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2020 (9) TMI 1238 - AAAR - GSTSupply 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 - HELD THAT - Apart from other services, one of the services rendered in relation to a chit is the collection of instalments from subscribers who defaulted in payment of the same. In addition, the foreman is duty bound to collect interest on such defaulted instalments, which the law under Section 21(1)(c) of the Chit Fund Act, 1982 entitles him to retain. It is pertinent to add that a Chit Fund business survives on the collection of instalments from all subscribers to a chit, which is then given to the Prized Subscriber who succeeds by way of lots or auction, and is repeated month after month till the conclusion of the chit. Any failure in payment of instalment by a subscriber would hamper the foreman in making the payment to the Prized Subscriber and jeopardize the entire flow of the chit. As foreman of the chit, it is his duty to collect and pass on the moneys to the Prized Subscriber. This service of ensuring that all instalments are received from all subscribers to a chit is the service rendered by the foreman in relation to the chit. As per Section 2(d). Under Section 22(1) of the Chit Fund Act, cited above, the law casts a duty upon the foreman to pay the Prize amount to the Prized Subscriber as detailed in the said Section 22. The foreman can comply with this provision only if the chit amount has been paid by all the subscribers, to constitute the Prize amount , which, as defined in Section 2(m) of the Chit Fund Act, is primarily the chit amount as defined under Section 2(d). It is extremely clear that unless all instalments of a chit are received by the foreman, the payment of the prize amount would be hampered. This clearly brings out the service that the foreman renders in ensuring that all the instalments of all subscribers is collected - the collection of delayed/defaulted instalments and penal interest thereon is purely a service rendered in relation to a chit and cannot be given any other connotation. The collection of defaulted instalments and interest thereon by the foreman is a supply of service in relation to the chit and squarely falls under the HSN classification of Heading 9971 as services provided by a foreman of a chit fund in relation to chit under Notification No.11/2017-Central Tax(Rate) Dated 28.06.2017 / Notification No.8/2017Integrated Tax(Rate) dated 28-6-2017 as amended from time to time. Exemption from GST or not - HELD THAT - In a Chit floated by a Chit Fund company, there is no concept of extending deposits, loans or advances. On the other hand, it is the subscribers who come together to subscribe towards the prized amount which is aggregated and taken by each member on the basis of lots or auction - the interest realized from the defaulting subscribers is different with that of the interest against loan or advance by the Bankers and other Financial Institutions. Therefore, there is no exemption available under Notification No.12/2017-Central Tax (Rate) as claimed by the appellant. HSN Rate - HELD THAT - The collection of defaulted / delayed instalments is a service performed by the foreman in relation to a chit. The appellant has been attempting to divert attention from this fact by bringing in the concept of actionable claims, etc. As seen from the law on Chits cited, it is clearly evident that it is the job of the foreman to collect defaulted instalments for which the penal interest of 18% as per law is collected by him and he is further permitted to retain the same by law. Hence, the interest so collected for the service rendered in relation to a chit, will be liable to GST at the rates applicable under HSN Heading 9971, (Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017) as it is earned in connection with the supply of service by the foreman to the chit.
Issues Involved:
1. Whether the interest/penalty collected for delay in payment of monthly subscription by the members forms a supply under GST. 2. If the said interest/penalty is a supply, what is the classification and rate of duty applicable on the said supply. 3. Whether the interest/penalty collected for delay in payment of subscription amount is exempt from GST. Issue-wise Detailed Analysis: 1. Whether the interest/penalty collected for delay in payment of monthly subscription by the members forms a supply under GST: The appellant, a company engaged in conducting chit auctions, collects interest/penalty from defaulting subscribers. The appellant argued that such interest/penalty should not be treated as a supply under GST. However, the Authority for Advance Ruling (AAR) concluded that the interest/penalty collected for delay in payment of monthly subscription by the members is a supply under GST. 2. If the said interest/penalty is a supply, what is the classification and rate of duty applicable on the said supply: The AAR classified the interest/penalty under Sl. No 15 of Heading 9971 Financial and related services, subject to GST at 12% as per Notification No 8/2017-Integrated Tax (Rate) dated 28th June 2017. The appellate authority upheld this classification, confirming that the collection of delayed/defaulted instalments and interest thereon by the foreman is a supply of service in relation to the chit and falls under HSN classification of Heading 9971. 3. Whether the interest/penalty collected for delay in payment of subscription amount is exempt from GST: The appellant contended that the interest/penalty is exempt from GST under Notification No.12/2017-CT(Rate) dated 28.06.2017, which exempts services by way of extending deposits, loans, or advances where the consideration is represented by way of interest or discount. However, the appellate authority found this argument misplaced, stating that the chit fund business does not involve extending deposits, loans, or advances. The authority clarified that the interest collected from defaulting subscribers is different from interest against loans or advances by financial institutions and is not exempt from GST. The interest collected is considered part of the service provided by the foreman in relation to the chit and is thus taxable. Discussion and Findings: The appellate authority reviewed the entire records, facts of the case, and submissions made by the appellant. It was determined that the collection of delayed instalments and interest thereon by the foreman is a service rendered in relation to a chit. The authority emphasized that the foreman’s duty to collect instalments and penal interest is essential for the functioning of the chit fund, as it ensures the payment of the prize amount to the prized subscriber. This service is classified under HSN Heading 9971 and is subject to GST. Order: 1. The collection of delayed instalments along with interest/penalty from the members of a chit constitutes the taxable supply of the services provided by a foreman of a chit fund in relation to chit. 2. The services provided by a foreman of a chit fund in relation to chit are classified under HSN Heading 9971 under Notification No. 11/2017-Central Tax (Rate) dated 28-6-2017 / Notification No. 8/2017-Integrated Tax (Rate) dated 28-6-2017 as amended from time to time. The rate of tax would be as applicable under the said heading 9971, depending on the nature of supply, i.e., intra-state or interstate. 3. The ruling of the Authority for Advance Ruling vide their order No. AAR No.13/AP/GST/2020 dated 05.05.2020 stands modified accordingly.
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