In re Bajaj Finance Limited (GST AAAR Maharashtra)
The Appellate Authority for Advance Ruling, hereby, hold that the additional/Penal interest recovered by the Applicant from their customers against the delayed payment of monthly instalments of the loan extended to such customers, would be exempt from GST in terms of Sl. 27 of the Notification No. 12/2017-C.T. (Rate) dated 28.06.2017.
FULL TEXT OF ORDER OF APPELLATE AUTHORITY OF ADVANCE RULING, MAHARASHTRA
A. 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.
B. In the present case, appeal had 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” or Applicant interchangeably) against the Advance Ruling No. GST-ARA-22/2018-19/B-85 dated 06.08.2018, which was disposed of vide AAAR Order No. MAH/AAAR/SS-RJ/24/2018-19 dated 14.03.2019. However, the Appellant has filed the present application, under section 102 of the CGST Act, 2017 on 13.09.2019 for the rectification of the order dated 14.03.2019, issued by AAAR.
C. The issue involved in the aforesaid appeal relates to the question as to whether the penal interest charged by the Applicants, which is in the nature of interest on loans, from its customers is in the nature of tolerating an act in terms of entry 5( e) of Schedule II of the CGST Act, 2017 or whether the same is in the nature of additional interest and is exempt vide Serial No. 27 of the Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.
BRIEF FACTSOFTHE CASE
1. The Appellant is a non-banking financial company and is inter olio 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.
2. The Appellant, inter olio, 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.
3. 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.
4. 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.
5. The Applicants had contended that the amount charged in the nature of penal interest from its customers consideration received through the way of additional interest and the same would squarely fall under the exemption granted vide Serial No. 27 of the Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.
6. This Hon’ble Authority vide Final Order MAH/AAAR/SS-RJ/24/2018-19 dated 14.03.2019 rejected the appeal filed by the Applicants and held that the consideration received by the Applicants is for tolerating the act of its customers and would be covered by the entry 5( e) of Schedule II of the CGST Act, 2017.
7. The present application for rectification of mistake in the order passed by this Hon’ble Authority has been filed on the following grounds:
GROUNDS FOR RECTIFICATION OF MISTAKE
8. The Applicants in its appeal before this Hon’ble Authority had made various submissions stating that the additional interest charged from its customers would fall under the exemption granted vide Serial No. 27 of the Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.
9. The submissions made by the Applicants in their appeal as well as during the time of the hearing is summarized below for reference:-
(i) The Applicants are only engaged in the business of lending/financing to customers, and the amount charged as penal interest is nothing, but interest on loans, which is exempt from GST.
(ii) In any case, penal interest is liable to be included in the value of main supply under Section 15(2)(d) of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as ‘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.
(iii) In any case, the penal interest charged by the Applicants 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.
(iv) Penal Interest charged by the Applicants for the breach of contract by the customer, is not covered under the ambit of Deemed Services under clause (e) of Entry 5 of Schedule II to the CGST Act.
(v) Even internationally, the damages for breach of contract were not taxed.
10. This Hon’ble Authority after considering the above submissions had concluded that the consideration received by the Applicants is for tolerating the act of its customers and would be covered by the entry 5(e) of Schedule II of the CGST Act, 2017. In this regard, the Applicants pray this Hon’ble Authority to re-consider the aforesaid submissions of the Applicants and allow the present appeal.
11. It is humbly submitted that the Central Government vide its Circular No. CBEC-102/21/2019-GST dated 28.06.2019 has issued certain clarifications in respect of the issue as involved in the present appeal. Vide the above circular, it has been clarified that the transaction of levy of additional/penal interest does not fall within the ambit of entry 5 ( e) of Schedule II of the CGST Act, 2017 as such levies are in the nature of “interest” as covered by the Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017. The relevant portion of the said circular is reproduced below for reference:-
“Various representations have been received from the trade and industry regarding applicability of GST on delayed payment charges in case of late payment of Equated Monthly Instalments (EMI). An EMI is a fixed amount paid by a borrower to a lender at a specified date every calendar month. EMIs are used to pay off both interest and principal every month, so that over a specified period, the loan is fully paid off along with interest. In cases where the EMI is not paid at the scheduled time, there is a levy of additional/penal interest on account of delay in payment of EMI.
2. Doubts have been raised regarding the applicability of GST on additional penal interest on the overdue loan i.e. whether it would be exempt from GST in terms of SI. No. 27 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 or such penal interest would be treated as consideration for liquidated damages [amounting to a separate taxable supply of services under GST covered under entry 5(e) of Schedule II of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the CGST Act) i.e. “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”]. In order to ensure uniformity in the implementation of the provisions of the law, the Board, in exercise of its powers conferred by section 168 (1) of the CGST Act, hereby issues the following clarification. Generally, following two transaction options involving EMI are prevalent in the trade: –
Case -1: X sells a mobile phone to Y. The cost of mobile phone is Rs 40, 000/-. However, X gives Y an option to pay in installments, Rs 11,000/- every month before 10th day of the following month, over next four months (Rs 11,000/- *4 = Rs. 44,000/-). Further, as per the contract, if there is any delay in payment by Y beyond the scheduled date, Y would be liable to pay additional penal interest amounting to Rs. 500/- per month for the delay. In some instances, X is charging Y Rs. 40, 000/-for the mobile and is separately issuing another invoice for providing the services of extending loans to Y, the consideration for which is the interest of 2. 5% per month and an additional/penal interest amounting to Rs. 500/- per month for each delay in payment.
Case -2: X sells a mobile phone to Y. The cost of mobile phone is Rs 40,000/-. Y has the option to avail a loan at interest of 2.5% per month for purchasing the mobile from M/s. ABC Ltd. The terms of the loan from M/s. ABC Ltd. allows Y a period of four months to repay the loan and an additional/penal interest @ 1.25% per month for any delay in payment.
4. As per the provisions of sub-clause (d) of sub-section (2) of section 15 of the CGST Act, the value of supply shall include “interest or late fee or penalty for delayed payment of any consideration for any supply”. Further in terms of SI. No. 27 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 “services by way of (a) 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. Further, as per clause 2 (zk) of the Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, “‘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 utilized;”.
5. Accordingly; based on the above provisions, the applicability of GST in both cases listed in para 3 above would be as follows:-
