2018 (12) TMI 1154 - AAR - GST

Levy of GST - penalty/ liquidated damages - supply of service or not - Whether the Bounce Charges collected by the Applicant should be treated as a supply under the GST regime? - Held that - The receipt of bounce charges would be receipt of amounts for tolerating the act of their customers for having bounced the cheque or any other mode of payment. In view thereof, the same would definitely be a supply under the GST Act and therefore, there arises an occasion to levy tax under the GST Act on the impugned transactions - the receipt of bounce charges on dishonor of cheques, etc, would be receipt of amounts for tolerating the act of their customers for having dishonored or where the client could not honour the said cheques and the same, would definitely be a supply under the GST Act and therefore, there clearly arises an occasion to levy tax under the GST Act on the impugned transactions. There is clearly an agreement that the applicant, in the case of bouncing of cheques, etc by their customer, the applicant would tolerate such act of default or a situation and the defaulting party i.e their customer was required to compensate the applicant by way of payment of extra amounts in addition to principal and interest as per the terms and conditions of the Agreement. It is also very clear as to the amount or quantum which is consideration in the form of bounce charges to be received by the applicant if these, are suitable compensation only for tolerating the act of default or situation of default by their customers and they have clearly foreseen that such situation can be there and have, in their agreement, clearly devised a suitable mechanism for receipt of charges for the same and it is not additional interest as claimed by the applicant. In the present case, there is a clear understanding or agreement between the parties in the present case to foresee and tolerate an act or a situation of default on the part of the client for a monetary consideration which is actually a consideration received by the applicant, though in the agreement they may be giving this consideration, other names such as penal charges , penalty, Bounce Charges, etc, as thought proper by them, but these different nomenclatures in their Agreement would in no way change the actual nature of monetary consideration which would clearly be taxable for the supply of services as per Sr.No. 5(e) of Sch. II of the CGST Act, 2018. The exemption for financial transactions under GST laws is only in respect of the interest/discount earned or paid for loans, deposits or advances. If the transaction, as in the subject case deviates from the above, i.e. the consideration not being an interest or discount, the exemption is not available - Dishonour of cheques i.e. a mode of repayment to the applicant by their customers, is an act which results in delay of receipt of repayments to the applicant. This delay is an act done by their customers which is tolerated by the applicant because inspite of such dishonour the applicant proposes to continue the agreement with the defaulting party. The recovery of bounce charges is made in view of toleration of the act of the client by the applicant and therefore construes as supply as per as per Sr. No. 5(e) of Sch. II of the CGST Act and is therefore taxable under the GST Act. Ruling - The Bounce Charges collected by the Applicant should be treated as a supply under the GST regime.

Summary

Issues Involved:
1. Whether the Bounce Charges collected by the Applicant should be treated as a supply under the GST regime?

Detailed Analysis:

Issue 1: Whether the Bounce Charges collected by the Applicant should be treated as a supply under the GST regime?

Applicant’s Contention:
- The Applicant is a non-banking financial company providing various types of loans.
- As per the loan agreements, in case of dishonour of cheque/ECS/NACH, the Applicant collects penal/bounce charges.
- The Applicant argues that bounce charges are in the nature of penalty/liquidated damages for breach of contract and not consideration for supply of service, hence not subject to GST.
- The Applicant refers to Section 7 of the CGST Act, which defines 'supply' and argues that bounce charges do not fall within its ambit as they are not consideration for any supply.
- The Applicant also refers to international precedents, such as Australian GSTD 2013/1, which states that a 'failed payment fee' does not constitute consideration for a supply.
- Additionally, the Applicant argues that even if considered as penalty for delayed payment, bounce charges should be included in the value of loans and treated at par with interest, which is exempt from GST.

Concerned Officer’s Submission:
- The Officer argues that bounce charges should be treated as a supply under GST.
- Citing Section 7(1)(d) and Schedule II, para 5(e) of the CGST Act, the Officer asserts that bounce charges for non-performance of a contract are treated as a supply of service.
- According to the Officer, the Applicant is deemed to have received consideration in the form of charges or liquidated damages and is required to pay tax on such amounts.

Authority’s Observations:
- The Authority reviewed the facts, submissions, and documents.
- The Applicant provides loans and charges interest, with agreements specifying repayment through EMI. In case of dishonour of payment modes, bounce charges are collected.
- The Authority noted that bounce charges are defined in the loan agreements as charges for dishonour of payment modes.
- The Authority examined Section 7 of the CGST Act, which defines 'supply', and Schedule II, para 5(e), which includes "agreeing to the obligation to tolerate an act or a situation" as a supply of services.
- The Authority concluded that the Applicant tolerates the act of dishonour of payment modes by customers in return for bounce charges, which constitutes a supply under GST.
- The Authority rejected the Applicant’s argument that bounce charges are not consideration for supply, stating that the charges are for tolerating the act of dishonour, thus falling under Schedule II, para 5(e).

Conclusion:
- The Authority ruled that bounce charges collected by the Applicant are treated as a supply under the GST regime.
- The ruling was based on the interpretation that the Applicant tolerates the act of dishonour of payment modes by customers in return for bounce charges, which qualifies as a supply of services under GST laws.

Order:
- The question of whether bounce charges collected by the Applicant should be treated as a supply under the GST regime was answered in the affirmative.