LOAN TAKEN FROM SUBSIDIARY COMPANY. RCM IMPLICATIONS, Goods and Services Tax - GST

[Sadanand Bulbule]

Loan taken from subsidiary company. GST Implications.

1.It is prevailing practice the, the holding company gives loan to its subsidiary company which is usually identified as corporate loan. Under the GST Act, the holding and its subsidiary company are related persons as per the explanation provided in section 15. This corporate loan is given with or without any nominal interest.

2. The services are defined under the GST Act as below:

Section 2(102) “services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged;

3. Further, I rely upon the exemption Notification No.12/2017 -Central Tax (Rate) dated 28th June 2017 in serial No. 27(a) as -

“Services 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 services);

(b) ……………………………………………………………………..”

The above exemption notification clearly speaks that, extending loan with a consideration by way of interest is exempted service.

4. In my considered opinion two facts emerge here: If the loan is received from the holding company without interest [or consideration in the form of interest], then it is outside the ambit of “scope of supply” under Section 7 of the Act. Moving little further, in case the loan is taken with interest, even then such services conclusively stand exempted services in terms of Notification No. 12/2017 -Central Tax (Rate) dated 28th June 2017 vide serial No. 27(a).

5. Despite this legal backdrop, some adjudicating authorities are pressing to pay GST under Section 9[4] in terms of Notification No.13/2017- Central Tax ( Rate) dated 28/06/2017 vide I Entry No. 6 which reads as under:

“Services supplied by a director of a company or a body corporate to the said company or the body corporate”.

6. So comments from the experts are solicited.

Posts / Replies

[Ganeshan Kalyani]

The Director of a company consent to extend loan to its subsidiary company. This does not amount to supply of service. I agree with your explanation.

[Amit Agrawal]

4. In my considered opinion two facts emerge here: If the loan is received from the holding company without interest [or consideration in the form of interest], then it is outside the ambit of “scope of supply” under Section 7 of the Act. Moving little further, in case the loan is taken with interest, even then such services conclusively stand exempted services in terms of Notification No. 12/2017 -Central Tax (Rate) dated 28th June 2017 vide serial No. 27(a).

My take: With regards to first part (i.e. loan without any interest), one needs to take note of the fact that due to serial No. 2 of Schedule - I, read with Section 7 (1) (c) & Explanation (a) & (b) after Section 15 of the CGST Act, 2017, there can be a 'supply' between related parties even though there is no consideration. However, to charge gst using said serial No. 2 of Schedule - I, there has to be supply of either goods or services or both. 'Activity of giving loan without any consideration' does not fall either under goods or services. As there is no goods / services involved in the 'Activity of giving loan without any consideration', there cannot be any supply even after serial No. 2 of Schedule - I, read with Section 7 (1) (c) & Explanation (a) & (b) after Section 15 of the CGST Act, 2017. With this background, I agree with first part.

I also agree with second part (i.e. loan with interest) with the understanding that even though supply of services & Section 7 is duly involved here, there is no gst liability under RCM as it is an exempted supply.

5. Despite this legal backdrop, some adjudicating authorities are pressing to pay GST under Section 9[4] in terms of Notification No.13/2017- Central Tax ( Rate) dated 28/06/2017 vide I Entry No. 6 which reads as under:

“Services supplied by a director of a company or a body corporate to the said company or the body corporate”.

My take: There is no liability to pay gst under RCM for reasons explained above. In addition thereto, as subject facility (i.e. loan) is NOT supplied by the director (but by the holding Co.) and same is also not provided by any person in his ''director's capacity'' to the entity taking loan, there cannot be any liability under RCM under Entry No. 6 of Notification No.13/2017- Central Tax ( Rate) dated 28/06/2017 (as amended till date) for given situations under discussion here.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[KASTURI SETHI]

Dear Sir,

Exemption is available.

For the purpose of RCM emphasis is on Director's services and not on Company to Company and Body Corporate to Body Coporate.

Loan is being extended by a company to an other company. Although holding company and subsidiary are related persons yet both have different legal entities. Providing loan by one company to another company cannot be linked with Director's services for the purpose of RCM. Also go through the following case law:-

"It is trite law that the petitioner No. 1 Company, which is incorporated under the provisions of the Companies Act, 1956 and its holding Company incorporated at Germany are both distinct persons and therefore, both cannot be treated to be establishments of the same Company distinct artificial jurisdiction person." ---Gujarat High Court in the case of LINDE ENGINEERING INDIA PVT. LTD. Versus UNION OF INDIA - 2020 (8) TMI 181 - GUJARAT HIGH COURT Para No.14 refers. Based on the Supreme Court judgement.

[Sadanand Bulbule]

Thanks to all the experts for providing so quick and effective clarification.

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

The judgement cited by me was accepted by the department. It is relevant in GST regime also. The judgment explains the concept/relationship of 'Holding Co. and Subsidiary Co. as per the Company Act.

I agree with Sh.Amit Agrawal Ji to the conclusion arrived at in , 'my take'.

[Sadanand Bulbule]

Sir, really this discussion is quite fabulous with an endeavour to de-stress all such tax payers.

Sri. Amit ji has narrated in an innovative way. It has enriched the clarification. Hope he would continue it in future too.

My sincere gratitude to all the experts once again.

[Ganeshan Kalyani]

The main point is that the loan has been extended by one company to another and not by the Director of the company in his own capacity. Since, service is not provided by Director the said activity is not covered under reverse charge as well.

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

Sir, Pl.refer to your observations extracted below :-

"Sri. Amit ji has narrated in an innovative way. It has enriched the clarification. Hope he would continue it in future too."

Yes. Sh.Amit Agrawal's replies are always innovative, comprehensive and full of logical and legal force. He continues replying to the query until and unless the concept is clear to the querist. I also 'steals' knowledge from him.

Whenever, a query is posted, I eagerly wait for his opinion first.

[KASTURI SETHI]

Well explained by Sh.Ganesh Kalyani Ji at serial no.7.

[Sadanand Bulbule]

Dear all experts

This TMI discussion forum has taught me that, it is not only the content of comments that holds values but the strength of conviction of the experts that holds sustained values, whatever it might be. My kudos to all of them for their contribution with systematic efforts to selflessly serve the tax payers.

Truly Great Forum.

[Amit Agrawal]

Dear Shri Sadanand Bulbule Ji & Kasturi Sethi Ji,

Thank you for your kind words!

To the extent possible, I do try to make these discussions meaningful, engaging & relevant - both for the professionals & for a average reader (say, businessmen, beginners etc.) visiting TMI forum.

And this cannot be achieved by anyone / only few persons and need active engagement, relevant & deep-thought contributions which both of you & few other/s regularly do.

But, we need more such people regularly doing the same which will make this forum more enriching for everyone.

[KASTURI SETHI]

Sh.Amit Agrawal Ji,

You are absolutely right, Sir. Your knowledge in every aspect is not the result of one day's earning. So many factors are involved i.e. education, talent, I.Q., aptitude. interest, zest and grace & blessing of God.

[Deepak Bubna]

With due respects to views expressed by all you gentlemen, in my opinion, even though loan is not supply of goods or service and has been explicitly kept out of taxability under GST Act, "discounted rate of interest" between two related parties is not a transaction at arms length and can be debated and differential rate of interest between PLR (SBI PLR is generally used as a benchmark) and rate of interest actually charged may be regarded as supply (since both are related parties) of service and be brought to tax. Do correct me pls if I am wrong.