The provisions of the GST Law allows a person to apply for advance ruling to get specific points clarified from the Authority for Advance Ruling (AAR). The AAR is expected to clarify the question(s) raised in the application. However, if the Applicant or his jurisdictional officer is not satisfied with the ruling pronounced by the AAR, the GST Law enables the applicant to file an appeal before the Appellate Authority for Advance Ruling (AAAR). The AAAR may, after giving the parties to the appeal an opportunity of being heard, pass such order as it thinks fit, confirming or modifying the ruling appealed against.
Recently, Bajaj Finance Limited (“Applicant”), has made an application before the Maharashtra AAR. The application has been made to seek clarifications on the below questions:
a. Whether the activity of collecting penal interest by the Applicant would amount to a taxable supply under the GST regime?
b. If answer to above question is affirmative, then whether such penal interest is to be treated as interest for the purpose of exemption under SI. No. 27 of Notification No. 12/2017-Central Tax (Rate) dated 28th June 2017?
While answering to the above questions in the said case which is reported in [2018] 99 taxmann.com 236 (AAR – MAHARASHTRA), the Maharashtra AAR, has pronounced ruling as follows:
a. As per Section 7(1)(d) of CGST Act, 2017 the activities to be treated as a supply of good or supply of services as referred in the schedule II to the CGST Act, 2017;
b. As per Para 5(e) of said schedule II, “agreeing to the obligation to refrain front an act, or to tolerate an act or a situation, or to do an act”.
c. The applicant has agreed to do an act (the act of tolerating, of delayed payment of EMIs by their customers) and such act, by the applicant, squarely falls under clause 5(e) of the Schedule II of CGST Act, 2017 mentioned above and therefore the amounts received by the applicant for having agreed to do such an act, would be treated as supply of service;
d. The amount of penal charges cannot be said to form a part of interest on “loan”, “deposit” or “advance”. In fact, it is recovered/imposed only because the loanee has delayed the payment of EMI (which consists of the principal amount and interest amount).
e. Therefore, penal interest collected by the Applicant would not be eligible for exemption under SI. No. 27 of Notification No. 12/2017-Central Tax (Rate) dated 28th June 2017.
The above ruling pronounced by Maharashtra AAR has been upheld by the Maharashtra AAAR which is reported in [2019] 108 taxmann.com 1 (AAAR-MAHARASHTRA).
Later on, the CBIC has issued Circular No. 102/21/2019-GST dated 28th June 2019 to clarify the applicability of GST on additional or penal interest. The said circular clarifies the following:
a. As per the provisions of Section 15(2)(d) of the CGST Act, 2017, the value of supply shall include “interest or late fee or penalty for delayed payment of any consideration for any supply”.
b. In terms of Sl. No. 27 of Notification No. 12/2017-Central Tax (Rate) dated 28th June 2017, “services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services)” is exempted.
c. As per clause 2(zk) of the Notification No. 12/2017-Central Tax (Rate) dated 28th June 2017, “interest’ means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) but does not include any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised;”.
d. The transaction of levy of additional or penal interest does not fall within the ambit of entry 5(e) of Schedule II of the CGST Act, 2017 i.e. “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”.
e. Any penal interest charged for delay in repayment of loan or payment of interest will be exempt from GST.
f. Any penal interest in respect of delay in payment for consideration of supply of goods or services or both, will not be exempted from GST.
From the above referred circular, it is very clear that penal interest or additional interest collected, in respect of delay in repayment of loan or payment of interest will be exempt from GST. The circular also states that these charges would not fall within the ambit of entry 5(e) of Schedule II of the CGST Act, 2017 i.e. “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”.
Given the above, it is very clear that this circular is overriding the ruling pronounced by Maharashtra AAAR, in the case of Applicant to the extent it was pronounced that penal interest will not be exempted from GST.
Now, the question is whether the Applicant should follow the circular or ruling pronounced by AAAR?
In this regard, attention is invited to section 103 of CGST Act, 2017 which provides that unless the law, facts or circumstances supporting the original advance ruling have changed, the advance ruling pronounced by the AAR or the AAAR shall be binding only on:
a. The applicant who had sought it in respect of any matter referred for advance ruling;
b. The concerned officer or the jurisdictional officer in respect of the applicant.
The circular issued after pronouncing of ruling cannot be said to be the change in law, facts or circumstances supporting the original advance ruling.
Further, there is no further mechanism provided in the GST Law in case the Applicant or the concerned officer or the jurisdictional officer is aggrieved by the ruling pronounced by the AAAR. In the case of JSW Energy Ltd. Reported in [2019] 108 taxmann.com 27 (Bombay), the Hon’ble Bombay High Court recently held that the circumstances which the Statutes in question have provided for no further appeal against the decision of the AAAR, will have to be respected. Therefore, the validity or otherwise of the orders of AAAR will have to be examined by applying the principles of judicial review and not the principles which apply in case of an appeal.
On the basis of above, it can be said that the ruling pronounced by Maharashtra AAAR is binding on the Applicant and hence, is liable to pay GST on penal interest recovered from the customers.
However, it is pertinent to note that it is a settled position of law that the circulars issued by the CBIC are binding on the Department and not on the assesse. This view has been repeatedly upheld by various courts including Hon’ble Supreme court. In the case of Ratan Melting Wire Industries (2008) 12 STR 416 (SC), Hon’ble Supreme Court has held that the departmental circulars are binding on the officers of CBIC and the same should be followed strictly.
In view of above settled position of law, the concerned officer or jurisdictional officer is bound to follow the circular. Therefore, he cannot state that the penal interest or additional interest will not be exempted from GST. At the same time, due to binding effect of the ruling pronounced by AAAR, the concerned officer or jurisdictional officer may take a view that the penal interest or additional interest collected by the Applicant, will not be exempted. In this regard, attention is invited to Article 14 of the Constitution of India which states that “The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.” Therefore, the jurisdictional officer cannot take one view with other assesses and other view with the Applicant in the case of same facts.
Given the above, in our view, the Applicant should follow the Circular since, the GST officers (including the concerned officer or jurisdictional officer of the Applicant) will be bound to follow the circulars issued by CBIC, to the extent it is contrary to ruling pronounced by AAR or AAAR, as the case may be.
However, the risk of litigation in this regard cannot be ruled out. Hence, the immediate clarification from the Government’s side in this regard, would be appreciated.
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