2022 (11) TMI 259 - AAR - GST

Reimbursement of tree cut compensation exempt from GST as pure agent, land compensation reimbursement taxable

AAR Karnataka ruled on GST liability for reimbursement of compensation amounts paid to farmers during work execution. The Authority held that ... Pure agent - value of supply of services in case of pure agent - reimbursement of expenses excluded from taxable value - supply of services by agreeing to refrain from an actPure agent - reimbursement of expenses excluded from taxable value - Reimbursement of tree cut compensation paid to farmers/land owners during execution of the work is not chargeable to GST. - HELD THAT: - The Authority examined whether the applicant acted as a pure agent of the contractee for payments of tree cut compensation. Applying rule 33 of the CGST Rules, 2017 and the explanatory conditions, the Authority found that (i) the applicant entered into a contractual arrangement (Special Conditions of Contract incorporated as a contract document) to incur tree cut/crop compensation on behalf of KPTCL; (ii) payments to beneficiaries are made on authorisation of the recipient and are separately indicated when invoiced; (iii) the supplies procured from third parties are additional to the applicant's own supplies; and (iv) the applicant receives only actual amounts incurred for such payments. The Special Conditions specifically refer to tree cutting and tree cut compensation being organized and reimbursed by the owner as per actuals, satisfying the statutory tests for treatment as a pure agent for tree cut compensation. Consequently, such reimbursed amounts are excluded from the value of supply and are not taxable under GST. [Paras 15, 16, 17, 18, 19]Tree cut compensation reimbursed by the applicant is not chargeable to GST as the applicant qualifies to be a pure agent for such payments.Pure agent - value of supply of services in case of pure agent - Reimbursement of land compensation paid to farmers/land owners during execution of the work is chargeable to GST. - HELD THAT: - The Authority considered whether land compensation falls within the applicant's role as a pure agent. Though payments of land compensation are made to beneficiaries and reimbursed by KPTCL, the relevant contractual clause in the Special Conditions of Contract (para 1.4) does not refer to land compensation. Because there is no contractual undertaking in the incorporated contract documents authorizing the applicant to act as a pure agent for land compensation, the first explanatory condition of rule 33 (existence of contractual agreement to act as pure agent) is not satisfied for land compensation. Therefore the reimbursement of land compensation cannot be excluded from the value of supply as a pure agent and is liable to GST. [Paras 15, 18, 19]Land compensation reimbursed by the applicant is chargeable to GST as the applicant does not qualify to be a pure agent in respect of such payments.Final Conclusion: Advance Ruling: reimbursement of tree cut compensation paid by the applicant is not taxable (applicant qualifies as a pure agent for tree cut compensation); reimbursement of land compensation is taxable (applicant does not qualify as a pure agent for land compensation). Issues Involved:1. Applicability of GST on reimbursement of tree cut compensation.2. Applicability of GST on reimbursement of land compensation.Detailed Analysis:1. Applicability of GST on reimbursement of tree cut compensation:The applicant, a partnership concern registered under CGST and KGST Acts, executes government projects and has been awarded a contract by Karnataka Power Transmission Corporation Limited (KPTCL) for establishing a sub-station. The applicant sought an advance ruling on whether GST applies to the reimbursement of tree cut compensation paid to farmers and landowners during the project execution.The applicant explained that the compensation amounts paid to farmers are not included in the contract amount and are reimbursed separately by KPTCL. The applicant acts as a pure agent, making payments on behalf of KPTCL and later getting reimbursed. Rule 33 of the CGST Rules, 2017, defines the conditions under which a supplier can be considered a pure agent. These conditions include acting on authorization by the recipient, indicating payments separately in the invoice, and procuring supplies in addition to the services provided.The agreement between the applicant and KPTCL includes a clause (Section V, clause 1.4 of the special conditions of contract) that specifies tree cutting and tree cut compensation would be paid by the contractor and reimbursed by the owner (KPTCL) as per actuals. This contractual agreement satisfies the conditions for the applicant to be considered a pure agent for tree cut compensation.Ruling:The reimbursement of tree cut compensation amount paid to farmers and landowners during the course of execution of work is not chargeable to GST as the applicant qualifies to be a pure agent.2. Applicability of GST on reimbursement of land compensation:The applicant also sought clarity on the GST applicability for the reimbursement of land compensation paid to farmers and landowners. The land compensation includes payments for tower foot/foundation compensation and regular land compensation, with rates set by the Deputy Director Land Records (DDLR) based on district magistrate orders.The special conditions of the contract (Section V, clause 1.4) do not mention land compensation, indicating no contractual agreement for the applicant to act as a pure agent for land compensation. The absence of this agreement means the applicant does not meet the criteria to be considered a pure agent for land compensation under Rule 33 of the CGST Rules, 2017.Ruling:The reimbursement of land compensation amount paid to farmers and landowners during the course of execution of work is chargeable to GST as the applicant does not qualify to be a pure agent for this purpose.