2019 (4) TMI 421 - AAR - GST

GST applicable on actual expense reimbursement in lease agreements determined by AAR

In Re: E-Square Leisure Pvt. Ltd.

The Authority for Advance Ruling (AAR) concluded that GST is levied on the reimbursement of expenses from the lessee by the lessor at actuals. The AAR ... Levy of GST - reimbursement of expenses from the lessee by the lessor at actuals - Rate of GST? - Pure Agent services or not - composite supply or mixed supply? - Applicant is of the view that reimbursement of water charges, electricity charges, is nothing but repayment of certain expenses incurred by a person on behalf of other and they do not have character of supply as defined under the GST Act. Held that:- The applicant has agreed to lease out the Theatre which is an immovable property to lessee to conduct and operate the Theatre for rent. As per entry no. 5 (a) of Schedule II - Activities of Transaction to be treated as supply of Goods or supply of Services; renting of immovable property is a supply of services and liable to tax under the provisions of GST Act. We strongly feel that Theatre business will not be organic unless it is accompanied with supply of power and water. The utilities such as electricity, supply and water supply are basic amenities subject to which competent authority will not issue’ No objection Certificate’ to conduct business of running a Theatre. As such applicant is providing more than two services such as renting of immovable property, supply of power through DG set and water through RO besides cooking fuel. Composite supply or mixed supply? - Held that:- The renting of immovable property would be the main supply and provision of other utilities such as electricity, and water supply, fuel etc. would be in the nature of ancillary supply which help in better enjoyment of the main supply that is Theatre. Principal supply or main supply basically signifies the supply of goods or services that is formed as a substantial constituent of a composite supply and any other supply being ancillary - the utility charges in the nature of electricity charges and water reimbursed by the applicant from lessee forms part of composite supply. The value of supply includes all amounts that pertains to specific supply for the purpose of levy of tax except, subsidies provided by the government and the value of discount. However, as per Rule 33 of GST Valuation Rules, 2017 the expenditure or cost incurred by a supplier, as a pure agent of the recipient of the supply shall be excluded from the value of supply. However, such exclusion of expenditure incurred as a pure agent is possible where the conditions are required to be considered as a pure agent and further conditions stipulated in the rules are satisfied by the supplier. Pure Agent or not? - Held that:- The applicant has installed the main electric connection and has different sub connections at each location for reading actual consumption of electricity. Applicant has also installed the DG sets for generation of electricity in case of power failure. The water required is also provided through RO system. All these goes to show that these supplies are on their own account and is for effective enjoyment of activities related to the Theatre - the provision of supply is made by the applicant to comply with the mandatory requirements of the local body and the Licensing Authority under Cinema Act and Cinema Rules 3 to operate the Theatre - there is no authorization, obtained by the applicant from the recipient of the services, to act as pure agent and to make payment to third parties. The applicant has failed to establish themselves as a pure agent as defined under the GST Valuation Rules and therefore the expenditure or cost incurred by the applicant and subsequent reimbursement thereof cannot be excluded from the value of supply. Issues Involved:1. Whether GST is levied on the reimbursement of expenses from the lessee by the lessor at actuals.2. In case GST is levied, what is the rate of GST applicable to said reimbursement of expenses.Detailed Analysis:Issue 1: Whether GST is levied on the reimbursement of expenses from the lessee by the lessor at actuals.The applicant, engaged in the business of renting immovable property, sought clarity on whether GST applies to reimbursements for utility expenses such as electricity, water charges, property tax, and cooking fuel from the lessee.The applicant argued that these reimbursements do not constitute a supply under Section 7 of the CGST Act, as they are merely repayments for expenses incurred on behalf of the lessee. They further contended that under Rule 33 of the CGST Rules, reimbursements made in the capacity of a 'pure agent' are not liable to GST.However, the Authority for Advance Ruling (AAR) concluded that the conditions for a 'pure agent' under Rule 33 were not fulfilled. Specifically, the applicant did not have authorization from the lessee to act as a pure agent, and the expenses were incurred for the applicant's own account rather than on behalf of the lessee.Additionally, the AAR noted that the supply of utilities like electricity and water is essential for the operation of the theatre and is inherently linked to the renting of the property, thus forming part of a composite supply.Conclusion: GST is levied on the reimbursement of expenses from the lessee by the lessor at actuals.Issue 2: In case GST is levied, what is the rate of GST applicable to said reimbursement of expensesRs.The AAR examined whether the reimbursement of expenses should be taxed at the rate applicable to the individual expenses or as part of the composite supply of renting immovable property.The AAR determined that the provision of utilities such as electricity and water, along with the renting of immovable property, constitutes a composite supply under Section 2(30) of the CGST Act. In a composite supply, the principal supply determines the tax rate for the entire supply. Here, the principal supply is the renting of immovable property.Conclusion: GST would be payable at the rate applicable to the principal supply, which is the renting of immovable property.Order:1. Question: Whether GST is levied on the reimbursement of expenses from the lessee by the lessor at actualsRs.Answer: Yes, GST is levied on the reimbursement of expenses from the lessee by the lessor at actuals.2. Question: In case GST is levied, what is the rate of GST applicable to said reimbursement of expensesRs.Answer: As the reimbursement of the expenses constitutes a composite supply, GST would be payable at the rate applicable to the principal supply.