Brief facts of the case:
1. The applicant M/s. Enpay Transformers Components India Pvt. Ltd. (hereinafter referred as Enpay, India) is engaged in the business of manufacturing and supplying transformer components.
2. The Company (Enpay, India) is importing goods from its Holding company situated at Turkey (hereinafter referred as Enpay, Turkey) for which the payment terms is 120 days from date of invoice and if company fails to pay on or before due date, the holding company will charge interest on late payment.
3. In support to this, Holding company has obtained bank credit facility from bank situated in Turkey on behalf of Enpay, India and Holding company has paid Stamp tax as their land rules and they have been raised as reimbursement invoice of same payment to ENPAY India.
4. The applicant has submitted a letter from supplier (Enpay, Turkey) stating that no markup was charged for the reimbursement of stamp tax paid.
Questions sought in AAR:
a. Whether liability to pay GST on reverse charge arises if amount is paid as interest on late payment of invoices of imported goods? If yes, then at what rate?
b. Whether liability to pay GST on reverse charge arises if amount is paid for reimbursement of Stamp tax paid as a pure agent by M/s. Enpay, Turkey on our behalf?
Legal provisions (The CGST Act, 2017) referred by AAR:
Section 7(1)(d) – Supply includes the activities to be treated as supply of goods of supply of services as referred to in Schedule II.
Entry No. 5(e) of the Schedule II states agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act
Section 15(2)(d) – The value of supply includes interest or late fee or penalty for delayed payment of any consideration for any supply
Section 2(31)(b) – Consideration includes the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government
Rule 33 Value of supply of services in case of pure agent–Notwithstanding anything contained in the provisions of this Chapter, the expenditure or costs incurred by a supplier as a pure agent of the recipient of supply shall be excluded from the value of supply, if all the following conditions are satisfied, namely,-
(i) the supplier acts as a pure agent of the recipient of the supply, when he makes the payment to the third party on authorization by such recipient;
(ii) the payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service; and
(iii) the supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account.
AAR Ruling (including Discussions & Findings)
a. AAR is of view that foreign buyer (Enpay, Turkey) has tolerated the act of receiving payment late in respect goods imported by the applicant and therefore stated that applicant is liable to pay GST on reverse charge basis on the interest amount charged on account of late payment of imported goods as it constitutes supply considering the section 7(1)(d) read with Entry No.5(e) of the Schedule II of the CGST Act, 2017 as mentioned above.
Further, AAR stated that interest charged paid will be covered under value of supply of goods imported by the applicant and therefore rate of GST will be the same as the rate of IGST levied on the imported goods. (Refer section 15(2)(d) mentioned above)
b. Since applicant has not produced any document, agreement or contract which proves that the applicant has authorized the supplier (Enpay, Turkey) to make payment to third party (Citi Bank) on their behalf and which results into non-fulfillment of the conditions of Rule 33 of the CGST Rules, 2017 as provide above.
Further, AAR states that mere production of letter issued by supplier (Enpay, Turkey) stating that no markup was charged for reimbursement of stamp tax paid can be treated as documentary evidence. Thus, the applicant is liable to discharge on amount paid for reimbursement of Stamp tax paid by the supplier (Enpay, Turkey).
Our opinion is basically similar to the ruling provided by Gujarat AAR despite the fact the AAR authority has considered the omitted provision of the CGST Act, 2017 i.e. Section 7(1)(d).
As we know, Section 7(1)(d) has been deleted and new section 7(1A) has been substituted via CGST Amendment Act, 2018 which has been reproduced as below:
“(1A) where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.
Now, in order to construct supply, we can’t refer Schedule II directly. But since definition of supply is inclusive andconjunct reading of the provisions of section 7 & section 2(31), charges paid in regard to tolerating act can be considered as supply of services and accordingly GST will be applicable on these services. Moreover, considering department’s revenue biased approach and several Advance Rulings stating liquidated damages amounts to supply, it can be expected that department will not miss any chance of charging GST on liquidated damages; therefore the above mentioned understanding of this transaction will keep the taxpayer on safer side. Although Advance Rulings are binding to the applicant only, but department’s stand may be derived thereon.
However, one may consider different view.