TMI Blog2020 (9) TMI 1238X X X X Extracts X X X X X X X X Extracts X X X X ..... This service of ensuring that all instalments are received from all subscribers to a chit is the service rendered by the foreman in relation to the chit. As per Section 2(d). Under Section 22(1) of the Chit Fund Act, cited above, the law casts a duty upon the foreman to pay the Prize amount to the Prized Subscriber as detailed in the said Section 22. The foreman can comply with this provision only if the chit amount has been paid by all the subscribers, to constitute the Prize amount , which, as defined in Section 2(m) of the Chit Fund Act, is primarily the chit amount as defined under Section 2(d). It is extremely clear that unless all instalments of a chit are received by the foreman, the payment of the prize amount would be hampered. This clearly brings out the service that the foreman renders in ensuring that all the instalments of all subscribers is collected - the collection of delayed/defaulted instalments and penal interest thereon is purely a service rendered in relation to a chit and cannot be given any other connotation. The collection of defaulted instalments and interest thereon by the foreman is a supply of service in relation to the chit and squarely f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 2017and the Andhra Pradesh Goods and Services Tax Act, 2017 [hereinafter referred to as the CGST Act and APGST Act ] by M/s. Ushabala Chits Private Limited (herein after referred to as the Appellant ) against the Advance Ruling No. AAR No.13/AP/GST/2020 dated 05.05.2020 issued by the Authority for Advance Ruling, Andhra Pradesh. 1. Brief Facts of the Case: The appellant is a company engaged in conducting chit auctions. The foreman is responsible for registering the members, collection of money from the members, conduct of auctions and other related matters. The applicant is collecting the foreman commission @5% from the amount to be distributed to the member taking the prize money. The GST paid on the foreman commission is @12%. If the subscribers fail to deposit subscriptions by the specified date, appellant charges interest/penalty and it is dependent upon the period of delay from specified date to actual date of payment. Under the GST law, the Appellant is of the view that penalty/interest collected from the defaulting subscribers cannot be treated as supply and therefore, the same is not subjected to GST levy. The Appellant had filed an application for Adva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ges, which are not chargeable to GST. d) Further attention is invited to the Circular No.102/21/2019-GST dated 28.06.2019 issued by the CBIC, wherein it was clarified that in cases involving interest or penal interest on delayed payment of EMI are not leviable to GST as the said amount is treated as part of Actionable Claim and being interest on deposit, extended in terms of Notification No.12/2017-CT(Rate) supra. e) The consideration towards the foreman services is represented by 5% of the prize money on which the applicant is already discharging GST liability. f) In view of the above, the interest/penalty collected for delay in payment of subscription amount is treated as neither supply of goods nor supply of services and cannot be levied to GST. g) However, the Advance Ruling authority misrepresented the facts by referring to the subscription amount cannot carry interest ignoring the fact that there is a legal interest provision in terms of Chit Fund Act, 1982 and AP Chit Fund Rules, 2008 and thus, the appellant has collected interest as provided under law. Hence, the penalty is nothing but interest and there is no provision under Chit Fund Act, 1982 to collect penal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. In fact, in terms of Section 64 of the Chit Funds Act, 1982 the word debt is used for a claim for or against foreman. This clearly indicates that if the subscription amount is not paid within the stipulated period, it is considered as debt. D. Interest/penalty charged for the delay in payment of monthly installments of subscription is interest/penalty only on the debt incurred by the subscribers and not consideration towards the supply of services. E. The appellant submits that in terms of Chit Fund Act, 1982 and Andhra Pradesh Chit Fund Rules, 2008, the foreman can collect interest not exceeding 18% per annum on the subscription amount paid belatedly by the subscriber. The appellant is following the said provisions and is collecting the interest on the outstanding subscription amount, which is nothing but the debt to be paid by the subscriber. F. The appellant submits that the word-Interest has been defined, vide clause 2(zk) of Notification No.11/2017-CT (Rate) dated 28.06.2017 as, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and legal aspects and passed the advance ruling treating the interest to be supply of service. Hence, it is requested to consider the facts detailed above and pass just and suitable orders as may be deemed fit. 5) Discussion and Findings: We have gone through the entire records of the appeal, facts of the case, and also considered the written and oral submissions made at length by the appellant as well, in light of the Ruling pronounced by the AAR. The issue at hand for discussion is whether the interest / penalty charged on the delayed payment of subscriptions by Members of a Chit Fund, is a supply liable to GST under the GST law. 1. It is an undisputed fact that the appellant is a company engaged in Chit Auctions. The appellants are conducting the chits as regulated by the Chit Fund Act, 1982 and Andhra Pradesh Chit Fund Rules, 2008. 2. The Ruling of the Advance Ruling Authority, Andhra Pradesh in the orders dated 05.05.2020 held that the said interest/penalty is classified under Sl. No 15 of Heading 9971 Financial and related services, GST @12% as per Notification No. 8/2017-Integrated Tax (Rate) dated, the 28th June, 2017 as amended from time to time. 3. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , payable on any default in the payment of installments and to such other amounts as may be payable to him under the provisions of the chit agreement; (emphasis added) (d) to receive and realize all subscriptions from the subscribers and to distribute the prize amounts to the prized subscribers; (e) to demand sufficient security from any prized subscriber for the due payment of future subscriptions payable by him. Section 22. Duties of foreman. (1) The foreman shall, on the prized subscriber furnishing sufficient security for the due payment of future subscriptions, be bound to pay him the prize amount: Provided that the prized subscriber shall be entitled to the payment of the prize amount without any security whatsoever if he agrees to the deduction therefrom of the amount of all future subscriptions and in such a case, the foreman shall pay the prize amount to the prized subscriber within seven days after the date of the draw or before the date of the next succeeding instalment, whichever is earlier: Provided further that where the prize amount has been paid to the prized subscriber under the first proviso, the amount deducted shall be deposited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all pay the interest @ 18% per annum on the amount so payable to the foreman and the foreman shall pay the amount of dividend of each draw even to the defaulted subscriber as and when the subscriber pays the defaulted subscription. 4.1. From the provisions of law as extracted above, it is clear that apart from other services, one of the services rendered in relation to a chit is the collection of instalments from subscribers who defaulted in payment of the same. In addition, the foreman is duty bound to collect interest on such defaulted instalments, which the law under Section 21(1)(c) of the Chit Fund Act, 1982 entitles him to retain. It is pertinent to add that a Chit Fund business survives on the collection of instalments from all subscribers to a chit, which is then given to the Prized Subscriber who succeeds by way of lots or auction, and is repeated month after month till the conclusion of the chit. Any failure in payment of instalment by a subscriber would hamper the foreman in making the payment to the Prized Subscriber and jeopardize the entire flow of the chit. As foreman of the chit, it is his duty to collect and pass on the moneys to the Prized Subscriber. This ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1/2017-Central Tax (Rate) Dated 28.06.2017/ Notification No.8/2017-Integrated Tax(Rate) dated 28.06.2017 as amended from time to time. 5. In the matter of exemption from GST of the interest element under Notification No 12/2017 dated: 28.06.2017, the same appears misplaced and out of context for reasons discussed hereunder. 5.1. Exemption under Serial No. 27 of Notification No.12/2017 CT(Rate) dated - 18.06.2017 reads as follows: Heading No. 9971 -- Services by way of- (a) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services); (b) inter sesale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange or amongst banks and such dealers. 5.2. Further, the term interest has been defined under clause (zk) of para 2 of the above said Notification, which reads as under: (zk) 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 charges in respect of the mon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , of chits or kuries as defined in any law which is for the time being in force in any State, or any business, which is similar thereto; (vi) collecting, for any purpose or under any scheme or arrangement by whatever name called, monies in lump sum or otherwise, by way of subscriptions or by sale of units, or other instruments or in any other manner and awarding prizes or gifts, whether in cash or kind, or disbursing monies in any other way, to persons from whom monies are collected or to any other person, 6.2. It is also relevant to mention that by Finance Act, 2015, definition of service contained in sub-section (44) of Section 65B of the Act has been amended by adding explanation 2 which reads as under: Explanation 2 For the purposes of this clause, the expression transaction in money or actionable claim shall not include (i) any activity relating to use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged; (ii) any activity carried out, for a consideration, in relation to, or for facilitation of, a transaction in money or actio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tionable Claim . Hence the Monthly Subscription or the interest collected from the defaulted subscribers is not Actionable Claim. The Interest is the consideration as per the settled principle of Law. The Interest is appropriated to the foreman s Account and not distributed to the Members of the Chit.The Appellant is a Financial Institution as per the R.B.I. Act, 1934 and the amendments thereon. 6.5. It is relevant to reproduce the statutory provisions pertaining to Supply , and Value of Supply as defined under the CGST Act, 2017. Section 7 defining Supply reads as follows: 7. Scope of supply.-( 1) For the purposes of this Act, the expression ―supply includes (a) 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; Section 15 explains the value of supply as under: Section 15 (1) The value 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 orboth where the supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the job of the foreman to collect defaulted instalments for which the penal interest of 18% as per law is collected by him and he is further permitted to retain the same by law. Hence, the interest so collected for the service rendered in relation to a chit, will be liable to GST at the rates applicable under HSN Heading 9971, (Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017) as it is earned in connection with the supply of service by the foreman to the chit. 7. Accordingly, this authority rules as follows: ORDER The collection of delayed instalments along with interest / penalty from the members of a chit constitutes the taxable supply of the Services provided by a foreman of a chit fund in relation to chit. (ii) The Services provided by a foreman of a chit fund in relation to chit is classified under HSN Heading 9971 under Notification No. 11/2017-CentraI Tax (Rate) Dated 28-6-2017 / Notification No. 8/2017-lntegrated Tax (Rate) dated 28-6-2017 as amended from time to time. The rate of tax would be as applicable under the said heading 9971 of the cited notifications, depending on the nature of supply, i.e., intra state or interstate. (iii) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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