Reimbursement of expenses incurred in relation to providing output services:
Where the company recovers some expenses which are incurred during the provision of supply of services, in that case, the company is required to charge GST on such value as well as per the provisions of section 15 of CGST Act. Please refer below the relevant extract of section 15 for your reference:
(2) The value of supply shall include–––
(a) 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;
(b) 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;
(c) 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;
Considering the above inclusion, the expenses incurred by the company in relation to providing services to the recipient shall be taxable under GST. However, reimbursement of expenses may be excluded from the value of supply if it qualifies the conditions of “Pure agent”.
Reimbursement of expenses incurred in the nature of pure agent:
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 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.
Further, 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 supplied 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,
For example: Statutory fees paid by a Professional/Legal consultant like Court fees, filing fees, etc. which is payable by the recipient of service but paid by the supplier on behalf of recipient.
As per the above explanation, the pure agent shall not use the goods/services procured during the supply for his own interest. Also, the pure agent shall not hold title to the goods and/or services.
Comment on GST applicability on reimbursement of expenses charged from ITC:
With reference to above explanations, we understand that AIPL has entered into the agreement with the client to render services for a lumpsum fees of Rs. 30 Lakhs. Also, both parties have agreed for a reimbursement of travel, food and lodging expenses on actual basis subject to maximum amount of Rs. 10.50 Lakhs.
Considering the above conditions of pure agent, the reimbursable expenses incurred by AIPL are not qualifying the conditions of pure agent as AIPL is incurring such reimbursable expenses in respect to provision of services. AIPL procures and holds title to such services. Further, the value of incidental expenses incurred by the supplier which is charged to the recipient shall be included in the value of supply as per Section 15(2).
Therefore, the GST shall be chargeable on reimbursement of expenses recovered by the Company.
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