DOES ‘THE KARNATAKA TIMBER DEPOT’ WORKS AS AGENT OF COFFEE GARDEN OWNERS- FOR THE PURPOSE OF SALE OF TIMBERS? -A question arise from the orders of the AAR & AAAR.
One advance ruling was pronounced by Hon’ble Advance Ruling Authority, Karnataka vide order No. KAR ADRG 99/2019 dated 27/09/2019 in the case of Tata Coffee Limited. The subject matter before the Hon’ble Advance Ruling Authority was as under:-
As per Karnataka Forest Act, the shade trees cut down from the Coffee Gardens are to be deposited with Governments Timber Depots. The said Timbers are sold through auction by the Govt. depot and the proceeds from the sale value are paid to Garden owners after deduction of 10% towards “supervision charges”.
The applicant has sought advance ruling in respect of six questions relating to applicability of GST. The main issue involved was that whether the legally binding and prescribed activity of depositing the timber / wood by the applicant with the Government Timber Depot for disposal as per the provision of Section 104A of the Karnataka Forest Act will constitute a “supply” and therefore subject to payment of GST for keeping the goods at the custody of the auctioneer i.e. Government Timber Depot?
The AAR observed as follows:-
1. The transactions of the applicant is examined and found that there are two types of transactions between the applicant and the Karnataka Timber Depots:
2. The sale of timber by the Karnataka Timber Depot on behalf of the applicant
3. provision of service of supervision of timber till the time of sale
4. The timber / wood belonging to the applicant is handed over to the Karnataka Timber Depot (referred hereinafter as “Depot”) for auction or further supply and the Depot is raising invoice against such supply made to third parties. This action of the Depot is in the capacity of an agent of the applicant with rights to transfer the title of the goods to third parties and hence is clearly transferred the same as an agent of the applicant. Hence the supply made by the agent on behalf of the principal amounts to supply and the depot is collecting GST on the same. The Depot is remitting the sale value of the timber to the applicant.
5. Since the depot is considered as an agent within the meaning of clause (5) of section 2 of the Central Goods and Services Tax Act, 2017, the transfer of goods from the applicant to the agent is also a supply for the reasons of provision at Clause 3(a) of Schedule-I.
It was thus ruled that the supply of goods by the applicant to the depot for further supply on behalf of the principal would also amount to a supply and the applicant has to issue a tax invoice and discharge GST on the same. On the same analogy other issues were resolved.
The applicant filed an appeal before the Hon’ble AAAR, Karnataka. Hon’ble AAAR has upheld the order of the AAR vide its order No.- KAR/AAAR/Appeal-18/2019-20 dated 19/03/2020.
Hon’ble AAAR observed as follows:-
As per Section 182 of the Indian Contract Act, 1872, an “agent” is a person employed to do any act for another, or to represent another in dealings with third person. The person for whom such act is done, or who is so represented, is called the “principal”. The term “agent” has been defined under sub-section (5) of section 2 of the CGST Act as follows:-
“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.”
Hon’ble AAAR also referred to CBIC Circular No. 57/31/2018-GST dated 4-09-2018 wherein the scope of principal-agent relationship was explained. The Appeal Order inter-alia contained:-
“We draw reference to the CBIC Circular No 57/2018 dated 4-09-2018 wherein the scope of principal-agent relationship was explained. In terms of the said Circular, the key ingredient for determining the principal-agent relationship under GST would be whether the invoice for the further supply of goods on behalf of the principal is being issued by the agent or not. Where the invoice for further supply is being issued by the agent in his name then, any provision of goods from the principal to the agent would fall within the fold of the said entry.”
The procedure adopted by the Government Depots has also been discussed in the Appeal order in following words:-
“In the instant case, once a lot of timber is sold to a successful bidder in the auction, the purchaser is required to pay l/4th value of the timber purchased along with applicable taxes to the Principal Chief Conservator of Forests (PCCF). On receipt of the amount, the forest department will send a sale confirmation letter to the Purchaser at which time the purchaser will pay the balance dues. Once the material is lifted by the Purchaser after payment of the sale value plus taxes, the concerned Range Forest Officer will raise a bill which will be forwarded to the Deputy Conservator of Forest (DCF). The DCF will prepare a separate bill and send the same to the Chief Conservator of Forests (CCF) who will issue the letter of credit (LOC). The LOC will be forwarded to the treasury who will issue the cheque to the DCF and the DCF will issue the same to the Appellant. Therefore, it is observed that the sale of timber happens through the GTD and not to the GTD as claimed by the Appellant. The proceeds of the timber sold through the auction process by the GTD is given to the Appellant on completion of the auction process.”
The Hon’ble AAAR finally concluded on this issue that the GTD acts in the capacity of agent of the Appellant and this transaction of depositing of timber by the Appellant in the GTD amounts to a supply in terms of clause 3 of Schedule I of the CGST Act.
Author’s view:-
It is true that aforesaid circular has elaborately discussed the scope of principal-agent relationship in the context of Schedule I of the CGST Act. It is however not a fair practice to conclude something on the basis of only a part of the circular without appreciating the whole circular.
What does the Circular says:-
In the said Circular, after referring to the definitions of the term “Agent” under section 182 of the Indian Contract Act, 1872 and under section 2(5) of the CGST Act, 2017, Ld. Commissioner GST had observed:-
“The following two key elements emerge from the above definition of agent:
- the term „agent‟ is defined in terms of the various activities being carried out by the person concerned in the principal-agent relationship; and
- the supply or receipt of goods or services has to be undertaken by the agent on behalf of the principal.
From this, it can be deduced that the crucial component for covering a person within the ambit of the term ‘agent’ under the CGST Act is corresponding to the representative character identified in the definition of “agent” under the Indian Contract Act, 1872.”
The crucial components for declaring someone as Agent of other, as per the said Circular’ are- (a) there must be an agent-principal relationship and (b) the supply must be receipt or made by the Agent on behalf of the Principal. The aforesaid circular contains that if there is a principal-agent relationship and if invoice for further supply is being issued by the agent in his own name, then any provision of goods from the principal to the agent would fall within the fold of Schedule I of the CGST Act.
Both the orders issued by the hon’ble authorities fails to establish that factually there was any agent principal relationship between the two parties i.e. Tata Coffee Ltd and the Karnataka Timber Depot. For being agent –principal relationship, there must be a contract, may be oral or implied, but in the instant case there was no such contract. There is no finding that the Karnataka Timber Depot is abide by any of the direction or suggestion of the Tata Coffee Ltd.
The entire transactions were executed as per the provisions of section 104A of the Karnataka Forest Act, 1963. For the sake of ready reference relevant sub-sections of the said section are exhibited below:-
- No person other than,—
- the State Government; or
- the officers of the State Government not below the rank of a Deputy Conservator of Forest , authorised in writing in this behalf,
shall purchase or transport any blackwood or bite tree (Dalbergia Latifolia) or timber thereof:
Provided that the purchase of any such tree or timber from the State Government or the aforesaid officers shall not be deemed to be a purchase in contravention of the provisions of this sub-section:
Provided further that the State Government may by order exempt any such tree or timber below such measurements as may be specified by it from time to time from the provisions of sub-section (1).
- No person shall sell or otherwise dispose of any such tree or timber to any person other than the State Government or the aforesaid officers.
- Notwithstanding anything contained in sub-section (1) any such tree or timber purchased from the State Government or the aforesaid officers by any person for bonafide personal use may be transported by such person in accordance with the terms and conditions of a permit issued by such authority and in such manner as may be prescribed.
- The price of any such tree or timber shall be such as the State Government may by order specify from time to time, having regard to,—
- prevalent market price;
- quality of the timber in the locality;
- transport facilities available in the locality;
- the cost of transport;
- general level of wages for labour prevalent in the locality; and
- such other matters as may be prescribed.
- The State Government or the aforesaid officers may establish such number of depots as may be necessary where any such tree or timber may be sold to the State Government or the aforesaid officers.
- The State Government or the aforesaid officers subject to the general supervision and control of the State Government shall be bound to purchase at the price fixed under sub-section (4) any such tree or timber offered for sale during the hours of business.
- Any tree or timber purchased under sub-section (1) shall be sold or otherwise disposed of in such manner as the State Government may from time to time direct.
From bare perusal of the aforesaid provisions of the law under which the transactions were effected, it appears to me that both the parties here to has acted on principal to principal basis and there was no agent- principal relationship.
In light of the aforesaid issue and with due respect to the authorities passing the orders, I am of the view that the relationship between the two parties as decided by the hon’ble Authorities needs re-consideration.
This write-up is just for academic discussion and the author has penned it down with a motive to get the views of the learned professionals on the issue.
Author Bio
Well explained.
Hon ble Supreme Court in the case of Bhopal Sugar Industries Ltd. v. STO AIR 1977 Supreme Court 1275, has explained-
A contract of agency differs from a contract of sale in as much as an agent, after taking delivery of the property, does not sell it as his own but sells it as the property of the principal under his instructions and directions. Thus, the essence of Contract of Agency is that the agent does not sell the goods as his own but sells the same as the property of the Principal under his instructions and directors. Thus an agent always acts on behalf of his Principal only and the benefits of the activities done by the agent would be reaped by the principal. Furthermore, since the agent is not the owner of goods, loss, if any, suffered by the agent is to be borne by the Principal and the agent shall be indemnified by the principal.