In general practice, number of reimbursement of expenses are taken place along with the consideration for the supply of Goods, Services or both. Now the question may arise whether such reimbursement of expenditure would be chargeable to tax or not? Answer to such question is conditional i.e. where such expenditure is incurred as a pure agent, then it would not be chargeable to tax otherwise tax will be levied on such expenditures. Now the new term comes to our notice which is ‘Pure Agent’ that will be discussed in this article in details with suitable examples and with some judicial pronouncements.
1. Who is an Agent?
Before moving to the concept of pure agent we should understand the term ‘Agent’ which has been defined under section 2(5) of CGST Act, 2017 as under:
“Agent” means 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.”
2. Who is a Pure Agent?
♠ Before introduction of GST, pure agent concept was being governed by the Service Tax Law. As such, this concept is borrowed from erstwhile Service Tax Determination of Value Rules, 2006 and Carried forward under GST. The Explanation to Rule 33 of GST Valuation Rules 2017, gives following meanings of pure agent.
A “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.
♠ Simply speaking, pure agent is a person who makes a supply of goods and services to the recipient. He undertakes to receive ancillary services from other suppliers of goods & services and incurs expenditure on behalf of his client. Later the actual incurred expenditure is claimed as reimbursement.
♠ Here it also to be noted that the pure agent does not use the goods or services so procured for his own interest. The fact that he did not use the goods or services for his own interest would be determined based on facts of the case and would be determined from the terms of the agreement.
Let’s understand it with following examples:
Example: 1 Mr. A approach the corporate service firm M/s B for the incorporation of his company. M/s B provided the service of incorporation of company and charge the service fees. In addition to the service fees, M/s B also recovers (as such) from A, registration fees and name approval fees paid to Registrar of Companies (ROC). It is very clear that liability to pay such registration fees and service fees to ROC relates to A. As such, B is merely acting as a pure agent in payment of those fees.
Example: 2 A is an importer and B is a custom broker. A approaches B for custom clearance of import consignment and delivery thereof, which require a transportation facility to be procured by B. So, A authorises B to procure service of transportation and agreed to reimburse the actual amount which would be incurred for such procurement of transportation service. B provide the custom broker service and paid to the transporter on behalf of A for the delivery of goods so cleared.
Now to come at the conclusion whether B is pure agent or not, it should be examined with conditions laid down in explanation to rule 33 of CGST Rules, 2017. Which is as under:
(i) There is a contractual agreement between A & B to incur the expenditure in the course of supply of his Custom Broker Service.
(ii) B not hold any title of transportation service received.
(iii) B also not used that service for his own interest.
(iv) B will receive the actual amount which was paid by him to transporter.
As such, all conditions are fulfilled and therefore, it can be said that B is acting as a pure agent.
♠ When it is clear that expenditure was incurred as pure agent then it becomes relevant for determination of the value of a supply for levy of GST. 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:
(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.
♠ For the valuation purpose, it is not enough for a supplier of service of goods or services, to be a pure agent because there are further more barriers (i.e. conditions) which is also required to be crossed by him. Revenue kept its eagle eyes targeting the taxation of reimbursement of expenditure incurred by pure agent. Now care should be taken by the pure agent at the time of claiming reimbursement of expenditure incurred on behalf of his client i.e. he should claim the expenditure as such as actually incurred by him and such expenditure should separately be shown in the Invoice otherwise it would be chargeable to GST.
Suppose a custom broker issues an invoice for reimbursement of a few expenses and for consideration towards agency service rendered to an importer. The amounts charged by the Customs Broker are as below:
|Sr. No.||Component charged in Invoice||Amount|
|2||Travelling Expenses, Hotel Expenses||Rs. 15000/-|
|3||Custom Duty||Rs. 48000/-|
|4||Port Charges||Rs. 10000/-|
In the above situation, agency income and travelling/ hotel expenses shall be added for determining the value of supply by the Customs Broker whereas the Customs Duty and Port Charges shall not be added to the value, provided the conditions of pure agent are satisfied.
♠ Some other examples of Pure Agents are:
4. Exclusion from Aggregate Turnover:
♠ In the GST law another remedy has been given to supplier of goods and services that expenditure incurred as a pure agent, will be excluded from the aggregate turnover. In other word it can be said that wherever supplier of goods and services incurred the expenditure as a pure agent then such expenditures will not be included in calculating the aggregate turnover thereof.
♠ As such pure agent concept has direct bearing on the aggregate turnover of the supplier. Therefore, it will not be included in calculating the threshold limit for registration.
A is supplier of furniture. During the year 2017-18 his turnover was Rs. 2200000/-. Out of which expenditure incurred by him as a pure agent was Rs. 250000/-. Now for the valuation purpose his aggregate turnover will be calculated as below:
|Turnover for the F.Y. 2016-17||22,00,000/-|
|Less: Expenditure incurred as a pure agent||2,50,000/-|
|Net Aggregate turnover||19,50,000/-|
Threshold limit for registration under GST is Rs. 20,00,000/- But in the given case net aggregate turnover is Rs. 19,50,000/- instead of Rs. 22,00,000/-. As such, A is not required to get registration under GST.
♠ Concept of pure agent and non-taxability of reimbursement of expenditure also supported by following judgments:
♠ In the ongoing business environment reimbursement of expenditure is generally seen. In the earlier law, reimbursement of expenditure was made taxable which was subject to expenditure incurred in the capacity of pure agent. The concept of pure agent has been brought forward from earlier law and carried forward to GST. In the GST law there are two types of conditions out of which first is to be complied with to be act as a pure agent and second is to be complied with by the pure agent to get an exemption from GST on reimbursement of expenditure incurred on behalf of receiver of supply of goods or services. From the above discussion it can be concluded that 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.
♠ Further, it can also be concluded that where expenditure incurred by the supplier as pure agent it would be not be included in calculating the aggregate turnover. Which would ultimately impact the threshold limit of registration. i.e. such type of expenditure will be excluded from aggregate turnover of the supplier.