CBEC issues concept note on PURE Agent in GST

CBEC issues concept note on PURE Agent in GST

INTRODUCTION

The GST Act defines an Agent as a person including a factor,broker, commission agent, arhatia, del credere agent, anauctioneer or any other mercantile agent, by whatevername called, who carries on the business of supply orreceipt of goods or services or both on behalf of another. So, who is a pure agent and why is a pure agent relevantunder GST Broadly speaking, a pure agent is one whowhile making a supply to the recipient, also receives andincurs expenditure on some other supply on behalf of therecipient and claims reimbursement (as actual, withoutadding it to the value of his own supply) for such suppliesfrom the recipient of the main supply. While the relationship between them (provider of service and recipient of service)in respect of the main service is on a principal to principalbasis, the relationship between them in respect of otherancillary services is that of a pure agent. Lets understand the concept by taking an example.Ais an importer and B is a Custom Broker. A approachesB for customs clearance work in respect of an importconsignment.The clearance of import consignment anddelivery of the consignment to A would also requiretaking service of a transporter.So A, also authorizesB, to incur expenditure on his behalf for procuring theservices of a transporter and agrees to reimburse B forthe transportation cost at actuals. In the given illustration,B is providing Customs Brokers service to A, which wouldbe on a principal to principal basis. The ancillary service of transportation is procured by B on behalf of A as a pureagent and expenses incurred by B on transportation shouldnot form part of value of Customs Broker service providedby B to A.This, in sum and substance is the relevance of thepure agent concept in GST.

RELEVANCE OF PURE AGENT UNDER GST

The concept is borrowed from the erstwhile Service TaxDetermination of Value Rules, 2006 and carried forwardunder GST. Under the GST Valuation Rules 2017, a pure agentis given the following meanings. A pure agent means a person who:

(a) enters into a contractual agreement with the recipientof supply to act as his pure agent to incur expenditure orcosts in the course of supply of goods or services or both.

(b) neither intends to hold nor holds any title to the goodsor services or both so procured or provided as pureagent of the recipient of supply.

(c) does not use for his own interest such goods or servicesso procured.

(d) receives only the actual amount incurred to procure suchgoods or services in addition to the amount received forthe supply he provides on his own account.

The important thing to note is that a pure agent does notuse the goods or services so procured for his own interestand this fact has to be determined from the terms of thecontract.In the illustration of Importer and Customs Brokergiven above, assuming that the contract was for clearanceof goods and delivery to the Importer at the price agreedupon in the contract.In such case, the Customs Broker would be using the transport service for his own interest(as the agreement requires him to deliver the goods at theimporters place) and thus would not be considered as a pureagent for the services of transport procured. Another important fact is that, the person who providesany service as a pure agent receives only the actual amountfor the services provided. Coming back to our example ofImporter and Customs Broker, the agreement providesreimbursement of transport services utilised at actuals. In this case, lets say the value of transport service wasRs.10,000/-.If the Customs Broker charges any amountmore than Rs.10,000/-, then he will not be considered as apure agent for the services of transport and the value oftransport service will be included in the value of his CustomsBroker service.

EXCLUSION FROM VALUE

Expenditure incurred as pure agent becomes relevant, whenit comes to determining the value of a supply for levy of GST.The preceding para explains who will be considered as a pureagent.The valuation rules provide that expenditure incurredas pure agent, will be excluded from the value of supply, and thus also from aggregate turnover. However, such exclusionof expenditure incurred as pure agent is possible only andonly if all the conditions required to be considered as a pureagent and further conditions stipulated in the rules aresatisfied 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 beconsidered as a pure agent)for exclusion from value: (i) The supplier acts as a pure agent of the recipient of thesupply, when he makes payment to the third party onauthorization by such recipient. (ii) The payment made by the pure agent on behalf of therecipient of supply has been separately indicated inthe invoice issued by the pure agent to the recipientof service. (iii) The supplies procured by the pure agent from the thirdparty as a pure agent of the recipient of supply are inaddition to the services he supplies on his own account In case the conditions are not satisfied, such expenditureincurred shall be included in the value of supply under GST.The following illustration will make the concept clearer:

• Corporate services firm A is engaged to handle the legalwork pertaining to the incorporation of Company B.
• Other than its service fees, A also recovers from B,registration fee and approval fee for the name of thecompany paid to Registrar of the Companies.
• The fees charged by the Registrar of the Companiesregistration and approval of the name are compulsorilylevied on B.
• A is merely acting as a pure agent in the payment ofthose fees.
• Therefore, As recovery of such expenses is adisbursement and not part of the value of supply madeby A to B.

Some examples of pure agent are:

1. Port fees, Port charges, Custom duty, dock dues,transport charges etc. paid by Customs Broker on behalfof owner of goods.
2. Expenses incurred by C&F agent and reimbursed byprincipal such as freight, godown charges.

Illustration:

Suppose a Customs Broker issues an invoice forreimbursement of a few expenses and for consideration towards agency service rendered to an importer. Theamounts charged by the Customs Broker are as below:

S.No.	Component charged in invoice	Amount
1	Agency Income	Rs. 10,000/-
2	Traveling expenses; Hotel expenses	Rs. 15,000/-
3	Customs Duty	Rs. 55,000/-
4	Docks Dues	Rs. 5000/-

In the above situation, agency income and travelling/hotel expenses shall be added for determining the value of supply by the Customs Broker whereas Docksdues and the Customs Duty shall not be added to the value, provided the conditions of pure agentare satisfied.

CONCLUSION

A pure agent concept is an important one for businessesas it has direct implications on the value of taxableservice. It has direct bearing on the amount of GSTcharged on a particular supply. It also has bearing onthe aggregate turnover of the supplier and thereforeon calculating the threshold limit for registration. Whenever the intention is to act as a pure agent, careshould be taken to ensure that the conditions specifiedfor such pure agents and further conditions given inthe valuation rules are also met so that only the realvalue of the service provided is subjected to GST.