DIFFERENCE OF OPINION IN APPELLATE ADVANCE RULING

[Dr. Sanjiv Agarwal]

In the instant case, there was a difference of opinion between members at the appellate advance ruling stage for deciding exemption to amount charged as interest on short-term loan. Therefore, both members passed separate orders in a appeal arising out of advance ruling.

In Re: Shreenath Polyplast Pvt. Ltd. 2019 (3) TMI 1008 - APPELLATE AUTHORITY FOR ADVANCE RULING, GUJARAT; , Gujarat had ruled that Service provided by M/s. Shreenath Polyplast Pvt. Ltd.  by way of extending short term loans in so far as the consideration is represented by way of interest, is covered under Sl. No. 27 of the Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 and Notification No. 12/2017-State Tax (Rate) dated 30.06.2017, and hence exempt from payment of Goods and Services Tax.

However, revenue Department, being aggrieved, preferred an appeal before AAAR, Gujarat through Assistant Commissioner, CGST, Division-VII (Satellite), Ahmadabad. Citing erroneous interpretation of Notification No. 12/2017-CT (Rate) (S.No. 27) and that Del Credere Agent (DCA) has been equated with a financial services provider as if DCA is solely a financial service provider.

Further, the definition of goods and supply under section 2(52) and 2(102) of the CGST Act, 2017 exclude money to money transactions. Loan transactions being money to money transactions are therefore not subject to GST. However, the exemption provided under Sr. No. 27 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, as amended, is applicable only to money to money transactions. Loan transactions being money to money transactions are therefore not subject to GST, and appears applicable purely to the person who is exclusively involved in supply of service by way of - (a) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card service), (b) inter-se sale or purchase of foreign currency amongst bank or authorized dealers of foreign exchange or amongst bank and such dealer, and not applicable to the agent like in this case i.e. DCA who is not involved in money to money transaction but also involved in supply of service or goods on behalf of the principal (supplier), otherwise purpose of the Government to extend the exemption to such person exclusively involved in such service i.e. extending deposits, loan or discount will be defeated.

There being difference of opinion, both members passed separate orders.

Per Mr. Ajay Jain, Member

Since the making of payment by the DCA to the principal in case of failure to make payment by the customer is inevitable part of the contract or arrangement of supply of goods through DCA, therefore the interest earned on such activity would be chargeable to GST.

On taxability, it was observed that  the issue of applicability of Goods and Services Tax on interest earned by a broker on temporary funding extended to clients towards pay-in obligation has been clarified vide para 2(iii) of Office Memorandum F.No. 349/40/2017-GST dated 05.09.2017 issued by the Central Board of Excise and Customs (now Central Board of Indirect Taxes and Customs), GST Policy Wing, as follows.

“(iii) Issue : Applicability of GST on Interest earned by a broker on temporary funding extended to  clients towards pay in obligations.

Comments : Section 15(2)(d) states that value of supply shall include interest or late fee or penalty for delayed payment of any consideration for any supply. If the facility of temporary funding extended to clients forms part of contract between the broker and client, then Interest earned on such an activity should be included under value of supply and chargeable to GST. But if this service is provided as a loan to client then, interest on such service is nil as per Notification No. 12/2017-Central Tax (Rate).”

Thus, the issue had been clarified in respect of interest earned by broker under two situations. In case the facility of temporary funding extended to clients forms part of contract, then interest earned on such an activity should be included under value of supply and chargeable to GST. But if this service is provided as an loan to client i.e. not forming part of contract but is a separate transaction, then interest on such services is covered by Notification No. 12/2012-Central Tax (Rate) (Serial No. 27).

The issue may also be looked at from another angle. In case of direct transaction between supplier and customer, where the customer makes delayed payment with interest, the amount of interest would be charged to GST. However, if the contention of the applicant is accepted, then in case of the same transaction through DCA, the customer would make delayed payment with interest to DCA, but interest would not be chargeable to GST. Such an interpretation would make the leviability of GST on the interest / late fee / penalty for delayed payment of consideration by the customer dependent upon the nature of transaction i.e. whether it is a direct transaction between supplier and customer or whether it is a transaction through DCA. Therefore, the interest or late fee or penalty for delayed payment of consideration by the customer would be leviable to Goods and Service Tax.

The AAR ruling was held to be erroneous and set aside.

Per Mr. P.D. Vaghela, Member

As per section 182 of the Indian Contract Act, 1872, an “agent” is a person employed to do any act for another, or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the “principal”. As delineated in the definition, an agent can be appointed for performing any act on the behalf of the principal which may or may not have the potential for representation on behalf of the principal. So, the crucial element here is the representative character of the agent which enables him to carry out activities on behalf of the principal.

The term ‘agent’ has been defined under sub-section (5) of section 2 of the CGST Act to:

mean a person, including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another.

The key element as emerges from the definition is that the supply or receipt of the goods or services has to be undertaken by the agent on behalf of the principal.

Further, the two limbs of any supply under GST are “consideration” and “course or furtherance of business”. Where the consideration is not extant in a transaction, such transactions do not fall within the ambit of supply. But, in certain scenarios, as elucidated in Schedule I of the CGST Act, the consideration is not required to be present for treating certain activities as supply.

The crucial factor is how to determine whether the agent is wearing the representative hat and is supplying or receiving goods on behalf of the principal. Since in commercial world there are various factors that might influence this relationship, it would be more prudent that an objective criteria for taxation is determined keeping in mind SGST Act, to bring the principal-agent relationship within the ambit of the said entry. Thus, the key ingredient for determining relationship under GST would be whether the invoice for the further supply of goods on behalf of the principal is being issued by the agent or not. Where the invoice for further supply is being issued by the agent then any provision of goods from the principal to the agent would fall within the fold of the said entry. Similarly where the goods being procured by the agent on behalf of the principal are invoiced in the name of the agent then further provision of said goods by agent to principal would be covered by the said entry. In other words, the crucial point is whether or not the agent has the authority to pass or receive the title of goods on behalf of the principal.

Transactions between DCA and buyers (recipient) are not supply of goods but supply of services by way of extending loans or advances i.e. transaction in money.

Section 15 (2) of the Act determines various amounts that become part of value of supply. It has relevance with respect to levy of tax under section 9 of the CGST Act. Section 15 doesn’t determine taxability of transaction but it has relevance only in case where transaction of supply of goods or services is taxable.

In the instant case, goods are supplied directly from the principal to the buyer (recipient) and in case buyer (recipient) is not in position to pay to the principal in due date, DCA extends loan to the buyer (recipient) and makes payment of such supply to the principal on behalf of the customer. The said loan is repaid by the buyer to DCA along with interest agreed between DCA and buyer (recipient). The amount of interest received by DCA on supply of services in form of loan or advances cannot be included in value of supply of goods by the principal as the following two transactions are separate (a) supply of goods from supplier (principal) to buyer (recipient) and (b) supply of service from DCA (loan giver) to buyer (recipient) by way of extending loan to buyer (recipient) with interest agreed between them.

AAR has given the ruling on services provided by DCA by way of extending short term loans to the buyer (recipient) and not to the principal. Even if the above mentioned Office Memorandum is read, it has clarified the short term loan given by broker to the client i.e. to the principal. Therefore, the said Office Memorandum is not applicable to the present case.

The appeal was held liable to be dismissed.

Discussions to this article

[Ganeshan Kalyani]

Interesting article. Really nice.

[Dr. Sanjiv Agarwal]

Thanks.

Your critical inputs are always welcome.