Sachin Mishra & Mahi Agrawal – [2024] 163 taxmann.com 736 (Article)

Interest payments made by borrowers to lenders for the time value of money lent are generally exempt from Goods and Services Tax (GST) in India. However, the treatment of penal interest or charges levied for breaching contract terms, delayed payments, or prepayments has been a subject of debate.

Clarifications issued by the GST Council and the Ministry of Finance have provided guidance on these matters. Penal interest on loan transactions is generally exempt, aligning with the exemption for loan interest itself. Conversely, penal charges on delayed payments for goods or services supplied are included in the taxable value and liable for GST.

However, a unique scenario arises when a financier makes an advance payment on behalf of a buyer to a seller, and the buyer subsequently repays the financier after a period, potentially with penal interest for any delays. Illustration-I: A warehouse operator (the financier) advances payment on behalf of a retailer (the buyer) to a supplier (the seller) for a bulk order of goods. The supplier delivers the goods to the warehouse, where they are stored temporarily. The retailer later repays the warehouse operator for the advance, and if there are any delays, a penal interest is charged.

This situation differs from a traditional loan, as the financier is not providing a loan but facilitating an advance payment. The tax treatment of penal interest in such tripartite transactions has been addressed here. This article delves into the nuances of this specific scenario, examining the rationale behind the tax treatment and its implications for businesses involved in such transactions.

Under the GST regime, services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount, are exempt from GST under Sr. No. 27 of the Notification No. 12/2017- Central Tax (Rate) dated 28.06.2017 (hereinafter referred to as ‘the Notification’). Further, definition clause 2 (zk) of the Notification states “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.

Making payments on behalf of someone else can be considered as a loans/advances under certain circumstances. Indian courts have recognized that such payments can amount to a loan, provided there is clear evidence of an agreement or understanding that these payments are to be repaid. This can include documentary evidence, oral agreements, or other forms of proof that establish the intent of the parties involved.

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Case Details: Lohum Cleantech (P.) Ltd. v. Assistant Commissioner of Revenue - [2024] 163 taxmann.com 164 (Calcutta)

Judiciary and Counsel Details

• Raja Basu Chowdhury, J.
• Ankit Kanodia, Ms Megha Agarwal & Jitesh Sah for the Petitioner.
• Anirban Ray, Ld. GP, T. M. Siddiqui, Tanoy Chakraborty & Saptak Sanyal for the Respondent.

Facts of the Case

The registration of assessee was cancelled on ground that it did not conduct any business from declared place of business. It filed appeal before the Appellate Authority but couldn’t succeed. Thereafter, the assessee filed writ petition since Appellate Tribunal was not constituted and submitted that a joint inspection was held at its place of business and report prepared by State Tax Officer indicated that entity was very much existent and carrying out business from said place of business.

High Court Held

The Honorable High Court noted that as per show cause notice, one of the primary grounds based on which the cancellation was proposed was that the assessee did not conduct any business from the declared place of business. A joint inspection was carried out at the place of business of assessee and report clearly indicated that the entity was very much existent and carrying out business from the said place of business. Therefore, it was held that the order cancelling registration was to be set aside and registration of assessee was to be restored.

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Circular No.211/5/2024-GST dated June 26th, 2024

The CBIC has clarified that in case of supplies received from unregistered suppliers where tax has to be paid by the recipient under reverse charge mechanism (RCM), the relevant financial year for calculation of time limit for availment of ITC under section 16(4) of CGST Act will be the financial year in which the invoice has been issued by the recipient.

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Circular No.222/16/2024-GST dated June 26th, 2024

The CBIC has clarified that in case where full upfront payment is made by the telecom operator, GST would be payable when the payment of the said upfront amount is made or is due, whichever is earlier.

However, in cases where deferred payment is made by the telecom operator in specified instalments, GST would be payable as and when the payments are due or made, whichever is earlier.

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Circular No.221/15/2024-GST dated June 26th, 2024

The CBIC has issued clarification regarding the time of supply in respect of supply of services of construction of road and maintenance thereof of National Highway Projects in Hybrid Annuity Mode (HAM) model, where certain portion of Bid Project Cost is received during construction period and remaining payment is received through deferred payment (annuity) spread over years.

It is clarified that the tax liability on the concessionaire under the HAM contract, including on the construction portion, would arise at the time of issuance of invoice, or receipt of payments, whichever is earlier, if the invoice is issued on or before the specified date or the date of completion of the event specified in the contract, as applicable.

If invoices are not issued on or before the specified date or the date of completion of the event specified in the contract, tax liability would arise on the date of provision of the said service (i.e., the due date of payment as per the contract), or the date of receipt of the payment, whichever is earlier.

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Circular No.220/14/2024-GST dated June 26th, 2024

The CBIC has clarified that the custodial services provided by banks or financial institutions to FPIs are not to be treated as services provided to ‘account holder’ and therefore, the said services are not covered under Section 13(8)(a) of the IGST Act. Therefore, the place of supply of such services has to be determined as per sub-section (2) of section 13 of the IGST Act.

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The post CBIC’s Clarification on Place of Supply Applicable for Custodial Services Provided by Banks to Foreign Portfolio Investors appeared first on Taxmann Blog.

Circular No.219/13/2024-GST dated June 26th, 2024

The CBIC has provided clarification that availment of input tax credit is not restricted in respect of ducts and manhole used in network of optical fiber cables (OFCs), either under clause (c) or under clause (d) of sub-section (5) of section 17 of CGST Act.

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Circular No.213/7/2024-GST dated June 26th, 2024

The CBIC has clarified that no supply of service would take place between the foreign holding company and the domestic subsidiary company where the foreign holding company issues ESOP/ESPP/RSU to the employees of domestic subsidiary company, and the domestic subsidiary company reimburses the cost of such securities/shares to the foreign holding company on cost-to-cost basis.

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Circular No.212/6/2024-GST dated June 26th, 2024

The CBIC has clarified that till the time a functionality/facility is made available on the common portal, the supplier may procure a certificate from the recipient of supply, issued by the Chartered Accountant (CA) or the Cost Accountant (CMA), certifying that the recipient has made the required proportionate reversal of input tax credit at his end in respect of such credit note issued by the supplier.

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The post CBIC Provides Mechanism for Providing Evidence of Reversal of ITC on Discount by the Recipient appeared first on Taxmann Blog.

Circular No.214/8/2024-GST dated June 26th, 2024

The CBIC has clarified that the amount of the premium for taxable life insurance policies, which is not included in the taxable value as determined under rule 32(4) of CGST Rules, cannot be considered as pertaining to a non-taxable or exempt supply and therefore, there is no requirement of reversal of input tax credit.

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