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In our series of articles detailing the valuation rules laid down by the GST council, we will now talk about the last valuation rule which is, the valuation of supply in the case of services to a pure agent.
Pure Agent means a person who:
(a) enters into a contractual agreement with the recipient of supply to act on their behalf and 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) procured on behalf of or provided to the recipient of supply;
(c) does not use the goods or services so procured for his own interest; and
(d) receives only the actual amount incurred to procure such goods or services.
A practising Chartered Accountant incorporating a private limited company on behalf of his client is an example of a pure agent.
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.
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:
(i) 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; For example, legal charges paid to Registrar of Companies (RoC) in above case.
(ii) the recipient of the supply is the only user of the services procured by the pure agent from the third party;
(iii) the recipient of the supply is liable to make payment to the third party;
(iv) the recipient of the supply authorizes the pure agent to make payment on his behalf;
(v) the recipient of the supply knows that the services (for which payment has been made by the pure agent) are provided by the third party;
(vi) 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;
(vii) the pure agent recovers from the recipient only such amount as has been paid by him to the third party; and
(viii) the services procured by the pure agent from the third party are in addition to the supply/service he provides on his own
Corporate services firm A is engaged to handle the legal work pertaining to the incorporation of a company run by B. Other than its service fees, the firm A also recovers from B the registration fee and approval fee for the name of the company which was paid to Registrar of Companies.
The fees charged by the Registrar for the company’s registration, and approval of the name are compulsorily levied on B. A is merely acting as a pure agent in the payment of those fees. Therefore, A’s recovery of such expenses is a disbursement and not part of the value of supply made by A to B.