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TMI Blog2019 (8) TMI 116X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 a fixed amount per default committed by the customer, e.g. Rs. 350/- for each dishonour of cheque/ECS. The bounce charges are collected o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder, 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 Appellant not to take any legal action against the borrower, nor the borrower gains any right to sue the Appellant for any legal action taken by the Appellant. Therefore, the bounce charges payable by the borrower on breach of its contractual obligation cannot be treated as a payment for any obligation on the Appellant towards the borrower. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply' 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 as supply of goods or supply of services as referred to in Schedule ll." 6. On perusal of the above provision, it can be seen that clause (a), (b) and (c) define the scope of supply, whereas, clause (d) classifies certain activities specified in Schedule Il as supply of goods or supply of services. 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. Clause (b) specifically includes import of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 'consideration' provided in Section 2(d) of the Indian Contract Act, 1872, which reads as under: "When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise." 13. Furthermore, it is submitted that various dictionaries define the term 'consideration' as follows: BLACK'S LAW DICTIONARY Consideration means something which is of value in the eye of law, moving from the plaintiff, either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 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. 19. In the present case, the Appellant 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 instalments on the due dates. 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, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act 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 shall not be leviable to GST. 25. The Ld. AAR has failed to consider the above submissions, and has proceeded on the presumption that the bounce charges are consideration for the toleration of the default committed by the borrowers. However, as explained above, the bounce charges are nothing but damages for the breach of contract committed by the borrowers, and the such damages do not constitute consideration for any supply. Further, the said breach does not constitute toleration of act, as explained in detail in the submissions made below. C. 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 II to the CGST Act. 26. As submitted above, clause (d) of Section 7(1) of the CGST Act states that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ously 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 consideration in the form of bounce charges in return. 33. The above findings of the Ld. AAR are completely erroneous, in as much as none of the clauses in the loan agreements entered into by the Appellant with the customers provide that in case of any breach, the Appellant would tolerate the same subject to receipt of consideration in the form of bounce charges in return. As submitted above, the bounce charges are only in the nature of liquidated damages or penalty payable by the borrowers for the breach of the terms of the loan agreement. Such bounce charges do not amount to consideration for any supply. 34. It is further submitted that the above said clause 5(e) of Schedule Il uses the word (obligation', therefore, it is important to understand its meaning to give correct interpretation to the entry. The said term has not been defined in the GST laws, or the Notifications issued thereunder, therefore, reference is being made to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... every duty enforceable by law, so that when a legal duty is imposed on the person in respect to another, the other is invested with a corresponding legal right. Therefore; an obligation comes into existence, only when there is a duty or a liability on the person making the obligation, with a corresponding right to the other person to enforce such obligation. 36. 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, in as much as, neither the Appellant has any duty or liability towards the borrower, nor the borrower has any right on the Appellant. The pavement of bounce charges neither obligates the Appellant not to take any legal action against the borrower, nor the borrower gains any right to sue the Appellant for any legal action taken by the Appellant. On the contrary, the borrower is under the contractual obligation to make timely repayment of the loan to the Appellant, and upon the breach of such obligation, the Appellant is legally entitled to recover damages for such breach and also sue the borrower for such breach. 37. It is further submitted that a sum which is payable in pursuance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not constitute a supply under the provision of Australian GST. 43. 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". Thus, when the aforesaid GSTR namely GSTR 2001/4 states that payment of liquidated damages is not towards any supply, it is reasonable to conclude that the GSTR has also considered the clause "an obligation to tolerate an act". In other words, the GSTR impliedly concludes that the acceptance of liquidated damages does not amount to tolerating an act and hence would not fall within the ambit of "supply" for the purposes of GST. 44. Similarly, reference is also 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 early 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther a sum paid as deposit in a contract related to the supply of hotel services was subject to tax or not. The Court held that where the client exercises the cancellation option available to him and that sum was retained by the hotelier as a fixed cancellation charge paid as compensation for the loss suffered and which has no direct connection with the supply of any service for consideration, it was not subject to tax. 48. Further, in a decision of the Court of Appeal (UK) in case of M/s. Vehicle Control Services Limited reported at (2013) EWCA Civ 186, it has been observed that payment in the form of damages/penalty for parking in wrong places/wrong manner is not a consideration for service as the same arises out of breach of contract with the parking manager. 49. In view of the above discussed rulings, the Appellant would like to submit that the very purpose of liquidated damages / penalty is to restitute or make good, the loss incurred by a person because of a default, non-compliance, etc. of the other person. Such liquidated damages/penalty may be in relation to some other supply of service or goods which would have a separate consideration and would be subject to certain te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly by way of the supplier presenting a cheque or the supplier attempting a direct debit on the recipient's bank account in accordance with the authority it has from the recipient; * the attempted payment is dishonoured or declined and the supplier's financial institution imposes an 'inward dishonor fee' on the supplier; * the supplier and recipient have agreed or would be taken to have agreed that in utilising direct debit or cheque payment methods the recipient will have available funds to make the payment of the initial consideration amount for the underlying supply (we accept that this would be the case in the absence of contrary arrangements between the supplier and recipient); * the supplier and the recipient have agreed that if the payment fails the recipient will be liable to pay a fee ('failed payment fee'). The obligation to pay the failed payment fee may be included in the agreement or contract for the underlying supply, or in the terms of the Direct Debit Authority for a direct debit, or because the supplier's ability to charge a failed payment fee is specified by statute; * the tailed payment fee arises because the recipient of the underlyinq supply has not fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Appellant presenting a cheque or the Appellant 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 fulfill 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 Appellant 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 Appellant and the borrower/customer tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 17(2) of the CGST Act is determined on the basis of the value of exempt supplies. Hence, the provisions of Section 15(2) are applicable to determine the value of exempt supplies as well. 62. In view of Section 15(2)(d) of the Act, 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. Therefore, the bounce charges so levied by the Appellant would be treated at par with interest, and any treatment given to the main consideration (i.e. interest) shall also be equally applicable to such amount (i.e. penalty). Hence, the bounce charges would 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. Personal Hearing 63. A personal Hearing in the matter was conducted on 07.03.2019, wherein Shri Sandeep Sachdeva, Advocate, representative of the Appellant, reiterated their written submissions. Smt.Harshal Kotale, (Dy Commissioner of State Tax), appearing as jurisdictional officer, reiterated the submissions, which had been made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duced herein below: 25. Events of Defaults: A default shall be deemed to have been committed if the borrower does not comply with its obligation covenants contained in this agreement, and also if: a. An default shall have occurred in a payment of Monthly Installment or an part thereof and / or in payment of any amount due and payable to BFL in terms of this agreement ..... i. Any of the PDCs delivered or to be delivered by the borrower to BFL in terms and conditions hereof is not encashed for any reason whatsoever on presentation, or ....... 26. Remedies for Default: The following are without prejudice to the other as also to other rights and remedies under law or in enquiry or under this agreement: a. BFL has full right to recall the entire loan and proceed against the borrower. b. In case of default by reason of PDCs ECS Mandate / ADM / any other electronic or other clearing mandate transaction being dishonored, BFL shall initiate legal proceeding under section 138 of the Negotiable Instrument Act 1881 for dishonor of cheques issued by borrower or under Payment and Settlement System Act, 2007. c. BFL shall be entitled to take possession of the product without pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter-alia, submitted in para (31) and (32) above that since there is no separate agreement between the Appellant and the borrower regarding this act of tolerance by the Appellant in case of the default by the borrower, the provision of the entry 5(e) to the Schedule II to the CGST Act, 2017 will not apply in their case. As regard to this argument put forth by the Appellant, we are of the view that though there is no separate agreement between the Appellant and the borrower, for the said act of tolerance of the default by the borrower, there is clear provision laid out at entry 3 (a) of the above discussed agreement and in this regard, it is the loan agreement itself which clearly proposes the remedy available for the default by the borrower. Thus, this argument of the Appellant is devoid of any rationale or merit, and hence is not worth considering. 70. The appellant further contended that it is relevant to first determine whether a particular activity of the appellant is covered within the scope of clause (a), (b) or (c) of Section 7(1) of the CGST Act as the clause (d) only provides to treat said activity as either supply of goods or as the case may be supply of services. The app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bounce / dishonor of cheque / ECS / NACH are brought into the ambit of supply by treating it as a 'supply of services'. There shall not be any confusion in the mind of anyone that the legislature intentionally brought this activity of tolerating an act in the scope of supply of services. As explained in the above paras the appellant received the consideration and tolerated the act of bounce / dishonor of cheque / ECS / NACH. In view of these facts, on a harmonious and purposive interpretation of the above referred clauses under sub-section (1) of Section 7 of CGST Act it is very clear that they are dependent upon each other and a conjoint reading of Clause (d) and (a) of the section 7 (1) removes all doubt and makes it absolute clear that such an act of tolerating cheque bounce / dishonor is nothing but supply as mandated under 7 of the CGST Act. 72. The Appellant has repeatedly submitted that the bounce charges recovered by them from their borrower cannot be considered as consideration, as the same is not received by them for supplying any specific service to the borrowers. It is rather in nature of damage or compensation for the loss incurred to them on account of the default of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 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 Appellant not to take any legal action against the borrower, nor the borrower gains any right to sue the Appellant for any legal action taken by the Appellant. In this respect the appellant in his grounds of appeal has also submitted that the Ld. AAR has misinterpreted the above clause 5 (e) of Schedule II and interpretation of clause 5 (e) submitted by Appellant in this regard is that it shall be read as under: (i) agreeing to the obligation to refrain from an act; (ii) agreeing to the obligation to tolerate an act or situation; (iii) agreeing to the obligation to do an act. Being, the expression "agreeing to the obligation" is a prefix to all the three entries. 73. We believe that the here the appellant has tried to play with words and coined a new theory of interpretation the law. In common parlance the prefix is a group of letters placed be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so worthy to note that in addition to semicolon, the conjunction 'or' is also used immediately after semicolon. Thus, the very syntax of the proviso to Rule 44(1) of the Act carrying different clauses would reveal that the punctuation 'semicolon' and the conjunction 'or' are used in between the clauses carrying different eligibility criteria for renewal commission, not without any purpose. In fact, they would indicate that in troth, they form a single sentence carrying different clauses." Therefore, the correct interpretations of expressions separated by "semicolon" followed by word "or" is that they are distinct and carry separate meaning. Thus, the words mentioned in first expression are separate and has limited applicability to the extent of first expression only. The second expression "to tolerate an act or situation" is clearly distinct and separate. In view of this the group of words "agreeing to the obligation" from first expression of clause 5 (e) mandating for agreement and obligation are not applicable to the expression "to tolerate an act or situation". Hence, it is concluded that the vary activity of tolerating act or situation of delay in payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rued not to include there in its ambit any other charges in respect to the money borrowed or debts incurred. The bounce charges collected by the Appellant is clearly not on account interest for the delayed payment of the consideration for their supply, but for dishonor of the repayment instruments, such as bouncing of the Cheques issued by the borrowers or the failure of the ECS for non-availability of the sufficient fund in the borrower's account. Further, the Appellant is recovering separate amount at the fixed rate of interest under the head of "default interest", as quoted in the loan agreement, on the delayed payment of the EMI by the borrowers. In view of these facts, we are of the opinion that the "bounce charges" in the present case are not covered in the interest meant for the purpose of the exemption and thereby not entitled for the exemption as claimed by the appellant. The Appellant have also relied upon the various overseas rulings, viz. GSTR 2001/4, GSTR 2001/4, GSTR 2003/11, GST Determination No. 2005/6, issued by the Australian Tax Office (ATO), New Zealand case S65 (1996) 17 NZTC 7408 etc. to substantiate their contention. As regards these international ruling pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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