GST GUIDANCE NOTE
ON
PRINCIPAL-AGENT
TRANSACTIONS
1
Index
1.
2.
Overview
1.1
Background
1.2
Meaning of Principal and Agent
1.3
Essence of Principal and Agent Transactions
1.4
Typical Agents in businesses
1.5
What is an Intermediary?
1.6
How is an intermediary different from an agent?
Existing Taxation
2.1
Taxability
2.2
Exemptions
2.3
Place of Provision of Service
2.4
Concept of Pure Agent
3.
Taxability in GST Regime
3.1
Registration
3.2
Taxability
3.3
Exemptions
3.4
Place of Supply
3.5
Valuation
3.6
Concept of Pure Agent
3.7
Input Tax Credit
3.8
Open Issues
4.
Frequently Asked Questions
2
1.
Overview
1.1
Background
An Agent plays a very important role in facilitation of supply of goods or of provision of
services between two persons. This guide is prepared to cover the nature of services
provided by various types of agents, tax provisions related to agents under current tax
regime and under GST scenario.
1.2
Meaning of Principal and Agent
In terms of provisions of Section 2(88) of the GST Laws, Principal means a person on
whose behalf an agent carries on the business of supply or receipt of goods or services or
both.
In terms of provisions of Section 2(5) of the GST Laws, Agent means a person, including a
factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other
mercantile agent, by whatever name called, who carries on the business of supply or receipt
of goods or services or both on behalf of another.
As per the Indian Contract Act, 1872, an "agent" is a person employed to do any act for
another or to represent another in dealings with third persons. The person for whom such
act is done, or who is so represented, is called the "principal".
To summarize we can say that, principal is one who uses the services of an agent and agent
is one who arranges supplies of goods and / or services on behalf of the principal.
The terms referred in above definition are described below:
•
Factors: The basic feature of this agent is that the agent has possession of the
goods before sale. In this case, such an agent can sell in his/her own name.
•
Brokers: An individual or firm employed by others to plan and organize sales or
negotiate contracts for a commission. A broker's function is to arrange contracts for
property in which he or she has no personal interest, possession, or concern. The
broker is an intermediary or negotiator in the contracting of any type of bargain,
acting as an agent for parties who wish to buy or sell stocks, bonds, real or personal
property, commodities, or services. A distinguishing feature between an agent and a
broker is that a broker acts as a middleperson. When a broker arranges a sale, he or
she is an agent of both parties
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1.3
•
Commission Agent: Agent who solicits and procures business from potential
customers on behalf of one or more principals, usually against payment of a
percentage of the realized sales revenue as commission.
•
Del Credere Agent: This agent undertakes to guarantee the goods or indemnify the
principal for any losses arising from the agency transaction. In return for this
assurance, the agent receives an extra remuneration from the principal.
•
Auctioneer: A person authorised by law to sell land or goods of other persons at
the public auction: one who sells at an auction.
Essence of Principal and Agent Transactions
Determination of correct relationship between two parties is relevant under both direct taxes
and indirect taxes. Section 194H of the Income Tax Act, 1961 requires deduction of tax at
source by the payer if such income is in the nature of commission or brokerage.
It is often difficult to decide whether a transaction is being held in the capacity of principal
or agent. An agent primarily represents either the supplier or the recipient. He has normally
no control over the prices or the title to the goods. He acts merely as per the orders of the
principal.
There are numerous judgments on this issue where the transactions between Telecom
Operator and the distributors has been considered as Principal to Principal (POP). Some of
the said judgments have been listed below;
•
•
Bharti Airtel Ltd. Vs. DCIT [TS-722-HC-2014(KAR)]
M/s Idea Cellular Ltd. Vs. Income Tax Officer[2015-TIOL-901-ITAT(JAIPUR)]
In these rulings, the HC / ITAT has ruled that withholding obligation is not attracted since
there is a sale of SIM cards to the Distributors, which are liable to the risk of loss or damage
to such products, and the Distributors are not authorized to bind the telecom company to the
ultimate customer. The HC also held that, although the SIM card, by itself, does not have
any value and is integral to the provision of telecom service, nevertheless, it constitutes a
right to service which can be sold.
There are also some other cases where it was held that Telephone Operators / SIM card
distributors are liable to deduct tax at source under Section 194H of Income Tax Act, 1961
on the discount / incentive payments to the distributors / retailers, being in the nature of
commission like
•
•
ITO vs. Jai Shree Enterprises [TS-222-ITAT-2015(DEL)]
Bharti Cellular Limited vs. Assistant Commissioner of Income tax [2011-TIOL396-HC-KOL-IT]
4
Whether a transaction will comes within the purview of sale or contract of agency is a
mixed question of fact and law which can be answered only from the terms of the
agreement entered into by the parties or appointment letter issued by the Principal in favour
of the Agent.
An agent should agree with the principal to act on their behalf in relation to the particular
transaction concerned. This may be a written or oral agreement, or merely inferred from the
way they conduct their business affairs. Following are the key aspects between agent and
Principal transactions:
•
•
•
it must always be clearly established from the agreement between agent and
principal, that the agent is arranging the transactions for the principal, rather than
trading on his own account
the agent will not be the owner of any of the goods or services which he buys or sells
for his principal
the agent will not alter the nature or value of any of the supplies made between the
principal and third parties
Agents acting on their own behalf, not meeting the above referred conditions would not be
qualified as agents acting for their Principals. They would be merely called as Agents for
the name sake. The nature of such transactions will be Principal to Principal.
1.4
Typical Agents in businesses
As per general industry practice, following are some of the types of agents engaged in
providing various services:
•
Air Travel Agent: Air Travel Agent means any person engaged in providing
any service connected with the booking of passage for travel by air
•
Customs Broker: Customs broker means a person licensed under the Customs
Brokers Licensing Regulations,2013 to act as an agent for the transaction of any
business relating to the entry or departure of conveyances or the import or
export of goods at any Customs Station
•
Clearing and Forwarding Agent: Clearing and Forwarding Agent means any
person who is engaged in providing any service, either, directly or indirectly,
connected with the clearing and forwarding operations in any manner to any
other person and includes a consignment agent.
•
Manpower Recruitment and Supply Agency: Manpower Recruitment and
Supply Agency means any commercial concern, engaged in providing any
service, directly or indirectly, in any manner, for recruitment of manpower to a
client.
5
•
Stock Broker: Stock Broker means a sub broker who has either made an
application for registration or is registered as sub broker in accordance with the
rules and regulations made under SEBI Act, 1992.
•
Buying / Purchasing Agent: People or companies who offer to buy goods or
property on behalf of another party. These are agents for all kinds of products,
from raw materials, commodities to specialized customized equipments.
•
Selling Agent: An agent who sells for a commission, the output of his
Principals on a contractual basis and provides them with market information.
Types of Stakeholders involved in an Agency transaction
A has engaged B to search prospective buyers, assist in finalizing agreements for
sale of goods belonging to A. B has identified C and facilitated the agreement
between A and C. The goods have moved from A to C directly and B has received
commission for such sale.
The stakeholders in the above illustration are:
A – Principal (Seller of Goods)
B – Selling Agent
C – Buyer
Engaged for sale of goods
A
B
Commission
Supply of Goods
Consideration
C
1.5
What is an intermediary?
In terms of provisions of Section 2(13) of the IGST Law, Intermediary means a broker, an
agent or any other person, by whatever name called, who arranges or facilitates the supply
of goods or services or both or securities, between two or more persons, but does not
include a person who supplies such goods or services or both or securities on his own
account.
As per the above definition, the person who arranges or facilitates transactions in securities
will also be considered as an Intermediary. To cover the services provided by an agent who
are engaged in dealing with securities under GST scenario, the word securities has been
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specifically included in the above definition as the same is excluded from the definition of
goods as well as services.
Currently, in service tax regime, services provided by agents who are dealing in securities
are exempt from service tax. In GST, whether this transaction will be exempted or not will
be decided based on the exemption list which is yet to be notified.
1.6
How is an Intermediary different from an Agent?
Accordingly, scope of agents are wider than intermediary. Agent may provide main
services on his own account however, an intermediary only arranges or facilitates the
supply of main services / goods.
Illustration: Persons such as call centers who provide services to their clients by
dealing with the customers of the client on client’s behalf, but actually provide these
services on their own account, will not be categorized as an intermediary
2
Existing Taxation
2.1
Taxability:
Currently, the transactions between the Principal and Agent, whether for supply of goods or
services, are subjected to Service Tax.
2.2
Exemptions:
In terms of Mega Exemption Notification No 25/2012 dated 20.06.2012 (Sr. No 29), services
provided by following persons, mainly acting as an agent, in respective capacities, are
exempt from service tax:
i.
ii.
iii.
2.3
Sub broker or an authorized person to a stock broker,
Authorized person to a member of a commodity exchange,
Selling agent or a distributor of SIM cards or recharge vouchers
Place of Provision of Service:
In terms of Rule 9 of the Place of Provision of Service Rules, 2012, the place of provision of
service in case of services provided by an intermediary is the location of the service
provider. Thus services by travel agents, tour operators, stock brokers and the likes even to
persons located outside India are taxable in India. On the contrary selling agents located
abroad for exporters are outside the tax net at present.
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2.3
Concept of Pure Agent:
“Pure agent is defined in Rule 5 of the Service Tax (Determination of Value) Rules 2006
and means a person who –
a) enters into a contractual agreement with the recipient of service to act as his pure agent
to incur expenditure or costs in the course of providing taxable service;
b) neither intends to hold nor holds any title to the goods or services so procured or
provided as pure agent of the recipient of service;
c) does not use such goods or services so procured; and
d) receives only the actual amount incurred to procure such goods or services.”
The expenditure or costs incurred by the service provider as a pure agent of the recipient
of service, shall be excluded from the value of the taxable service, if all the following
conditions are satisfied, namely:i)
the service provider acts as a pure agent of the recipient of service when he makes
payment to third party for the goods or services procured
ii) the recipient of service receives and uses the goods or services so procured by the
service provider in his capacity as a pure agent of the recipient of services;
iii) the recipient of services is liable to make payment to the third party;
iv) the recipient of services authorises the service provider to make payment on his
behalf;
v) the recipient of services knows that the goods and services for which payment has
been made by the service provider shall be provided by the third party;
vi) the payment made by the service provider on behalf of the recipient of services has
been separately indicated in the invoice issued by the service provider to the
recipient of services;
vii) the service provider recovers from the recipient of services only such amount as
has been paid by him to the third party; and
viii)the goods or services procured by the service provider from the third
party as a pure agent of the recipient of services are in addition to the
services he provides on his own account.
3. Taxability in GST Regime
3.1 Registration:
Agents shall be required to be registered compulsorily irrespective of the threshold limit
in terms of Section 24(vii) of the CGST Act. (As per the current tax regime, the threshold
exemption limit is applicable for agents)
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3.2 Taxability:
Supply of Goods:
The transaction between a Principal and an Agent towards supply of goods made without
consideration will be considered as supply of goods in terms of Schedule I of the CGST Act.
(Such transactions are not taxable under current VAT regime)
In a case where the goods are transferred from principal to agent for sale to customer and the
consideration for such sale is flowing directly from the customer to the principal who will be
the supplier of goods?
Based on the above provision there would be four supplies:
a) transfer of goods between principal to agent without consideration –
In this case principal will be the supplier of goods and accordingly he has to discharge
the GST liability in terms of Schedule I of the GST Law;
b) the transaction between agent and principal –
Supply of services by the agent as a facilitator of the sale against a commission will be
taxable;
c) the sale transaction between principal to customer Principal can be considered as supplier of goods as the ownership of goods is being
transferred to the customer against a consideration. However it is in conflict with (a)
above as can the supply of goods be taxed twice: once against consideration and once as
per the deeming fiction without consideration?
d) The transaction between agent and the customer –
GST law does not prescribe anything here and thus results in breaking the chain
established in terms of a) above
It appears that there is some anomaly in the current law as to how can the principal again be
a supplier in this case? It seems that the intention of the law is to tax a), b) and d) and not c)
Supply of Services:
Services provided by agent to the principal would be considered as supply of services
(Similar to the current tax provisions)
3.3
Exemptions:
Exemptions are yet to be notified under the GST Law.
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3.4
Place of Supply:
Place of Supply of Goods:
The place of supply of goods in case of agents (other than import or export transactions) will
be the principal place of business of the agent on whose direction the goods are actually
delivered by the supplier to the recipient.
Illustration: A located in Maharashtra has supplied goods to B located in Gujarat on
the direction of C located in Rajasthan.
From GST point of view, there will be two supplies;
• between A (principal) and C (agent) for which the POS will be the location
of C i.e., Rajasthan and
• between C (agent) and B (customer) for which POS will be location of B i.e.,
Gujarat where the goods are delivered.
The Place of supply of goods in case of import transactions will be the location of the
importer of goods. Similarly, in case of export transactions, the place of supply of goods will
be the location outside India.
Place of Supply of Services:
Location
Status of Principal
Agent and
Registered
Principal both
are located in
Not
Address available
India
registered
on record
Address not
available on
record
Either Agent or
Principal is
located out of
India
3.5
Place of supply
Location of the
Principal
Location of the
Principal
Location of the
Agent
Location of the
Agent
Valuation:
In terms of Rule 3 of the Valuation Rules, the value of supply of goods between the
principal and his agent shall:
a) be the open market value of the goods being supplied, or at the option of the
supplier, be ninety percent of the price charged for the supply of goods of the like
kind and quality by the recipient to his customer not being a related person, where
the goods are intended for further supply by the said recipient;
Illustration: A Principal supplies goods to a customer through an agent at Rs.925 per
unit. Another Principal is supplying goods of like kind and quality through the same
agent at Rs.950 per unit. The agent is supplying such goods to customers (who are not
related) at a price of Rs.1000 per unit. The value of supply made by the principal shall
be Rs. 950 per unit or where he exercises the option the value shall be 90% of Rs. 1000
i.e., Rs. 900/- per unit.
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b) where the value of the supply is not determinable under clause (a), the same shall be
determined by application of rule 4 (i.e., based on cost) or rule 5 (i.e., residual method)
in that order.
3.6
Concept of Pure Agent:
Concept of pure agent as prevalent earlier has been largely retained.
“Pure agent means a person who
a) 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;
b) neither intends to hold nor holds any title to the goods or services or both so procured or
provided as pure agent of the recipient of supply;
c) does not use for his own interest such goods or services so procured; and
d) receives only the actual amount incurred to procure such goods or services.”
As per Rule 7 of the Valuation Rules, notwithstanding anything contained in these rules, the
expenditure or costs incurred by the supplier as a pure agent of the recipient of supply of
services shall be excluded from the value of supply, if all the following conditions are
satisfied, namely:i.
the supplier acts as a pure agent of the recipient of the supply, when he makes
payment to third party for the services procured as the contract for supply made by
third party is between third party and the recipient of supply
ii.
the recipient of supply uses the services so procured by the supplier service provider in
his capacity as pure agent of the recipient of supply;
iii.
the recipient of supply is liable to make payment to the third party;
iv.
the recipient of supply authorises the supplier to make payment on his behalf;
v.
the recipient of supply knows that the services for which payment has been made by
the supplier shall be provided by the third party;
vi.
the payment made by the supplier on behalf of the recipient of supply has been
separately indicated in the invoice issued by the service provider to the recipient of
service;
vii.
the supplier recovers from the recipient of supply only such amount as has been paid
by him to the third party; and
viii.
the services procured by the supplier from the third party as a pure agent of the
recipient of supply are in addition to the supply he provides on his own account.
Difference between the existing provision as per Service Tax Law and GST Law
Description
Service Tax
GST
Remarks
Definition
A service
A supplier of goods
There is a
of Pure
provider can act
contradiction in
or services or both
Agent
as a pure agent
can act as a pure
the definition of
for the recipient
agent for the
pure agent and
of services.
recipient of supply.
the scope of
pure agent in
terms of Rule 7
11
Conditions
of valuation
rules
A service
provider can act
as a pure agent
for the
procurement of
goods as well as
services.
However in terms of
Rule 7 of Valuation
Rules, a supplier of
service can only act
as a pure agent.
A supplier can act as
a pure agent only for
the procurement of
services.
of Valuation
Rules.
The scope of
pure agent has
been limited to
the extent of
procurement of
services in GST.
Illustration: Company ABC Limited has engaged Mr. X, a legal firm to provide legal
services in relation to register a patent in the name of Company ABC Limited for a fee
of Rs.1,00,000/-. Mr. X has paid the registration fee of Rs.20,000/- to the Government
on behalf of ABC Limited which is to be recovered from the Company as a
reimbursement. Such recovery of registration fees will not be treated as consideration
towards the legal services provided by Mr. X as the same is in the capacity of a pure
agent.
Government
Registration fees on
behalf of ABC Ltd.
Service Fee
Mr. X
ABC Ltd
Legal Services
Reimbursement of registration fees
3.7
Input Tax Credits:
Input Tax Credit of the services supplied by the agent to the principal will be eligible in the
hands of the principal so long as the said services are used or intended to be used by the
principal in the course or furtherance of his business for the taxable supplies made by him.
Further, input tax credit of the supplies made by the principal to the agents (for supplies as
per Schedule I of the CGST Law) will be eligible in the hands of agents for the taxable
supplies made by the agent.
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4 Frequently Asked Questions
Q 1. Mr. X, a freight forwarder provides domestic transportation within a taxable
territory (say, from the exporter’s factory located in Pune to Mumbai port) as well
as international freight service (say, from Mumbai port to the international
destination), under a single contract, on his own account (i.e. he buys-in and sells
freight transport as a principal), and charges a consolidated amount to the exporter.
Whether services provided by Mr X would be covered as an intermediary service?
Ans. No. In this case, since the freight forwarder provides the main service of
transportation, he will not be treated as an intermediary. This is a service of transportation
of goods for which the place of supply is the destination of goods. Since the destination of
goods is outside taxable territory, this service will not attract GST.
Q 2. One of the conditions to claim tax credit is that the receiver has received the
goods and or services. How will an agent who plays a role of introducing a potential
customer to the principal and directs the supply to the customer be able to take the
credit when he is not receiving such goods?
Ans. The agent will be eligible to take credit in relation to the supply of goods in terms of
the Explanation to Section 16(2), where it is deemed that the taxable person has received
the goods where the goods are delivered by a supplier to the recipient or any other person
on the direction of the agent, before or during the movement of goods either by way of
transfer of documents of title to goods or otherwise.
Q 3. A person located in India appointed a foreign agent for sale of goods outside
India. For facilitating sales in the foreign market, the foreign agent charges
commission to the principal located in India. Whether GST will be applicable on the
commission amount?
Ans. In terms of Section 2(13) of the IGST Act, intermediary means a broker, an agent or any
other person, by whatever name called, who arranges or facilitates the supply of goods or
services or both, or securities, between two or more persons, but does not include a person
who supplies such goods or services or both or securities on his own account.
Accordingly, in this case the foreign agent is an intermediary and hence GST will not be
applicable on the commission amount charged by the foreign agent to his principal located in
India being the place of supply of services will be the location of the supplier of services i.e.,
the foreign agent’s location in terms of Section 13(8) of the IGST Act
Q4. Whether agent is liable for tax in case of transaction made by him on behalf of
the principal in case the principal fails to discharge his tax liability?
Ans. Yes. As per provisions of Section 86 of the CGST Act, when an agent supplies or
receives any goods on behalf of the principal, both agent and principal are jointly and
severally liable in respect of tax payable on such goods.
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Q5. Whether the provisions of a casual taxable person are applicable to agents?
Ans. Yes. An agent is included in the definition of casual taxable person. As per Section
2(20) of the CGST Act, casual taxable person means a person who occasionally undertakes
transactions involving supply of goods or services or both in the course or furtherance of
business, whether as principal, or agent or in any other capacity, in a State or a Union
territory where he has no fixed place of business.
Q6. XYZ located in USA engaged a call centre PQR Ltd in Mumbai who provides
services by dealing with the customers of XYZ Ltd on his behalf. For these activities,
PQR Ltd is charging certain consideration from XYZ Ltd. What will be the Place of
Supply in this transaction? Whether GST would be applicable?
Ans. In terms of Section 2(13) of the IGST Act, intermediary means a broker, an agent or
any other person, by whatever name called, who arranges or facilitates the supply of
goods or services or both, or securities, between two or more persons, but does not
include a person who supplies such goods or services or both or securities on his own
account.
Accordingly, in the given case, PQR Ltd. who provides services to XYZ Ltd. by dealing with
the customers of XYZ Ltd on client’s behalf, but actually provided these services on their
own account, will not be categorized as intermediaries. Hence, the place of supply of
services will be the location of service recipient i.e., USA in terms of Section 13(2) of the
IGST Act. No GST will be applicable on this transaction.
Q7. A Shipping Company has appointed a steamer agent to book a space for cargo
for export out of India. The shipping Company made a total payment of Rs 10000 to
the steamer agent as commission (Rs.1000/-) and the cost of booking the cargo space
(Rs.9000/-). What will be the value on which GST is payable by the steamer agent.
Ans. There will be two situations in the above mentioned case:
a) Where the steamer agent raises 2 invoices on the shipping company – one for Rs.
1000 as his commission and Rs. 9000 as reimbursements of booking charges.
b) Where the steamer agent raises an invoice of total amount of Rs.10000 on the
shipping Company
In case of option a) GST will be payable on the commission amount of Rs. 1000 by the
steamer agent. The amount claimed as reimbursements through a separate invoice will not
be subjected to GST in the hands of steamer agent in terms of Rule 7 of the Valuation
Rules. (Also, as per the provisions of Income Tax Act, TDS will be deducted only on the
commission income and not on the reimbursements amount as the same is not an income
of the steamer agent).
In case of option b) GST will be payable on Rs. 10000 as the agent is raising an invoice
of the total amount and booking the same as income in his books of accounts. Here, the
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steamer agent is not acting as an agent and the transaction qualifies as a P to P
transaction.
Q8. ABC Ltd located in Singapore hires a courier agent in India for delivery of the
goods to its client in New Delhi. Whether GST is payable on the services provided by
courier agent?
Ans. In terms of provisions of Section 13(2), the place of supply for transportation of
goods by way of courier will be the location of service recipient and accordingly, no
GST will be payable as the service recipient i.e., ABC Ltd is located in Singapore.
Q9. Whether the representation service provided by Indian bank to foreign MTSO
in relation to money transfer to a beneficiary in India falls in the category of
Intermediary Service? Whether GST is leviable on service provided by Indian bank
to MTSO located outside India?
Ans. In terms of provisions of Section 2(13) of the IGST Law, Intermediary means a
broker, an agent or any other person, by whatever name called, who arranges or
facilitates the supply of goods or services or both or securities, between two or more
persons, but does not include a person who supplies such goods or services or both or
securities on his own account.
An Indian bank acting as an agent to foreign MTSO facilitates provision of money
transfer service by foreign MTSO to beneficiary in India and receives commission in
return. Hence, the Indian Bank falls in the category of Intermediary and representation
service provided by Indian bank is an intermediary service.
In terms of Section 13(8) of the IGST Act, the place of supply in case of intermediary is
the location of service provider and hence GST is leviable on representation service
provided by Indian bank to MTSO located outside India
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