contract, the aggrieved party is entitled to claim compensation for breach of contract. Such compensation is a legal and statutory right provided under Section 73 and 74 of the Indian Contract Act, 1872, and even without any specific clause in the contract for the damages or compensation payable upon the breach of contract, the party suffering such breach has the statutory right to claim damages of compensation from the party who has broken the contract.
A.4 The provisions of Section 73 and 74 are extracted 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
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act.
A.6 It is submitted that the damages in Section 74 may either be in the nature of liquidated damages or penalty. If the sum stipulated in the contract is a genuine pre-estimate of damages likely to flow from the breach, it is called liquidated damages. If it is not a genuine pre-estimate of the loss, but an amount intended to secure performance of the contract, it may be penalty. The question whether a 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.
A.7 In the present case, 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. Further, the borrower is under a contractual obligation to ensure that sufficient funds are available in his account on the due dates of the EMI.
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he contract. However, the Court may hold such Bounce Charges to be penalty, in case the Court finds it as exorbitant or extravagant.
A.9 Therefore, in view of the above discussions, it is submitted that the Bounce Charges may either be treated as liquidated damages, or penalty, but in any case, the same shall be damages for breach of contract only.
A.10 It is submitted that payment of liquidated damages or penalty is not a consideration for any service, and therefore, bounce charges collected by the Applicant, being in the nature of liquidated damages or penalty, cannot be treated as a consideration for supply of service, as they are merely damages for the breach of contract.
A.11 It is further submitted 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
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further submitted that the bounce charges shall not be covered by clause (e) of Entry 5 of Schedule II 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 submitted that the expression “agreeing to the obligation” is a prefix to all the three entries, viz. 'to refrain from an act', 'to tolerate an act or a situation', and 'to do an act'. Therefore, the correct interpretation of the law would be to read the above said clause as under:
– agreeing to the obligation to refrain from an act,
– agreeing to the obligation to tolerate an act or a situation,
– agreeing to the obligation to do an act
B.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 su
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do or suffer something; it implies a right in another person to 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; and not merely a moral, social or religious one. An obligation 'nay not be a legal one, where it cannot be reduced to a money value; legal 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. This definition is used in its wider juristic sense as covering duties arising ex contractu or ex delicto, and 'nay cooer any other enforceable duty under any statute.'
* Black's Law Dictionary:
“Obligation, (n,)
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
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n 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 making the obligation, with a corresponding right to the other person to enforce such obligation.
B.5 However, in the present case, there is no obligation upon the Applicant to tolerate the act of non-payment or delayed payment by the borrower, in as much as, neither the Applicant has any duty or liability towards the borrower, nor the borrower has any right on the Applicant. The payment of bounce charges neither obligates 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
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ly. the damages for breach of contract are not taxed.
C.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.
C.2 In Australian Law, the GST is levied on supply under 'A New Tax System (Goods and Services Tax) Act, 1999'. The term “'supply' is defined under Section 9(10) of the said Act. Clause (g) of sub-section (2) is pari materia the provisions of clause (e) of Entry 5 of Schedule II to the CGST Act, which reads as under;
“9-10 Meaning of Supply
(1) A supply is any form of supply whatsoever.
(2) Without limiting subsection (1), supply includes 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.”
C.3 In the above context, reference is made to GSTR 2001/4, issued by the Australian Tax Office (ATO)
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o tolerating an act and hence would not fall within the ambit of “supply' for the purposes of GST.
C.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 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.6 Further, in a decision of the Court of Appeal (U.K.) in case of M/s. Vehicle Control Services Limited
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rty.
C.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 for the liquidated damages.
C.9 Hence, in view of the above submissions, the bounce charges levied by the Applicant cannot be treated as a supply of service, and therefore, is not liable to GST.
D. The present issue of Bounce Charges is squarely covered by the Australian GSTD 2013/1
It is further submitted that the present issue of Bounce Charges is squarely covered by the Australian GSTD 2013/1 which holds that the payment of a 'failed payment fee' is not consideration for a supply. Para 5 of the said GSTD, defines the term 'failed payment' as a dishonored cheque or a declined direct debit request. Further, the term 'failed payment fee' has been defined as the fee charged by the supplier to the recipient in respe
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upply (we accept that this would be the case in the absence of contrary arrangements between the supplier and 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 terms of the Direct Debit Authority for a direct debit, or because the supplier's ability to charge a failed payment fee is specified by statute;
* the failed payment fee arises because the recipient of the underlying supply has not fulfilled its obligation to ensure funds were available to honour a cheque, or meet a direct debit request;
* the recipient's failure to fulfil its payment obligations causes the supplier to incur additional costs, such as the inward dishonour fee charged by the supplier's financier, or to suffer other loss, such that the failed payment fee is character
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(c) There is nothing in addition to the underlying supply that the failed payment fee could be described as “for: even within the broader definition of 'for consideration?”
….Emphasis Supplied
D.3 It is relevant to note that the above GSTD has been issued in the context of Australian GST law, wherein the ambit of 'supply' is wide enough to cover an obligation to tolerate an act or situation, as submitted in para C2 above. Even in such context, the GSTD holds that the payment of “failed payment fee' does not amount to consideration for supply. The GSTD emphasises on the point that there is no additional supply which is 'for consideration; the 'failed payment fee' arises due to the failure of the borrower to meet his obligation. The “failed payment fee' is not for the service to the borrower, but is against the borrower for failing to meet his obligation. Hence, on this basis, the GSTD concludes that there is no supply arising on the payment of 'failed payment fee', and that
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t
* 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 or loss incurred; and
* there is nothing in the agreement between the Applicant and the borrower/customer that describes the bounce charges as part of the consideration for anything supplied by the Applicant.
D.5 In view of the above facts and circumstances, it is submitted that the above GSTD 2013/1 Shall be squarely applicable to the bounce charges in the present case. The Bounce Charges payable by the borrower is not for any service rendered to him, but is against the borrower for the failure to meet his contractual obligation. The bounce charges are merely damages for the breach of contractual obligations, and therefore, the same do not have any connection with provision of service. Hence, the payment of bounce charges does not amount to consideration for any service.
D.
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or delayed payment of consideration is to be included in the value of the supply in view of clause (d) of sub-section (2) of Section 15 of the CGST Act.
F.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:
“15. Value of taxable supply.
(2) The value of supply shall include –
(d) interest or late fee or penalty for delayed payment of any consideration for any supply;”
…….Emphasis Supplied
F.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 value of the said supply.
F.3 It Is relevant to note that the said provision does not have a restricted application to “taxable supply'; the said provision is applicabl
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ated 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). Hence, the bounce charges would 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.
G. It is submitted that the above submissions are in addition and without prejudice to the submissions made by the Applicant in its application dated 09.05.2018.
03. CONTENTION – AS PER THE CONCERNED OFFICE
Comments and submission regarding above referred application as follows.
BRIEF 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 loan etc. All these loans are interest bearing loans.
The applicant inter alia enters i
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Submission and view of jurisdictional officer –
Name of Dealer : M/s. Bajaj Finance Limited
Registration No. of Service tax : AABCB1518LST001
Period of Registration :Date of issue of Original ST-2: 02/11/2001 TO 30/06/2017
Registered address for service tax :4th Floor, Unit 401 to House, Lohgaon, Pune-411014
Classification of service
Chapter/Section/Heading
Description of Service
CGST Rate (%)
SGST/UTGST Rate(%)
IGST Rate(%)
Condition
Heading 9997
Other services (washing, cleaning and dyeing services; beauty and physical well-being services; and other miscellaneous services including services nowhere else classified).
9
9
18
0
Section 7
Financial
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ervices 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 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
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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 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 amount of
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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 before respective due date for other modes.
II. TERMS OF THE LOAN:
3. The Borrower agrees and confirms that:
(iv) BEL is entitled to levy penalty as follows on default:
(a) (a) Bounce Charges of up to Rs. 350/- on each Bounce as per clause B of the schedule.”
A perusal of the above extract reproduced by the applicant from a sample auto loan agreement and submitted by them in support of their argument that Bounce Charges, collected by them is in the nature of penalty, reveals that while drafting the agreement they themselves h
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) 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 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 a supply of services; or
(b) a supply of services and not as a supply of goods.”
SCHEDULE 1 [See section 7] ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSID
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er 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) …………..;
(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 states as
* '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 busines
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on (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 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.
* In case of dishonour of cheque/ECS/NACH or any other electronic or clearing mandate by the customers, in respect of the EMIs, the Applicant collects 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.
* In the
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rding 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 that the receipt of above mentioned 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.
In their copy of agreement at page 19 of their submissions, with Punya Nath Mishra, in respect of an auto loan at point no.r of the said agreement it is mentioned that “Bounce Charges” shall mean, dishonor of post-dated cheque/ ECS ADM/ entrusted by the borrower/co app
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r 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 agreement, clearly devised a suitable mechanism for receipt of charges for the same and it is not additional interest as claimed by the applicant.
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 u
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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 the applicant because inspite of such dishonour the applicant proposes to continue the agreement with the defaulting party. Thus we find that the recovery of bounce charges is made in view of toleration of the act of the client by the applicant and therefore construes as 'supply' as per as per Sr. No. 5(e) of Sch. 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-A
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