Pure Agent under GST

Under CGST Act 2017 the agent is defined under section 2(5) of CGST Act 2017 which states that 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. There is another term under GST which is known as pure agent. In this article the main issue of our consideration would be the pure agent i.e., what is the meaning of pure agent and why is a pure agent relevant under GST and taxability of transactions with the pure agent.

The pure agent is not defined under section 2 of CGST Act 2017, the definition of pure agent is given under the explanation of rule 33 of CGST Rules 2017. The said explanation is as follows;
“Explanation.- For the purposes of this rule, the expression '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”.

Thus from the above definition it is clear that pure agent is a person who enters into a agreement with recipient, to incur some expenses or cost while providing supply of goods or services. The pure agent does not use the goods or services so procured for his own interest and the pure agent recovers only the actual amount incurred to procure such goods or services.  In other words the  pure agent is one who while making a supply to the recipient, also incurs expenditure on some other supply on behalf of the recipient and claims reimbursement (as actual) for such supplies from the recipient of the main supply . To understand the concept of pure agent in detail, lets discuss one example; Mr. A is a Chartered Accountant in Practice and handles the various works of taxations, audits, company formations etc. Mr. B has approached Mr.A to handle the legal work pertaining to the incorporation of his Company. For this Mr. A has incurred registration fee and approval fee for the name of the company paid to the Registrar of Companies. Mr. A has later on in addition to their service fee, has also recovered such expenses from Mr.B as the same was incurred by Mr.A on behalf of Mr.B.  In this case Mr. A is merely acting as a pure agent in the payment of those fees.

Now, in respect of the pure agent the question that arises is whether such expenses incurred by pure agent would become the part of the value of supply of original service which provided by the pure agent to the recipient.

In this respect it is necessary to refer the rule 33 of valuation rules which is laid down as follows;
“Notwithstanding anything contained in the provisions of this Chapter, the expenditure or costs incurred by a supplier as a pure agent of the recipient of supply shall be excluded from the value of supply, if all the following conditions are satisfied, namely,-

(i) the supplier acts as a pure agent of the recipient of the supply, when he makes the payment to the third party on authorisation 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”.

The above Rule 33 of CGST Rules states that the expenditure incurred as pure agent, will be excluded from the value of supply, 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.

In clarify the scope of pure agent the CBIC has also issued a Circular No. 115/34/2019-GST dated 11-10-2019 wherein it was clarified that amount recovered by Airlines from passengers in account of PSF (Passenger Service Fee) and UDF (User Development Fee) on behalf of Airport Authority shall not be part of the value charged by Airlines from their customers if conditions stated under the rule 33 relating to the Pure Agent are satisfied.

For the scope of pure agent there are various advance rulings. The Uttar Pradesh Appellate Authority for Advance Ruling in case of M/s ION Trading India Private Limited [2020(03)LCX0174(AAAR)] held that the amount recovered from the employees towards car parking charge payable to Shanti Niketan Properties Private Limited (building authorities), would be deemed as "supply of service" by the applicant to its employees. Value of the supply would be nil, subject to the fulfilment of the conditions prescribed for pure agent by the appellant. Brief facts of the case and the observations of appellate authority are as follows;

The appellant is engaged in the business of software development which is exported to the overseas company. The appellant entered into a rent agreement with M/s Shanti niketan Properties Private Limited (Building Authority) for renting of office premises including certain number of free car parking spaces and certain number of parking spaces on payment of agreed rent per car parking space per month. The appellant facilitates procurement of car parking spaces from the Building Authority and procures it on payment of agreed lease charges per car parking space per month. The appellant bears part of the lease charges and the balance amount is equally recovered from all the employees using the parking spaces.

The appellant has sought an advance ruling on whether amount recovered from the employees towards car parking charges payable to Shanti niketan Properties Private Limited (building authorities), would be deemed as “Supply of service” by the applicant to its employees?

2. If the first question is answered in affirmative, whether the value of aforesaid supply would be NIL, being provided in the capacity of a “Pure Agent”? If valuation is not accepted as NIL, what would be the value of such supply?
The authority for advance ruling ruled that In the absence of requisite documents, no ruling can be given on the questions asked by the applicant.

Being aggrieved with the aforesaid order, the appellant filed an appeal application and stated that the facilitation of parking spaces between its employees and building authority does not amount to supply of services, due to reason that for an activity to qualify as supply, it is required to be made in the course or furtherance of business. The appellant further submitted that in case the said activity is supply then the value of such supply should be NIL, as the same is being provided in the capacity of a pure agent. The appellant also submitted that they are not utilizing the amount recovered from the employees (i.e. parking charges) for their own benefit and whatever amount is collected from the employees is passed on to the Building Authority.

In respect of the given case it was observed that the appellant is providing right to its employee’s to use parking facility on the parking space provided by the building authority and for this work they are collecting certain amount from their employee. Accordingly the activity provided by the appellant, is squarely falls under the Schedule II and treated as supply of service.

Regarding the second question it was observed that in the given case the appellant has submitted that they obtains parking facility on authorization/request made by their employees and makes payment thereof only on the basis of said authorization. With respect to condition “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” the appellant has submitted that they specifically indicated the amount to be recovered from the employees for parking charges in the employee manual, though the same is an approximate amount and the said amount is not clubbed with other charges, if any, recovered from the employees. Now coming to the third condition i.e. “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”, the appellant has contended that they, on their own account, provides facilitation assistance to the employees and in addition to this they also procures services of parking from the Building Authority and provides it to employees in capacity of a pure agent.

Further,  it was observed that the appellant has contended that they are transferring the entire amount collected, from their employees towards parking charges, to the Building Authorities. Accordingly, in view of aforesaid discussion the value of the services in the present case will be NIL, as the appellant is providing the same in the capacity of a Pure Agent, subject to the fulfilment of the conditions prescribed for “Pure Agent”.

Thus the appellate authority held that the amount recovered from the employees towards car parking charge payable to Shanti Niketan Properties Private Limited (building authorities), would be deemed as "supply of service" by the applicant to its employees. The value of the supply would be nil, subject to the fulfilment of the conditions prescribed for pure agent by the appellant.

From the above detailed discussion about the pure agent let’s move for the conclusion.

Conclusion:  The expenses incurred as a pure agent has direct implications on the value of taxable service. To consider any services as a pure agent, once should carefully understand the agreement between both the parties and also take care of conditions of Rule-33 of CGST Rules

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.