Section 2(5) of the CGST act defines an agent as a person who carries on the business of supply and/ or reception of goods or services on behalf of another, as a factor, broker, commission agent, arhatia, del credere agent, auctioneer or any other mercantile agent. However, apart from these agents, there are agents who supply goods/services to and from the Principals place of business, with no intent of benefiting from the transaction or hold any title of goods and/or services, such agents are known as Pure Agents. Contrary to the above-mentioned agents, who work as a mediator, the pure agent only takes the supply of goods or services on behalf of principal and claim reimbursement against the same.
Who can be defined as a Pure Agent under GST?
Under GST Valuation Rules 2017, Pure Agent is 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;
- neither intends to hold nor holds any title to the goods or services or both, so procured or provided as a pure agent of the recipient of supply;
- does not use for his own interest such goods or services so procured; and
- Receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account.
Definition of Principal
As per the definition provided in the GST law, the term “Principal” means a person on whose behalf an agent carries on the business of supply or receipt of goods or services or both.
Valuation Rule for Pure Agents
According to the valuation rule, the expenditure or costs incurred by the supplier as a pure agent (contracted to the recipient of the supply of services) shall be excluded from the value of supply, if all of the following conditions are satisfied:
- The pure agent makes a payment to a third party, on behalf of the recipient, for procuring a supply when the contract for the supply of services procured is between the third party and the recipient;
- The recipient of the supply is the only user of the services procured by the pure agent from the third party;
- The recipient of the supply is liable to make payment to the third party;
- The recipient of the supply authorizes the pure agent to make payment on his behalf;
- The recipient of the supply knows that the third party provides the services (for which the pure agent has made payment);
- The payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the agent;
- The pure agent recovers from the recipient only such amount as has been paid by him to the third party; and
- The services procured by the pure agent from the third party are in addition to the supply/service he provides on his own
To understand the concept better, let us consider an example as given below:
An importer asks a Custom Broker for clearance of his import consignment. For this purpose, the Customs Broker also requires the help of a transporter. So, the importer asks the Custom Broker to incur expenditure on behalf of him and get them reimbursed. Customs Broker clears the consignment and transports them to the importer. He charges the clearance fees and transportation costs separately. The transportation costs charged by him equals the amount paid by him to the importer. In this case, Custom Broker has never held the title of the consignment. Also, he does not gain anything from transporting the consignment to the importer. While billing to importer he separately indicated the amount paid by him for transporting consignment. Hence, in this case, Custom Broker will be termed as the pure agent of the importer.
Following are some examples of pure agent:
- Port fees, Port charges, Custom duty, dock dues, transport charges etc. paid by Customs Broker on behalf of the owner of goods.
- Expenses incurred by C& F agent and reimbursed by principal such as freight, godown charges.
Whenever the intention is to act as a pure agent, care should be taken to ensure that the conditions specified for such pure agents are met and goods and services are valued properly. Also, GST Law exempts the value of services provided as Pure Agent from the turnover. So it should be noted that the expenses spent and reimbursed as part of Pure Agent are not included in total turnover of the agent.
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