2025 (12) TMI 868 - HC - GST

GST on chit foreman commission u/s 21(b) upheld; interest penalty under 21(c) exempt as loan consideration Entry 27

HC held that while the foreman's commission/remuneration up to 7% of the gross chit amount under Section 21(b) of the Chit Funds Act, 1982 is taxable ... Supply or not - interest/penalty collected for delay in payment of monthly subscription by the members - classification and rate of duty applicable on the said supply - To be part of the consideration paid to the foreman for his services and running the chit or not - HELD THAT:- There is no dispute that the petitioner is liable to pay GST on the remuneration or commission paid to the foreman under Section 21(b) of the Act, 1982. The Hon’ble Supreme Court of India, in the case of Oriental Kuries Limited Vs. Lissa & Ors [2019 (11) TMI 1818 - SUPREME COURT], had an occasion to consider whether future installments payable by a chit subscriber would be a debt owed to the chit foreman and whether such debt could be recovered in case of default in payment of a installment. The Hon’ble Supreme Court of India held that the chit amount paid out to a prized subscriber, is in the nature of grant of a loan and the same can be recovered by the foreman by treating the same as a debt - In view of the aforesaid observations of the Hon’ble Supreme Court of India, the interest or the penalty recovered by a foreman, from a defaulting chit subscriber would clearly fall under Entry No.27 of the N/N. 12 of 2017. Section-21 of the Act, 1982, sets out the rights of a foreman. Section 21(b) places a cap on the service fees that can be collected by a foreman to 7% of the gross chit amount. In such a situation, the right to interest and penalty, if any payable on any default in payment of installments set out, in Section 21(c) falls outside the purview of commission or remuneration specified in Section 21(b). Further, the cap of 7% set out in Section 21(b) would be a bar to the foreman to recover interest and penalty under Section 21(c) - it must be held that the interest or penalty recovered by a foreman, on account of defaulting payment of installments, cannot be treated to be a service fee or another charge, mentioned in the definition of interest, in the notification No. 12 of 2017. The findings of the Authority for Advance Ruling, dated 05.05.2020 and the Appellate Authority for Advance Ruling, dated 21.09.2020 are set aside and it is held that the interest and penalty, recovered by a foreman, in relation to default in payment of installments would not be exigible to tax under the GST Act - Petition allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether interest and penalty charged by a chit foreman on delayed payment of chit installments by subscribers constitute taxable consideration for 'services provided by a foreman of a chit fund in relation to chit' under the applicable GST notifications. 1.2 Whether such interest and penalty are covered by the exemption in Entry 27 of Notification No. 12/2017-CT (Rate), dated 28.06.2017, as consideration by way of 'interest' on deposits, loans or advances. 1.3 Whether the interest and penalty on defaulted installments are in the nature of 'service fee or other charges' in respect of moneys borrowed or debt incurred, thereby excluded from the definition of 'interest' in Notification No. 12/2017-CT (Rate). 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of interest and penalty on delayed payment of chit installments as consideration for foreman's services Legal framework 2.1 The relevant charging provision in the rate schedule is Sl. No. 15 of Notification No. 11/2017, dated 28.06.2017, taxing 'services provided by a foreman of a chit fund in relation to chit' (Heading 9971) at 12%. 2.2 The Chit Funds Act, 1982 prescribes rights and duties of a foreman. Section 21(1)(b) entitles the foreman to commission/remuneration up to 7% of the gross chit amount. Section 21(1)(c) entitles the foreman to 'interest and penalty, if any, payable on any default in the payment of instalments'. Section 22 imposes duties on the foreman to ensure timely payment of prize amounts to prized subscribers. Rule 2 (AP Chit Fund Rules) stipulates interest at 18% per annum on defaulted installments payable to the foreman. 2.3 The advance ruling authorities had held that additional amounts collected as interest/late fee/penalty on delayed installments 'take colour' from the original supply of financial and related services by the foreman and thus form part of the taxable value of such services. Interpretation and reasoning 2.4 The Court examined the statutory scheme of the Chit Funds Act, 1982 to delineate what constitutes 'services provided by a foreman'. Section 22 mandates that the foreman must pay the prize amount to the prized subscriber within the stipulated time, irrespective of defaults by other subscribers, thereby obliging the foreman to make good any deficit arising from such defaults. 2.5 Section 21(1)(b) separately caps 'commission, remuneration or [amount] for meeting the expenses of running of the chit' at 7% of the gross chit amount. Section 21(1)(c), in a distinct clause, entitles the foreman to interest and penalty on defaults in payment of installments, in addition to other contractually payable amounts. 2.6 The Court held that, structurally and textually, Section 21(1)(c) creates a right to interest and penalty distinct from, and outside, the capped commission/remuneration under Section 21(1)(b). The statutory cap on commission under Section 21(1)(b) operates as a bar to treating the interest and penalty under Section 21(1)(c) as additional 'service fee' or 'remuneration' for the foreman's services. 2.7 Referring to the decision of the Supreme Court in Oriental Kuries Ltd. v. Lissa & Ors., the Court adopted the characterization that when a prized subscriber receives the chit amount, it is 'in the nature of a grant of a loan' from the common fund with repayment in installments; the relationship creates a debt at the time of subscription, and upon default the foreman is entitled to recover the consolidated amount of future subscriptions. 2.8 In light of this characterization, interest and penalty recovered from defaulting subscribers are linked to the debtor-creditor relationship arising from the loan-like character of the chit draw, rather than being additional consideration for the service of conducting the chit. Conclusions 2.9 Interest and penalty collected by the foreman on delayed payment of chit installments are not part of the commission/remuneration for services provided by the foreman in relation to chit under Section 21(1)(b). 2.10 Such interest and penalty are not to be treated as part of the taxable value for 'services provided by a foreman of a chit fund in relation to chit' under Sl. No. 15 of Notification No. 11/2017. Issue 2 - Applicability of exemption under Entry 27 of Notification No. 12/2017-CT (Rate) to interest and penalty on defaulted installments Legal framework 2.11 Entry 27(a) of Notification No. 12/2017-CT (Rate), dated 28.06.2017, exempts services 'by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services)'. 2.12 The same notification defines 'interest' as 'interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) but does not include any service fee or other charges in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.' 2.13 The Supreme Court in Oriental Kuries Ltd. held that the chit amount paid to a prized subscriber is in the nature of a loan, that the subscriber incurs a debt payable in installments from the date of subscription, and that the foreman is empowered to recover the entire balance in a lump sum on default, to protect the interests of other subscribers and ensure the smooth functioning of the chit fund. Interpretation and reasoning 2.14 Based on Oriental Kuries Ltd., the Court treated the future installments payable by a prized subscriber as a 'debt incurred' and the chit amount as a 'grant of a loan' from the common fund managed by the foreman. 2.15 Consequently, interest and penalty recovered by the foreman from defaulting subscribers are viewed as amounts payable in respect of moneys borrowed or debt incurred under this loan-like arrangement. 2.16 The appellate authority had reasoned that, because Section 21(1)(c) grants the foreman a right to interest and penalty 'along with' commission and remuneration, such interest and penalty should be construed as fee/consideration for the same supply of services, and therefore outside Entry 27. The Court rejected this by emphasizing the clear structural separation and cap under Section 21(1)(b), and by recognizing the independent debtor-creditor character of the defaulted amounts. 2.17 Once treated as interest on debt, the consideration by way of interest and penalty on delayed installments falls within the scope of 'interest payable in any manner in respect of any moneys borrowed or debt incurred' in the definition in Notification No. 12/2017, thereby satisfying the condition for exemption under Entry 27(a), subject to exclusion of service fee or other charges. Conclusions 2.18 Interest and penalty collected by a chit foreman from defaulting subscribers on delayed payment of chit installments arise from a debt incurred by the prized subscriber and are in the nature of consideration by way of 'interest' on such debt. 2.19 Such interest and penalty squarely fall within Entry 27(a) of Notification No. 12/2017-CT (Rate) and are therefore exempt from levy of GST. Issue 3 - Whether such interest and penalty are excluded from the definition of 'interest' as 'service fee or other charges' Legal framework 2.20 The definition clause in Notification No. 12/2017-CT (Rate) excludes from 'interest' any 'service fee or other charges in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.' 2.21 Section 21(1)(b) of the Chit Funds Act, 1982 limits the foreman's entitlement to 'commission, remuneration or [amount] for meeting the expenses of running of the chit' to a maximum of 7% of the gross chit amount. Section 21(1)(c) gives an independent entitlement to interest and penalty on defaulted installments. Interpretation and reasoning 2.22 The Court reasoned that, given the statutory cap of 7% in Section 21(1)(b), any amount characterized as 'service fee' or 'remuneration' for running the chit must fall within that limit. Interest and penalty under Section 21(1)(c) are over and above this capped commission/remuneration and are separately provided for. 2.23 Therefore, interest and penalty under Section 21(1)(c) cannot be re-characterized as 'service fee or other charges' for the purposes of the exclusion in the definition of 'interest' in Notification No. 12/2017-CT (Rate). 2.24 As those amounts are not 'service fee or other charges' but are interest on debt/default, they remain within the positive part of the definition of 'interest' and thus qualify for the exemption under Entry 27. Conclusions 2.25 Interest and penalty recovered by the foreman on defaulted installments do not constitute 'service fee or other charges' in respect of the moneys borrowed or debt incurred within the meaning of the exclusion in the definition of 'interest' in Notification No. 12/2017-CT (Rate). 2.26 Such interest and penalty are properly characterized as 'interest' on a debt incurred and therefore remain eligible for exemption under Entry 27 of Notification No. 12/2017-CT (Rate). Overall operative conclusion 2.27 The interest and penalty recovered by a foreman from defaulting chit subscribers on account of delayed payment of installments are not exigible to GST, being exempt under Entry 27 of Notification No. 12/2017-CT (Rate) and not forming part of the taxable consideration for foreman's services under Notification No. 11/2017; the rulings of the Authority for Advance Ruling and the Appellate Authority for Advance Ruling to the contrary are set aside.