The Hon’ble AAAR, Maharashtra upholds the order of AAR which held that ‘Bounce Charges’ collected from customers/borrowers in case of dishonor of instruments on the ground of insufficient funds would 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. All these loans are interest bearing loans.
The Appellant enters into agreements with borrower/customers for providing loans to them. The loan agreements provide for the repayment of the outstanding dues/Equated Monthly Instalments (“EMI”) through cheque/ Electronic Clearing System (‘ECS’)/ National Automated Clearing House (‘NACH’) or any other electronic or clearing mandate.
In case of dishonor 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. dishonor ₹ 350/- for each dishonor of cheque/ECS. The bounce charges are collected only from the defaulting customers and not from all customers.
Issue involved:
Whether the Bounce Charges collected by the Appellant should interest-bearing as a supply under the GST regime?
Held:
The Hon’ble AAAR, Maharashtra observed Entry 5 (e) of Schedule ll of Central Goods and Services Act, 2017 (“CGST Act”) and vide Order No. MAH/AAAR/SS-RJ/25/2018-19 dated March 14, 2019, held:
- The default in payment of EMIs as also the bouncing or dishonor of the cheque are deemed to default under the provisions of the agreement entered between the appellant and their customers. On any default or breach of the agreement, the remedies available with the appellant are either to recall loan or cancellation of the agreement, or to initiate legal proceedings under the Negotiable Instruments Act or under the Payments and Settlement Act, or taking possession of the product, etc. However, the appellant instead of taking recourse to the remedial provisions in the agreement are tolerating the act or the situation of bounce/dishonor of the cheque / ECS / NACH, tendered by the customers for repayment of EMIs, by imposing / recovering a certain amount as ‘bounce charges’. Hence, such activity of tolerance of situation of bounce / dishonor of cheque is adequately covered by entry 5 (e) of Schedule ll.
- The Appellant is entitled to recover the bounce charges from such defaulting borrowers. It is adequately clear that there is mutual agreement between the Appellant and the borrower that whenever this event of default occurs, the Appellant can tolerate this event against some fixed agreed amount. Thus, here it can be said that the Appellant has tolerated an act or situation of default by the borrowers, for which they are recovering some amount in the name of the bounce charges, wherever the repayment instruments, discussed above, have been dishonored. Hence, such activity of tolerance is against consideration.
- On Appellant’s argument that bounce charges would be exempt from GST under Serial No. 27 of the Notification No. 12/2017-Central Tax (Rate) dated June 28, 2017, read with Maharashtra State Notification No. 12/2017-State Tax (Rate) dated June 29, 2017, court held that the bounce charges collected by the Appellant is clearly not on account interest for the delayed payment of the consideration for their supply, but for dishonor of the repayment instruments, such as bouncing of the Cheques issued by the borrowers or the failure of the ECS for non-availability of the sufficient fund in the borrower’s account. Further, the Appellant is recovering separate amount at the fixed rate of interest under the head of “default interest”, as quoted in the loan agreement, on the delayed payment of the EMI by the borrowers – the “bounce charges” in the present case are not covered in the interest meant for the purpose of the exemption and thereby not entitled for the exemption as claimed by the appellant.
Therefore, 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.
Citation: TS-565-AAAR-2019-NT
Relevant provisions:
Entry 5 (e) of Schedule ll of CGST Act
“5. Supply of services
The following shall be treated as supply of services, namely:
(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; and”