2019 (8) TMI 31 - AAAR - GST

Penal charges for delayed EMI payments taxable under GST as per Schedule II

In Re: M/s. Bajaj Finance Limited

The Authority upheld the decision that penal charges collected for delayed EMI payments are taxable under GST as per Schedule II to the CGST Act. The ... Levy of GST - Penal Interest for delayed payment of EMI - interest for the purpose of exemption under Sr. No. 27 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, 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 - taxable supply or not - Tolerate an act or a situation - Challenge to AAR decision. HELD THAT:- The agreement between appellant and customers has clearly defined the terms therein and the terms (Default Interest’, ‘Penal Charges’ and ‘Bounce Charges’ are defined separately and therefore are exclusive of each other. A further reference to the clause 16 and schedule referred therein shows that the appellant recovers the charges for delay in payment of EMI and for continuing of non-payment as a penalty not exceeding 3% per month on amount due calculated on pro-rata basis from due date till date of actual payment. In clause 3 (iv) of the agreement also the appellant mentioned that he is entitled to recover the penalty as above in the event of default and delay in payment of EMI. Thus, it is evident that although the agreement between appellant and customer has defined separately the terms ‘Default Interest’, ‘Penal Charges’ and ‘Bounce Charges’, but they are exclusive and what appellant recovered or recovers from his customer is only the penalty for delayed payment of EMI under the term ‘Penal Charges’. The penalty recovered by the appellant does not get covered by the term ‘penal interest’ as used by the appellant in his grounds of appeal, as per se it is not interest but it is penalty / penal charges. What is exempted vide N/N. 12/2017-Central Tax (Rate) dated 28.06.2017 is the interest as construed under definition provided in the said notification. By abiding to the correct interpretation of term ‘interest’ as discussed herein above, the penal charges / penalty being not construed as interest, will not qualify for such exemption. The provisions of clause (d) of sub-section (2) of Section 15 of the CGST Act would apply in these cases where interest is not defined separately anywhere else in a specific context. A separate carving out of the word ‘interest’ in the notification in the context of this case sets it apart from drawing a general meaning from Section 15. Entry 5 (e) of the schedule II to the CGST Act, 2017 - HELD THAT:- There is mutual agreement between the Appellant and the borrower. Thus, here it can be said that the Appellant have tolerated an act or situation of default by the borrowers, for which they are recovering some amount in the name of the penal charges / penalty. Hence, such activity of tolerance is against consideration - As regards the contention of the appellant that there is no separate agreement, we are of the view that though there is no separate agreement between the Appellant and the borrower, for the said act of tolerance of the delay by the borrower, there is clear provision laid out at entry 3 (a) of the above discussed agreement, in this regard, in the loan agreement itself which clearly proposes the remedy available for the default by the borrower. Thus, this argument of the Appellant is devoid of my rationale or merit, and hence is not worth considering. Clause 5 (e) of the Schedule II of the CGST Act includes the activities to be treated as services and it covers the very activity in the form of expression “to tolerate an act or a situation” and thereby an act of tolerating delay in payment of EMI is brought into ambit of supply by treating it as supply of services. There shall not be confusion in the mind of anyone that legislature intentionally brought this activity of tolerating an act in the scope of supply of services - the very activity of tolerating act or situation of delay in payment of EMI is covered under clause 5 (e) of the Schedule II without such obligation as contended by the appellant. The penal charges / penalty recovered by the Appellant from their borrowers on account of the delay in payment of EMI by borrowers are adequately covered under clause 5 (e) of the Schedule II of the CGST Act, and will attract GST. Issues Involved:1. Whether the penal interest is to be treated as interest for the purpose of exemption under relevant GST notifications.2. Whether the activity of collecting penal interest amounts to a taxable supply under the GST regime.3. Whether the penal interest is in the nature of penalty or liquidated damages for breach of contract and thus not subject to GST.4. Whether the penal interest falls under the ambit of clause (e) of Entry 5 of Schedule II to the CGST Act.Summary of Judgment:1. Treatment of Penal Interest Under GST Exemption Notifications:The Appellant argued that penal interest should be considered as additional interest and thus exempt from GST under Sr. No. 27 of Notification No. 12/2017-Central Tax (Rate). The term 'interest' in the notification means interest payable in any manner in respect of any moneys borrowed or debt incurred but excludes any service fee or other charges. The Authority concluded that penal charges do not qualify as 'interest' as defined in the notification, and therefore, do not qualify for exemption.2. Penal Interest as Taxable Supply:The Appellant contended that penal interest is not consideration for any supply but rather a penalty for breach of contract. The Authority noted that the penal charges are for tolerating the delay in payment of EMI by the customers, which falls under Sr. No. 5(e) of Schedule II to the CGST Act, making it a taxable supply. The Authority emphasized that the penal charges are not additional interest but penalty/penal charges.3. Penal Interest as Penalty or Liquidated Damages:The Appellant argued that penal interest should be treated as penalty or liquidated damages, which do not amount to consideration for any supply and thus should not be subject to GST. The Authority rejected this argument, stating that the penal charges are for tolerating the delay in payment, which constitutes a supply of service under the GST regime. The Authority highlighted that the penal charges are not merely damages but consideration for the tolerance of an act.4. Applicability of Clause (e) of Entry 5 of Schedule II to the CGST Act:The Appellant claimed that clause (e) of Entry 5 of Schedule II applies only when there is an agreement to the obligation to tolerate an act or situation. The Authority disagreed, stating that the penal charges collected for the delay in payment of EMI fall under the scope of tolerating an act or situation as per clause (e) of Entry 5 of Schedule II. The Authority emphasized that the agreement between the Appellant and the borrower includes provisions for penal charges in case of delay, making it a taxable supply.Conclusion:The Authority upheld the Advance Ruling's decision, stating that penal charges collected by the Appellant for the delay in payment of EMI are taxable under GST as they fall under Sr. No. 5(e) of Schedule II to the CGST Act. The penal charges are not considered additional interest and do not qualify for exemption under Sr. No. 27 of Notification No. 12/2017-Central Tax (Rate). The appeal was dismissed, and the ruling of the Authority for Advance Ruling was affirmed.