Financial services company must pay GST on interest subvention income from automobile manufacturer under SAC 999792

AAR TamilNadu ruled that interest subvention income received by a financial services company from an automobile manufacturer to reduce customer interest rates is chargeable to GST. The Authority held that the arrangement between the related parties constitutes a supply of service under SAC 999792 as "Other miscellaneous Services, agreeing to do an act." The financial services company provides vehicle loans at reduced rates and enhanced customer services to promote the manufacturer's business. The transaction attracts 9% CGST and 9% SGST under the applicable notification, as the subvention amount represents consideration for services rendered between the related entities.

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Issues Involved:
1. Whether the interest subvention income received by Daimler Financial Services India Private Limited (DFSI) from Mercedes-Benz India Private Limited (MB India) to reduce the effective interest rate to the final customer is chargeable to GST.

Detailed Analysis:

1. Background and Facts:
M/S. Daimler Financial Services Private Limited (DFSI) is a non-banking financial institution engaged in leasing and financing activities, including operating leases of passenger vehicles and financing commercial and passenger vehicles. DFSI has a Memorandum of Understanding (MOU) with MB India, wherein MB India nominates DFSI as the preferred financier to provide retail loans at concessional rates to customers purchasing Mercedes-Benz vehicles. The differential interest (market rate less the rate offered to customers) is paid by MB India to DFSI as interest subvention or subsidy.

2. Applicant's Argument:
The applicant contends that the interest subvention income received from MB India is essentially "interest" and is exempt from GST under Notification No. 12/2017-Central Tax (Rate) dated 28th June 2017. They argue that the consideration for a service can be paid by a person other than the service recipient, and the subvention payment or discount is consideration in the form of interest paid by MB India on behalf of the customer. They also refer to various case laws to support their claim that the interest subvention qualifies as interest and is thus exempt from GST.

3. Jurisdictional Commissioner's Argument:
The jurisdictional Commissioner asserts that the interest subvention income received by DFSI from MB India is chargeable to GST. They argue that MB India is providing the interest subvention to promote the sale of its vehicles, and DFSI is supplying a business support service by extending loans at lower interest rates. This service is classified under SAC 9985999 (Other Support Service) and is chargeable to GST at 18%.

4. Authority's Analysis:
The Authority for Advance Ruling analyzed the agreement between DFSI and MB India. It was noted that DFSI provides loans to customers at a lower interest rate, and MB India compensates DFSI for the difference. This compensation is termed as "interest subvention." The Authority examined whether this subvention qualifies as "interest" exempt from GST or as a taxable supply of service.

5. Supply of Service:
The Authority concluded that the interest subvention received by DFSI from MB India is not "interest" exempt from GST. Instead, it is a consideration for a supply of service by DFSI to MB India. The service provided by DFSI includes offering loans at lower interest rates and providing various customer services as per the MOU. This service is classified under SAC 999792 (Other miscellaneous services, agreeing to do an act).

6. GST Applicability:
The Authority ruled that the interest subvention income received by DFSI from MB India is chargeable to GST. The service provided by DFSI falls under SAC 999792 and is subject to 9% CGST and 9% SGST as per Sl no 35 of Notification No 11/2017 Central Tax (Rate) dated 28.06.2017.

Ruling:
The interest subvention income received by Daimler Financial Services India Private Limited (DFSI) from Mercedes-Benz India Private Limited (MB India) to reduce the effective interest rate to the final customer is chargeable to GST as a supply under SAC 999792 (Other miscellaneous services, agreeing to do an act) at the rate of 9% CGST and 9% SGST.

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