With the globalization of businesses being on the rise, there has been an equivalent rise in the complexity of transactions. The management for the smooth conduct of their business receives various goods and services from different suppliers. However, suppliers, sometimes for the sake of convenience, provide additional goods and services to their intended customers/ recipients and later on, recompensed by the supplier for the same. The question now arises is whether GST is payable on such provision of goods or services provided by the supplier. In this regard, section 15 of the Central Goods and Services Act (CGST), 2017 provides that the value of a supply of goods and/or services shall be the transaction value, that is the price actually paid or payable for the said supply of goods and/or services where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. Further, clause(c) of subsection 2 of section 15 provides for 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. Thus, any goods or service provided by the supplier, for which consideration is charged from the recipient shall be included in the transaction value and thus would be chargeable to tax. However, at the same time Rule 33 of CGST Rules probates the inclusion of the expenditure incurred by the supplier of service as a pure agent. From the skim view, the two provisions might seem contradictory to each other. However, an analysis of the same from the service tax era to GST era would help us to mark the differentiation.
Under service tax regime, with the Finance Act, 2015 section 67 was amended so as to include reimbursement of expenses in and as consideration. The amendment had been specifically provided that consideration for taxable service shall include all reimbursable expenditure or cost incurred and charged by the service provider.
At this juncture, it is pertinent to understand that globally there are three methods of calculation of indirect taxes viz. Specific duty, ad valorem tax, and value-added tax (VAT). GST uses the method of value-added tax calculation which removes the cascading effect. GST is calculated on “value-added” and not the value of the goods or services. Value addition is the value added to the raw materials and other things purchased by the producer which means that the cost of purchase inputs would be excluded. Thus, the intent of GST is to tax the value addition. This value addition, on which tax is to be levied is calculated as per section 15 of CGST Act, 2017 read with the relevant rules. Whether reimbursement of expenses by the supplier would be covered by this rule or will fall under the dominion of section 15(2) (c) shall be required to find.
However, rule 33 probates only those supplies which are provided by the pure agent. In trade parlance, the person who acts on behalf of someone can be termed an Agent. The definition of pure agent has been given under rule 33 of CGST Rules, 2017.
Explanation – For the purposes of this rule, the expression “pure agent” means a person who
1. 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;
2. neither intends to hold nor holds any title to the goods or services or both so procured or supplied as a pure agent of the recipient of supply;
3. does not use for his own interest such goods or services so procured and
4. 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
Therefore, only those suppliers who supply the services only in addition to their own supply of goods or services shall be considered as pure agents. Further, the provision of such service should be only for the sake of convenience of the recipient and not with any profit motive. For example – Advertisement charges to the newspaper/ magazine are paid by the advertising agency on behalf of the customer and recovered separately along with their charges for proving the content of the advertisement. Further, the rule also specifies the conditions which are required to be fulfilled if the services provided are to be considered as pure agent services. These conditions are enumerated below:
- 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;
- 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.
Thus, this rule covers only those expenses which are separately authorized by the person on whose behalf such payment is made and such supply is in addition to services already provided by the supplier. Once it has been established what kind of conditions a pure agency has to fulfill, the next query that needs to be answered is whether the reimbursement of any and every expense shall fall within the realm of Rule 33 and thus should be excluded for GST. To answer this, attention should be made to the meaning of reimbursement. The CGST Act has not been defined the word reimbursement. However, the Black’s Law Dictionary defines it as “To pay back; to make return or restoration of an equivalent for something paid, expended or lost; to indemnify or make whole”. Further, a fair understanding can be made from the Bangalore Tribunal, in the case of Bovis Lend Lease (I) P Ltd vs ITO [ITA 636,637 & 665/Bang/2008], wherein, the hon’ble tribunal noted that the following parameters are essential for a payment to be regarded as reimbursement:
The actual liability to pay should be of the person who reimburses the money to the original payer.
- The liability should be clearly determined. It should not be an approximate or varying amount.
- The liability should have crystallised. In other words, the reason given that payments that were never required but were made just to avoid a potential problem may not qualify.
- There should be a clear ascertainable relationship between the paying and reimbursing parties. Therefore, alleged reimbursement by an unconnected person may not qualify.
- The payment should first be made by somebody whose liability it never was and the repayment should then be made to that person to square off the account.
Thus, from the above-held parameters, it can be safely construed that only such clearly ascertainable payments which are made by the supplier on behalf of the recipient and later on recovered by him from the recipient shall constitute the reimbursements. Thus, reimbursement clearly falls within the purview of rule 33 and therefore, reimbursements received by the supplier in capacity of pure agent should not be included in the value of taxable supplies.
To establish that the conditions of pure agent are getting satisfied, it is recommended that there should be a written contract between the supplier and the recipient. The terms and clauses of the contract should clearly point to all the conditions as discussed above with regard to pure agent. This will act as the most reasonable defence if any questions are raised by the Department later on. Further, in order to claim any amount as a deduction in the form of a pure agent, the dealer will have to demonstrate with substantial evidence that the liability to incur the cost was on the recipient and the dealer has incurred such cost merely for convenience’s sake. Furthermore, it is advisable that when the invoice is issued, services provided as pure agent should be distinctly provided in the invoice, even though GST on same is not applicable. The SAC Code for the same should be 9997 which provides for the other services (washing, cleaning and dyeing services; beauty and physical well-being services; and other miscellaneous services including services nowhere else classified).
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