Under the GST framework, the value of a supply of goods or services or both is the transaction value. Transaction value is the price actually paid or payable for the supply of goods or services or both, where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. Section 15 of the CGST Act, 2017, enumerates the items to be included in transaction value as well as the items that need not be included in transaction value. Further, valuation rules are applicable in situations where transaction value can not be determined as per sub-section (1) of section 15 of the CGST Act, 2017. Clause (c) of sub-section (2) of section 15 of the CGST Act, 2017 suggests that incidental expenses charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or services shall be included in the value of the supply. As such, reimbursement of expenditure needs to be included in the value of supply and attracts GST except in the case of a pure agent. A pure agent incurs certain expenditure on behalf of the recipient of supply and recovers the same from the recipient in the form of reimbursement. The term reimbursement has not been defined under the GST law. The Cambridge Dictionary defines it as “the act of paying back money to someone who has spent it for you…”. The dictionary.com defines reimbursement as “repayment for an expense or loss”. Rule 33 of the CGST Rules, 2017, categorically excludes the expenditure incurred by a supplier as a pure agent of the recipient of supply from the value of supply subject to the fulfillment of certain conditions. In terms of the said rule, reimbursement of expenditure in case of a pure agent shall not form part of the value of supply, provided all the conditions as stipulated in the said rule are cumulatively met.
Pure Agent Concept under GST
The concept of pure agent is common to businesses. A pure agent, at the time of making main supply to the recipient, also procures some additional supplies from third party and makes payment for the supplies so procured to such third party on behalf of the recipient. Then the pure agent claims reimbursement of such expenditure from the recipient at actual without adding any profit element. So far as the main supply is concerned, the relationship between the supplier and recipient is on principal to principal basis. However, in respect of the additional supplies procured from the third party on behalf of the recipient, the supplier acts as a pure agent of the recipient.
The explanation to Rule 33 of the CGST Rules, 2017 has defined the expression ‘pure agent’ and the same is reproduced below-
“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.”
In view of the above definition, the pure agent does not hold any title to the goods or services or both so procured or supplied as a pure agent. A pure agent does not use the goods or services so procured for his own interest. Pure agent receives only the actual amount incurred to procure such goods or services in addition to the amount receivable for his main supply. The supplier has to enter into a contractual agreement with the recipient of supply to act as his pure agent.
Value of supply of services in case of Pure Agent
Section 15 of the CGST Act, 2017 read with rule 33 of the CGST Rules, 2017 deals with the value of supply of services in case of pure agent. In terms of rule 33, the expenditure 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.
It is pertinent to note that to exclude such expenditure incurred by a supplier as a pure agent from the value of his supply, all the above conditions along with the conditions to qualify as a pure agent has to be simultaneously met by the supplier in each case. Otherwise such expenditure would be included in the value of supply. The supplies procured by the pure agent from the third party are in addition to his main supply. Pure agent makes payment to the third party on authorisation of the recipient. Such payment made by the pure agent on behalf of the recipient has to be separately indicated in the invoice issued by the pure agent.
Example
The illustration given in Rule 33 of the CGST Rules, 2017 is reproduced below: –
Corporate services firm A is engaged to handle the legal work 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 the company paid to the Registrar of Companies. The fees charged by the Registrar of Companies for the registration and approval of the name are compulsorily levied on B. A is merely acting as a pure agent in the payment of those fees. Therefore, A’s recovery of such expenses is a disbursement and not part of the value of supply made by A to B.