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TMI Blog2018 (12) TMI 1154X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct . 02. FACTS AND CONTENTION - AS PER THE APPLICANT The submissions, as reproduced verbatim , could be seen thus- 1. The Applicant is a non-banking financial company and is inter alia engaged in providing various types of loan to the customers such as auto loans, loans against the property, personal loans, consumer durable goods loans, etc. All these loans are interest bearing loans. 2. The Applicant inter alia enters into agreements with borrower/customers for providing loans to them. The loan agreements provide for repayment of the outstanding dues/Equated Monthly Installments (EMI) through cheque/ Electronic Clearing System ( ECS )/National Automated Clearing House ( NACH ) or any other electronic or clearing mandate. The illustrative copies of loan agreement entered into between the Applicant and the customers are collectively enclosed as Annexure-1. 3. In case of dishonour of cheque/ECS/NACH or any other electronic or clearing mandate by the customers, the Applicant collects penal/bounce charges, which is in line with the agreed terms and conditions. The bounce charges are generally a fixed amount per default committed by the customer, for e.g. ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herance of business and importation of services. It also includes activities specified in Schedule I made or agreed to be made without a consideration. The said Section 7 is reproduced herein below for reference: 7 (1) For the purposes of this Act, the expression supply includes (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; (b) import of services for a consideration whether or not in the course or furtherance of business; (c) the activities specified in Schedule 1, made or agreed to be made without a consideration, and (d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II. .Emphasis Supplied A.2 In view of the above provision, any activity undertaken without consideration, except those covered under Sch. I, shall not be treated as supply , and accordingly, will not be subject to GST levy and hence, not liable for payment of GST. Further, the Bounce Charges collected by the Applicant are not covered under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exchange for something of value given or done by another, in order to make binding contract; inducement for a contract. A.8 From the above discussed meaning of the term consideration , it can be said that consideration would necessarily mean quid pro quo , i.e. something in return. It is a benefit which must be bargained for between the parties, and is essential reason for a party entering into a contract. Further, the consideration for an activity must be at the desire of the other person. A.9 In the present case, the Bounce Charges are collected by the Applicant on account of failure of the borrower/ customer in fulfilling its obligation to ensure that the funds were available to honour a cheque or meet a direct debit request presented by the Applicant for the loan installment. Therefore, it is submitted that the Bounce Charges are not recovered by the Applicant in lieu of, or, in return for any activity performed by the Applicant. A.10 The Applicant would like to bring your attention to clause (d) of sub-section (1) of Section 7 of the CGST Act, which states that the expression supply also includes the activities to be treated as supply of goods or supply of service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate non-payment of loan dues. Therefore, it would be erroneous to assume that the party granting loan (i.e. the Applicant) are entering the loan agreement to tolerate the default of the borrowers. It is further submitted that the consideration for breach of Contract, in the form of liquidated damages cannot be treated as the consideration for the contract per se. Therefore, merely because of existence of the clause of penal/ bounce charges in the contract for breach of the performance of the contract, it does not mean that the parties have entered into the contract for the penal/bounce charges. It is only a deterrent for the customer/borrower not to commit default. Hence, it is submitted that there is no obligation on the Applicant to tolerate the act of the default in payment of loan installments by the customer/borrower. A.15 Therefore, the activity of collecting penal/bounce charges does not even fall under the ambit of the deemed supply under Clause (e), Entry 5 of Schedule II of the CGST Act. Hence, the penal/ bounce charges collected for the default in payment of loan installment cannot be treated as consideration for any supply, and accordingly, is not taxable under the G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the most common form of remedy arising out of the termination or breach of contract. The damage, loss or injury, being the substance of the dispute, cannot in itself be characterized as a supply made by the aggrieved party. This is because the damage, loss or injury in itself does not constitute a supply under the provision of Australian GST. B.7 Reference is further made to GSTR 2003/11 , pertaining to payment on early termination of a lease of goods . It has been clarified therein that a payment received to compensate the lessor for damage or loss flowing from any termination as a result of a default by the lessee is not consideration for a supply, even though the lessor brings the lease to an end by exercising the right to terminate the lease. The Ruling further provides that in such cases, there will be no taxable supply because a payment for genuine damages, which is not consideration for any earlier or current supply, cannot be said to be made in connection with any supply. The less or merely exercises his right to terminate and the payment is in the nature of damages for the lessee s breach of the lease which gave rise to the lessor s right to terminate. Thus, in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g liquidated damages. Such liquidated damages/penalty cannot itself become consideration for continuing with the main supply of service/ goods by terming the same as towards tolerating the acts of the defaulting party. B.11 It may be noted that there is a similar kind of taxability provisions or exactly same provisions under the above referred countries with respect to taxability of penal/ bounce charge and hence, the ratio laid down by the above judicial precedents should equally apply in the current fact scenario. B.12 In view of the above, it is humbly submitted that the penal charges collected by the Applicant by way of Bounce Charges, are nothing but in the nature of liquidated damages/ penalty received from the borrowers for defaults/ breach committed by them by defaulting in loan repayments. B.13 Hence, the Bounce Charges would not be treated as a consideration for any supply, and therefore, will be outside the levy of GST. C. The present issue is squarely covered by the Australian GSTD 2013/1 C.1 It is further Submitted that the present issue is squarely covered by the Australian GSTD 2013/1 which holds that the payment of a failed payment fee is not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Applicant in the present case is identical to the failed payment fee referred to in the above GSTD, in as much as, there is an attempt to make a payment for the loan installment by way of the Applicant presenting a cheque or the Applicant attempting a direct debit on the borrower/customer s bank account in accordance with the ECS or NACH or any Other electronic or clearing mandate obtained from the borrower/customer: the borrower/ customer has agreed that it will have funds available to make the payment of the loan installment; the borrower/customer has agreed that if the payment fails, it will be liable to pay the bounce charges as per the terms of the loan agreement; the liability to pay bounce charges arise because the borrower/customer has failed to fulfil its obligation to ensure that the funds were available to honour a cheque, or meet a direct debit request; the borrower/ customer s failure to fulfil its payment obligations causes the Applicant to incur additional costs, such that the bounce charges is characterised as compensation for the additional costs or loss incurred; and there is nothing in the agreement between Applicant and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bounce Charges do not amount to supply of services under the GST Regime and therefore would not be taxable. In any case, the bounce charges being in the nature of penalty for delayed payment of consideration would be included in the value of supply of loans and therefore, would be treated at par with interest, hence, the same shall be exempt from GST. Additional submissions on 01.08.2018 Synopsis Of submissions made in Appln. dt 09.05.2018 during personal hearing held on 27.06.2018 18.07.2018. A. Bounce Charges are in the nature of liquidated damages or penalty for breach of contract, which does not amount to consideration for any contract, and therefore, there cannot be any supply of service. A.1 The Applicant lends money to the customers/borrowers with one of the conditions in the loan agreement that the customers/borrowers shall make timely repayment of loan installments on the due dates as per the repayment schedule, through cheque/ Electronic Clearing System ( ECS)/ National Automated Clearing House ( NACH ) or any other electronic or clearing mandate. A.2 However, in case of dishonour of cheque/ ECS/ NACH or any other electronic or clearing mandat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sum named. In other words, Sec. 74 is narrower in scope and limits the compensation to the extent provided for, or stipulated in the contract. A.6 It is submitted that the damages in Section 74 may either be in the nature of liquidated damages or penalty. If the sum stipulated in the contract is a genuine pre-estimate of damages likely to flow from the breach, it is called liquidated damages. If it is not a genuine pre-estimate of the loss, but an amount intended to secure performance of the contract, it may be penalty. The question whether a particular stipulation in a contract, is in the nature of penalty has to be determined by the Court against the background of various relevant factors, such as the character of the transaction and its special nature. A.7 In the present case, the Applicant lends money to the customers/ borrowers with one of the conditions in the loan agreement that the customers/ borrowers shall make timely repayment of loan installments on the due dates. Further, the borrower is under a contractual obligation to ensure that sufficient funds are available in his account on the due dates of the EMI. However, in case, the borrower fails to maintain fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the borrower cannot be treated as a consideration either for the primary contract of loan, or for any other contract. A.12 Hence, in the absence of any consideration, the bounce charges collected by Applicant in present case does not amount to a supply under Section 7 of the CGST Act, and therefore, the same shall not be leviable to GST. B. Bounce Charges collected by the Applicant for the breach of contract by the customer, is not covered under the ambit of Deemed Services under clause (c) of Entry 5 of Schedule II to the CGST Act. B.1 It is further submitted that the bounce charges shall not be covered by clause (e) of Entry 5 of Schedule II to the CGST Act, which reads as agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. It is submitted that the expression agreeing to the obligation is a prefix to all the three entries, viz. to refrain from an act , to tolerate an act or a situation , and to do an act . Therefore, the correct interpretation of the law would be to read the above said clause as under: - agreeing to the obligation to refrain from an act, - agreeing to the obligation to toler ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bear from doing, whether the duty is imposed by law, contract, promise, social relations, courtesy, kindness, or morality. 2. A formal. binding agreement or acknowledgement of a liability pay a certain amount or to do a certain thing for a particular person or set of persons; esp., a dury arising by contract. 3. Civil law. A legal relationship in which one person, the obligor, is bound to render a performance in favor of another, the obligee. Oxford Dictionary: obligation n. an act or course of action to which a person is morally or legally bound. the condition of being so bound. 2. a debt of gratitude for a service or favour. Emphasis Supplied B.4 In view of the above, it is submitted that the word obligation can be understood to be an act or course of action to which a person is morally or legally bound. It is a bond or tie, which constrains a person to do or suffer something and it implies a right in another person to which it is correlated. As defined in the Specific Relief Act, 1963, obligation includes every duty enforceable by law, so that when a legal duty is imposed on the person in respect to another, the oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of clause (e) of Entry 5 of Schedule II to the CGST Act, which reads as under; 9-10 Meaning of Supply (1) A supply is any form of supply whatsoever. (2) Without limiting subsection (1), supply includes any of these: (g) an entry into, or release from, an obligation: (i) to do anything; or (ii) to refrain from an act; or (iii) to tolerate an act or situation. C.3 In the above context, reference is made to GSTR 2001/4 , issued by the Australian Tax Office (ATO), which explains the GST treatment of court orders and out-of-court settlements. In para 73 of the said ruling, it has been clarified that the damages are the most common form of remedy arising out of the termination or breach of contract. The damage, loss or injury, being the substance of the dispute, cannot in itself be characterized as a supply made by the aggrieved party. This is because the damage, loss or injury in itself does not constitute a supply under the provision of Australian GST. C.4 It is pertinent to bear in mind that the definition of supply under the Australian GST legislation includes within its ambit an obligation to tolerate an act . Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erely for making good the loss suffered by a contracting party due to breach of terms of the contract by other contracting party. There is no additional benefit given under the main contract of supply of service, in return for the liquidated damages. C.9 Hence, in view of the above submissions, the bounce charges levied by the Applicant cannot be treated as a supply of service, and therefore, is not liable to GST. D. The present issue of Bounce Charges is squarely covered by the Australian GSTD 2013/1 It is further submitted that the present issue of Bounce Charges is squarely covered by the Australian GSTD 2013/1 which holds that the payment of a failed payment fee is not consideration for a supply. Para 5 of the said GSTD, defines the term failed payment as a dishonored cheque or a declined direct debit request. Further, the term failed payment fee has been defined as the fee charged by the supplier to the recipient in respect of the failed payment. Para 3 of the said GSTD states that in the circumstances described in para 2, which is reproduced herein below, the payment of failed payment fee does not amount to consideration for either a financial supply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly. The following matters, in combination, arc relevant to this conclusion: (a) The failed payment fee relates to losses suffered by the supplier when the recipient fails to meet its obligations to have funds available. (b) The failed payment fee is not an intended consequence of the underlying supply, but arises because the recipient failed to have sufficient funds available (c) There is nothing in addition to the underlying supply that the failed payment fee could be described as for: even within the broader definition of for consideration? .Emphasis Supplied D.3 It is relevant to note that the above GSTD has been issued in the context of Australian GST law, wherein the ambit of supply is wide enough to cover an obligation to tolerate an act or situation, as submitted in para C2 above. Even in such context, the GSTD holds that the payment of failed payment fee does not amount to consideration for supply. The GSTD emphasises on the point that there is no additional supply which is for consideration; the failed payment fee arises due to the failure of the borrower to meet his obligation. The failed payment fee is not for the service to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being primarily engaged in the business of financing/lending, any amount recovered by the Applicant in respect of granting loans is in the nature of interest only. E.1 Without prejudice to the above, the Applicant being primarily engaged in the business of financing/lending, any amount recovered by the Applicant in respect of granting loans is in the nature of interest only. E.2 Hence, the bounce charges collected by the Applicant in the present case for the delayed payment of loan installments by the customer is to be treated at par with interest, and accordingly, the same shall be exempt from GST under Serial No. 27 of the Notification No. 12/2017-central Tax (Rate) dated 28.06.2017, read with Maharashtra State Notification No. 12/2017-State Tax (Rate) dated 29.06.2017. F. Without prejudice the above. penalty for delayed payment of consideration is to be included in the value of the supply in view of clause (d) of sub-section (2) of Section 15 of the CGST Act. F.1 Without prejudice to the above, it is submitted that in view of clause (d) of sub-section (2) of Section 15 of the CGST Act, penalty for delayed payment of consideration for a supply would be include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Non-Banking Financial Company and inter alia engaged in providing various types of loan to the customers such as auto loans, loans against the property, personal loans, consumer durable goods loan etc. All these loans are interest bearing loans. The applicant inter alia enters into agreements with borrower/customers for providing loans to them. The loan agreements provide for repayment of the o are equated monthly through ECS i. e. Electronic Clearing System/ N ACH i.e. National Automated Clearing House/Cheque/any other electronic or clearing mandate. In case of dishonour of Cheque/ECS/NACH or any other electronic or clearing mandate by the customers, the applicant collects penal/bounce charges which is in line with the agreed terms and conditions. The bounce charges are generally a fixed amount per default committed by the customer for e.g.Rs.350/- for each dishonour of cheque/ECS for the breach of the terms and conditions of the loan. The amount of bounce charges collected from the customers are accounted by the Applicant in its core accounting platform i.e. SAP under General Ledger Code 60000150. Questions asked by the applicant for advance ruling Whether th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government; 3) Value of Supply: As per sub-section 1 of section 15 the value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the Supply are not related and the price is the sole consideration for the supply. As per sub-section 2 of section 15 The value of supply shall include- a) any taxes, duties, cesses fees and charges levied under any law for the time being in force other than this Act, the Central Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged Separately by the supplier; d) interest or late fee or penalty for delayed payment of any consideration for any supply As per above provision Bounce Charges on Non-performance of a contract is an activity or transaction which is treated as a supply of service and the Applicant is deemed to have received the consideration in the form of Charges, liquidated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jected to GST levy. While submitting that the Applicant is of the view that penal interest collected from the customer is in the nature of additional interest, and therefore, the same is not subjected to GST levy, the applicant has reproduced the relevant extract of clauses of a sample auto loan agreement in respect of penal interest which is as follows: The relevant extract of clauses of a sample auto loan agreement in respect of bounce charges is reproduced below for ease of reference: 1. DEFINITIONS AND ABBREVIATIONS: r. Bounce Charges Shall mean, dishonor of post-dated cheque/ ECS ADM/ entrusted by the borrower/co-applicant/co borrower for clearance of EMI (monthly installments) or non-payment of installment on or before respective due date for other modes. II. TERMS OF THE LOAN: 3. The Borrower agrees and confirms that: (iv) BEL is entitled to levy penalty as follows on default: (a) (a) Bounce Charges of up to ₹ 350/- on each Bounce as per clause B of the schedule. A perusal of the above extract reproduced by the applicant from a sample auto loan agreement and submitted by them in support of their argument that Bounc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 25, when made in the course or furtherance of business: Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both. 3. Supply of goods- (a) by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or (b) by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal. 4. Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business. SCHEDULE II [See section 71 ACTIVITIES TO BE TREATED AS SUPPLY OF GOODS OR SUPPLY OF SERVICES 1. Transfer (a) any transfer of the title in goods is a supply of goods; (b) any transfer of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services; (c) any transfer of title in goods under an agreement which stipulates that property in goods shall pass at a future date upon payment of full consideration as agreed, is a supply of goods. 2 . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing mandate by the customers, in respect of the EMIs, the Applicant collects bounce charges, which is in line with the agreed terms and conditions. The bounce charges are generally a fixed amount per default committed by the customer, for e.g. ₹ 350/- for each dishonour of cheque/ECS. In the process the applicant has agreed to do an act (tolerating the dishonor of the mode of payment of EMIs of their customers) in lieu of such bounce charges being made to them as per the agreements. Thus, the applicant has agreed to do an act (the act of tolerating, of delayed payment of EMIs by their customers) which is very clear from the terms and conditions of Loan Agreements entered into by them with their clients which very clearly provide that in case of any such breach as notified in Agreement, the applicant would tolerate the same subject to receipt of consideration in the form of Bounce Charges in return 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. However the applicant has argued that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Thus we find that the consideration if any as received by the applicant would clearly qualify as supply as per Sr. No. 5(e) of Schedule II of the CGST Act which reads as under:- (5) Supply of Services : The following shall be treated as supply of services:- (e) Agreeing to the obligation to refrain from an act or to tolerate an act or a situation or to do an act. In the present case, as per details presented before us, we clearly find that 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 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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