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TMI Blog2024 (8) TMI 234X X X X Extracts X X X X X X X X Extracts X X X X ..... or contravention of provisions of law as stated in para 1.4. The circular is binding and hence are of the opinion that these activities are not in the nature of a consideration for an activity and hence, would not constitute a supply of service, service. Penalty of the nature for non-performance or under-performance as per contractual agreement by RBI with third party vendors - HELD THAT:- The penalty of the nature for non-performance or under-performance as per contractual agreement by RBI with third party vendors. It is in nature of liquidated damages and the amount is paid only to compensate for injury, loss or damage suffered by the RBI due to breach of the contract. RBI is interested in getting services within stipulated time lines and not collecting penalty. The principal laid down in the circular is applicable to these penalties in nature of liquidated damages levied by RBI on third party vendors for non-performance or under-performance as per contractual agreement - these activities are not in the nature of a consideration for an activity and hence, would not constitute a supply of service, service. - SHRI. AJAYKUMAR V. BONDE AND MS. PRIYA JADHAV, MEMBER PROCEEDINGS (UNDE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Formulates, implements and monitors the monetary policy. Objective: maintaining price stability while keeping in mind the objective of growth. 1.2.2 Regulator and supervisor of the banking and financial system: Prescribes broad parameters of banking operations within which the country s banking and financial system functions. Objective: maintain public confidence in the system, protect depositors interest and provide cost-effective banking services to the public. 1.2.3 Manager of Foreign Exchange Manages the Foreign Exchange Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. 1.2.4 Issuer of currency: Issues, exchanges and destroys currency notes as well as puts into circulation coins minted by Government of India. Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality. 1.2.5 Developmental role Performs a wide range of promotional functions to support national objectives. 1.2.6 Regulator and Supervisor of Payment and Settlement Systems: Introduces and upgrades safe and efficient modes of payment systems in the country to me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... posits where the company is prohibited by RBI to do so (Vide section 47A (1) (a) (b) (c) read with 46 (2) (3) and (4) of BR Act, 1949) 1.4.4 Foreign Exchange Management Act, 1999 Late Submission Fees (LSF) for delayed regulatory reporting on account of External Commercial Borrowings and Trade Credits availed under FEMA, 1999 (Vide Notification no. FEMA 3(R)/2018-RB dated 17 December, 2018 as amended from time to time and Circular No. A.P. (DIR Series) Circular No. 16 dated 30 September, 2022) Late Submission Fees (LSF) for delayed regulatory reporting of Foreign Investments under FEMA, 1999 (Vide Notification no. FEMA. 395/2019-RB dated 17 October, 2019 and Circular No. A.P. (DIR Series) Circular No. 16 dated 30 September, 2022) 1.4.5 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Chapter II) Penalty for contravention of direction of RB. (Vide Sec 30A of SARFAESI Act, 2002) 1.4.6 Credit Information Companies (Regulation) Act, 2005 Penalty for unlawful access of credit information (Vide section 25 read with 22 (2), 23 (2), 23 (3), and 23 (4) of the CIC Act) 1.4.7 Payment and Settlement Systems Act, 2007: Penalty for submission o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Parliament i.e. the Reserve Bank of India Act, 1934. As a part of its functions, RBI administers various Acts. To reiterate, it is hereby submitted that penalties, categorized under two parts, on which the subject advance ruling is being filed are as under: Category A: Penalty, late fees/penal interest, fine of the nature levied and collected by RBI for contravention or violation of provisions of Law. Category B: Penalty of the nature for non-performance or under-performance as per contractual agreement with third party vendors. 2.1) Submissions with respect to penalties under Category A 2.1.1) We are providing herewith our detailed submission with regard to non-levy of GST on the penalties as enumerated under Category A viz. Penalty, late fees/penal interest, fine of the nature levied and collected by RBI for contravention or violation of provisions of Law. In this regard, reference is invited to Circular No. 178/10/2022-GST dated 03 August 2022 (Tax Research Unit) (hereinafter referred as the CBIC Circular ) issued by CBIC wherein, inter alia, clarification has been provided in respect of non-applicability of GST on penalties imposed for violation of laws and collected for b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nalties, late fees/penal interest, fine, the relevant extracts from one of the circulars issued by RBI are given below: Relevant extracts of Circular vide Folio no. DCM (CC) No. G-4/03.35.01/2022-23 dated 1 April 2022 issued by RBI (Copy of circular attached as Annexure D) reads as follows: a. Para 5.2.3: As the intention behind the levy of penal interest/ penalty is to inculcate discipline among banks so as to ensure prompt/correct reporting, requests by banks for waiver of penal interest on grounds that delayed/wrong/non-reporting did not result in utilization of the Reserve Bank s funds or shortfall in the maintenance of CRR/SLR or that they were the result of clerical mistakes, unintentional or arithmetical errors, first time error, inexperience of staff etc., shall not be considered as valid grounds for waiver of penal interest. b. Para 3.3 Delayed reporting where currency chests had Net Deposit : Penal interest at the prevailing rate for delayed reporting of the instances where the currency chest had reported net deposit shall not be charged. However, in order to ensure proper discipline in reporting currency chest transactions, a flat penalty of 50,000 shall be levied on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of non-performance or under-performance as per contractual agreement with vendors. 2.2.1. In this regard, reiterating the submission under Para 4 of this Annexure, reference is again invited to Circular No. 178/10/2022-GST dated 03 August 2022 (Tax Research Unit) issued by CBIC wherein, inter alia, clarification has been provided in respect of non-applicability of GST on penalties imposed for violation of laws and collected for breach of contract by discussing the scope of the entry at para 5 (e) of Schedule II of CGST Act. In this regard, specific reference is invited to relevant extracts of Para 7.1 of the CBIC Circular, whereby CBIC has made the following observation: 7.1 Breach or non-performance of contract by one party results in loss and damages to the other party. Therefore, the law provides in Section 73 of the Contract Act, 1972 that when a contract has been broken, the party which suffers by such breach is entitled to receive from the other party compensation for any loss or damage caused to him by such breach. The compensation is not by way of consideration for any other independent activity; it is just an event in the course of performance of that contract........... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of GST. 3) Submission of the Jurisdictional Officer: Officer relied upon the Circular no. 178/10/2022-GST dated 03rd August 2022, content of para 7.1 to 7.1.5. and submitted its opinion as under, The payments received in the form of penalties, late fees/penal interest, fine of the nature, levied and collected by RBI, for contravention or violation of provisions of Law or Penalty of the nature for non-performance or under-performance as per contractual agreement by RBI with third party vendors are not taxable as such payments do not constitute consideration for a supply. (Emphasis supplied) 4) Hearing - Preliminary hearing in the matter was held on 30 04.2024. Mrs. Ankita Goel, C.A. Appeared, and requested for admission of the application. Jurisdictional Officer Mrs. Radha Rajiv Ugale, MUMBAI-LTU-547, LTU-4, MUMBAI-SOUTH-EAST also appeared. The application was admitted and called for final hearing on 18.06.2024. Mrs. Ankita Goel, C.A. Appeared, and requested for admission of the application. Jurisdictional Officer Mrs. Radha Rajiv Ugale, MUMBAI-LTU-547, LTU-4, MUMBAI-SOUTH-EAST also appeared. 5) Findings, observations, discussion and decision. 5.1) Uncontroverted facts of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyment of shredder and currency machines, where such machines have a downtime or there is faulty machine, RBI recovers penalty amount from such vendors in terms of the underlying contract. Similarly, there can be various other services which RBI may avail from a vendor under a contractual agreement wherein the terms can provide for recovery or levy of penalty on or from such vendor for non-performance or underperformance of the services desired to be availed by RBI. a. Extract of one of such contracts with a vendor M/s Giesecke and Devrient India Pvt Ltd dated 09 August, 2022, wherein the contract provides for levy of penalty on the aforementioned vendor for non-performance or under-performance as per the terms of the contract. Para 5.2 of the contract reads as under: - Para 5.2 Downtime Penalty The systems shall not be non-functional for more than 4 hours in a week per 8-hour shift. In case of system remaining non-functional beyond 04 hours during a week on account of any breakdown due to System failure/ repairs/ settings of the CVPS, penalty will be imposed as under. In the backdrop of these facts RBI has raised following questions: 5.2) Question no 1. Whether the penalties, late ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olation but for not tolerating, penalizing and deterring such violations. There is no agreement between the Government and the violator specifying that violation would be allowed or permitted against payment of fine or penalty. There cannot be such an agreement as violation of law is never a lawful object or consideration. The service tax education guide issued in 2012 on advent of negative list regime of services explained that fines and penalties paid for violation of provisions of law are not considerations as no service is received in lieu of payment of such fines and penalties. Decision : - Penalty, late fees, penal interest, fine etc. levied and collected by RBI for contravention or violations of various laws administered by RBI are for the purpose of maintaining discipline and deterrence in the regulatee banks, non-banking financial institutes other institutes. Therefore, squarely are covered by explanation given para 7.4 of the aforesaid circular and as explained in the FAQ referred above as answer to question no. 49. The principal laid down in the circular is applicable to the penalties etc. levied by RBI for contravention of provisions of law as stated in para 1.4. We are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of performance of that contract. 7.1.4 In this background a reasonable view that can be taken with regard to taxability of liquidated damages is that where the amount paid as liquidated damages is an amount paid only to compensate for injury, loss or damage suffered by the aggrieved party due to breach of the contract and there is no agreement, express or implied, by the aggrieved party receiving the liquidated damages, to refrain from or tolerate an act or to do anything for the party paying the liquidated damages, in such cases liquidated damages are mere a flow of money from the party who causes breach of the contract to the party who suffers loss or damage due to such breach. Such payments do not constitute consideration for a supply and are not taxable. 7.1.5 Examples of such cases are damages resulting from damage to property, negligence, piracy, unauthorized use of trade name, copyright, etc. Other examples that may be covered here are the penalty stipulated in a contract for delayed construction of houses. It is a penalty paid by the builder to the buyers to compensate them for the loss that they suffer due to such delayed construction and not for getting anything in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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