2019 (7) TMI 810 - AAR - GST

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 ... Levy of GST- 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? - HELD THAT:- In the instant case of the agreement titled ‘Mercedes-Benz Financial’, the rate of interest for this loan is specified in Annexure I to this agreement. The methodology of arriving at this rate of interest is given in the Annexure itself as the ‘Net Applicable Fixed Interest Rate’ after deducting the ‘Applicable Fixed Interest Rate Gross’ less the ‘Interest subsidy from MB India’ (ref Para 4.2). The buyer has to pay the ‘Loan Amount’ (SI no 3 of (B) Financial details) specified in the Annexure I with interest at the “Rate of Interest per Annum” (Sl.no. 4 of (B) Financial details Annexure I) specified therein: There is no obligation of the buyer to pay back the principal at the ‘Applicable Fixed Interest Rate Gross’. There is no obligation on part of the buyer in this agreement to pay any further amount beyond the amount calculated as per the “Rate of Interest per Annum”. Hence, the stand of the applicant that the interest subvention amount given by MB India to DFSI is a part of the consideration for the transaction between DFSI and buyer is not correct as the buyer is under no obligation to pay this amount equivalent to the interest subvention to DFS as per the terms of the agreement between FSI and the buyer. In the instant case, there is an MOU / agreement between DFSI and MB India for an amount determined by the agreement interest subvention amount for each loan taken by buyer of MB India’s vehicles. This amount is part of the consideration in this transaction and as per the definition in Section 2(31); this is the amount payable by MB India to DFSI and receivable by DFSI from MB India which is recorded as such in the audited financials of DFSI. As DFSI and MB India are related parties, the value of this supply may be different from the transaction value here. This agreement between DFSI and MB India is for the furtherance of the business of lending of DFSI as they are the preferred financiers of MB India’s vehicles. Customers buying MB India’s vehicle would prefer to take out a loan from DFSI because of their lower interest rates offered as a consequence of their agreement with MB India. Therefore, this transaction between DFSI and MB India is a ‘Supply’ under Section 7 of CGST Act. In the instant case, DFSI is agreeing to provide vehicle loan to buyers of MB India’s vehicles at a lower interest rate as decided between DFSI and MB India and also to provide better customer luxury experience, structured insurance products offerings with claims processing within minimum turnaround time, tailor made products, quick loan approvals, maintain customer relation etc. as per the MOU between FSI and Mb India. Hence, the supply of service by DFSI to MB India is covered under SAC 999792 as Other miscellaneous Services, agreeing to do an act. 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 as Other miscellaneous Services , agreeing to do an act, to 9% CGST and 9% SGST as per Sl no 35 of Notification No 11/2017 Central Tax (Rate) dt. 28.06.2017 as amended are chargeable as per Sl no 35 of Notification No. II(2)/CTR/532(d-14)/2017 vide G.O. (Ms) No. 72 dated 29.06.2017 as amended. 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.