Penal Interest

GS/ADMN/2019                                                       Dated. 05.08.2019

To     

          The Principal Chief Commissioner of Central Tax, Central Excise & Customs

          Thiruvanathapuram Zone, I.S. Press Road, Cochin 682018

Sir,

          Sub:Instructions issued on tax liability on the value of Penal / Default

Interest collected as an additional interest on delay in payment by NBFC

and chitties – Reg

Kind attention is invited to letter C No. IV/16/148/2018/CC(TZ)/IVC dated 16.11.2018 wherein relying on the Maharashtra Advance Authority Ruling (AAR) order on Penal / Default Interest collected as an additional interest on delay in payment by NBFC and chitties vide GST-AAR-22/2018-19/B-85 Mumbai dated 06.08.2018, it was pointed out that similar transaction was taxable under Section 66E(e) of the Finance Act,1994 in respect of Penal / Default interest charged by NBFC and other chitties and directions issued to ensure that these transactions were brought to the tax net both under GST as well as the erstwhile Service Tax regime.

In this regard, the following is brought to notice for kind consideration:

1.    SECTION 103 of the CGST Act, 2017 specifies that the Applicability of the advance ruling pronounced by the Authority or the Appellate Authority is binding only on the applicant who had sought the advance ruling in respect of any matter referred to in sub-section (2) of section 97 and on the concerned officer or the jurisdictional officer in respect of the applicant.

2.    SECTION 15 of the CGST Act, 2017 specifies that the Value of taxable supply  of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply and that it would inter alia include the interest or late fee or penalty for delayed payment of any consideration for any supply

3.    Circular No. 102/21/2019-GST dated 28.06.2019 clarified the applicability of GST on additional / penal interest and specified that the transaction of levy of additional / penal interest in the second example (reproduced at the end of the paragraph)given would not fall within the ambit of entry 5(e) of Schedule II of 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”, as this levy of additional / penal interest satisfies the definition of “interest” as contained in notification No. 12/2017- Central Tax (Rate) dated 28.06.2017.(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. Clarification:  The additional / penal interest is charged for a transaction between Y and M/s ABC Ltd., and the same is getting covered under Sl. No. 27 of notification No. 12/2017- Central Tax (Rate) dated 28.06.2017. Accordingly, in this case the 'penal interest' charged thereon on a transaction between Y and M/s ABC Ltd. would not be subject to GST, as the same would be covered under notification No. 12/2017-Central Tax (Rate) dated 28.06.2017. The value of supply of mobile by X to Y would be Rs. 40,000/- for the purpose of levy of GST.)

4.    Under the provisions of the erstwhile Service Tax laws too, the value of the taxable service was the gross amount charged and Rules 5 & 6 of the Service Tax (Determination of Value) Rules, 2006 prescribed the Inclusion in or exclusion from value of certain expenditure or costs and Cases in which the commission, costs, etc., will be included or excluded respectively. Specifically not to be included in the taxable value was interest on delayed payment of any consideration for the provision of services or sale of property, whether moveable or immoveable as per the provisions of Rule 6(2) (iv) of the Rules ibid. (w.e.f 01.07.2012)

          In the light of the specific exclusion from the taxable value as highlighted above, it is opined that the instructions issued by the letter C No. IV/16/148/2018/CC(TZ)/IVC dated 16.11.2018 is bad in law to the extent of application of the Maharashtra AAR to erstwhile Service Tax cases and it is requested that the said directions be withdrawn as far as Service Tax is concerned in order to avoid unnecessary and futile litigation.

         

                                                                             Yours faithfully

                                                                             ARUN ZACHARIAH.P

                                                                             GENERAL SECRETARY

Copy submitted to:

          The Principal Commissioner of Central Tax & Central Excise

          Cochin Commissionerate

          The Principal Commissioner of Central Tax & Central Excise,

          Thiruvanathapuram Commissionerate

          The Commissioner of Central Tax & Central Excise,

          Calicut Commissionerate

          The Commissioner of Central Tax & Central Excise (Audit)

          Cochin