Value of supply in case of Pure Agent Concept in GST [Rule 33 of CGST Rules] - GST Ready Reckoner - GST

Determination of value of supply in case of Pure Agent Concept in ( GST Rule 33 Of CGST Rules ) Introduction The GST Act defines an Agent as a person including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another. So, who is a pure agent and why is a pure agent relevant under GST? Broadly, speaking a pure agent is one who while making a supply to the recipient, also receives and incurs expenditure on some other supply on behalf of the recipient and claims reimbursement (as actual, without adding it to the value of his own supply) for such supplies from the recipient of the main supply . While the relationship between them (provider of service and recipient of service) in respect of the main service is on a principal to principal basis, the relationship between them in respect of other ancillary services is that of a pure agent. Example A is an importer and B is a Custom Broker. A approaches B for customs clearance work in respect of an import consignment. The clearance of import consignment and delivery of the consignment to A would also require taking service of a transporter. So A, also authorises B, to incur expenditure on his behalf for procuring the services of a transporter and agrees to reimburse B for the transportation cost at actuals. In the given illustration, B is providing Customs Brokers service to A, which would be on a principal to principal basis. The ancillary service of transportation is procured by B on behalf of A as a pure agent and expenses incurred by B on transportation should not form part of value of Customs Broker service provided by B to A. This, in sum and substance is the relevance of the pure agent concept in GST. RELEVANCE OF PURE AGENT UNDER GST The concept is borrowed from the erstwhile Service Tax Determination of Value Rules, 2006 and carried forward under GST. Under the GST Valuation Rules 2017 pure agent is given the following meaning. Pure agent means a person who - a) enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both; b) neither intends to hold nor holds any title to the goods or services or both, so procured or provided as pure agent of the recipient of supply; c) does not use for his own interest such goods or services so procured; and d) receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account. The important thing to note is that a pure agent does not use the goods or services so procured for his own interest and this fact has to be determined from the terms of the contract. In the illustration of importer and Customs Broker given above, assuming that the contract was for clearance of goods and delivery to the importer at the price agreed upon in the contract. In such case, the Customs Broker would be using the transport service for his own interest (as the agreement requires him to deliver the goods at the importers place) and thus would not be considered as a pure agent for the services of transport procured. Another important fact is that, the person who provides any service as a pure agent receives only the actual amount for the services provided. Coming back to our example of Importer and Customs Broker, the agreement provides reimbursement of transport services utilised at actuals. In this case, let s say the value of transport service was ₹ 10,000/-. If the Customs Broker charges any amount more than ₹ 10,000/-, then he will not be considered as a pure agent for the services of transport and the value of transport service will be included in the value of his Customs Broker service. Case Law : IN RE: M/S. SREE SUBHA SALES ( 2022 (11) TMI 259 - AUTHORITY FOR ADVANCE RULINGS, KARNATAKA ) Reimbursement of tree cut compensation amount paid to farmers and land owners during the course of execution of work is not chargeable to GST as the Applicant qualifies to be a Pure Agent and Reimbursement of land compensation amount paid to farmers and land owners during the course of execution of work is chargeable to GST as the Applicant does not qualifies to be a Pure Agent. EXCLUSION FROM VALUE Expenditure incurred as pure agent becomes relevant, when it comes to determining the value of a supply for levy of GST (Rule 33 of CGST Rule). The preceding para explains who will be considered as a pure agent. The valuation rules provide that expenditure incurred as pure agent, will be excluded from the value of supply, and thus also from aggregate turnover. However, such exclusion of expenditure incurred as pure agent is possible only and only if all the conditions required to be considered as a pure agent and further conditions stipulated in the rules are satisfied by the supplier in each case. The supplier would have to satisfy the following conditions (in addition to the condition required to be satisfied to be considered as a pure agent) for exclusion from value as under:- i. the supplier acts as a pure agent of the recipient of the supply, when he makes payment to the third party on authorization by such recipient; ii. the payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service; and iii. the supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account. In case the conditions are not satisfied, such expenditure incurred shall be included in the value of supply under GST. The following illustration will make the concept clearer. Corporate services firm A is engaged to handle the legal work pertaining to the incorporation of Company B. Other than its service fees, A also recovers from B, registration fee and approval fee for the name of the company paid to Registrar of the Companies. The fees charged by the Registrar of the companies, registration and approval of the name are compulsorily levied on B. A is merely acting as a pure agent in the payment of those fees. Therefore, A s recovery of such expenses is a reimbursement and not part of the value of supply made by A to B. Clarification on issue of GST on Airport levies Circular No. 115/34/2019-GST dated 11th October 2019 Facts:- Passenger Service Fee (PSF) is charged under rule 88 of Aircraft Rules, 1937 according to which the airport licensee may collect PSF from embarking passengers at such rates as specified by the Central Government. According to the rule the airport license shall utilize the said fee for infrastructure and facilitation of the passengers. User Development Fee (UDF) is levied under rule 89 of the Aircraft rules 1937 which provides that the licensee may levy and collect, at a major airport, the User Development Fee at such rate as may be determined under clause (b) of section 13(1) of the Airports Economic Regulatory Authority of India Act, 2008. Though the rule does not prescribe the specific purpose of levy and whether it is to be charged from the airlines or the passengers. However, it is seen from section 2(n) of Airports Economic Regulatory Authority of India Act, 2008, that the authority which manages the airport is eligible to levy and charge UDF from the embarking passengers at any airport. In order to avoid inconvenience to passengers and for smooth and orderly air transport/airport operations, the User Development Fees (UDF) shall be collected from the passengers by the airlines at the time of issue of air ticket and the same shall be remitted to Airports Authority of India in the line system/procedure in vogue. For this, collection charges of ₹ 5/- shall be receivable by the airlines from AAI, which shall not to be passed on to the passengers in any manner. Issue:- 1. whether GST is on airport levies and 2. Airport levies do not form part of the value of services provided by the airlines and consequently no GST should be charged by airline on airport levies. Clarification Section 2(31) of the CGST Act states that consideration in relation to the supply of goods or services or both includes any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person. Thus, PSF and UDF charged by airport operators are consideration for providing services to passengers. PSF and UDF being charges levied by airport operator for services provided to passengers, are collected by the airlines as an agent and is not a consideration for any service provided by the airlines. Thus, airline is not responsible for payment of ST/GST on UDF or PSF provided the airline satisfies the conditions prescribed for a pure agent under Rule 33 of the CGST rules . It is the licensee, that is the airport operator (AAI, DIAL, MIAL etc.) which is liable to pay ST/GST on UDF and PSF. Airlines may act as a pure agent for the supply of airport services in accordance with Rule 33 of the CGST rules . Rule 33 of the CGST rules provides that the expenditure or costs incurred by a supplier as a pure agent of the recipient of supply shall be excluded from the value of supply, if all the following conditions of pure agent is satisfied. The airline acting as pure agent of the passenger should separately indicate actual amount of PSF and UDF and GST payable on such PSF and UDF by the airport licensee, in the invoice issued by airlines to its passengers. The airline shall not take ITC of GST payable or paid on PSF and UDF. The airline would only recover the actual PSF and UDF and GST payable on such PSF and UDF by the airline operator. The amount so recovered will be excluded from the value of supplies made by the airline to its passengers. In other words, the airline shall not be liable to pay GST on the PSF and UDF (for airport services provided by airport licensee), provided the airline satisfies the conditions prescribed for a pure agent under Rule 33 of the CGST rules . The registered passengers, who are the ultimate recipient of the airport services, may take ITC of GST paid on PSF and UDF on the basis of pure agent s invoice issued by the airline to them. The collection charges paid by airport operator to airlines are a consideration for the services provided by the airlines to the airport operator (AAI, DAIL, MAIL etc) and airlines shall be liable to pay GST on the same under forward charge. ITC of the same will be available with the airport operator. Examples RPM Ltd., registered in Mumbai (Maharashtra), is a manufacturer of paint. It imports a paint mixer machine from Dubai. RPM Ltd enters into a contract with Mudra Logistics, a licensed customs broker with its office at Ahmedabad (Gujarat), to meet all the legal formalities in getting the said machine cleared from the customs station. A p a rt from this, RPM Ltd authorises Mudra Logistics to incur, on its behalf, the expenses in relation to clearance of the imported machine from the customs station and bringing the same to the warehouse of RPM Ltd. which shall be reimbursed by RPM Ltd . to Mudra Logistics on the actual basis in addition to agency charges. Mu d r a Lo g i s t i cs provided following details in the invoice issued by it to RPM Ltd. S.No. Particular Amount 1 A ge n c y charges 5,00,000 2 Un l o a d i n g of machine at Kandla port, Gujarat 50,000 3 C h a r g e s for transportation of machine from Kandla port, Gujarat to its Mudra Logistics godown in Ahmedabad, Gujarat 25,000 4 C h a r g e s for transportation of machine from Mudra Logistics Ahmedabad godown to the warehouse of RPM Export Import House in Mumbai, Maharashtra 28,000 5 P r e p ar e d and submitted Bill of Entry and paid customs duty 5,00,000 6 D o c k d u e s paid 50,000 7 P o r t charges paid 50,000 8 H o te l expenses 45,000 9 Tr a v e l l in g expenses 50,000 10 T e l e p h o n e e xp e n s e s 2,000 C o m put e t h e value of supply made by Mudra Logistics with the help of given information. W o u l d y o ur a n s w e r be different if Mudra Logistics has charged Rs. 13,0 0 ,0 0 0 as a lump sum consideration for getting the imported machine cleared from the customs station and bringing the same to the warehouse of RPM Ltd.? In this case Mudra Logistics has entered into a contractual agreement with recipient of supply, RMP Pvt. Ltd.., to incur, on behalf of such recipient, the expenses mentioned in S. No. (2) to (7) incurred in rel a t i o n to clearance of the imported machine from the customs station and bringing the same to the warehouse of the recipient. Further, Mudra Logistics does not hold any title to said services and does not use them for his own interest. L a s t l y , Mudra Logistics receives only the actual amount incurred to procure such services in addition to agency charges. Thus, Mudra Logistics qualifies as a pure agent. Fu r t h e r , rule 33 stipulates that notwithstanding anything contained in the provisions of Chapter IV Determination of Value of supply, the expenditure or costs incurred by a supplier as a pure agent of the recipient of supply shall be excluded from the value of supply, if all the following conditions are satisfied, namely- (I ) the supplier acts as a pure agent of the recipient of the supply, when he makes the payment to the third party on authorisation by such recipient; (I I ) the payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service; and ( I I I ) the supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account. S i nc e conditions (I) to (III) mentioned above are satisfied in the given case, expenses (ii) to (vii) incurred by Mudra Logistics as a pure agent of RPM Ltd. shall be excluded from the value of supply. CONCLUSION A pure agent concept is an important one for businesses as it has direct implications on the value of taxable service. It has direct bearing on the amount of GST charged on a particular supply. It also has bearing on the aggregate turnover of the supplier and therefore on calculating the threshold limit for registration. Whenever the intention is to act as a pure agent, care should be taken to ensure that the conditions specified for such pure agents and further conditions given in the valuation rules are also met so that only the real value of the service provided is subjected to GST.