Pure Agent not liable to pay GST on reimbursement of the compensation amount paid to farmers and land owners

The AAR, Karnataka in the matter of M/s Sree Subha Sales [Advance Ruling No. KAR ADRG39/2022 dated October 27, 2022] ruled that, if the assessee qualifies to be a pure agent then reimbursement of tree cut compensation paid to farmers and land owners during the course of execution of work is not chargeable to Goods and Services Tax ("GST").

Facts

M/s Sree Subha Sales ("the Applicant") execute government projects on tender basis and their main area of expertise is water supply and underground drainage works. The Applicant was awarded a contract for establishment of sub-station at B.V. Halli in Channapatna taluk from the Karnataka Power Transmission Corporation Limited ("KPTCL").

The Applicant submitted that, the amount is paid as compensation to the affected persons i.e. land owners/ farmers, by the Applicant as per the contract, wherein, tree cutting, tree cut compensation, crop compensation is reimbursed by the KPTCL as per actuals. Further, as per the agreement, the work order amount does not include the compensation paid to farmers and it is being paid merely as reimbursement. The reimbursement bills are raised to KPTCL by the Applicant during execution of the project and the compensation amount is not included in the contract amount. The Applicant raises a bill to KPTCL with necessary proofs and documents for reimbursement of the same.

The Applicant has sought this advance ruling w.r.t. the applicability of GST for reimbursement of tree cut compensation and land compensation amount paid to farmers and land owners during the course of execution of the work.

Issue

Whether the GST is applicable on reimbursement of compensation amount paid to farmers and land owners during the course of execution of work?

Held

The AAR, Karnataka in the matter of Advance Ruling No. KAR ADRG39/2022 held as under:

• Noted that, as per Rule 33 of the Central Goods and Services Tax Rules, 2017 ("the CGST Rules"), a pure agent would be a person who enters into contractual agreement with the recipient of supply to act as recipient’s pure agent to incur expenditure or costs, in the course of supply of goods or services or both.
• Observed that, the Special conditions of contract in the agreement states that the Applicant will act as a pure agent of KPTCL to incur expenditure or costs in the course of supply of goods or services, however, it does not mention anything about land compensation therefore, the first condition of pure agent is satisfied only to the extent of tree cut compensation and crop compensation.
• Further observed that, the farmers or land owners are paid compensation either for cutting the trees or crops or to build any structures below the express feeder line. This is the service supplied by the farmers or land owners to the KPTCL which is covered under Schedule II of the Central Goods and Services Tax Act, 2017 ("the CGST Act") therefore, second and third condition to be a pure agent is satisfied. Further as the compensation is paid by the contractor and then the same is reimbursed by the owner as per actuals therefore, the fourth condition to be a pure agent is also satisfied.
• Opined that, since all the conditions to be a pure agent are satisfied, the Applicant is acting as the pure agent to the extent of reimbursement of tree cut compensation and not to the extent of reimbursement of land compensation as the Special conditions of contract does not mention land compensation. However, if the Special conditions of contract is not a part of the main agreement, then Advance Ruling issued in this case does not apply.
• Held that, reimbursement of tree cut compensation paid to farmers and land owners during the course of execution of work is not chargeable to GST as the Applicant qualifies to be a Pure Agent. However, the Applicant does not qualifies to be a pure agent for the land compensation amount.

Relevant Provisions

Rule 33 of the CGST Rules

"Value of supply of services in case of pure agent.-

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.

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.

Illustration

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."