DECEMBER 18, 2018

By Dr G Gokul Kishore

PROVISIONS of law sometimes exhibit anxiousness of the draftsmen. It is manifested by use of provisos and explanations. CGST Act is no exception causing consternation among taxpayers. Despite such caution, certain needs are not anticipated and the taxpayer charges the draftsmen of blunder. In this sixteenth part, we will discuss the above statements with the support of advance rulings.

Pure agent- Interpretation is not so pure

From Service Tax regime, the concept of pure agent has been part of Indian indirect tax law. Creating a new species from the concept of agency as provided in the Indian Contract Act, GST law continues the service tax legacy by incorporating similar provisions in Rule 33 of CGST Rules. Devoid of jargon, this provision intends to exclude the expenditure or cost incurred by the supplier from the taxable value subject to certain conditions. The supplier should be acting as pure agent of the recipient of supply i.e. the recipient should have authorized this supplier (pure agent) to procure services from third parties and make payment on his behalf. Payment made to third parties should be separately indicated in the invoice raised by this agent-supplier. Anxiousness of draftsmen shows up with the explanation to Rule 33 (followed by illustration) which defines pure agent and indirectly adds further conditions. The agent-supplier should enter into contractual arrangement with recipient to act as 'pure agent' to incur expenditure or cost, does not use the goods or services for his own interest and receives only actual amount that is paid to third parties.

In general, the conditions are so onerous that the number of taxpayers who have used this provision and have not got any notice from the department can be counted in double digits. The Authority for Advance Ruling, West Bengal [In Re: Premier Vigilance & Security Pvt. Ltd., Ruling - 2018-TIOL-243-AAR-GST] held that toll charges paid by security service provider to bank who also transports cash are not in the nature of reimbursement and the applicant is not covered by Rule 33 - pure agent. This means that toll charges paid by the applicant need to be included in taxable value. The AAR read the illustration under explanation in Rule 33 which uses the word 'disbursement' and toll charges recovered by the applicant were held as not a disbursement but cost of the service provided to banks. Agreement with the bank has been stated as not mentioning applicant as 'pure agent' though it takes into account the terms stating that toll charges will be paid (reimbursed) on actuals.

Compared to the above, the applicant before Maharashtra Advance Ruling Authority was fortunate. When salary is deposited by the overseas shipping company in applicant's account for the purpose of disbursal to crew, the same was held as excludible from taxable value of services supplied by the applicant [In Re: DBS Marine Services Pvt. Ltd. - 2018-TIOL-304-AAR-GST]. It appears the word 'pure agent' was not used in the agreement but the AAR read the agreement as a whole and held in favour of the applicant.

Contracts and agreements are interpreted by reading the terms in a holistic manner to understand the intention of the parties. They may not use the very same words as applicable statutes may contain in relevant provisions. Merely because the agreement does not use the word 'pure agent', the person concerned cannot be held as not a pure agent when the amount is in the nature of compulsory charges/fee paid and the same is reimbursed on actuals. The parties know that the amount is paid on actuals. This ruling underscores the need for interpretation founded on law by the AAR.

Advance Rulings - No entry for recipients

Advance ruling is a beneficial provision meant to assist taxpayers. It does not add to revenue though binding nature of rulings in general and pro-revenue rulings do swell the coffers of the government. Section 95(a) of CGST Act defines 'advance ruling' and it seeks to apply to matters or questions (specified) in relation to supply of goods or services or both being undertaken or proposed to be undertaken by the applicant. While 'in relation to' expands the scope of this provision, use of words 'supply….being undertaken or proposed to be undertaken' tends to restrict the same to the supplier leaving recipient out its scope. This interpretation was adopted to reject an application by Tamil Nadu AAR [In Re: Naga Limited - 2018-TIOL-278-AAR-GST]. The applicant was importing wheat, an agricultural item, and services for loading, unloading, storage or warehousing, etc., were availed from various service providers. In tune with the farmer-friendly legal and policy framework, certain exemptions to various services used in relation to agricultural produce have been granted through various entries in Notification No. 12/2017-Central Tax (Rate).

The applicant was confronted with divergent practices as some of the service providers were not charging GST on the above services while some others chose to be conservative. Faced with such uncertainty on the tax front, the applicant knocked the doors of AAR created to remove such uncertainties. Adopting a literal interpretation of the definition of advance ruling, the AAR held that since the applicant was a recipient of services and not a supplier, application was not liable to be admitted.

It appears that the entry no. 54 of the above said notification is ambiguous as it uses the word 'services relating to cultivation of plants' in the opening sentence though it lists several services which are not related to cultivation per se but post cultivation. But the present discussion is on whether advance ruling should be extended to the taxpayer who is handed over invoices with both tax and without tax for same set of services provided by different vendors. If the objective is to provide the taxpayer with certainty, then the answer is in the affirmative. Let second year of GST take such practical difficulties faced by the trade and address them, either by way of amendment or appropriate clarification.

(...To be continued)

[The author is an Advocate and Joint Partner, Lakshmikumaran & Sridharan, New Delhi. The views expressed are personal.]

See Part XV