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 bounce charges recovered by the Appellant from their borrowers on account of the default of the borrowers, where their repayment instruments get dishonored due to lack of the sufficient fund in their bank account, will attract GST.
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. All these loans are interest bearing loans.
B. The Appellant, inter alio, 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 only from the defaulting customers and not from all customers.
D. The relevant extract of clauses of a sample auto loan agreement in respect of bounce charges is reproduced below for ease of reference:
“I. DEFINITIONS AND ABBREVIATIONS:
“Bounce Charges” shall mean, dishonor of post-dated cheque / ECS/ ADM/ entrusted by the borrower / co appellant / co borrower for clearance of EMI (monthly instalments) or non-payment of installment on or before respective due date for other modes.
II. TERMS OF THE LOAN:
3. The Borrower agrees and confirms that:
…………(iv) BFL is entitled to levy penalty as follows on default:
(a) Bounce Charges of up to Rs.350/- on each Bounce 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 ,
E. The amount of bounce charges collected from the customers are accounted by the Appellant in its core accounting platform i.e. SAP under General Ledger Code 60000150.
F. Under the GST law implemented from July 01, 2017, the Appellant is of the view that bounce charges collected by it from the customers (for the breach of the terms and conditions of the loan agreement) are in the nature of penalty/ liquidated damages, and therefore, the same is not a consideration for supply of service and hence, should not be subjected to the levy of GST. However, considering the ambiguity on taxability of penal/ bounce charges 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 ‘Ld. AAR’) on 09.05.2018, on the following question:
“Whether the Bounce Charges collected by the Appellant should be treated as a supply under the GST regime?”
G. The Ld. AAR passed the Order holding that the bounce charges collected 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.
H. Aggrieved by the impugned order dated 06.08.2018, the Appellant has filed this 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 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 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.
(ii) 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.
(iii) The present issue of Bounce Charges is squarely covered by the Australian GSTD 2013/1, according to which, the payment of a ‘failed payment fee’ (similar to bounce charges) is not a consideration for supply.
(iv) 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. Therefore, any treatment given to the main consideration for supply (i.e. interest on loans) shall also be equally applicable to the penalty for delayed payment of such consideration (i.e. bounce charges). Hence, the bounce charges would also be exempt from GST, as in the case of interest on loans.
2. It is submitted that the above submissions are very crucial to determine whether the bounce charges collected by the Appellant are 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:
