9911796707
TMI Blog2019 (8) TMI 116X X X X Extracts X X X X X X X X Extracts X X X X ..... tain amount as bounce charges . Hence, such an activity of tolerance of situation of bounce / dishonor of cheque is adequately covered by entry 5 (e) of Schedule ll. Appellant is entitled to recover the bounce charges from such defaulting borrowers. Thus, from the language of the above mentioned clause related to bounce charges, it is adequately clear that there is mutual agreement between the Appellant and the borrower that whenever this event of default occurs, the Appellant can tolerate this event against some fixed agreed amount. Thus, here it can be said that the Appellant has tolerated an act or situation of default by the borrowers, for which they are recovering some amount in the name of the bounce charges, wherever the repayment instruments, discussed above, have been dishonored. Hence, such activity of tolerance is against consideration. We do not find any scope and requirement as such to discuss the meaning of consideration in such cases, as there is no mention of the term consideration anywhere in the description provided in the entry 5 (e) of the Schedule Il to the CGST Act, 2017. The bounce charges are recovered by the appellant for tolerating the act of dela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ling No. GST-ARA-22/2018-19/B-85 dated 06.08.2018 = 2018 (11) TMI 884 - AUTHORITY FOR ADVANCE RULING, MAHARASHTRA . BRIEF FACTS OF THE CASE A. The Appellant is a non-banking financial company and is inter alia engaged in providing various types of loans 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. B. The Appellant, 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 Appellant and the customers have been enclosed. C. In case of dishonour of cheque/ECS/NACH or any other electronic or clearing mandate by the customers, the Appellant collects penal/bounce charges, which is in line with the agreed terms and conditions between the borrower and the Appellant. The bounce charges are generally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal, inter alia, on the following grounds which are urged without prejudice to each other. GROUNDS OF APPEAL A. The impugned AAR order is a non-speaking order and is liable to be set aside on this ground alone. 1. At the outset, it is submitted that the impugned AAR order is a non-speaking order, in as much as the Ld. AAR while passing the said order has failed to consider the following submissions made by the Appellant and has also failed to record any findings in that regard: (i) Bounce Charges collected by the Appellant for the breach of contract by the customer, is not covered under the ambit of clause (e) of Entry 5 of Schedule Il to the CGST Act. The said clause can be made applicable only when there is an agreement to the obligation to tolerate an act or situation, and the word obligation implies a duty or a liability on the person making the obligation, with a corresponding right to the other person to enforce such obligation. However, in the present case, there is no obligation upon the Appellant to tolerate the act of non-payment or delayed payment by the borrower. The payment of bounce charges neither obligates the Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Credit Bank Ltd., 2018-TIOL-2313-HC-MUM-CX = 2018 (10) TMI 1711 - BOMBAY HIGH COURT 4. However, the Ld. AAR has failed to consider the above submissions of the Appellant, and the said error on part of the Ld. AAR has rendered the impugned AAR order as irregular and non-speaking. B. Bounce Charges do not fall within the ambit of supply under the GST regime. 5. Under the GST regime, the taxable event is the supply of goods or services. The scope of the term supply is provided under Section 7 of the CGST Act, which 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 l, made or agreed to be made without a consideration; and (d) the activities to be treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services 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; (b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services 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: 10. Since the above definition is an inclusive one, the meaning of the term consideration has to be understood from various external aids, including the natural meaning given in various dictionaries, meaning given to the term in rulings by various forums, etc. 11. It is submitted in this regard that the concept of consideration has been derived from the Latin phrase quid pro quo which means something in return for something . It is a well settled principle that where there is no consideration, there is no contract . 12. Reference in this regard is also made to the definition of the term co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be likely to result from the breach of it. 74. Compensation for breach of contract where penalty stipulated for. - When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for. Explanation . - A stipulation for increased interest from the date of default may be a stipulation by way of penalty. 17. Both, Section 73 and 74, provide for reasonable compensation, but, Section 74 is narrower in scope and limits the compensation to the extent provided for, or stipulated in the contract. 18. 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 liquidate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of damages upon breach of contract does not constitute a separate contract; it is a part of the original contract only. The payment of damages arises on account of breach of the primary contract, and it would be an incorrect interpretation to say that such payment is a consideration for any other contract. 23. In the present case, there is only one contract between the Appellant and the borrower, which is the agreement for loan, for which consideration is payable by the borrower in the form of interest. The bounce charges are payable by the borrower, only upon the breach of such contract, and therefore, such payment does not constitute a second contract. Therefore, the payment of bounce charges by the borrower cannot be treated as a consideration either for the primary contract of loan, or for any other contract. 24. In view of the submissions, it is submitted that the bounce charges are merely damages for the breach of contract, and therefore, the same cannot be treated as a consideration. Hence, in the absence of any consideration, the bounce charges collected by the Appellant do not amount to a supply under Section 7 of the CGST Act, and therefore, the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entries, viz. to refrain from an act , to tolerate an act or a situation , and to do an act . Therefore, to attract the above said clause, there must be an agreement to the obligation in respect of any of the three entries. In other words, the act of tolerance requires the willful agreement of certain situations wherein the party agrees to suffer or restrain from doing something for some pre-fixed consideration. 31. In the present case, there is no agreement between the Appellant and the borrower to tolerate the default committed by the borrowers. The only agreement between the Appellant and the borrower is in respect of agreement for loan, for which consideration is payable by the borrower in the form of interest. The bounce charges are payable by the borrower, only upon the breach of such contract, and therefore, such payment does not constitute a second contract. 32. However, the Ld. AAR has erroneously recorded various findings in the impugned AAR order that the loan agreements entered into by the Appellant with the customers provide that in case of any breach as mentioned in agreement, the Appellant would tolerate the same subject to receipt of considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is bound to do or forbear 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 to pay a certain amount or to do a certain thing for a particular person or set of persons; esp., a duty 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. 1. 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. 35. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a supply and therefore not subjected to GST/VAT levy. 41. In Australian Law, the GST is levied on supply under A New Tax System (Goods and Services Tax) Act, 1999 . The term supply is defined under Section 9(10) of the said Act. Clause (g) of sub-section (2) is pari materia the provisions 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. 42. In the above context, reference is made to GSTR 2001/4 , issued by the Australian Tax Office (ATO), explains the GST treatment of court orders and out-of-court settlements. In the said ruling at Para 73, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration for a supply and hence not leviable to GST. It has been clarified in the above GSTD that if the true nature of fine or penalty is a punishment and/or to act as a deterrent, it does not accord with that nature to suggest that there is a supply to the member in return for its payment. 46. Reference is also made to the New Zealand case S65 (1996) 17 NZTC 7408 , wherein it has been held that an association, in accepting the payment of fine or penalty, does not enter into an obligation with the particular member to tolerate the misconduct, but rather is fulfilling its obligation to all members to enforce the rules. The member does not gain rights additional to those which are already enjoyed by virtue of being a member. That is, upon payment of the fine or penalty, the member continues to enjoy the same rights and privileges and it follows that the association is required to continue to provide the benefits of membership. In this sense, it cannot be said that the association makes a supply where it already has a pre-existing obligation to continue to provide the benefits of membership. 47. Reference is further made to the decision of the European Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an obligation to tolerate an act or situation. 52. Hence, by applying the above rulings, it can be concluded that the bounce charges collected by the Appellant in the present case, being penalty/liquidated damages for breach of contract, are not taxable, as the same does not amount to consideration for any supply. The impugned AAR order has not dealt with the above submissions, and is therefore, liable to be set aside on this ground alone. E. The present issue is squarely covered by the Australian GSTD 2013/1. 53. 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 a failed payment fee does not amount to considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment fee does not have sufficient nexus to any supply. The following matters, in combination, are 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 underlyinq supply that the failed payment fee could be described as for , even within the broader definition of for consideration . 55. 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall not be subjected to GST. The impugned AAR order has not dealt with the above submissions, and is therefore, liable to be set aside on this ground alone. F. Without prejudice to 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. 59. Without prejudice to the above, it is submitted that in view of clause (d) of subsection (2) of Section 15 of the CGST Act, penalty for delayed payment of consideration for a supply would be included in the value of that supply. The said provision is extracted herein below for reference: (2) The value of supply shall include- (d) interest or late fee or penalty for delayed payment of any consideration for any supply; and 60. In view of the above provision, the bounce charges levied for delayed payment of loan dues/EMI, being in the nature of penalty, is to be included in the value of loans, which is nothing but interest only. 61. It is relevant to note that sub-section (2) of Section 15 of the CGST Act is applicable for determination of value of any supply both fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions of the agreement entered between the Appellant and its borrowers) would attract GST as the Appellant has tolerated the act, or situation of default by the borrowers of the loan, against some fixed amount/charges agreed to be paid by the borrowers. The Advance Ruling Authority has held that this very activity of the Appellant viz. tolerating the act, or situation of the default by the borrowers, is adequately covered under the provisions of the entry 5 (e) of the Schedule II to the CGST Act, 2017 and thus amounts to supply of service in accordance with the provision of Section 7(1)(d) of the CGST Act, 2017. 65. On perusal of the above, the issue before us, to decide is whether the bounce charges collected by the Appellant from their borrowers in lieu of remedies available in the event of the default by the borrowers, occurred in the form of dishonouring of the loan repayment instruments due to the non-availability of the sufficient funds in the borrower s account, is for tolerating any act as envisaged under the entry 5 (e) of the schedule II to the CGST Act, 2017, or otherwise. 66. To decide this issue, first we will go through the entry 5 (e) of the schedul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstruments Act or under the Payments and Settlement Act, or taking possession of the product, etc. However, the appellant instead of taking recourse to the remedial provisions in the agreement is tolerating the act or the situation of bounce / dishonor of the cheque / ECS / NACH, tendered by the customers for repayment of EMIs, by imposing / recovering certain amount as bounce charges . Hence, such an activity of tolerance of situation of bounce / dishonor of cheque is adequately covered by entry 5 (e) of Schedule ll. 68. Such a tolerance of an activity of cheque / ECS / NACH bounce / dishonor is against the consideration and it is in the form of bounce charges . The clause related to such bounce charges is as under: 3. BFL is entitled to levy penalty as follow on defaults: a. Bounce charges up to ₹ 350/- per bounce as per clause B of schedule b. .. Thus, as per clause 3 (a) of the said agreement it is also agreed that in case some default in the form of the dishonoring of the repayment instruments, such as cheque, failure of ECS and other electronic payment instruments by the borrower occurs, the Appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 l, 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. From the aforesaid scheme of scope of supply, it is evident that clause (a) covers all kinds of supply of goods or services made or agreed to be made for a consideration by a person in the course or furtherance of business. The wording provided in clause (a) start with all forms of supply such as .. It means that the form of supplies enlisted therein are provided by way of examples and it is inclusive of supplies other than those of enlisted. Clause (b) specifically includes import of services for a consideration, whether or not in the course or furtherance of business. Clause (c) expands the scope of suppl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CGST Act, 2017 and the amount recovered from such borrowers would attract GST in accordance with the provision of Section 9(1) of the CGST Act, 2017. We do not find any scope and requirement as such to discuss the meaning of consideration in such cases, as there is no mention of the term consideration anywhere in the description provided in the entry 5 (e) of the Schedule Il to the CGST Act, 2017. The bounce charges are recovered by the appellant for tolerating the act of delay and it is nothing but consideration. It is clear from the meaning of the consideration provided under Section 2(31) that it includes the impugned charges. The definition is reproduced herein: consideration in relation to the supply of goods or services or both includes- (a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services 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; (b) the monetary value of any act or forbearance, in respect of, in response to, or for the induc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to separate expressions mentioned therein and separated by semicolon. It is evident from the construction of the said entry that it contains three expressions and that all three expressions namely agreeing to the obligation to refrain from an act; or to tolerate an act or a situation; or to do an act are separated with semicolon followed by word or . It shows that semicolon and or separates the above said three expressions showing that they are not inextricably connected. Therefore, the theory of interpretation coined out by the appellant by connecting group of words of first expression agreeing to obligation with rest of two expressions is not the correct legal interpretation. 74. The relevant extract of Hon. Supreme Court judgment in the case of PIL of Shri. Jayant Verma Vs. Union of India, dated 16/02/2018 = 2018 (2) TMI 1326 - SUPREME COURT related to the expressions separated by semicolon is as under: We are afraid we cannot agree for several reasons. Firstly, purely grammatically, a semicolon separates the two expressions showing that they are not inextricably connected . Entry 5, List III deals with seven completely di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the CGST Act, 2017, the bounce charges recovered from the borrower will form part of the value of their main consideration, which in this case is interest, for the supply of their main service, which in the present case is to extend the loans of various nature to the borrowers seeking such loans at the fixed rate of interest as per the agreement entered between them and the borrowers. Further, since the main consideration, i.e. interest in this case, is exempt from the levy of GST as per the Notification No. 12/2017-C.T. (Rate) dated 28.06.2017, the bounce charges collected from the borrowers, being the part of the main consideration, will eligible for exemption from the levy of GST. 76. As regards this contention, we intend to delve into the entry laid out in above said exemption notification. The same has been reproduced herein under for reference: Heading 9971 Services by way of- (a) extending deposits, loans or advances in so far as the consideration is represented by wav of interest or discount (other than interest involved in credit card services); On perusal of the above entry it is evident that above said notification has exemp ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
