Whether the Applicant and various State Government owned entities would be treated as ?related persons? under the GST law? If yes, whether GST is chargeable on notional processing fees / any other charges?

PJ/Case Law/2020-2021/3632

M/s Gujarat State Financial Services Ltd. GUJ/GAAR/R/10/2019 dated June 27, 2019
Brief Facts: - The applicant (a State Government owned Non-Banking Finance Company- NBFC) engaged in providing financial assistance services in the form of loan to various State Government owned entities. The State Government has directed all its entities to park all their surplus funds with the Applicant. Such surplus funds are provided in the form of loan to various State Government owned entities which need funds.
The Applicant receives consideration in the form of interest for the loans given and they do not charge any processing fees or any other charges for providing financial assistance to various entities.
Issue: -Whether the Applicant and various State Government owned entities would be treated as ‘related persons’ under the GST law? If yes, whether GST is chargeable on notional processing fees / any other charges?
Appellant contentions : -The applicant submitted contended on following terms , firstly on clause (iv) of Explanation (a) to section 15 of CGST Act 2017, persons shall be deemed to be ‘related persons’ if any person directly or indirectly owns, controls or holds twenty-five percent or more of the outstanding voting stock or shares of both. As per the said definition, the Applicant and other State Government owned entities would be related persons. They are charging interest which is exempt under GST as per Sr. no. 27 of notification no. 12/2017 – CT (R).
Secondly the applicant took reference to the FAQs issued on financial services also clarifies that any charges or amounts collected over and above the interest or discount would represent taxable consideration and hence, liable to GST.
Further, there is no specific guideline issued by RBI to NBFC to compulsorily charge processing fees on loans provided. The Applicant is not charging any processing fees and hence, GST is not payable on the notional processing fees.
Reasoning of Judgement: - The Authority agreed with the contention of the Applicant and made the following observations where the applicant is providing loans for which only interest is charged as a consideration. Moreover, there is no other consideration, so even if the service is provided to related party, exemption can be claimed under the exemption notification, as this notification neither talks about related – unrelated party nor about notional consideration and hence, the question of charging GST on notional consideration does not arise.
Held: -The judiciary held that the Applicant and various State Government owned entities should be treated as related persons in terms of section 15 of the CGST Act, 2017. Since no other consideration is involved except interest, the services provided by way of extending loans to various State Government owned entities is covered under the exemption notification.
Comment: - When reference to Schedule I is made, the transaction between related parties gets covered in the definition of supply even if the said transaction is without any consideration however it was not discussed in the ruling.Usually, the consideration collected by banks or NBFC’s are in the form of interest, processing or documentation charges. Accordingly, in the absence of such processing or documentation charges, can there be a notional charge, when transaction is between related parties? Though this ruling is in favour of the taxpayers but it raises numerous queries related to GST applicability if no fees is charged from the recipient by the taxpayers.
Prepared By: CA. Kartik Singhvi

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PJ/Case Law/2020-2021/3632

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