GST leviable on interest paid on late payment of invoices

The AAR Gujarat in the matter of M/S. Enpay Transformer Components India Private Limited [Advance Ruling No. GUJ/GAAR/R/01/2021, dated January 20, 2021] has held that Indian company is liable to pay GST on reverse charge basis for amount paid as interest to its holding foreign company on late payment of invoices of imported goods, as the same is to be included value of supply as per Section 15(2)(d) of the Central Goods and Services Act, 2017 ('CGST Act').

Facts

M/s. Enpay Transformers Components India Private Limited ('the Applicant') is a company engaged in the business of manufacturing and supplying Transformer components and is importing goods from M/s. Enpay Endstriyel Pzarlama ve Yatirim A.S., Turkey ('holding Company') for which the payment terms is 120 days from the date of invoice for import of goods and if the Applicant does not make the payment on due date, the holding Company charges interest on late payment.

The Applicant has obtained bank credit facility from CITI Bank based on the Corporate Guarantee issued by holding Company and the holding Company has paid stamp tax in Turkey as per their land rules and they have raised reimbursement invoice of said payment to the Applicant. They have submitted a copy of the said Corporate Guarantee.

The Applicant has contended that, the stamp duty paid by holding Company is neither intending to hold any title for it and not for the use of his own interest. Further, the holding Company has received only actual amount of stamp tax paid and the value paid as a reimbursement to holding Company should not be considered as import of services considering it as a payment made to pure agent and hence no GST on reverse charge basis should be liable to pay.

Issues

• Whether liability to pay GST on reverse charge basis arises if amount is paid as interest on late payment of invoices of imported goods?
• Whether liability to pay GST on reverse charge basis arises if amount is paid for reimbursement of stamp tax paid as a pure agent by holding Company on behalf of the Applicant?

Held

The AAR Gujarat in Advance Ruling No. GUJ/GAAR/R/01/2021, dated January 20, 2021 held as under:

• Analysed Section 7(1) and Schedule II of the CGST Act and noted that, the holding Company has tolerated the act of receiving payment after a lapse of a period of 120 days from the date of the invoice in respect of the goods supplied by them to the Applicant for which interest is to be paid by the Applicant, therefore, such act will be covered under the supply of services under Entry No. 5(e) of the Schedule II to the CGST Act. Further noted that, as per Section 15(2)(d) of the CGST Act, the value of supply also includes ‘interest or late fee or penalty for delayed payment of any consideration for any supply’.
• Stated that, the expenditure or costs incurred by the supplier i.e., holding Company as a pure agent of the recipient of supply shall be excluded from the value of supply, if , the supplier satisfies all the conditions envisaged in Rule 33 of the Central Goods and Services Tax Rules, 2017 ('CGST Rules').
• Observed that, the holding Company does not fulfil/satisfy all the conditions required for being a ‘Pure agent’ in terms of the Explanation to Rule 33 of the CGST Rules:
  • Condition 1- No document reproduced that proves that the Applicant has entered into contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both.
  • Condition 2- The Applicant has not provided any documentary evidence to prove that the supplier i.e., holding Company neither intends to hold nor holds any title to the services so procured as pure agent of the recipient of supply.
  • Condition 3- The services procured by the supplier i.e., holding Company are used for his own interest only as the bank guarantee entered into by them with the CITI Bank on behalf of the Applicant is in direct relation to the business connection/link that they are having with the Applicant by way of supply of goods to the Applicant.
  • Condition 4- Whether only actual amount of stamp duty has been received without any mark-up by the holding Company is not proved as the document produced are in foreign language.

Therefore, the expenditure or costs incurred by the holding Company cannot be excluded from the value of supply in terms of the provisions of Rule 33 of the CGST Rules and is liable to GST on reverse charge basis.

• Held that, the payment of interest by the Applicant and is liable to GST under the provisions of Section 15(2)(d) of the CGST Act and the rate of GST is liable to be paid on the interest, wouldbe the same rate as that of the IGST applicable on the goods supplied.
• Further held that, the Applicant is liable to pay GST on reverse charge basis on amount paid for reimbursement of stamp tax paid by the holding Company on behalf of the Applicant.

Our Comments

Earlier (before the Central Goods and Services (Amendment) Act, 2018) Section 7(1)(d) of the CGST Act included activities referred to in Schedule II to CGST Act, in the scope of supply. Thus, activities falling under paragraph 5(e) of Schedule II to the CGST Act (i.e., agreeing to the obligation to refrain from an act, or to tolerate an act or situation, or to do an act) were included in the scope of supply.

Thereafter, vide Central Goods and Services (Amendment) Act, 2018, Section 7(1)(d) of the CGST Act was retrospectively omitted and a new sub-section i.e., Section 7(1A) of the CGST Act was inserted retrospectively w.e.f. July 1, 2017. Consequently, all activities which were specified in Schedule II to the CGST Act would be only for determination of classification of transactions either as ‘supply of goods’ or supply of services’ but, it would be chargeable to GST only if such transaction qualify as a supply in terms of Section 7(1) of CGST Act.

In our view, the levy of GST on amount paid as interest on late payment of invoices of imported goods depends upon the 'test of supply' i.e., one has to satisfy that the same is itself a supply, then only GST could be levied on it in terms of the insertion of sub-clause (1A) in Section 7 of the CGST Act read with omission of sub-section (d) of Section 7(1) of the CGST Act.

The Schedule II of the CGST Act is confined to define as to what constitute supply of goods or supply of services and does not defines supply per se. Schedule II of the CGST Act has to be read along with Section 7 of the CGST Act, which means if an activity does not constitute a 'supply' in itself as per Section 7(1) of the CGST Act, mere coverage of the same under the entry Schedule II ibid cannot make it liable to GST.

Relevant Provisions

Section 7(1) and Section 7(1A) of the CGST Act

'Scope of supply-

(1) For the purposes of this Act, the expression 'supply' includes––

• all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
• import of services for a consideration whether or not in the course or furtherance of business and;
• the activities specified in Schedule I, made or agreed to be made without a consideration;

(1A) where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.'

Section 15(2)(d) of the CGST Act

'Value of taxable supply-

(2) The value of supply shall include–––

(d) interest or late fee or penalty for delayed payment of any consideration for any supply; and'

Rule 33 of the CGST Rules

'33. Value of supply of services in case of pure agent.-

Notwithstanding anything contained in the provisions of this Chapter, the expenditure or costs incurred by a supplier as a pure agent of the recipient of supply shall be excluded from the value of supply, if all the following conditions are satisfied, namely,-

• the supplier acts as a pure agent of the recipient of the supply, when he makes the payment to the third party on authorisation by such recipient;
• the payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service; and
• the supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account.

Explanation.- For the purposes of this rule, the expression 'pure agent' means a person who-

• enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both;
• neither intends to hold nor holds any title to the goods or services or both so procured or supplied as pure agent of the recipient of supply;
• does not use for his own interest such goods or services so procured; and
• receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account.'

Entry 5(e) of the Schedule II of the 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'