Safiya Malik

The High Court of Kerala Single Bench of Justice Gopinath P. held that a show cause notice issued demanding Goods and Services Tax (GST) on interest collected from defaulting subscribers of chits was without jurisdiction. The Court quashed the impugned notice issued against the petitioner company, which is wholly owned by the State of Kerala, and declared that interest collected from defaulting subscribers in chit transactions does not amount to consideration for the supply of services under the GST regime. The Court, however, declined to adjudicate on the validity of certain notifications, as the petitioner chose not to press those grounds. Directions were issued accordingly, concluding the matter in favor of the petitioner.

The petitioner, Kerala State Financial Enterprises Ltd. (KSFE), challenged a show cause notice dated 21.04.2022 seeking to levy GST on interest collected from defaulting subscribers of chit funds, amounting to ₹61,55,21,173/-. The petitioner contended that the demand was without jurisdiction and prayed for the quashing of the notice under Article 226 of the Constitution of India.

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The petitioner is a company incorporated under the Companies Act, 1956, wholly owned by the Government of Kerala, and primarily engaged in the business of conducting chits. Although several notifications were initially challenged (Exhibits P5 to P8), the petitioner later chose not to press those challenges and also left open the challenge regarding Exhibit P9 notification concerning the rate of GST on commissions.

The main grievance raised was that the interest collected from defaulting subscribers was being treated as a taxable supply of service under the CGST/SGST Acts. It was contended that this collection was in the nature of interest on delayed payment in a debtor-creditor relationship and therefore fell under Entry No. 27 of Notification No. 12/2017-Central Tax (Rate), attracting nil GST rate.

The petitioner relied heavily on the Supreme Court’s judgment in Oriental Kuries Limited v. Lissa and Others, (2019) 19 SCC 732, which held that a chit transaction creates a debtor-creditor relationship upon subscription. The learned Senior Counsel submitted that this understanding made the interest component outside the scope of "supply" under the GST law.

Several provisions were cited to bolster the petitioner’s claim, including Section 21(1)(c) of the Chit Funds Act, 1982, Section 15(2)(d) of the CGST Act, and relevant circulars and notifications. Reliance was also placed on judicial precedents such as Pratibha Processors v. Union of India (1996) 11 SCC 101 and Indian Oxygen Ltd. v. Collector of Central Excise (1988) 4 SCC 139, arguing that interest cannot exist independently from the principal debt and cannot be separately taxed.

The respondent authorities, through the learned Senior Standing Counsel, argued that the petitioner’s activities constituted a service and that the consideration received, including interest on defaulted payments, should attract GST. The Revenue contended that the transaction was not a loan, deposit, or advance and fell outside the exemption granted by Notification No. 12/2017. It was further submitted that the petitioner had an alternative remedy and should not invoke Article 226.

The Court, after considering rival submissions, noted that where a show cause notice is challenged on the ground of lack of jurisdiction, availability of an alternative remedy is no bar to the exercise of writ jurisdiction.

The Court recorded that "the petitioner is entitled to succeed" since the challenge was against a show cause notice issued "without jurisdiction." The Court stated that in matters where jurisdiction is contested, writ jurisdiction can be exercised despite the existence of alternative remedies.

Referring to the Supreme Court’s decision in Oriental Kuries Limited, the Court observed that "the relationship between a chit subscriber and the chit foreman is a contractual obligation, which creates a debt on the day of subscription." It further noted that "on default taking place, the foreman is entitled to recover the consolidated amount of future subscriptions from the defaulting subscriber in a lump sum."

Regarding the GST implications, the Court recorded that "the amounts received by the petitioner are actually consideration represented by way of interest for extending deposits, loans, and advances," thus falling under Entry 27 of Notification No. 12/2017 and attracting a nil rate of GST.

The Court also examined the value of taxable supply under Section 15 of the CGST/SGST Acts, stating that "it is only when interest or late fee or penalty is levied on account of delayed payment of any consideration for supply that such amounts would form part of the value of taxable supply." It found that "the payment of subscription by a subscriber is not consideration for services rendered by the foreman," thus interest charged on delayed subscription payments does not constitute taxable supply.

Citing Pratibha Processors, the Court held that "interest takes colour from the principal amount upon which it is charged and has no independent existence." It ruled that in the absence of supply of goods or services, interest on defaulted subscriptions cannot be brought under GST.

The Court further stated that "unless there is a nexus between the amounts received and the actual supply of goods or services," taxation under GST cannot be sustained. Ext.P1 show cause notice, being confined to interest on defaulted subscriptions, was thus found to be "without jurisdiction."

The High Court of Kerala declared that "Ext.P1 show cause notice is issued without jurisdiction." Accordingly, the Court quashed Ext.P1, concluding that the proceedings initiated through the impugned show cause notice could not be sustained under law.

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In relation to the other challenges raised by the petitioner, the Court recorded that, "in view of the submission of the learned Senior Counsel for the petitioner, the challenge to Exts. P5 to P8 notifications are dismissed as not pressed." Thus, the petitioner’s prayer regarding these notifications was expressly rejected based on the petitioner’s own submission.

As regards the challenge to Ext.P9 notification concerning the GST rate applicable to commission received under the Chit Funds Act, the Court stated that "the challenge to Ext.P9 notification is left open for adjudication in an appropriate case." Therefore, no adjudication on this issue was made in the present case, and it was left open for determination in future proceedings if required.

The writ petition was accordingly allowed to the extent that Ext.P1 was quashed, with the remaining reliefs either dismissed or left open as per the submissions recorded.

Advocates Representing the Parties

For the Petitioner: V. Raghuraman, Senior Advocate; Bhanumurthy J.S., K.S. Bharathan, Alphin Antony, Aadithyan S. Mannali, Christine Mathew, Rance R., Advocates.

For the Respondents: Shri Sreelal N. Warrier, Senior Standing Counsel for GST Intelligence.

Case Title: M/s Kerala State Financial Enterprises Ltd. v. The Union of India & Others
Neutral Citation: 2024:KER:67655
Case Number: WP(C) No. 24620 of 2022
Bench: Justice Gopinath P.

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