2019 (9) TMI 693 - AAR - GST

Classification of supply - charge of interest from customers for delayed payment - Interest charged on cost of securities is exempt under notification no. 12/2017 Central Tax(Rate) dated 28-06-2017 as amended. HELD THAT - The additional amount being charged in delay of payment by whatever named called should be classified as principal supply and the classification of the same cannot differ from the original supply. Hence the additional amount charged on delayed payment shall be taxed as per original supply i. e. supply of Stock broking services. Applicability of Notification No. 12/2017 - HELD THAT - Having regard to the nature of transaction it cannot be said that the share broker has extended any deposit, loans or advances to its clients hence the additional amount being charged cannot be treated as interest hence the exemption granted under entry no 27 of notification no 12/2017 is not applicable on the transaction on which advance ruling is sought.

Issues Involved:

1. Classification of additional amount termed as interest charged on delayed payment.
2. Applicability of Notification No. 12/2017.
3. Determination of tax liability on the additional amount charged.

Detailed Analysis:

1. Classification of Additional Amount Termed as Interest:

The primary issue is the classification of the additional amount termed as interest charged on delayed payments from customers. According to Section 15(2)(d) of the CGST Act, the value of supply includes interest, late fee, or penalty for delayed payment of any consideration for any supply. This implies that such additional charges should be included in the transaction value and taxed at the same rate as the principal goods or services.

In the case at hand, the applicant, a stock broker, charges brokerage as a percentage of the transaction value for buying and selling securities on behalf of clients. If clients delay payment, an additional amount is charged, which may be termed as interest, late fee, or penalty. The classification of this additional amount should align with the principal supply, which is stock broking services. Hence, the additional amount charged on delayed payments takes the classification of the principal supply, i.e., stock broking services.

The explanation inserted to Section 2(102) of the CGST Act clarifies that the definition of services includes facilitating or arranging transactions in securities. Moreover, Section 8 of the CGST Act, which deals with composite supply, states that in a supply comprising two or more goods/services, the classification follows the principal supply. Here, stock broking service is the principal supply, and any ancillary supplies take the same classification.

2. Applicability of Notification No. 12/2017:

The applicant contends that the additional amount charged on delayed payments is in the nature of interest, which should be exempt under Notification No. 12/2017. However, the ruling differentiates between interest, late fee, and penalty. Interest compensates for the time value of money and is charged at a specified percentage, whereas late fees and penalties are fixed amounts charged for delays or defaults.

In this case, the additional amount charged by the stock broker is not based on a specific percentage and thus does not qualify as interest. Instead, it is in the nature of a penalty for delayed payments. Consequently, the exemption under entry no. 27 of Notification No. 12/2017, which applies to services by way of extending deposits, loans, or advances represented by interest, does not apply to the additional amount charged by the stock broker.

3. Determination of Tax Liability:

Given the classification of the additional amount as part of the principal supply, the tax liability on the additional amount charged for delayed payments should be the same as that on the original supply, i.e., stock broking services. The ruling confirms that the additional amount charged cannot be termed as interest and thus does not qualify for the exemption under Notification No. 12/2017.

Ruling:

1. The principal supply in this case is stock broking services, and all ancillary supplies, including the additional amount charged on delayed payments, take the classification of stock broking services.
2. The additional amount charged for delayed payments cannot be termed as interest, and the exemption under entry no. 27 of Notification No. 12/2017 does not apply.
3. The ruling is valid under Section 103(2) until declared void under Section 104(1) of the GST Act.

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