For the purpose of determination of GST on Reimbursement, we first have to understand the meaning of a pure agent. The GST Act defines pure agent as 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 of goods or services or both on behalf of another person.
A pure agent is one who while making a supply to the recipient, also receives and incurs expenditure on some other supply on behalf of the recipient and claims reimbursement (as actual, without adding it to the value of his own supply) for such supplies from the recipient of the main supply.
While the relation between the service provider and service recipient in respect of the main service is on a principal to principal basis, the relationship between them in respect of other ancillary services is that of a pure agent.
Example of Reimbursement by a Pure Agent
Karan purchases furniture from Mr. F for Rs. 50,000 and requests Mr. F to deliver the same to his office. Mr. F who has a retail furniture shop does not himself undertake services of delivery of furniture.
On special request of Karan Batra, Mr F agrees to deliver the furniture to Karan’s office by hiring a transporter. The actual charges paid to the transporter (Rs. 1,000) would be reimbursed by Karan to Mr. F.
In the above mentioned example, the arrangement between Karan and Mr. F is only for sale of furniture for Rs. 50,000. The amount paid by Mr. F to the transporter (Rs. 1,000) is on behalf of the Mr. Karan which would be reimbursed on actual basis and this does not form a part of the contract.
Therefore, in the above mentioned example:-
- The sale of furniture by Mr. F to Karan for Rs. 50,000 is on a principal to principal basis.
- The expenses for transport of furniture incurred by Mr. F on behalf of Karan and reimbursed by Karan would be considered as pure agent service. (Rs. 1,000)
However, if the agreement between Karan and Mr. F was for sale as well as delivery of furniture for Rs. 51,000, in such a case – Mr. F would be availing the services of the transporter for his own interest and therefore he would be not considered as a pure agent in this case.
For the purpose of determination of pure agent service, it is pertinent to observe that the person who provides any service as a pure agent should only be reimbursed for the actual amount which was incurred as an expense.
Therefore in the above mentioned example, if the amount paid by Karan to Mr. F as reimbursement for transport of furniture is more than Rs. 1,000, then this would not be considered as a case of pure agent. In such a case, the amount paid would be included in the sale price of the furniture.
Who is a Pure Agent?
Under the GST Valuation Rules, a pure agent means a person who:-
- 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.
- Neither intends to hold or holds any title to the goods or services or both so procured or provided as pure agent of the recipient of supply.
- Does not use for his own interest, such goods or services so procured.
- Receiver only the Actual amount incurred to procure such goods or services in addition to the amount received for the supply he provides on his own account.
The important thing to note here is that the pure agent does not use the goods or services so procured for his own interest. The fact that he did not use the goods or services for his own interest would be determined based on the facts of the case and would be determined from the terms of the agreement.
The amount received as reimbursement by the pure agent would be excluded from the value of supply as well as from aggregate turnover. As the amount of reimbursement of expenses would not be included in the value of supply, the supplier himself cannot charge GST on the same and would only charge the actual amount paid to the person to whom the payment has been made.
However, such exclusion of expenditure incurred as pure agent is possible only and only if all the conditions required to be considered as a pure agent are satisfied by the supplier in each case.
Apart from the above, the supplier would also be required to satisfy the following conditions:-
- The supplier acts as pure agent of the recipient, when he makes payment to the 3rd party on authorisation by such recipient.
- 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 supplies procured by the pure agent from the 3rd party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account.
In case the conditions are not satisfied, such expenditure incurred shall be included in the value of supply under GST.
The following example will make the concept more clearer.
- Mukesh Ambani contacts Karan for the legal work pertaining to incorporation of one of his new companies Reliance MA. Karan charges a professional fee for the same.
- Due to paucity of time, Mukesh Ambani requests Karan to pay himself pay the registration fees and approval fees for the name of the Company to be paid to the Registrar of Companies. This would be reimbursed to Karan on actual basis.
- The fees charged by the Registrar of Companies for registration and name approval are compulsorily levied on Reliance MA. Karan is merely acting as a pure agent in the payment of those fees.
- Therefore, Karan’s recovery of such expenses is a disbursement and would not form a part of value of supply from Karan to Reliance MA.