Applicability of GST on reimbursements levied with Rent

It is a well settled law that renting of commercial properties is subject to GST, provided the basic exemption limit is exceeded for registration. However, the subject matter prone to litigation is the recovery of other charges made by the landlord in addition to rent, viz. reimbursement of electricity charges, water charges, gas charges etc., whether they would also be subject to the levy of GST or not.

The erstwhile Service tax law also had a similar conundrum and there have been diverse rulings in this relation.

• In the case of Ticel Bio Park Ltd. (2013) 33 taxmann.com 102 (CCE-Chennai) it was observed that recovery of electricity charges is incidental reimbursable expenses which need not be included in the taxable value of the Renting services. Further, it was held that the activity of providing electricity consumed by tenants and remitted to the Electricity Board tantamount to sale of goods and no service is rendered by the Appellant, which is outside the purview of Service Tax law.
• In the case of ICC Reality (India) Pvt. Ltd., CESTAT Mumbai [4], it was observed that electricity is specifically covered under tariff schedule of Central Excise Tariff Act/VAT Act. The same is not chargeable to Service Tax.
• In the case of Union of India & ANR. Vs M/s Intercontinental Consultants and Technocrats Ltd. (Supreme Court of India), it was held that on reimbursement of expenses which are incurred while providing a Service (in the present case, renting service), no service tax can be charged. However, while noting the amendment to Section 67 vide the Finance Act, 2015, whereby clause (a) which deals with ‘consideration’ was suitably amended to include reimbursable expenditure or cost, The Hon’ble Supreme Court has categorically held that only with effect from May 14, 2015, by virtue of provisions of Section 67 itself, such reimbursable expenditure or cost will form part of valuation of taxable services for charging of Service tax.
• In the 2019 ruling of Srijan Realty (P) Ltd., the honorable High court at Calcutta held that the transaction of the petitioner obtaining high-tension electric supply converting it to low-tension supply, and supplying it to the occupants, raising bills on such occupants and realizing the electricity consumption charges from such occupants, is a service which the petitioner renders and such an activity is exigible to Service Tax under the Finance Act, 1994.

Therefore, while there could be various standpoints, it can well be concluded that Post the amendment in 2015 and that of the latest judgement in case of Srijan Realty, reimbursements would be included in the value of supply and accordingly would be subjected to levy of Service Tax.

With the above varied decisions and opinions, we ushered in into the GST regime continuing the divergent views. Having a common tax act for both goods and services nullified the argument of electricity being goods, since both goods and services were now governed by the same act.

While most corporates were still reluctant to pay tax on such transactions, few had started to comply; also, because in GST the input provisions were eased and there being seamless flow of credit, taxes paid on such impugned payments were as such available as ITC to them, thereby not having any cost effect on their accounts.

However, on 14^th November, 2017 vide Notification No. 46/2017-Central Tax (Rate) the government denied availability of ITC to the F&B sector and once again the question on charging of GST on various reimbursements came back to spotlight as the same once again became a cost factor to this sector.

But then what does the law state? Let us go through the relevant provisions.

As per Section 2(30) of The Central Goods and Services Tax Act, 2017, “composite supply” means ‘a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;’

The Provisions of Section 15 of The Central Goods and Services Tax Act, 2017, dealing with value of taxable supply has been kept wide enough to include any amount charged for anything done by the supplier in respect of supply of goods/services.

Section 15(2) of The Central Goods and Services Tax Act, 2017, covering amounts to be included in value of supply, inter alia, covers the following vide clauses (a), (b) and (c):

• any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier;
• any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both;
• incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services

Further, the definition of ‘consideration’ under Section 2(31) of The Central Goods and Services Tax Act, 2017, has also been broadly defined to cover any payments 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, it may be concluded that in GST regime, reimbursements are subject to tax unless incurred as a pure agent.

The concept of pure agent has been explained vide Rule 33 of The Central Goods and Services Tax (CGST) Rules, 2017 which 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 are satisfied, namely, –

• 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;
• 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
• 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.

Explanation. – For the purposes of this rule, the expression ― “pure agent” means a person who-

• 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;
• neither intends to hold nor holds any title to the goods or services or both so procured or supplied as pure agent of the recipient of supply;
• does not use for his own interest such goods or services so procured; and
• 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.

Now in order for a recovery to qualify as that being done in the capacity of a pure agent, all the conditions provided above have to be fulfilled and not to be read exclusive of each other.

Condition (i) which speaks about authorisation from the recipient for making payment to the third party is usually not specifically provided for in the terms of the agreement or contract and in absence of the same he cannot be classified as a pure agent.

This condition can be taken care of by such specific inclusion in the terms of the agreement or contract.

Condition (a) speaks about entering 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. Now an agreement is entered into for this aspect, however it usually provides for recovery of any such incidental expenses incurred by the recipient on actual basis as would be derived by the supplier which could also include conversion loss, transmission loss or other rounding off factors and hence necessarily may not be pure reimbursement in its true sense, which could also invalidate conditions (c) and (d).

Condition (b) provides that the title to the goods or services or both so procured should not be in the same of the supplier, however invoices are raised in the name of supplier who is liable to pay to the service provider and then recovers the same on apportionment from the recipients. An argument that recovery is based on actual cost will not make them an agent.

Condition (c) states that such goods or services so procured should not be used by the supplier for his own interest, however it is pertinent to note that for their own space and common spaces the services or goods are used by the supplier and may or may not be recovered from the recipients. Aside this point, it is also to note that usually a consolidated bill is received and the same is broken down for various tenants on the basis of sub-meters installed, thereby making it all the more difficult to prove that such goods or services so procured have not been used by the provider for his own interest.

Thus, unless all the above conditions are cumulatively satisfied, the recovery cannot be classified as that of a pure agent.

A ruling by Maharashtra AAR in the case of E-Square Leisure Pvt. Ltd. vide its Order No. GST-ARA-71/2018-19/B-171 dated December 29, 2018 has also held that renting of immovable property would be the main supply and provision of other utilities such as electricity, and water supply, fuel etc. would be in the nature of ancillary supply which help in better enjoyment of the main supply that is theatre. Therefore, the utility charges in the nature of electricity charges and water reimbursed by the applicant from lessee forms part of composite supply. All provision of services as envisaged by the contract are interdependent and if one or more is removed the nature of supply would be affected.

Accordingly, reimbursement of various charges along with rental / maintenance services can be said to be chargeable to GST and on the basis of concept of Composite Supply GST would be payable at a rate as applicable to the principal supply.