GST on Refundable Security deposits given on phone

[Deepak Kumar]

Dear Sir

One of my friend, who was a dealer of Ji* phones he as recently been issued a notice from GST department for not paying GST on amount collected from the customers towards JI* phones. Basically, as per the terms and conditions of Re*ianc* Company, on 2019, these phones were to be given to the customers at Rs. 1500/- phone, which would be refunded on return of the phone after 36+3 months. This refund will be dealt directly between the customer and Company. Dealers have no role in refund.  Now, my friend, who has sold/supplied these phones, has received a SCN from the department that this consideration is subject to GST.

Is it okay? Shouldn't the department issue the notice to the company.?

[Sadanand Bulbule]

Refer CBIC Circular No. 178/10/2022 -GST dated 03/08/2022 for treatment of security deposits. It emphasis that GST is not appliacable at the time of taking deposit unless it is adjusted or forfeited. You have to reply the SCN with the documented facts to the authority.

[YAGAY and SUN]

Yes, your friend receiving the GST notice may not be entirely appropriate. In this case, the ?1500 collected from customers is treated as consideration for the supply of goods (phones), and GST is applicable on that amount. However, since the refund mechanism and ownership of the scheme lie with the company (Reianc), and dealers act only as intermediaries, the primary liability to clarify the tax treatment should rest with the company. The department ideally should address the issue at the company level, not target individual dealers, unless theres clear evidence of non-compliance by the dealer himself.

[Ganeshan Kalyani]

I agree with Sri Sadanand Sir, that the amount collected from the customers were sort of security deposit. Therefore, no GST on deposit.

[Ganeshan Kalyani]

Since the dealer was a kind of agent between the customer and the company, the department is asking the clarity from dealer. He should show the account with amount collected and remitted to the company and as such there is no margin or any kind of service. 

[KASTURI SETHI]

 concur with the views of the experts.

 Although the following judgment pertains to Service Tax, yet it useful for drafting reply to the SCN

A security deposit for any length of time not automatically becomes a sale proceed in the hands of the company and no Service Tax chargeable on such security deposit or on notional interest on a security deposit - Demand not sustainable - Section 73 of Finance Act, 1994. [paras 27, 28, 32, 37, 38].---------------------- in the case of VIMLA INFRASTRUCTURE INDIA PVT. LTD. Versus COMMR. OF C. EX., CUS. & S.T., - 2020 (2) TMI 1051 - CESTAT NEW DELHI

[Deepak Kumar]

Thanks for the replies.
I have also suggested my friend that in this scenario, he is working as Pure agent. And here, its not a sale, as the ownership of the phone lies with the company itself, if the phone is not returned after 36+3 months.

[Shilpi Jain]

If the amount is collected as a deposit and the same is given to the Company and nothing remains with the dealer then this will not be liable to GST.

However, if any part of this is retained by the dealer, then the situation will have to be analysed further.

AI Summary

GST on refundable security deposits applies only when deposit is adjusted or forfeited; intermediaries must document remittance.
Security deposits collected for supply of phones that are refundable and handled by the manufacturer are treated as security deposits, not immediate taxable consideration; GST is not payable at collection unless the deposit is adjusted against price or forfeited. Dealers should document collection and remittance to the company and evidence their role as a pure agent with no margin; retention of any part by the dealer or application/forfeiture of the deposit triggers GST consequences.