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2018 (11) TMI 884 - AAR - GSTLevy of GST - Penal interest - Taxable supply or not - activity of collecting penal interest by the Applicant - default in repayment of EMI - tolerate an act or a situation of default - penal interest for the purpose of exemption under Sr. No. 27 of Notification No. 12/2017 Central Tax (Rate) dated 28.06.2017, Sr. No. 27 of Maharashtra State Notification No. 12/2017-State Tax (Rate) dated 29.06.2017, and Sr. No. 28 of Notification No. 9/2017 Integrated Tax (Rate) dated 28.06.2017. Held that - The Applicant, a non-banking financial company are providing various types of loan such as auto loans, loan against the property, personal loans, consumer durable goods loans, etc, to their customers and charge interest on such loans disbursed, for which they enter into agreements with borrower/customers. The agreements provide for repayment of the loan in the form of Equated Monthly Installments (EMI) vide cheque/ Electronic Clearing System (ECS), etc. - The EMI paid by the customers is a fixed amount payable at a specified date, which includes both interest and the principal amount. In cases of delay in repayment of such EMI by the customers, the Applicant collects penal/default interest (penal interest), in terms of the agreements executed by the customers. The same is calculated at a percentage not exceeding a fixed percentage, on the overdue loan amounts of the customer. The percentage of penal interest varies from customer to customer. The amounts collected by the applicant from their customers are nothing but amounts towards Penalty / Penal Charges and can in no way be construed as additional interest. Such penalty/ penal charges are collected by them from their customers for the reason that the said customers have delayed the payment of EMI and the applicant has tolerated the said act of their customers of delaying payment of such EMI. The applicant has agreed to do an act (the act of tolerating, of delayed payment of EMIs by their customers) and such act, by the applicant, squarely falls under clause 5(e) of the Schedule II mentioned above and therefore the amounts received by the applicant for having agreed to do such an act, would attract tax liability under GST laws - The receipt of penal charges on delayed payment of EMIS would be receipt of amounts for tolerating the act of their customers for having delayed/defaulted on their EMI payments within due dates 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. There is a clear understanding or agreement between the parties to foresee and tolerate an act or a situation of default on the part of loanees 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 interest , penal charges, penalty, 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 Schedule Il 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 the same fails the test of being a loan , deposit or advance , or the consideration is not an interest or discount, the exemption is not admissible - In the subject case the amount of penal charges cannot be said to form a part of interest on loan , deposit or advance . It is recovered/imposed only because the loanee has delayed the payment of EMI (which consists of the principal amount and interest amount). This recovery of penal charges is made in view of toleration of the act of the loanee by the applicant and therefore construes as supply as per as per Sr. No. 5(e) of Schedule II of the CGST Act and is therefore taxable under the GST Act. Ruling - The Penal Interest will not be treated as interest for the purpose of exemption under Sr. No. 27 of Notification No. 12/2017Central Tax (Rate) dated 28.06.2017, Sr, No. 27 of Maharashtra State Notification No. 12/2017-State Tax (Rate) dated 29.06.2017, and sr. No. 28 of Notification No. 9/20171ntegrated Tax (Rate) dated 28.06.2017. The activity of collecting penal interest by the Applicant would amount to a taxable supply under the GST regime - The said activity squarely falls under clause 5(e) of the Schedule II of the GST Act, 2018 and therefore such amounts received, would attract tax liability under GST laws.
Issues Involved:
1. Whether Penal Interest is to be treated as interest for the purpose of exemption under Sr. No. 27 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, Sr. No. 27 of Maharashtra State Notification No. 12/2017-State Tax (Rate) dated 29.06.2017, and Sr. No. 28 of Notification No. 9/2017-Integrated Tax (Rate) dated 28.06.2017. 2. If the answer to the above is negative, whether the activity of collecting penal interest by the Applicant would amount to a taxable supply under the GST regime. Issue 1: Treatment of Penal Interest as Interest for Exemption The applicant argued that penal interest should be treated as additional interest on overdue loan installments and thus be exempt from GST under Sr. No. 27 of the relevant notifications. The applicant contended that penal interest represents the time value of money for delayed payments and should be considered part of the interest on loans, which is exempt from GST. The applicant cited various legal provisions and judicial precedents to support the claim that penal interest is essentially interest and should be treated as such for tax purposes. Analysis: The authority examined the definition of 'interest' under the relevant exemption notifications and concluded that penal interest is not covered under this definition. The authority noted that the agreements between the applicant and customers explicitly defined penal charges as overdue charges for non-payment of installments, not as additional interest. The penal charges were calculated at a rate not exceeding a certain percentage, indicating they were penalties rather than interest. The authority also considered that penal charges were collected for tolerating the act of delayed payment, not for providing a loan or advance. Judgment: The authority ruled that penal interest is not to be treated as interest for the purpose of exemption under the specified notifications. The answer to the first question was negative. Issue 2: Taxability of Penal Interest under GST Given the negative answer to the first question, the authority considered whether the activity of collecting penal interest amounts to a taxable supply under GST. The applicant argued that penal interest should not be treated as consideration for any supply and thus should not be taxable. The applicant claimed that penal interest is either additional interest (and thus exempt) or liquidated damages for breach of contract (and thus not a supply). Analysis: The authority referred to Section 7 of the CGST Act, which defines 'supply' and includes activities specified in Schedule II. Clause 5(e) of Schedule II categorizes "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act" as a supply of services. The authority concluded that the applicant's collection of penal charges for tolerating delayed payments falls under this clause. The penal charges were deemed a consideration for the applicant's agreement to tolerate the act of default by customers. Judgment: The authority ruled that the activity of collecting penal interest by the applicant amounts to a taxable supply under GST. The answer to the second question was affirmative, and such amounts received would attract tax liability under GST laws. Conclusion: 1. Penal interest is not to be treated as interest for the purpose of exemption under the specified GST notifications. 2. The activity of collecting penal interest by the applicant amounts to a taxable supply under the GST regime and attracts tax liability.
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