“Composite Supply”- Reimbursement of actual expenses “E-Square Leisure AAR”

In re E-Square Leisure Pvt Ltd (GST AAR Maharashtra)

This is with reference to an order passed by the Kerala Authority for Advance Ruling (‘AAR’) in the case of M/s E-Square Leisure (the Applicant).

This is very common query whether GST is to levied on the reimbursement of actual expenses incurred while providing the principal supply of services/supply of goods. The above advance ruling is covering such scenario.

The definition of “Composite supply” under GST law (CGST Act, 2017) is as defined below:

(30) “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;

Brief facts:-

-The Applicant is engaged in the business of accommodation in hotels, inns, guest house etc.

-The Applicant intends to enter into a contractual agreement of renting of immovable property and also intends to collect expenses of electricity, water charges etc. from the lessee in actual.

Question raised before the Authority:   

-Whether GST is to be levied on reimbursement of expenses from the lessee by the lessor at actuals

-In case GST is to be levied, what would be the applicable rate of GST

-Whether reimbursement of expenses by Applicant can qualify as expenses incurred as a ‘Pure Agent’ and would not be considered in the value of supply for levy of tax

Contentions of the Applicant:

-Since the utility expenses are recovered in actual basis which would vary from month to month, it can be construed that there is no supply of goods or service from the lessee to lessor.· The utility expenses are variable in nature whereas rent is always fixed by way of contractual agreement. Thus, it can be inferred that reimbursement of expense is not covered under the definition of supply, hence GST is not applicable.

-Without prejudice, even if reimbursement is qualified as supply, the same is not liable to GST, if incurred in the capacity of ‘pure agent’.

-However, for the purpose of levy of GST there are 2 possible scenarios as provided below

-GST could be levied at the rate as applicable to expenses reimbursed; or

– GST could be levied at the rate as applicable to renting of immovable property.

Ruling of the Authority: 

-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.

-The utility charges reimbursed by the Applicant from lessee forms part of composite supply. Thus, GST is payable at a rate as applicable to the principal supply.

-Applicant has failed to establish themselves as a “pure agent” as defined under the GST Valuation Rules. Therefore, the cost incurred by the Applicant and subsequent reimbursement thereof cannot be excluded from the value of supply.

Under GST, authorities are of view that the same would be constituted as “Composite supply” and accordingly, chargeable to GST.

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