2019 (8) TMI 116 - AAAR - GST

Bounce charges deemed taxable supply under GST Act by Appellate Authority for Advance Ruling

In Re: M/s. Bajaj Finance Limited

The Appellate Authority for Advance Ruling (AAAR) upheld the ruling that bounce charges collected by the appellant constitute a supply of services under ... Nature of activity - supply of service or not - bouncing/dishonoring of cheques - Levy of GST - Bounce Charges collected by the Appellant - tolerate an act or situation of the default by the borrowers - scope of supply - entry 5 (e) of the Schedule II to the CGST Act, 2017 - HELD THAT:- The default in payment of EMIs as also the bouncing or dishonor of the cheque are hereby deemed to be defaults under the provisions of the agreement entered between the appellant and their customers. On any default or breach of the agreement, the remedies available with the appellant are either to recall loan or cancellation of agreement, or to initiate legal proceedings under the Negotiable Instruments Act or under the Payments and Settlement Act, or taking possession of the product, etc. However, the appellant instead of taking recourse to the remedial provisions in the agreement is tolerating the act or the situation of bounce / dishonor of the cheque / ECS / NACH, tendered by the customers for repayment of EMIs, by imposing / recovering certain amount as ‘bounce charges’. Hence, such an activity of tolerance of situation of bounce / dishonor of cheque is adequately covered by entry 5 (e) of Schedule ll. Appellant is entitled to recover the bounce charges from such defaulting borrowers. Thus, from the language of the above mentioned clause related to bounce charges, it is adequately clear that there is mutual agreement between the Appellant and the borrower that whenever this event of default occurs, the Appellant can tolerate this event against some fixed agreed amount. Thus, here it can be said that the Appellant has tolerated an act or situation of default by the borrowers, for which they are recovering some amount in the name of the bounce charges, wherever the repayment instruments, discussed above, have been dishonored. Hence, such activity of tolerance is against consideration. We do not find any scope and requirement as such to discuss the meaning of consideration in such cases, as there is no mention of the term “consideration” anywhere in the description provided in the entry 5 (e) of the Schedule Il to the CGST Act, 2017. The bounce charges are recovered by the appellant for tolerating the act of delay and it is nothing but consideration. It is clear from the meaning of the “consideration” provided under Section 2(31) that it includes the impugned charges - Here, the bounce charges recovered by the Appellant from their borrower can be construed as the monetary value of the act of the tolerance from the side of Appellant in the case of default by the borrower. Thus, this argument of the Appellant is not tenable. Benefit of Notification No. 12/2017-C.T. (Rate) dated 28.06.2017 - HELD THAT:- The bounce charges collected by the Appellant is clearly not on account interest for the delayed payment of the consideration for their supply, but for dishonor of the repayment instruments, such as bouncing of the Cheques issued by the borrowers or the failure of the ECS for non-availability of the sufficient fund in the borrower’s account. Further, the Appellant is recovering separate amount at the fixed rate of interest under the head of “default interest”, as quoted in the loan agreement, on the delayed payment of the EMI by the borrowers - the “bounce charges” in the present case are not covered in the interest meant for the purpose of the exemption and thereby not entitled for the exemption as claimed by the appellant. Thus, the bounce charges recovered by the Appellant from their borrowers on account of the default of the borrowers, where their repayment instruments get dishonored due to lack of the sufficient fund in their bank account, will attract GST. Issues Involved:1. Whether the bounce charges collected by the appellant should be treated as a supply under the GST regime.2. Whether the bounce charges fall within the ambit of 'supply' under the GST regime.3. Whether the bounce charges collected by the appellant for breach of contract by the customer are covered under clause (e) of Entry 5 of Schedule II to the CGST Act.4. Whether the bounce charges are considered as consideration for supply of services.5. Whether the international rulings and guidelines are applicable in determining the taxability of bounce charges.6. Whether the bounce charges should be included in the value of the supply in view of clause (d) of sub-section (2) of Section 15 of the CGST Act.Issue-wise Analysis:1. Whether the bounce charges collected by the appellant should be treated as a supply under the GST regime:The Appellate Authority for Advance Ruling (AAAR) upheld the view that bounce charges collected by the appellant amount to a supply of services under Sr. No. 5(e) of Schedule II to the CGST Act. The AAAR concluded that the appellant has tolerated the act or situation of default by the borrowers, which is covered under the provisions of entry 5(e) of Schedule II to the CGST Act, 2017.2. Whether the bounce charges fall within the ambit of 'supply' under the GST regime:The AAAR examined Section 7 of the CGST Act, which defines 'supply'. It was determined that for an activity to be treated as a supply under GST, it must be carried out for a consideration, except those activities specified in Schedule I. The AAAR found that the bounce charges collected by the appellant constitute a supply for consideration under clause (a) of Section 7(1).3. Whether the bounce charges collected by the appellant for breach of contract by the customer are covered under clause (e) of Entry 5 of Schedule II to the CGST Act:The AAAR analyzed clause (e) of Entry 5 of Schedule II, which includes activities such as agreeing to the obligation to tolerate an act or situation. The AAAR concluded that the appellant's tolerance of the default by the borrower, in exchange for bounce charges, falls under this clause, making it a supply of services.4. Whether the bounce charges are considered as consideration for supply of services:The AAAR emphasized that consideration includes any payment made in respect of, in response to, or for the inducement of the supply of goods or services. The bounce charges were found to be a monetary value for the act of tolerance by the appellant in the case of default by the borrower. Therefore, the bounce charges are considered as consideration for supply of services.5. Whether the international rulings and guidelines are applicable in determining the taxability of bounce charges:The AAAR acknowledged the appellant's reliance on various international rulings and guidelines, such as those from the Australian Tax Office (ATO). However, the AAAR noted that these international rulings are not binding and interpreted the issue based on the provisions of the CGST Act, 2017.6. Whether the bounce charges should be included in the value of the supply in view of clause (d) of sub-section (2) of Section 15 of the CGST Act:The AAAR examined Section 15(2)(d) of the CGST Act, which includes interest or penalty for delayed payment of any consideration for any supply. The AAAR concluded that the bounce charges, being in the nature of penalty, should be included in the value of the loans, which is considered as interest. Therefore, the bounce charges would be treated at par with interest and would be exempt from GST under the relevant notifications.Conclusion:The AAAR upheld the ruling of the Authority for Advance Ruling (AAR) that the bounce charges collected by the appellant from their borrowers in the event of dishonoring of the cheques or failure of payment through ECS and other electronic means due to non-availability of sufficient funds in the borrower’s account would attract GST. The AAAR concluded that the appellant has tolerated the act or situation of default by the borrowers, which is covered under the provisions of entry 5(e) of Schedule II to the CGST Act, 2017, making it a supply of services.