Pure Agent concept in GST

Introduction: This article discusses in detail about the Pure Agent concept in GST.

The concept of Pure Agent concept in GST is explained in rule 33 of CGST rules, 2017.

A pure agent is a registered taxable person who liaises between other suppliers on behalf of his client. Under this concept, while providing services to the client, he also undertakes to receive other ancillary services from other service providers, and incurs expenditure on behalf of his client. The actual expenditure incurred by a pure agent is later claimed as reimbursement. In other words, over and above the value of services rendered to his client, any other expenditure incurred by a pure agent (on behalf of his client) will be a reimbursement.

Therefore, the relationship between the supplier and recipient with respect to the main service, is on a principal-to-principal basis. The relationship between them in respect of other ancillary services is that of a pure agent.

Let us understand the concept of pure agent with an example

XYZ Traders is an importer, and ABC Export & Import Agency is a customs broker. XYZ Trader approaches ABC Export & Import Agency for customs clearance work for an import consignment. The clearance of import consignment, and the delivery of the consignment to XYZ Trader would also require taking service of a transporter. So XYZ Trader authorises ABC Export & Import Agency to incur expenditure on his behalf for procuring the transportation. XYZ Trader then agrees to reimburse the actual transportation cost to ABC Export & Import Agency.

In the given illustration,

• ABC Export & Import Agency is providing customs broker service to XYZ Traders. This is a main service sought out by XYZ Traders which would be on a principal-to-principal basis.
• The ancillary service of transportation is received by ABC Export & Import Agency on behalf of XYZ Trader is on pure agent basis.
•  The expenses incurred by ABC Export & Import Agency on transportation is claimed as reimbursement and will not be part of taxable value of customs broker service.

“Pure agent” means a person who–

• 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.

(This implies that there is an agreement in terms of ancillary supplies which supplier will receive and incur expenditure on behalf of the recipient.

 In the above example of customs broker services, ABC Export & Import Agency is authorised to receive and incur expenditure towards transportation services acting as pure agent of XYZ Traders.)

• Neither intends to hold nor holds any ownership to the goods and/or services so procured or provided as pure agent of the recipient of supply.

(Considering the above example, as a pure agent, ABC Export & Import Agency should not hold any title of goods or services which are supplied to recipient.) 

• Does not use for his own interest such goods and/or services so procured; and

(This implies that the goods or service procured by a pure agent is not used for his own interest and this fact can be determined from the terms of contract. In the above example, the contractual agreement says that, ABC Export Agency is only to provide services related to clearance of goods from customs, and not responsible for delivery of goods to XYZ Traders premises.

 Therefore, the transportation services received by ABC Export Agency is not on his own interest, instead it is on behalf of XYZ Traders.

If the terms of contract is for clearance of goods from customs and delivery to the XYZ Traders premises at an agreed price. In this case, ABC Export Agency would be using the transport service for his own interest since the agreement requires him to deliver the goods at the XYZ Traders premises. Thus, ABC Export Agency would not be considered as a pure agent for transportation service received.)

• Receives only the actual amount incurred to procure such goods and/or services in addition to the amount received for supply he provides on his own account

(A pure agent should receive only the actual amount incurred on behalf of the recipient. If he claims more than the actual amount, he will not be considered as a pure agent. Assuming the transportation cost incurred by ABC Export Agency is ₹ 20,000, and if he claims more than ₹ 20, 000, he will be not considered as a pure agent for receiving the transportation services on behalf of XYZ Traders.)

Conditions for excluding value of pure agent services

Expenditure or costs incurred by the supplier as a pure agent of the recipient of service shall be excluded from the value from the value of taxable supply if all the following conditions are satisfied which are as follows:

• The service provider acts as a pure agent of the recipient of service when he makes payment to third party on authorization by such recipient.

• 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

• 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.

Some examples of pure agent are:

1. Port fees, Port charges, Custom duty, dock dues, transport charges etc. paid by Customs Broker on behalf of owner of goods.

2. Expenses incurred by C&F agent and reimbursed by principal such as freight, go down charges.

Illustration: 1

ABC is an importer and XYZ is a custom house agency. ABC approaches XYZ agency for the custom clearance work for an import consignment. Along with the clearance of import consignment and delivery of the consignment to ABC, XYZ would also be required to take the services of a transporter. So ABC authorizes XYZ agency to incur expenditure on his behalf for procuring the transportation. ABC agrees to reimburse the actual transportation cost to XYZ agency.

From above, we can conclude that:

• The services provided by XYZ agency is the main service sought out by ABC which would be on principal-to-principal basis.
• The transportation service received by the XYZ agency on behalf of ABC is on Pure Agent basis.
• The transportation expenses are claimed as reimbursement and will not be part of a taxable value of customs broker services.

Illustration: 2

Suppose a Customs Broker issues an invoice for reimbursement of a few expenses and for consideration towards agency service rendered to an importer. The amounts charged by the Customs Broker are as below:

In the above situation, agency income and traveling/ hotel expenses shall be added for determining the value of supply by the Customs Broker whereas Docks dues and the Customs Duty shall not be added to the value, provided the conditions of pure agent are satisfied.

Conclusion

1. The concept of pure agent has direct implications on the value of taxable supply.

2.  It affects the amount of GST charged on a particular supply.

3. It also impacts the aggregate turnover of the supplier which is important for calculating the threshold limit for registration

4. Conditions specified for pure agents and those in the valuation rules have to be met so that only the real value is subjected to GST.

The author is a practising CA based in Delhi and is registered Insolvency Professional. He can be reached at [email protected] , Mob. +91 9953587496.