Value of Supply of Services in Case of Pure Agent

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.

Who is 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 practicing Chartered Accountant incorporating a private limited company on behalf of his client is an example of a pure agent.

What does the Valuation Rule say?

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. For example, legal charges paid to Registrar of Companies (RoC) in above case.

*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 services (for which payment has been made by the pure agent) are provided by the third party;

*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

Let’s understand with the help of this example:

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.

Valuation of Supply Rule Under GST – Cost Method

In our previous articles, we discussed the valuation rules of supply between related entities, principal-agent etc. Continuing our discussion further, here we are providing the analysis of Cost Method of Valuation of supply under Goods and Services Tax Law.

Cost method has also been referred in each valuation rule where there is no direct method for valuation possible. Cost method says that “where the value of a supply of goods or services or both is not determinable by any of the preceding rules, the value shall be one hundred and ten percent of the cost of production or manufacturing or cost of acquisition of such goods or cost of provision of such services”. 

Valuation of Supply Using Cost Method

In simple terms, 110% of the cost of manufacturing or cost of provision of goods or services shall be considered for the purpose of the valuation and accordingly Goods and Services Tax will be charged on such amount. Suppose Nilkamal Limited is manufacturing office chairs and the cost of manufacturing is INR 4,000 per chair. Similar chair in open market is valued at INR 4,500. These chairs are supplied to a furniture showroom at the rate INR 3,000 and balance in non-monetary consideration. Now since the open market value is available, INR 4,500 will be considered for valuation of supply. However, in case if Open Market Value is not available, the value of supply as per cost method will be followed which says it has to be 110% of the cost of manufacturing i.e. INR 4,000*110% = INR 4,400.

Thus GST will be charged on INR 4,400 in this case.

Residual Method of Valuation

As per the residual method, where the value of supply of goods or services or both cannot be determined under the cost method, the same shall be determined using reasonable means consistent with the principles and general provisions of the Goods and Services Tax law.

A simple interpretation of this rule suggests that supplier can use any method to determine the value of supply under GST, provided such method is justifiable in the case of inquiry. The registered taxable person should not exploit this method to displace the GST liability as the penal provisions are strict under the new indirect tax regime.

One example of the residual method is valuation on the basis of per unit when the cost of manufacturing can not be determined in principle. The number of man hours required to complete a job can be another example of such valuation method.

Determination of Value for Certain Businesses

Apart from the above rules, there are certain businesses which have been notified for which a separate valuation method will be applicable. Here, we will discuss these businesses and the value of supplies from such businesses. These shall be determined in the manner provided below.

Purchase or Sale of Foreign Currency, Including Money Changing

The value of supply of services when purchasing or selling foreign currency, including money changing, shall be determined by the supplier of service in the following manner:-

1. For a currency, when exchanged from, or to, Indian Rupees (INR), the value shall be equal to the difference in the buying rate or the selling rate, as the case may be, and the Reserve Bank of India (RBI) reference rate for that currency at that time, multiplied by the total units of currency.

For example, on 20th July 2017, Mr. A converted USD 100 into INR 6,200 (INR 62 per USD) through Akbar Travel Group. RBI’s reference rate for buying and selling was INR 61/61.5 respectively on such date. Now the value of supply

will be: (62-61)*100 = INR 100.

Thus the value of supply for Akbar Travel will be INR 100 and GST will be levied on this amount.

In cases where the RBI reference rate for a currency is not available, the value shall be 1% of the gross amount of Indian Rupees provided or received by the person changing the money.

In above example, if the reference rate is not available then 1% of INR 6,200 i.e INR 62 will be the value of supply of service.

2. If neither of the currencies exchanged is Indian Rupee, the value shall be equal to 1% of the lesser of the two amounts the person changing the money would have received by converting any of the two currencies into Indian Rupee on that day at the reference rate provided by RBI.

For example, let’s assume that USD is converted against EURO. Now as per the above rule, both these currencies will be converted into INR terms and the value of supply will be1% of the lesser amount.

Also at the option of the supplier of services, the value in relation to a supply of foreign currency, including money changing, shall be deemed to be:

(i) one per cent. of the gross amount of currency exchanged for an amount up to one lakh rupees, subject to a minimum amount of two hundred and fifty rupees;

(ii) one thousand rupees and half of a per cent. of the gross amount of currency exchanged for an amount exceeding one lakh rupees and up to ten lakh rupees; and

(iii) five thousand rupees and one-tenth of a percent of the gross amount of currency exchanged for an amount exceeding ten lakh rupees, subject to maximum amount of sixty thousand rupees

However, once opted, this option cannot be withdrawn during the remainder of the financial year.

Services in Relation to Booking of Tickets for Travel by Air Provided by an Air Travel Agent

The value of supply of services in relation to booking of tickets for travel by air provided by an air travel agent such as Yatra or MakeMyTrip, shall be deemed to be an amount calculated at the rate of five percent of the basic fare in the case of domestic bookings, and at the rate of ten percent of the
basic fare in the case of international bookings of passage for travel by air.

Note: For this rule, the expression “basic fare” means that part of the airfare on which commission is normally paid to the air travel agent by the airline

Life insurance business

The value of supply of services in relation to life insurance business shall be:

(a) the gross premium charged from a policyholder reduced by the amount allocated for investment, or savings on behalf of the policyholder, if such amount is intimated to the policyholder at the time of supply of service;

Example: If INR 50,000 is gross premium, of which INR 45,000 is invested in funds, then the value of supply shall be INR 5,000.

(b) in the case of single premium annuity policies other than

(a), ten percent of single premium charged from the policyholder; or

(c) in all other cases, twenty-five percent of the premium charged from the policyholder in the first year and twelve and a half percent of the premium charged from policyholder in subsequent years

This rule will not be applicable if the entire premium paid by the policyholder is only towards the risk
cover in life insurance.