Court :
AAR, Karnataka
Brief :
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").
Citation :
Advance Ruling No. KAR ADRG39/2022 dated October 27, 2022
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").
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.
Whether the GST is applicable on reimbursement of compensation amount paid to farmers and land owners during the course of execution of work?
The AAR, Karnataka in the matter of Advance Ruling No. KAR ADRG39/2022 held as under:
"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.
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.
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."
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