The Maharashtra Authority of Advance Ruling ruled that penalties, late fees/penal interest, fine of the nature, levied and collected by RBI, for contravention or violation of provisions of Law are not taxable under GST.
The Authority further held that the penalty of the nature for non-performance or under-performance as per contractual agreement by RBI with third party vendors are not taxable under GST.
The AAR’s rationale behind the ruling was that the penalty imposed for violation of laws such as traffic violations, or for violation of pollution norms or other laws are also not considered for any supply received and are not taxable, which are also not taxable. Same is the case with fines, penalties imposed by the mining Department of a Central or State Government or a local authority on discovering mining of excess mineral beyond the permissible limit or of mining activities in violation of the mining permit. The penalties imposed for violation of laws cannot be regarded as consideration charged by the Government or a Local Authority for tolerating violation of laws. Laws are not framed for tolerating their violation. They stipulate a penalty not for tolerating violation but for not tolerating, penalising and deterring such violations. There is no agreement between the Government and the violator specifying that violation would be allowed or permitted against payment of fine or penalty. There cannot be an agreement as violation of law is never a lawful object or consideration. The service tax education guide issued in 2012 on the advent of the negative list regime of services explained that fines and penalties paid for violation of provisions of law are not considered as no service is received in lieu of payment of fines and penalties.
The AAR noted that where the amount paid as ‘liquidated damages’ is an amount paid only to compensate for injury, loss or damage suffered by the aggrieved party due to breach of the contract and there is no agreement, express or implied, by the aggrieved party receiving the liquidated damages, to refrain from or tolerate an act or to do anything for the party paying the liquidated damages. In cases liquidated damages are merely a flow of money from the party who causes breach of the contract to the party who suffers loss or damage due to such breach. Such payments do not constitute consideration for a supply and are not taxable.
The AAR while citing an example stated that the cases are damages resulting from damage to property, negligence, piracy, unauthorized use of trade name, copyright, etc. Other examples that may be covered here are the penalty stipulated in a contract for delayed construction of houses. It is a penalty paid by the builder to the buyers to compensate them for the loss that they suffer due to such delayed construction and not for getting anything in return from the buyers. Similarly, forfeiture of earnest money by a seller in case of breach of ‘an agreement to sell an immovable property by the buyer or by Government or local authority in the event of a successful bidder failing to act after winning the bid, for allotment of natural resources, is a mere flow of money, as the buyer or the successful bidder does not get anything in return for such forfeiture of earnest money. Forfeiture of Earnest money is stipulated in such cases not as a consideration for tolerating the breach of contract but as a compensation for the losses suffered and as a penalty for discouraging the non- serious buyers or bidders. The payments being merely flow of money are not a consideration for any supply and are not taxable. The key in such cases is to consider whether the impugned payments constitute consideration for another independent contract envisaging tolerating an act or situation or refraining from doing any act or situation or simply doing an act. If the answer is yes, then it constitutes a ‘supply’ within the meaning of the Act, otherwise it is not a “supply”.
Issues Raised
- Whether the penalties, late fees/penal interest, fine of the nature, levied and collected by RBI, for contravention or violation of provisions of Law are taxable under GST?
- Whether the penalty of the nature for non-performance or under-performance as per contractual agreement by RBI with third party vendors are taxable under GST?
Facts
The applicant, RBI is a statutory body, set up under the Act of the Parliament i.e. the Reserve Bank of India Act, 1934. As a part of its functions, RBI administers various Acts, To reiterate, it is hereby submitted that penalties, categorized under two parts.
Firstly, penalty, late fees/penal interest, fine of the nature levied and collected by RBI for contravention or violation of provisions of Law.
Secondly, penalty of the nature for non- performance or under-performance as per contractual agreement with third party vendors.
Case Information
Applicant Name: M/S Reserve Bank Of India
Judicial Level & Location : Maharashtra AAR
Case Number : 117 of 2022-23
Date of Decision : 31/07/2024
Decision in favor of: Applicant
Judges: Shri. Ajaykumar V. Bonde Joint Commissioner Of State Tax, (Member) And Ms. Priya Jadhav, Joint Commissioner Of Central Tax, (Member)
