2018 (12) TMI 1154 - AAR - GST

Bounce charges deemed taxable supply under GST laws

The Authority ruled that bounce charges collected by the Applicant are treated as a supply under the GST regime. This decision was based on the ... Supply under GST - consideration - agreeing to the obligation to tolerate an act - Schedule II Entry 5(e) - Section 7 - scope of supply - value of supply - inclusion of penalty/late feeSupply under GST - consideration - agreeing to the obligation to tolerate an act - Schedule II Entry 5(e) - Section 7 - scope of supply - Whether the bounce charges collected by the applicant constitute a supply under the GST law. - HELD THAT: - The Authority examined the loan agreements and observed that the contracts expressly define and provide for recovery of bounce charges where payment by cheque/ECS/NACH is dishonoured. The terms show that the applicant, having foreseen such events, agreed to tolerate the dishonour/ delayed payment subject to receipt of the specified charges. Section 7 of the GST Act defines 'supply' and Schedule II classifies certain activities as supply of services; Entry 5(e) of Schedule II treats '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. On the material before it the Authority found a contractual agreement to tolerate the act of dishonour in return for payment, so the bounce charges have the requisite nexus to a supply under Schedule II Entry 5(e) and fall within the scope of Section 7. Contrary submissions that such charges are merely liquidated damages or compensatory in nature and not consideration for a supply were considered, but the Authority held that the contractual arrangement demonstrated an agreement to tolerate the act for monetary consideration and therefore the amounts received are consideration for a supply of service within the meaning of the GST law.Bounce charges collected by the applicant are a supply of service under the GST Act and therefore taxable.Final Conclusion: The Authority answered the question in the affirmative: bounce charges collected by the applicant are consideration for a supply (agreement to tolerate an act under Schedule II Entry 5(e)) and are thus subject to GST. Issues Involved:1. Whether the Bounce Charges collected by the Applicant should be treated as a supply under the GST regimeRs.Detailed Analysis:Issue 1: Whether the Bounce Charges collected by the Applicant should be treated as a supply under the GST regimeRs.Applicant’s Contention:- The Applicant is a non-banking financial company providing various types of loans.- As per the loan agreements, in case of dishonour of cheque/ECS/NACH, the Applicant collects penal/bounce charges.- The Applicant argues that bounce charges are in the nature of penalty/liquidated damages for breach of contract and not consideration for supply of service, hence not subject to GST.- The Applicant refers to Section 7 of the CGST Act, which defines 'supply' and argues that bounce charges do not fall within its ambit as they are not consideration for any supply.- The Applicant also refers to international precedents, such as Australian GSTD 2013/1, which states that a 'failed payment fee' does not constitute consideration for a supply.- Additionally, the Applicant argues that even if considered as penalty for delayed payment, bounce charges should be included in the value of loans and treated at par with interest, which is exempt from GST.Concerned Officer’s Submission:- The Officer argues that bounce charges should be treated as a supply under GST.- Citing Section 7(1)(d) and Schedule II, para 5(e) of the CGST Act, the Officer asserts that bounce charges for non-performance of a contract are treated as a supply of service.- According to the Officer, the Applicant is deemed to have received consideration in the form of charges or liquidated damages and is required to pay tax on such amounts.Authority’s Observations:- The Authority reviewed the facts, submissions, and documents.- The Applicant provides loans and charges interest, with agreements specifying repayment through EMI. In case of dishonour of payment modes, bounce charges are collected.- The Authority noted that bounce charges are defined in the loan agreements as charges for dishonour of payment modes.- The Authority examined Section 7 of the CGST Act, which defines 'supply', and Schedule II, para 5(e), which includes 'agreeing to the obligation to tolerate an act or a situation' as a supply of services.- The Authority concluded that the Applicant tolerates the act of dishonour of payment modes by customers in return for bounce charges, which constitutes a supply under GST.- The Authority rejected the Applicant’s argument that bounce charges are not consideration for supply, stating that the charges are for tolerating the act of dishonour, thus falling under Schedule II, para 5(e).Conclusion:- The Authority ruled that bounce charges collected by the Applicant are treated as a supply under the GST regime.- The ruling was based on the interpretation that the Applicant tolerates the act of dishonour of payment modes by customers in return for bounce charges, which qualifies as a supply of services under GST laws.Order:- The question of whether bounce charges collected by the Applicant should be treated as a supply under the GST regime was answered in the affirmative.