MAY 07, 2019

By Dr G Gokul Kishore

INTEREST is paid for use or enjoyment of another person's money. A claim by taxman on such interest charged in commercial transactions involving supply of goods or services should naturally raise a few questions. We shall try to analyse these questions in this 36th part.

Cost, taxable value, price and consideration

Section 15 of CGST Act mandates inclusion of amount charged or recovered as interest by a supplier of goods or services in the taxable value. Interest is normally charged in mercantile transactions when payment for supply is delayed normally or beyond the admissible credit period provided by the supplier. Payment for supply of goods or services is usually the monetary consideration which is made before or during or after supply, either in part or in full. The expenses incurred in production of particular goods supplied or services provided form part of the cost which includes direct and indirect costs. Nobody engages in business to merely recover cost and the basic objective of any business is to make profit and, therefore, cost plus profit is generally the price paid or payable for the supply of goods or services. Such price when expressed in monetary terms is consideration in part as non-monetary consideration which has the effect of reducing the price makes up for constituting the entire consideration for any supply. If non-monetary consideration is absent, then the price becomes consideration for the supply.

The taxman needs to enter the above scenario at such a moment which will ensure maximum revenue. Therefore, transaction value is taken as the taxable value and such transaction value is the price actually paid or payable for the supply. When transaction value is suspect, as in the case of supplies between related parties, then rules provide for separate treatment including the method whereby such value is taken as cost plus something which is usually the notional profit. However, to provide a semblance of commercial realities having been taken into consideration, provision is made to exclude certain elements from such taxable value or transaction value. The word 'semblance' is used as the urge for revenue is overtly manifest when inclusions (five elements) outnumber the sole exclusion of discounts. Notable among the express elements of inclusion is interest. As per the provision, interest or late fee or penalty for delayed payment of any consideration for any supply is includible in taxable value.

Inclusion of interest - Is it valid?

As mentioned above, the urge to maximize revenue is patent universally in tax laws and Section 15 of CGST Act is no exception. Interest for delayed payment of any consideration is includible in value. This means transaction value gets enlarged from price paid or payable to price plus interest. In other words, taxable value is consideration plus interest. This is why the word 'semblance' has been used above - the universally accepted basis of transaction value for commodity or service taxation is made subordinate to revenue interest of taxing interest also. Section 7 seeks to define scope of 'supply' and consideration is one of the essential elements except those transactions mentioned in Schedule I. Section 2(31) defines 'consideration' and in simple terms, payment made in monetary and non-monetary terms for supply of goods or services, whether by the recipient or by any other person, is the consideration as per law. As abstinence is also treated as consideration under the Indian Contract Act, 1872, the same has been included in the definition of consideration in CGST law which has a corresponding entry in Schedule II as 'agreeing to refrain from an act or to tolerate an act…'.

Keeping forbearance clause aside for the present discussion, it appears that the definition of consideration does not go beyond payment in respect of or in response to or for inducement of supply of goods or services. This leads us to the question - it is valid to treat interest for delayed payment of consideration as additional consideration when the definition does not provide any such indication and when scope of supply includes only those supplies which are made for a consideration (except Schedule I)? Is there a disconnect or gap between the provisions defining consideration, supply and taxable value? Can interest commercially charged to recover finance cost by the seller be part of transaction value which seeks to reckon price actually paid or payable? If price 'actually' paid or payable is to be the basis for valuation, then can the provisions elsewhere be contrary to such main provision to the extent of rendering it otiose in certain circumstances? Why should the tax department be concerned over delayed payment of consideration between the seller and buyer and consequential interest when tax is anyway paid based on time of supply which includes invoice date and date of payment of advance amount?

If interest is treated as an additional consideration, then what is the supply for which such additional consideration is paid? Strictly speaking, interest recovery by supplier constitutes a transaction distinct from supply transaction and it is related to payment terms. In so far as supply of goods or services is concerned, payment of the price concludes transaction value for tax purpose and extending the same artificially to include financial arrangements / cost of financing may not be good law. If one is to look from another angle, money is not included in the definition of goods and it not service either. Interest can be said to be a transaction in money as it relatable to finance cost and use of money and price of goods remains unchanged whether or not interest is charged. It is nobody's case that interest represents incremental price. If the price is increased, additional tax is paid on differential consideration but to stretch the same to include interest cost may be a step too far. The objective sought to be achieved by valuation provision is to identify the elements and situations which have the effect of depressing the value. Charging of interest by the supplier for delay in payment by the buyer does not have the effect of reducing the price actually paid or payable.

After-effects of jurisprudence under legacy law

Valuation under Central Excise Act, 1944 was subject to plethora of interpretation and litigation. Landmark judgments on this subject could not stem the flood in the pre-GST era. Even in such regime, commercial interest was not expressly part of valuation provisions. Leaving such commercial interest aside, the department had to struggle to sustain its demand for interest on delayed payment of duty on differential amount (consideration) when price was retrospectively increased. The matter is currently before Larger Bench of Supreme Court [Steel Authority of India Ltd. v CCE - 2015-TIOL-292-SC-CX. Though the provisions of Central Excise Act and the dispute as mentioned above are not identical to the present discussion under CGST Act, the same have been noted to highlight the fact that the department has sought to widen the ambit of transaction value by including even commercial interest as against its claim for statutory interest on delayed payment of tax of differential consideration. By using multiple terms like fine and penalty along with interest, it appears that the tendency of using different nomenclature to avoid payment of tax is sought to be arrested. However, the larger legal questions may have to wait for a few years to be answered.

(…To be continued)

(The author is an Advocate and Joint Partner, Lakshmikumaran & Sridharan, New Delhi. The views expressed are strictly personal.)

See Part 35.