TaxTMI 
TaxTMI 
2024 (8) TMI 234
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.... with third party vendors are taxable under GST? (as illustrated under Category B in Para 7.5 of Annexure 1 attached to this application) At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to any dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under the MGST Act. Further to the earlier, henceforth for the purposes of this Advance Ruling, the expression 'GST Act' would mean CGST Act and MGST Act. 1) Facts and contention of the Applicant. 1.1 Reserve Bank of India ('RBI' or 'the Applicant') is a statutory body constituted under the Reserve Bank of India Act 1934. RBI is fully owned by the Government of India. RBI is the central bank of the country and provides currency management services to the public. It also acts as the regulator of the banking and financial system and performs the role of monetary policy authority. The Preamble to the RBI describes the basic functions of the Reserve Bank as: "to regulate the issue of Bank notes and keeping of reserves with a view ....
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.... 1.3.3 Banking Regulation Act, 1949. 1.3.4 Foreign Exchange Management Act, 1999 1.3.5 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Chapter II) 1.3.6 Credit Information Companies (Regulation) Act, 2005 1.3.7 Payment and Settlement Systems Act, 2007 read with Payment and Settlement Systems Regulations, 2008 1.3.8 Factoring Regulation Act, 2011 Penalty, late fees/penal interest, fine of the nature levied and collected by RBI for contravention or violation of provisions of Law 1.4 Few examples of the penalties levied and collected by RBI under Category A are given below, 1.4.1 Under the RBI Act • Imposition of Penalty on Agency Banks (Vide Circular No. DGBA. GAD. No. 2132/42.01.011/2016-17) • Penalty/Penal Interest for Non-maintenance of CRR and SLR by Banks/ and SLR for NBFCs (Vide Circular No. DOR. No. RET. REC. 32/12.01.001/2021-22) • Penalty for accepting fresh deposits where the company is prohibited by RBI to do so (Vide section 58G read with sub section (4A) & (5)(a) & (aa) of 58B, sub-section (1) of 45IA, 45K, 45MB of RBI Act ....
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.....4.8 Factoring Regulation Act, 2011 • Penalty for non-adherence of directions of RBI (Vide Section 22 read with section 6 of the FR Act) 1.5. Penalty of the nature for non-performance or under-performance as per contractual agreement with third party vendors. (Categorised as "Category B" penalties by RBI) 1.5.1 RBI engages into contractual agreements with third party vendors to avail various services like deployment of shredding and briquetting system and currency verification and processing machines, Annual maintenance contracts etc. at their premises. As a part of such contracts, say the contract for deployment of shredder and currency machines, where such machines have a downtime or there is faulty machine, RBI recovers penalty amount from such vendors in terms of the underlying contract. Similarly, there can be various other services which RBI may avail from a vendor under a contractual agreement wherein the terms can provide for recovery or levy of penalty on or from such vendor for non-performance or underperformance of the services desired to be availed by RBI. 1.5.2 Extract of one of such contracts with a vendor M/s Giesecke and Devrient India Pvt Ltd ....
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....2017 (hereinafter referred to as, "CGST Act"). In the circular, CBIC through the following example/s has discussed the levy of GST on penalties imposed for violation of laws: • Imposition of penalty for violation of laws such as traffic violations, or • Imposition of penalty for violation of pollution norms or other laws, • Imposition of penalty by mining department of a Central or State Government or a local authority on discovering mining of excess mineral beyond the permissible limit or of mining activities in violation of the mining permit In this regard, specific attention is invited to Para 7.4 of the CBIC Circular, whereby CBIC has made the following observation: "Penalties imposed for violation of laws cannot be regarded as consideration charged by Government or a Local Authority for tolerating violation of laws. Laws are not framed for tolerating their violation. They stipulate penalty not for tolerating violation but for not tolerating, penalizing and deterring such violations. There is no agreement between the Government and the violator specifying that violation would be allowed or permitted against payment of fine o....
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....or delayed reporting, irrespective of the value of net deposit. 2.1.5 Reference is also made to FAQs issued by Central Board of Indirect Taxes and Customs (CBIC) viz., Frequently Asked Questions on Banking, Insurance and Stock Brokers Sector [which are provided on CBIC portal www.cbic-gst.gov.in, screenshot of the portal attached as Annexure 6], whereby the following clarification is provided: "Question 49 Would imposition of a fine or penalty for violation of a provision of law be a consideration for the activity of breaking the law, making such activity as service? Answer No. Fines and penalties are imposed for breaking the law by a person. They are not in the nature of a consideration for an activity and hence, would not constitute a supply of service" 2.1.6. In line with the above submission, it is additionally submitted that for penalties, late fees/penal interest, fine described under category A in Para 7.4 to Annexure 1, to attract the levy of GST, the penalties, late fees/penal interest, fine are required to qualify as a consideration against an underlying supply. For this purpose, Section 7 (scope of supply) has to be read with Sec....
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....e course of performance of that contract........................... The stance of CBIC in respect of applicability of GST is clear vide the aforementioned CBIC circular that GST is not applicable on liquidated damages where the amount paid is only to compensate for injury, loss or damage and such payments do not constitute consideration for a supply. 2.2.2. In the present case, the penalty collected by RBI for breach of terms of contractual agreement entered between RBI and the vendor is akin to liquidated damages as referred in CBIC Circular. Such amount cannot be said to be a consideration received for tolerating the breach or non-performance of contract. They are rather payments for not tolerating the breach of contract. Payment of liquidated damages is stipulated in a contract to ensure performance and to deter non-performance, unsatisfactory performance or delayed performance. 2.2.3. Based on the perusal of the definition of the scope of supply as per Section 7 of CGST Act, it can be inferred that in the present case of levy of penalty arising out of breach of terms and conditions of the contract, there cannot be regarded any transfer of property in goods or flo....
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....-EAST also appeared. 5) Findings, observations, discussion and decision. 5.1) Uncontroverted facts of the case are as under, 5.1.1. Reserve Bank of India ("RBI") is a statutory body constituted under the Reserve Bank of India act, 1934. It is fully owned by the Government of India. RBI is the central bank of the country and provides currency management services to the public. It also acts as the regulator of the banking and financial system and performs the role of monetary policy authority. 5.1.2 Broadly its main functions are as under: - Monetary Authority, Regulator and supervisor of the banking and financial system, Manager of Foreign Exchange, Issuer of currency, Developmental role, Regulator and Supervisor of Payment and Settlement Systems, Related Functions. 5.1.3 RBI administrator various Acts, Rules & regulation which are stated in para 1.3 of this order. 5.1.4 RBI, being a statutory body administering multiple Acts, levies the penalties, late fees/penal interest, fine arising out of such legal Statutes. 5.1.5 Various Penalty, late fees/penal interest, fine of the nature levied and collected by RBI for contravention or violation of provisions ....
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....failure/ repairs/ settings of the CVPS, penalty will be imposed as under. In the backdrop of these facts RBI has raised following questions: 5.2) Question no 1. Whether the penalties, late fees/penal interest, fine of the nature, levied and collected by RBI, for contravention or violation of provisions of Law are taxable under GST (as stated in para 1.4 of this order)? 5.2.1 Submission of the applicant: RBI has relied on CBIC Circular No. 178/10/2022-GST dated 03 August 2022 (Tax Research Unit) and judgment of CESTAT, Principal Bench, New Delhi in the case of M/s South Eastern coalfields Ltd [2021 (55) GSTL 549 (Tri. -Dei.)], Referred Paragraphs 27, 28, 32, and 43; and FAQ issued by Central Board of indirect Taxes and Customs (CBIC) viz., frequently asked questions on banking, insurance and stock brokers sector [which are provided on CBIC portal question no. 49. RBI is of the opinion that imposition of such penalties such etc. as regulator to discipline regulates banks, non-banking financial institutes and other institutes is not a supply under GST and Tax is not leviable on such amounts. 5.2.2 Submission of Jurisdictional Officer- The Officer relied on Circula....
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....f the aforesaid circular and as explained in the FAQ referred above as answer to question no. 49. The principal laid down in the circular is applicable to the penalties etc. levied by RBI for contravention of provisions of law as stated in para 1.4. We are bound by the circular and hence are of the opinion that these activities are not in the nature of a consideration for an activity and hence, would not constitute a supply of service, service. 5.3 Question no.2. Whether the penalty of the nature for non-performance or underperformance as per contractual agreement by RBI with third party vendors are taxable under GST? (As stated in para 5.2 of this order)? 5.3.1 Submission of the applicant: RBI has relied on CBIC Circular No. 178/10/2022-GST dated 03 August 2022 (Tax Research Unit)-Paragraph No 7.1-Liquidated damages and judgment of CESTAT, Principal Bench, New Delhi in the case of M/s. South Eastern coalfields Ltd [2021 (55) GSTL 549 (Tri. -Del.)], Referred Paragraphs 2727, 28, 32, and 43. RBI submitted that "the stance of CBIC in respect of applicability of GST is clear vide the aforementioned CBIC circular that GST is not applicable on liquidated damages where the amoun....
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....unauthorized use of trade name, copyright, etc. Other examples that may be covered here are the penalty stipulated in a contract for delayed construction of houses. It is a penalty paid by the builder to the buyers to compensate them for the loss that they suffer due to such delayed construction and not for getting anything in return from the buyers. Similarly, forfeiture of earnest money by a seller in case of breach of 'an agreement to sell' an immovable property by the buyer or by Government or local authority in the event of a successful bidder failing to act after winning the bid, for allotment of natural resources, is a mere flow of money, as the buyer or the successful bidder does not get anything in return for such forfeiture of earnest money. Forfeiture of Earnest money is stipulated in such cases not as a consideration for tolerating the breach of contract but as a compensation for the losses suffered and as a penalty for discouraging the non-serious buyers or bidders. Such payments being merely flow of money are not a consideration for any supply and are not taxable. The key in such cases is to consider whether the impugned payments constitute consideration for another i....