Escrowed freight not consideration under Section 7 CGST Act; GST only on facilitator's subscription and commission income

The AAR held that freight amounts deposited into an escrow account maintained by the applicant for the sole purpose of transfer from shippers to carriers do not constitute "consideration" in the hands of the applicant under Section 7 of the CGST Act. The applicant acts only as a facilitator/agent; the escrowed freight amounts never belong to it and are merely held and transferred per parties' instructions. Consequently, no "supply" of goods or services occurs in respect of these freight deposits, and no GST is leviable on such amounts. GST is payable only on the applicant's subscription/commission income.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the applicant qualifies as a "pure agent" under Rule 33 of the CGST Rules, 2017 in respect of the freight amounts routed through its bank account.

1.2 Whether the balance freight amount deposited by shippers into the applicant's bank account for onward transfer to carriers constitutes "consideration" in relation to any supply by the applicant under Section 2(31) of the CGST Act, 2017.

1.3 Whether the routing and holding of the balance freight amount through the applicant's bank account constitutes a "supply" under Section 7 of the CGST Act, 2017, attracting levy of GST in the hands of the applicant.

2. ISSUE-WISE DETAILED ANALYSIS

2.1 Qualification as "pure agent" under Rule 33 of CGST Rules

Legal framework

2.1.1 The Court referred to the definition of "pure agent" in the Explanation to Rule 33 of the CGST Rules, 2017, which contemplates a person who, while making a supply to the recipient, also receives and incurs expenditure on some other supply on behalf of the recipient and claims reimbursement at actuals without adding it to the value of his own supply.

Interpretation and reasoning

2.1.2 The applicant's stated role was to operate an online portal facilitating connection between shippers and carriers and to receive the balance freight amount into a designated bank account (earlier described as "escrow account", later corrected to "separate current account") for onward payment in full to carriers upon proof of delivery, without any deduction or mark-up.

2.1.3 The Court noted that the applicant does not receive any other supply on behalf of shippers or carriers nor incur expenditure on such supply; it only holds and transfers amounts belonging to the parties concerned.

2.1.4 The applicant separately receives subscription/commission from shippers and carriers for facilitation services, on which it undertakes to pay GST.

Conclusions

2.1.5 The concept and conditions of "pure agent" under Rule 33 are not satisfied on these facts, and the applicant cannot be treated as a pure agent in respect of the freight amounts routed through its bank account.

2.2 Characterisation of the balance freight amount as "consideration" under Section 2(31) of CGST Act

Legal framework

2.2.1 The Court considered Section 2(31) of the CGST Act, defining "consideration" to include any payment made or to be made, in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, by the recipient or any other person, and the proviso that a deposit given in respect of a supply shall not be treated as payment unless the supplier applies such deposit as consideration.

Interpretation and reasoning

2.2.2 The Court found that the actual supply of service (freight/service of carriage) is between shippers and carriers; the major portion of freight and corresponding consideration flows directly between them.

2.2.3 Only the balance portion of the freight amount is deposited into the applicant's current account, to be forwarded in full to the carrier upon fulfilment of delivery obligations. This amount represents consideration for freight services rendered by the carrier to the shipper, not for any supply by the applicant.

2.2.4 From the applicant's perspective, the balance freight amount is a sum held as deposit/entrusted funds belonging to the parties, not in respect of any supply of goods or services or both by the applicant.

2.2.5 Even if treated as a "deposit" in respect of a supply, under the proviso to Section 2(31), it does not become consideration to the applicant unless the applicant, as supplier, applies it as consideration for its own supply, which is not the case.

Conclusions

2.2.6 The balance freight amount deposited with and transferred by the applicant cannot be regarded as "consideration" accruing to the applicant in relation to any supply by it.

2.2.7 The only "consideration" received by the applicant is the subscription/commission from shippers and carriers for facilitation services, which is independently subject to GST.

2.3 Whether routing/holding of freight amounts constitutes "supply" under Section 7 of CGST Act and GST liability thereon

Legal framework

2.3.1 The Court referred to Section 7 of the CGST Act, which defines "supply" to include all forms of supply of goods or services or both, such as sale, transfer, barter, exchange, licence, rental, lease or disposal, made or agreed to be made for a consideration in the course or furtherance of business, as well as specified activities without consideration under Schedule I, and exclusions under Schedule III.

Interpretation and reasoning

2.3.2 For an activity to qualify as "supply", it must be made for a "consideration" in the course or furtherance of business.

2.3.3 On the admitted facts, the applicant's role with respect to the freight amount is limited to acting as a facilitator/agent holding and transferring amounts which do not belong to it, strictly in accordance with directions of shippers and carriers.

2.3.4 Since the balance freight amount does not constitute "consideration" to the applicant, the mere receipt, holding and onward transfer of this amount cannot be treated as a taxable "supply" by the applicant.

2.3.5 The only taxable activity constituting "supply" in the hands of the applicant is the facilitation service for which it receives subscription/commission from shippers and carriers, on which GST is payable as admitted.

Conclusions

2.3.6 No "supply" of goods or services or both arises vis-à-vis the applicant in respect of the balance freight amount deposited in and routed through its bank account.

2.3.7 The applicant is not liable to pay GST on the balance freight amount deposited by shippers into its current account and forwarded without deduction to carriers; GST liability is confined to the subscription/commission earned for facilitation services.

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