Principal Agent Relation-GST Implications

There is the concept of principal agent prevailing in the industry. Under which the agent supplies the goods or services on behalf of principal. The principal is defined under section 2(88) of CGST Act 2017 which states that “principal means a person on whose behalf an agent carries on the business of supply or receipt of goods or services or both”.  Further as per section 2(5) of CGST Act 2017 “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”. In this article we are going to discuss the treatment of transactions between agent and principal, whether the agent needs to apply for registration under the GST and many other issues in this respect.

As we know that GST is applicable on supply of goods or service and as per section 7 for the transaction to be treated as supply there must be a flow of consideration except the activities specified in Schedule I of CGST Act 2017. In other words, the schedule I contain the list of activities to be treated as supply even if made without consideration. The para 3 of said schedule is laid down as follows;

“3. Supply of goods
(a) by a principal to his agent  where the agent  undertakes to supply such goods on behalf of the principal; or
(b) by an agent  to his principal where the agent  undertakes to receive such goods on behalf of the principal”.

Thus as per para 3 of schedule I, the supply of goods by principal to his agent or supply of goods by agent to principal would be treated as supply even if there is no consideration involved in it. Also it is important to note that the supply of services between agent and principal is outside the scope of above entry and would therefore require consideration to consider it as supply. Further, the word used in above para 3 is “supply or receipt of goods on behalf of the principal”. Hence the question arises how to determine whether the agent is supplying or receiving goods on behalf of the principal.
In this respect the CBIC has issued a clarification vide Circular No. 57/31/2018 dated 04.09.2018. In para 7 of the said circular it was clarified that the key ingredient for determining agent-principal relationship under the GST would be whether the invoice for the further supply of goods on behalf of the principal is issued by the agent or not? In case where the invoice for further supply is issued by the agent in his name then, any supply of goods by the principal to the agent would fall within the scope of the entry/serial number 3 of said schedule. However, it may be noted that in cases where the invoice is issued by the agent to the customer in the name of the principal, such an agent shall not be covered within the ambit of Schedule I of the CGST.

Similarly, where the goods being procured by the agent on behalf of the principal are invoiced in the name of the agent then further provision of the said goods by the agent to the principal would be covered by the said entry.

Registration provisions in respect of Agent:
As per sec 24(vii) of CGST Act 2017 the person who makes a taxable supply of goods or services or both on behalf of other taxable persons whether as an agent or otherwise shall compulsorily be required to obtain registration irrespective of the limit of the aggregate turnover threshold.

Principal and Agent shall be jointly liable:
Section 86 of CGST Act 2017 states about the joint liability of agent and principal. Hence if an agent supplies or receives any taxable goods on behalf of his principal, such agent and his principal shall be jointly and severally liable to pay the tax payable on such goods under this Act.

Accordingly, the liability of the principal who supplies the goods through an agent or receives supplies through an agent, can’t be relieved as soon as he pays tax on the supply made by him to the agent; instead, the liability in the hands of the principal continues till the tax is duly discharged by an agent on the said supply. Thereby the principal needs to ensure that all the compliance are duly followed by an agent apart from the compliance requirements to be followed by him.

Difference between intermediary and agent:
As per section 2(13) of IGST Act 2017, a person who arranges or facilitates the supply between two or more persons would be considered an intermediary and does not include a person who supplies such goods or services or both or securities on his own account. Hence as per the definition of an intermediary, it is clear that an intermediary is just a facilitator between two or more persons and merely arranges or facilitates the main supply and does not himself provide the main supply. Thus, the role of the intermediary is only supportive to the main supply.

However, as per section 2(5) of CGST Act 2017, agent means a person, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another. The agent is also defined under section 182 of Indian Contract Act 1872, which states that “agent” is a person employed to do any act for another or to represent another in dealings with third persons. Further as per section 237 of Indian Contract Act, when an agent has, without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound by such acts or obligations.

The main difference between the intermediary & agent is that in case of intermediary, the supplier or recipient would not be liable for any act of intermediary but in case of agent the principal would be liable for the acts of agent. And the intermediary is always works for two persons (supplier & recipient). However the agent is always works for one person i.e, principal.

Conclusion: The supply of goods by principal to agent or by an agent to the principal would be covered under schedule I when the invoice for further supply is issued by the agent in his name to the customer. However, in cases where the invoice is issued by the agent to the customer in the name of the principal, such an agent shall not be covered within the ambit of Schedule I of the CGST.

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.