GST Applicable to Reimbursement received towards Stipend paid to Trainees on behalf of Industry partner: AAR Karnataka

The Karnataka Authority of Advance Ruling (AAR) has ruled that GST applies to reimbursements for stipends provided to trainees on behalf of an industry partner as part of a training agreement.

The applicant, M/s Teamlease Education Foundation, is a section 25 company registered under the Companies Act, 1956, engaged in charitable activities, and has obtained registration under section 12 AA of the Income Tax Act, 1961, with the goal of promoting and sponsoring educational institutions, including universities, dedicated to domain specific, work culture, the enhanced offer of technology supported, industry relevant, and low cost academic programmes.

The applicant is an approved NEEM (National Employability Enhancement Mission) Facilitator under the All India Council for Technical Education. According to the NEEM Regulations, the applicant as well as the Industry partner have certain obligations, and in order to meet those obligations, the applicant charges an Administration Fee, Sourcing Fee, Enrollment Fee, Reimbursement of monthly stipend paid to trainees on behalf of Industry partner, and Reimbursement of the cost of medical and accident insurance obtained for trainee welfare as agreed by the Industry Partner.

Although the applicant collects GST on the entire transaction value, including reimbursement amounts, the applicant believes that the reimbursement received for stipend is an expenditure or cost incurred as a pure agent of the Industry Partner as defined by rule 33 of the CGST Rules 2017, and thus such reimbursements should be excluded from the taxable value and no GST should be charged. As a result, the applicant requested an advance judgement in this matter.

Before determining whether or not the reimbursement is chargeable under GST, AAR sought to determines whether or not the applicant qualifies as a pure agent of the Industry Partner. A pure agent, as defined by rule 33 of the CGST Rules 2017, is a person (supplier, in this case, applicant) who enters into a contractual agreement with the recipient of supply (Industry partner, in this case) to act as the recipient’s pure agent to incur expenditure or costs in the course of supplying goods or services or both. The applicant issues a stipend invoice and distributes it to the trainees after receiving the funds. The applicant has also failed to provide any contractual agreement to incur expenses first and then claim the funds. As a result, the applicant does not meet the criteria for being a pure agent under Rule 33 of the CGST Rules 2017.

The applicant has provided a copy of an agreement entered into with one of the Industry partners, LG Electronics India Pvt. Ltd., which clearly states that “the Industry partner shall deposit the amount towards the stipend to the trainees on or before the second day of each calendar month,” implying that the applicant is not incurring the said amount initially and later claiming the same by raising an invoice. In addition, the applicant has not provided any formal evidence that the Industry Partner has authorised the applicant to pay a third party and then claim the actual amounts. As a result, the applicant does not meet the required criterion on this account as well.

AAR also noted that the applicant’s Course Registration Letter to trainees specifies that the stipend for a given month must be paid on or before the 10^th of the following month, implying that the applicant receives the stipend amount from the industry partner by the 2^nd of the month and distributes/ disburses the same to the trainees by the 10^th of the month. Thus, it is established beyond a reasonable doubt that the applicant is not incurring stipend expenses and then claiming reimbursement, but rather gets the amount and disburses it, indicating that the applicant does not meet the requisite requirement.

The AAR bench comprising of Dr. MP Ravi Prasad and T. Kiran Reddy, eventually ruled that, the applicant does not qualify to be a pure agent of the industry partner to the extent of reimbursement received towards stipend paid to the trainees on behalf of the industry partner as part of training agreement and therefore the said reimbursement dischargeable to GST.