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08 March 2019
Under Indian goods and services tax (GST) law, the Authority for Advance Rulings (AAR) provides binding clarifications with regard to:
While rulings are binding only on the taxpayer that raises the question, they carry persuasive value in identical situations. Appeals against AAR rulings can be brought before the Appellate Authority for Advance Ruling.
The concept of 'pure agents' is key when evaluating taxable services, particularly for tax exemption claims in respect of expense reimbursements and applicable GST. It also has bearing on a supplier's aggregate turnover when determining the appropriate turnover threshold for tax registration and payment. Thus, where any party intends to act as a pure agent, they must ensure that they meet the relevant conditions.
The applicant for the advance ruling was a crew recruitment and placement agency. It selected and recruited shipping personnel on behalf of another company (the principal) domiciled in Bermuda, which was also a foreign shipowner.
The applicant charged administration fees for its recruitment and placement services and paid GST on such charges. The applicant was reimbursed for the value of the salaries disbursed to the principal's crew members (ie, employees).
The applicant filed an advance ruling application before the AAR in Maharashtra regarding whether the reimbursed salary was liable to GST.
Notably, by way of Circular 15 (issues 24 September 2015), the Reserve Bank of India (RBI) permitted ship and crew management agencies that render services to shipping and airline companies incorporated outside India to open, hold and maintain non-interest-bearing foreign currency amounts with an Authorised Dealer (AD) Category - I Bank in India in order to meet local expenses associated with said shipping and airline companies.
In light of the RBI's circular, the applicant was responsible for paying the crew members' salaries on behalf of the principal. After the applicant paid these salaries, the principal would reimburse the same to the applicant in a single remittance. The applicant would then instruct the bank to disburse the money to the crew members' bank accounts, as per details provided by the principal.
To complete this activity, the applicant charged service charges and GST. These charges did not deduct any charges from the amount of salary received for disbursement. The applicant referred to the Central GST Rules 2017,(2) according to which "the expenditure or costs incurred by a supplier as a 'pure agent' of the recipient of supply shall be excluded from the value of the supply". Since the activity was carried out on the principal's behalf and the applicant did not deduct any charges from the amount of salary received for disbursement, the applicant argued that it would not be taxable as GST in view of the rules.
As per the Central GST Rules, expenditures or costs incurred by a supplier as a pure agent of a recipient are excluded from the value of supply in case of a pure agent if all of the specified conditions are satisfied.
A 'pure agent', as defined by law, must enter into a contract to act as a pure agent and cannot intend to hold title to the goods or services or use the goods or services for its own interest. Further, a pure agent receives only the actual amount incurred.
The AAR found that due to the nature of the agreement (ie, that the applicant would disburse salary to crew members on behalf of the principal, who would then reimburse the same to the applicant in a single remittance), the applicant was a pure agent.
In light of this finding, the AAR held that the amount received by the applicant for remittance qualified as reimbursement in the capacity of a pure agent and thus this amount should not be included in the value of supply for the levy of GST.
For further information on this topic please contact Dinesh Kumar at BDO in India by telephone (+91 22 3332 1600) or email (email@example.com). The BDO in India website can be accessed at www.bdo.in.
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