In re Bajaj Finance Limited (GST AAAR Maharashtra)
The Appellate Authority for Advance Ruling upheld the ruling given by the Advance Ruling Authority by observing that the penal charges / penalty recovered by the Appellant from their borrowers on account of the delay in payment of EMI by borrowers are adequately covered under clause 5 (e) of the Schedule II of the CGST Act, and will attract GST.
Read AAAR Order on Rectification Application- No GST on additional/Penal interest for delayed Loan EMI payment
FULL TEXT OF ORDER OF APPELLATE AUTHORITY OF ADVANCE RULING, MAHARASHTRA
At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provisions under the MGST Act.
The present appeal has been filed under Section 100 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and MGST Act”] by Bajaj Finance Limited(herein after referred to as the “Appellant”) against the Advance Ruling No. GST-ARA-22/2018-19/B-85 dated 06.08.2018.
BRIEF FACTS OF THE CASE
A. The Appellant is a non-banking financial company and is inter alio 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.
B. The Appellant, inter alba, enters into agreements with borrowers/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 with the Appeal.
C. The installment of a loan is computed taking into consideration the amount of loan, rate of interest, duration for a loan etc. Generally, EMI paid by the customer is a fixed amount paid at a specified date. EMI includes the amount of interest and the principal amount.
D. In case of delay in repayment of EMI by the customers, the Appellant collects penal/default interest (hereinafter referred to as ‘penal interest’) as an additional interest for the number of days of delay as per terms of the agreements executed with the customers. The penal interest is calculated at a fixed percentage on the overdue loan amounts of the customer. The percentage of penal interest varies from customer to customer, and generally ranges between 2% to 4% per month depending on the product.The illustrative copies of customer account statement reflecting the penal interest collected by the Appellant have been enclosed with the Appeal. Further, the sample working of the penal interest is also enclosed herewith.
E. The relevant extract of clauses of a sample auto loan agreement in respect of penal interest is reproduced below for ease of reference:
“I. DEFINITIONS AND ABBREVIATIONS:
r. “Penal Charges” shall mean and include overdue charges on non-payment of installment on the due date.
II. TERMS OF THE LOAN:
3. The Borrower agrees and confirms that:
…………
(iv) BFL is entitled to levy penalty as follows on default:
(a) for continuing non-payment of amount due, a penalty not exceeding 3% per month on amount due calculated on pro-rata basis from due date till actually paid as per clause B of the schedule.
………….
Schedule forming part of Auto Loan agreement:
(B) Penal Charges for bounce up to Rs. 350/- per default/ per month & late payment penalty not exceeding 3% on amount due.”
F. The amount of penal interest collected from the customers are accounted by the Appellant in its core accounting platform i.e. SAP under General Ledger Code 60000150.
G. Under the GST law, the Appellant 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. However, considering the ambiguity on taxability under the GST law, as an abundant caution, the Appellant had filed an application for Advance Ruling before the Maharashtra Authority for Advance Ruling (hereinafter referred to the ‘Id. AAR’) on 09.05.2018, on the following questions:
“i) Whether the Penal Interest is to be treated as interest for the purpose of exemption under Sr. No. 27 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, Sr. No. 27 of Maharashtra State Notification No. 12/2017-State Tax (Rate) dated 29.06.2017, and Sr. No. 28 of Notification No. 9/2017-Integrated Tax (Rate) dated 28.06.2017?
ii) If the answer to the above is negative, whether the activity of collecting penal interest by the Appellant would amount to a taxable supply under the GST regime?”
H. The AAR passed the Order No. GST-ARA-21/2018-19/B-24 dated 06.08.2018 (hereinafter referred to as ‘impugned order’), holding that the penal interest charged by the Appellant amounts to supply of services under Sr. No. 5(e) of Schedule II to the CGST Act, and is therefore liable to GST.
I. Aggrieved by the impugned order dated 06.08.2018, the Appellant has filed this appeal, inter alio, on the following grounds which are urged without prejudice to each other.
GROUNDS OF APPEAL
1. The impugned AAR order is a non-speakinfl order and is liable to be set aside on this ground alone.
(i) Without prejudice to the submissions that the penal interest is an additional interest on loan, such penal interest is liable to be included in the value of main supply under Section 15(2)(d) of the CGST Act, and therefore, any treatment given to the main supply shall be given to the penal interest, and hence, shall be exempt from GST.
(ii) In any case, the penal interest charged by the Appellant is in the nature of penalty or liquidated damages for breach of contract, which does not amount to consideration for any contract, and therefore, there cannot be any supply of service.
(iii) Penal interest 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. 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 an act of non-payment or delayed payment by the borrower. The payment of penal interest 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 penal interest 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.
(iv) Even internationally, the damages received by way of compensation for termination or breach of a contract are not treated as a supply and therefore not subjected to GST/VAT levy.
2. It is submitted that the above submissions are very crucial to determine whether the penal interest collected by the Appellant is liable to GST. However, the impugned AAR order is completely silent on the above submissions and fails to provide any reasons/observations for not accepting the same.
3. While passing the impugned AAR order, the Ld. AAR was under an obligation to consider each and every submission of the Appellant and record the reasons for acceptance or rejection of every submission of the Appellant, in order to establish the linkage between the facts, and grant sanctity to the order. In this regard, reliance is placed on the following judgements of the Apex Court:
