The Hon’ble Appellate Authority for Advance Ruling (“AAAR”) upheld the ruling given by the Advance Ruling Authority (“AAR”) 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, 2017 (“CGST Act”), and will attract GST.
Facts:
M/s. Bajaj Finance Limited (“the Appellant”) is a non-banking financial company and is inter alia 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.
The Appellant, inter alia, 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 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
In case of delay in repayment of EMI by the customers, the Appellant collects penal/default interest (“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.
Issues involved:
- 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 June 28, 2017, Sr. No. 27 of Maharashtra State Notification No. 12/2017-State Tax (Rate) dated June 29, 2017, and Sr. No. 28 of Notification No. 9/2017-Integrated Tax (Rate) dated June 28, 2017?
- 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?
Held:
The Hon’ble AAAR, Maharashtra vide MAH/AAAR/SS-RJ/24/2018-19 dated March 14, 2019 held:
- The agreement between appellant and customers has clearly defined the terms therein and the terms Default Interest’, ‘Penal Charges’ and ‘Bounce Charges’ are defined separately and therefore are exclusive of each other and the penalty recovered by the appellant does not get covered by the term ‘Penal Interest’ as used by the appellant in his ground of appeal.
- Further, it was observed that clause 5(e) of the Schedule II of the CGST Act includes the activities to be treated as services and it covers the very activity in the form of expression “to tolerate an act or a situation” and thereby an act of tolerating delay in payment of EMI is brought into ambit of supply by treating it as supply of services. There shall not be confusion in the mind of anyone that legislature intentionally brought this activity of tolerating an act in the scope of supply of services – the very activity of tolerating act or situation of delay in payment of EMI is covered under clause 5 (e) of the Schedule II without such obligation as contended by the appellant.
Therefore, 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.
Citation: [TS-564-AAAR-2019-NT]