AI Drafter 
TaxTMI 
TaxTMI 
2019 (8) TMI 116
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....8 (11) TMI 884 - AUTHORITY FOR ADVANCE RULING, MAHARASHTRA. BRIEF FACTS OF THE CASE A. The Appellant is a non-banking financial company and is inter alia engaged in providing various types of loans to the customers such as auto loans, loans against the property, personal loans, consumer durable goods loans, etc. All these loans are interest bearing loans. B. The Appellant, inter alia, enters into agreements with borrower/customers for providing loans to them. The loan agreements provide for repayment of the outstanding dues/Equated Monthly Installments (EMI) through cheque/ Electronic Clearing System ('ECS')/ National Automated Clearing House ('NACH') or any other electronic or clearing mandate. The illustrative copies of loan agreement entered into between the Appellant and the customers have been enclosed. C. In case of dishonour of cheque/ECS/NACH or any other electronic or clearing mandate by the customers, the Appellant collects penal/bounce charges, which is in line with the agreed terms and conditions between the borrower and the Appellant. The bounce charges are generally a fixed amount per default committed by the customer, e.g. Rs. 350/- for each dishonour of ....
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....to be set aside on this ground alone. 1. At the outset, it is submitted that the impugned AAR order is a non-speaking order, in as much as the Ld. AAR while passing the said order has failed to consider the following submissions made by the Appellant and has also failed to record any findings in that regard: (i) Bounce Charges collected by the Appellant for the breach of contract by the customer, is not covered under the ambit of clause (e) of Entry 5 of Schedule Il to the CGST Act. The said clause can be made applicable only when there is an agreement to the obligation to tolerate an act or situation, and the word 'obligation' implies a duty or a liability on the person making the obligation, with a corresponding right to the other person to enforce such obligation. However, in the present case, there is no obligation upon the Appellant to tolerate the act of non-payment or delayed payment by the borrower. The payment of bounce charges neither obligates the Appellant not to take any legal action against the borrower, nor the borrower gains any right to sue the Appellant for any legal action taken by the Appellant. Therefore, the bounce charges payable by the borrower on brea....
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....d AAR order as irregular and non-speaking. B. Bounce Charges do not fall within the ambit of 'supply' under the GST regime. 5. Under the GST regime, the taxable event is the 'supply' of goods or services. The scope of the term 'supply' is provided under Section 7 of the CGST Act, which is reproduced herein below for reference: "7. (1) For the purposes of this Act, the expression "supply" includes- (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; (b) import of services for a consideration whether or not in the course or furtherance of business; (c) the activities specified in Schedule l, made or agreed to be made without a consideration; and (d) the activities to be treated as supply of goods or supply of services as referred to in Schedule ll." 6. On perusal of the above provision, it can be seen that clause (a), (b) and (c) define the scope of supply, whereas, clause (d) classifies certain activities specified in Schedule Il as supply of goods or sup....
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....earance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:" 10. Since the above definition is an inclusive one, the meaning of the term 'consideration' has to be understood from various external aids, including the natural meaning given in various dictionaries, meaning given to the term in rulings by various forums, etc. 11. It is submitted in this regard that the concept of consideration has been derived from the Latin phrase "quid pro quo" which means "something in return for something". It is a well settled principle that "where there is no consideration, there is no contract". 12. Reference in this regard is also made to the definition of the term 'consideration' provided in Section 2(d) of the Indian Contract Act, 1872, which reads as under: "When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a co....
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....l damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for. Explanation. - A stipulation for increased interest from the date of default may be a stipulation by way of penalty." 17. Both, Section 73 and 74, provide for reasonable compensation, but, Section 74 is narrower in scope and limits the compensation to the extent provided for, or stipulated in the contract. 18. It is submitted that the damages in Section 74 may either be in the nature of liquidated damages or penalty. If the sum stipulated in the contract is a genuine pre-estimate of damages likely to flow from the breach, it is called liquidated damages. If it is not a genuine pre-estimate of the loss, but an amount intended to secure performance of the contract, it may be penalty. The question whether a particular stipulation in a contract, is in the nature of penalty has to be determined by the court against the background of various relevant factors, such as the character of the transaction and its special nature. 19. In the present case, the Ap....
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....ich consideration is payable by the borrower in the form of interest. The bounce charges are payable by the borrower, only upon the breach of such contract, and therefore, such payment does not constitute a second contract. Therefore, the payment of bounce charges by the borrower cannot be treated as a consideration either for the primary contract of loan, or for any other contract. 24. In view of the submissions, it is submitted that the bounce charges are merely damages for the breach of contract, and therefore, the same cannot be treated as a consideration. Hence, in the absence of any consideration, the bounce charges collected by the Appellant do not amount to a supply under Section 7 of the CGST Act, and therefore, the same shall not be leviable to GST. 25. The Ld. AAR has failed to consider the above submissions, and has proceeded on the presumption that the bounce charges are consideration for the toleration of the default committed by the borrowers. However, as explained above, the bounce charges are nothing but damages for the breach of contract committed by the borrowers, and the such damages do not constitute consideration for any supply. Further, the said breach ....
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....rate the default committed by the borrowers. The only agreement between the Appellant and the borrower is in respect of agreement for loan, for which consideration is payable by the borrower in the form of interest. The bounce charges are payable by the borrower, only upon the breach of such contract, and therefore, such payment does not constitute a second contract. 32. However, the Ld. AAR has erroneously recorded various findings in the impugned AAR order that the loan agreements entered into by the Appellant with the customers provide that in case of any breach as mentioned in agreement, the Appellant would tolerate the same subject to receipt of consideration in the form of bounce charges in return. 33. The above findings of the Ld. AAR are completely erroneous, in as much as none of the clauses in the loan agreements entered into by the Appellant with the customers provide that in case of any breach, the Appellant would tolerate the same subject to receipt of consideration in the form of bounce charges in return. As submitted above, the bounce charges are only in the nature of liquidated damages or penalty payable by the borrowers for the breach of the terms of the loan....
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....ich a person is morally or legally bound. * the condition of being so bound. 2. a debt of gratitude for a service or favour." 35. In view of the above, it is submitted that the word 'obligation' can be understood to be an act or course of action to which a person is morally or legally bound. It is a bond or tie, which constrains a person to do or suffer something and it implies a right in another person to which it is correlated. As defined in the Specific Relief Act, 1963, 'obligation' includes every duty enforceable by law, so that when a legal duty is imposed on the person in respect to another, the other is invested with a corresponding legal right. Therefore; an obligation comes into existence, only when there is a duty or a liability on the person making the obligation, with a corresponding right to the other person to enforce such obligation. 36. However, in the present case, there is no obligation upon the Appellant to tolerate the act of non-payment or delayed payment by the borrower, in as much as, neither the Appellant has any duty or liability towards the borrower, nor the borrower has any right on the Appellant. The pavement of bounce charges neither obl....
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.... (iii) to tolerate an act or situation." 42. In the above context, reference is made to GSTR 2001/4, issued by the Australian Tax Office (ATO), explains the GST treatment of court orders and out-of-court settlements. In the said ruling at Para 73, it has been clarified that the damages are the most common form of remedy arising out of the termination or breach of contract. The damage, loss or injury, being the substance of the dispute, cannot in itself be characterized as a supply made by the aggrieved party. This is because the damage, loss or injury in itself does not constitute a supply under the provision of Australian GST. 43. It is pertinent to bear in mind that the definition of "supply" under the Australian GST legislation includes within its ambit "an obligation to tolerate an act". Thus, when the aforesaid GSTR namely GSTR 2001/4 states that payment of liquidated damages is not towards any supply, it is reasonable to conclude that the GSTR has also considered the clause "an obligation to tolerate an act". In other words, the GSTR impliedly concludes that the acceptance of liquidated damages does not amount to tolerating an act and hence would not fall within....
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....member. That is, upon payment of the fine or penalty, the member continues to enjoy the same rights and privileges and it follows that the association is required to continue to provide the benefits of membership. In this sense, it cannot be said that the association 'makes' a supply where it already has a pre-existing obligation to continue to provide the benefits of membership. 47. Reference is further made to the decision of the European Court of Justice in the case of Societe Thermale v. Ministere de l'Economie [2007] S.T.1 1866, Celex No. 605J0277, wherein the issue was whether a sum paid as deposit in a contract related to the supply of hotel services was subject to tax or not. The Court held that where the client exercises the cancellation option available to him and that sum was retained by the hotelier as a fixed cancellation charge paid as compensation for the loss suffered and which has no direct connection with the supply of any service for consideration, it was not subject to tax. 48. Further, in a decision of the Court of Appeal (UK) in case of M/s. Vehicle Control Services Limited reported at (2013) EWCA Civ 186, it has been observed that payment in the form of....
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....iled payment' as a dishonored cheque or a declined direct debit request. Further, the term 'failed payment fee' has been defined as the fee charged by the supplier to the recipient in respect of the failed payment. Para 3 of the said GSTD states that in the circumstances described in para 2, which is reproduced herein below, the payment of a 'failed payment fee' does not amount to consideration for either a financial supply or another supply (for example, a supply of administrative services): "2. This Determination applies where: • There is an attempt to make a payment for the underlying supply by way of the supplier presenting a cheque or the supplier attempting a direct debit on the recipient's bank account in accordance with the authority it has from the recipient; • the attempted payment is dishonoured or declined and the supplier's financial institution imposes an 'inward dishonor fee' on the supplier; • the supplier and recipient have agreed or would be taken to have agreed that in utilising direct debit or cheque payment methods the recipient will have available funds to make the payment of the initial consideration amount for the un....
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....rate an act or situation. Even in such context, the GSTD holds that the payment of 'failed payment fee' does not amount to consideration for supply. The GSTD emphasises on the point that there is no additional supply which is 'for' consideration; the 'failed payment fee' arises due to the failure of the borrower to meet his obligation. The 'failed payment fee' is not for the service to the borrower, but is against the borrower for failing to meet his obligation. Hence, on this basis, the GSTD concludes that there is no supply arising on the payment of 'failed payment fee', and that such payment is not a consideration for any supply. 56. It is submitted that the Bounce Charges collected by the Appellant in the present case is identical to the 'failed payment fee' referred to in the above GSTD, in as much as, • there is an attempt to make a payment for the loan installment by way of the Appellant presenting a cheque or the Appellant attempting a direct debit on the borrower/customer's bank account in accordance with the ECS or NACH or any other electronic or clearing mandate obtained from the borrower/customer; • the borrower/customer has agreed that it w....
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....ion, the bounce charges levied for delayed payment of loan dues/EMI, being in the nature of penalty, is to be included in the value of loans, which is nothing but interest only. 61. It is relevant to note that sub-section (2) of Section 15 of the CGST Act is applicable for determination of value of 'any supply' both for taxable as well as exempt supply. Therefore, even if the main supply is exempt by way of any exemption notification, still, the provisions of Section 15(2) shall be applicable to determine the value of such exempt supply. It would be incorrect to say that the provisions of Section 15(2) are not applicable for exempt supplies, in as much as, the valuation of exempt supplies is equally important as that of taxable supplies, as the quantum of reversal of input tax credit under Section 17(2) of the CGST Act is determined on the basis of the value of exempt supplies. Hence, the provisions of Section 15(2) are applicable to determine the value of exempt supplies as well. 62. In view of Section 15(2)(d) of the Act, the bounce charges levied for delayed payment of loan dues/EMI, being in the nature of penalty, is to be included in the value of loans, which is nothing ....
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....the non-availability of the sufficient funds in the borrower's account, is for tolerating any act as envisaged under the entry 5 (e) of the schedule II to the CGST Act, 2017, or otherwise. 66. To decide this issue, first we will go through the entry 5 (e) of the schedule II to the CGST Act, 2017, which has been reproduced herein under: "(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;" In the instant case, the Appellant has entered into loan agreement with the borrowers. On perusal of the sample agreement dated 29.06.2015 entered with one such borrower, it is observed that it contains specific clauses namely 'Events of Defaults' and 'Remedies in case of Defaults'. The relevant portion of these clauses from sample auto loan agreement are reproduced herein below: 25. Events of Defaults: A default shall be deemed to have been committed if the borrower does not comply with its obligation covenants contained in this agreement, and also if: a. An default shall have occurred in a payment of Monthly Installment or an part thereof and / or in payment of any amount due and payable to BFL in....
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....s also agreed that in case some default in the form of the dishonoring of the repayment instruments, such as cheque, failure of ECS and other electronic payment instruments by the borrower occurs, the 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. 69. The Appellant, inter-alia, submitted in para (31) and (32) above that since there is no separate agreement between the Appellant and the borrower regarding this act of tolerance by the Appellant in case of the default by the borrower, the provision of the entry 5(e) to the Schedule II to the CG....
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....sted. Clause (b) specifically includes import of services for a consideration, whether or not in the course or furtherance of business. Clause (c) expands the scope of supply by including activities specified in Schedule l, made or agreed to be made without consideration. 71. The wordings of clause (d) of the section 7 (1) of the CGST Act are very clear and provide for inclusion of activities enlisted in Schedule II to be treated as supply of goods or as the case may be supply of services in the scope of supplies. Schedule II of the CGST Act provides the list of activities to be treated as supply of goods or services as provided therein. Clause (a) of section 7 (1) covers in its scope all forms of supplies for consideration. 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 bounce / dishonor of cheque / ECS / NACH are brought into the ambit of supply by treating it as a 'supply of services'. There shall not be any confusion in the mind of anyone that the legislature intentionally brought this activity of to....
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....e Central Government or a State Government; (b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:" The consideration also includes the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both. 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. The appellant has also contended that the clause (e) of Entry 5 of Schedule II to the CGST Act can be made applicable only when there is an agreement to the obligation to tolerate an act or situation, and the word 'obligation' implies a duty or a liability on the person making the obligation, with a corresponding right to the other person to enforce such obligation. However, there is no obligation upon the Appellant ....
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....ng that they are not inextricably connected....... Entry 5, List III deals with seven completely different subjects, all banded together under Entry 5 and separated by semicolons, making it clear that each subject matter is separate and distinct from what follows each semicolon..........." The first expression "agreeing to the obligation to refrain from" is followed by 'semicolon' and word 'or' itself indicates that the legislature intended to read these expressions separately in a disjunctive manner. This has been discussed by the Hon. High Court of Kerala in case of Mr. Vincent Mathew Vs. LIC of India dated 15/01/2013. The relevant portion of said judgment is as under: "......But, what is more relevant and crucial for the purpose of deciding the issue is that each of the earlier clauses viz., (a) to (bbb) ends up with semicolon. It is to be noted that semicolon (;) is a punctuation mark indicating a greater degree of separation than the 'comma' and it is being used to separate parts of a sentence. It is also worthy to note that in addition to semicolon, the conjunction 'or' is also used immediately after semicolon. Thus, the very syntax of the proviso ....
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....ntry it is evident that above said notification has exempted from GST, the consideration represented by way of interest or discount other than interest involved in credit card services. The term "interest" has also been defined in said notification. The definition provided therein reproduced as under: "2. For the purposes of this notification, unless the context otherwise requires, - (zk) "interest" means 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 charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised; Thus, as per said definition the entry includes only the interest payable in respect of the money borrowed or debts incurred, but does not include any service fees or other charges in respect of the money borrowed or debts incurred or in respect of any credit facility which has not been utilized. The "interest" requires to be construed not to include there in its ambit any other charges in respect to the money borrowed or debts incurred. The bounce....