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TMI Blog2019 (4) TMI 421X X X X Extracts X X X X X X X X Extracts X X X X ..... s, a reference to the CGST Act would also mean a reference to the same provision under the MGST Act. Further to the earlier, henceforth for the purposes of this Advance Ruling, a reference to such a similar provision under the CGST Act / MGST Act would be mentioned as being under the "GST Act". 02. FACTS AND CONTENTION - AS PER THE APPLICANT The submissions, as reproduced verbatim, could be seen thus- 3.1 STATEMENT OF THE RELEVANT FACT SHAVING A BEARING ON THE QUESTION(S) ON WHICH THE ADVANCE RULING IS REQUIRED * The application is being filed by 'E-SQUARE LEISURE PRIVATE LIMITED' (hereinafter referred as 'E-square' or 'Applicant' or 'the Company'); having GSTIN 27AAACG5176C1ZT and is engaged in the business of exhibition and business services, accommodation in hotels, inn, guest house, club or camp site, etc services, and restaurant services; submits that, * The Company intends to enter in to a contractual agreement of renting of immovable property with the lessee for leasing of the immovable property for rent. Apart from rent, E-Square also plans to collect expenses of electricity, water charges, property tax and cooking fuel from the lessee. * Further, the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; b)... c)... d)... * We submit that, to qualify a certain transaction as supply the condition given below are required to be satisfied A. Supply includes all forms such as sale, transfer, barter etc. Of goods and service. B. Said transaction shall be made or agreed to be made for a consideration C. Two or more person shall be involved (By one person to another) D. in the course or furtherance of business * Hence, it is essential to analyse whether all the conditions as above are satisfied in case of reimbursement of expenses * Reimbursement is nothing but to repay for certain expenses incurred by the person on behalf of other. e.g. in case of electricity the supply of transmission is from the State Electricity Board hence it could be construed that Lessor has not supplied any goods or services but incurred certain expenses in relation to property which lessee is liable to pay. * Erstwhile, in Finance Act, 1994 there were plethora of judgement wherein it was held that reimbursement of expenses is not incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ettled by the decision of this Court in Intercontinental Consultants and Technocrats Pvt, Ltd (2012 (12) TMI 150 - DELHI HIGH COURT). Therefore, prima facie, the amount of 14.22 crores, which has been actually received by the petitioner from its clients towards reimbursement of expenses, could not be the subject matter of service tax. * Also, we submit that, what the Lessor recovers from the Lessee by way of reimbursement of water charges, electricity charges, taxes etc, do not have the character of revenue or value addition in the hands of the Lessor. * Also, it is important to note that water, electricity charge, taxes etc. has a co-relation with exact quantity of water or electricity consumed, hence, it is variable on the basis of usage whereas component of rent is always fixed by way of contractual agreement. (for example, rate of water tax/charge levied for hospitals differs from rate chargeable for commercial or industrial users). * Given the aforesaid, it could be constructed that reimbursement is not covered under the definition of supply hence GST is not applicable. Without prejudice to aforesaid submission reimbursement of expenses by the lessor to lessee can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... implied right given to the lessee. Hence, the question under consideration is whether implied right or possession constitute title in goods or service or both. * In the law of property, title in its broadest sense refers to all rights that can be secured and enjoyed under the law. It is frequently synonymous with absolute ownership. However, the term does not necessarily imply absolute ownership, however; it can also mean mere possession or the right thereof. * Given this, it could be construed that, even the invoice is in the name of lessor it constitutes as lessee hold the possession of the Goods. (Like Electricity bill is in the name of lessor however used by the lessee hence it could be construed that lessee hold or enjoy the title in goods). * We submit that, when water charges, electricity charges, taxes etc. are reimbursed by the lessee then the Lessor acts as an Agent of the lessee. In the event of the failure to pay such water charges, etc., the Corporation will treat it as a statutory charge over the property of the lessor (see: Section 141 of the Mumbai Municipal Corporation Act). * Given the aforesaid, it could be construed that GST is not levied on the reim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... netary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or any other person. 2 Two or more person shall be involved in case of transaction under consideration two persons are involved (i.e. lessor and lessee) 3 in the course or furtherance of business As per Section 2(17) of the CGST Act, business includes any activity or transaction in connection with or incidental or ancilla of the trade * As discussed in the aforesaid paras, the definition of supply is inclusive and includes all supply other than supply specified in Schedule III of the CGST Act. Hence it could be construed that reimbursement of expenses is also covered under Supply as defined under Section 7 of the CGST Act. * However, for the purpose of levy of GST there are two scenarios required to be considered under GST Law * Whether GST is levied at the rate as applicable to expenses reimbursed or * GST could be levied at the rate as applicable to renting of immovable property, A. GST could be levied at the rate which is applicable to expenses reimbursed by the Landlord * In case of reimbursem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 12/03 ST dated 20/6/2003 exempt from service tax, any value of goods supplied by service provider to service recipient. * Hence, it could be construed that electricity is separate independent supply and does not constitute the part of renting contract. * Further, the category, electricity has been kept aside under the purview of GST at present. * Further, it is to be noted that, electricity is an "exempt supply" covered under HSN 2716 00 00 [Notification No.1/2017-Central Tax (Rate)], * Also, transmission or distribution of electricity by an electricity transmission or distribution utility is exempt from GST under sr. No.25 of Notification No. 12/2017-CT (R). * Given the aforesaid, electricity expenses are not liable to GST when procured by the Company. * Further, in case of reimbursement of expenses, it could be construed that the GST is levied at the rate applicable to original supply. As electricity is not leviable to GST hence reimbursement of electricity is also not liable to GST. * Given below are certain expenses recovered by the lessor from the lessee and applicability of GST Rate if the rationale as discussed in the aforesaid para is applied No. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f expenses from the lessee by the lessor at actual? - In case GST is levied what is the rate of GST applicable to said reimbursement of expenses. Additional submissions made by the applicant - 3.3 ADDITIONAL SUBMISSION TO BE CONSIDERED WITH RESPECT TO PURE AGENT * We refer the application filed by E-Square Leisure Pvt Ltd ('The Company") dated 23rd August 2018 where in the Company intends to seek below clarification * Whether GST is levied on the reimbursement of expenses from the lessee by the lessor at actuals? * In case GST is levied what, is the rate of GST applicable to said reimbursement of expenses? * With regards to same the GST authority has raised query that, * Amongst the 4 conditions specified in the rule the given below condition is not fulfilled with respect to underlaying transaction as there is no contractual agreement with the supplier (i.e. Electricity Board) and recipient (I.e. Lessee) : * "The contractual agreement by the supplier with the recipient to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both. * The methodology used by the Company for apportionment of electricity charges a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en provider of service and recipient of service in respect of the main service is on a principal to principal basis, the relationship between them in respect of other ancillary services is that of a pure agent. (7) Additionally, we would like to refer the example given in the FAQ issued by the Government with respect to pure agent: 'Let's understand the concept by taking an example. A is an importer and B is a Custom Broker. A approaches 8 for customs clearance work in respect of an import consignment. The clearance of import consignment and delivery of the consignment to A would also require taking service of a transporter. So A, also authorizes B, to incur expenditure on his behalf for procuring the services of a transporter and agrees to reimburse B for the transportation cost at actuals. In the given illustration, B is providing Customs Brokers service to A, which would be on a principal to principal basis. The ancillary service of transportation is procured by B on behalf of A as a pure agent and expenses incurred by B on transportation should not form part of value of Customs Broker service provided by B to A. This, in sum and substance is the relevance of the pure agent co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricity to lessee on behalf of electricity board Supply of goods/services in respect of main supply. (12) Given this, pure agent is a person who provides services with respect to main service to the service recipient and same is a per the contractual agreement between provider and recipient of the main service. Rule 33 of Determination of Value of Supply Rules specify the contractual agreement between supplier and recipient of the main service (i.e. Renting) (13) As per Rule 33 of CGST Rules, the contractual agreement by the supplier with the recipient to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both." (14) Hence, the contractual agreement specified between the supplier (Lessor) to recipient (Lessee) to act as his pure agent to incur specified expenditure (i.e. Electricity) and later on provider of main service will take reimbursement of the actual expenses incurred. (15) Further FAQ has also clarified that, the important thing to note is that a pure agent does not use the goods or services so procured for his own interest and this fact has to be determined from the terms of the contract. In the illustration of Importe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... costs in the course of supply of goods or services or both." The contractual agreement is entered in between the E-Square Leisure Pvt. Ltd and Carnival Films Pvt. Ltd. for renting of property 2. 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 We would like to refer para 8(i) of the agreement of E-Square Leisure Pvt. Ltd and Carnival Films Pvt. Ltd 'Electricity charges (including running cost of DG & HVAC) for electricity consumed in the Theatre and for any Signage of the Lessee installed at the Complex / facade of the Complex shall be reimbursed by the Lessee based on the reading shown in the sub-meter/ BTU provided by the Lessor at the Multiplex, at such rate (which shall be arrived at by diving the total electricity bill by the number Of units measured excluding any late payment charges) as may be charged by the electricity/power supply. company. Given this, to compute the consumption, the Company has installed Siemens technology for recovery of the electricity charges based on respective consumption. 3. The pure agent does not use the goods or services so procured in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to seek below clarification * Whether GST is levied on the reimbursement of expenses from the lessee by the lessor at actuals? * In case GST is levied what is the rate of GST applicable to said reimbursement of expenses? * With regards to same we hereby submit that we had applied for determination of the question of applicability of GST of the reimbursement of expenses from lessee to lessor given below - Electricity charge - Water Supply - Property Taxes - Cooking fuel * In this regard, we would submit that, at the time of filing of application for advance ruling the Company was intent to enter in to the Agreement with Carnival Films Private Limited (herein under referred as 'Lessee'). Hence, the terms of the agreement were not final. Given this, we had applied for the determination of GST liability on the expenses which we were intent to collect from lessee. * However, it is to be noted that, in the registered agreement the Company has agreed to reimburse the expenses given below at actual Electricity charge Water Supply * Given the aforesaid, we submit that kindly consider the revised details of reimbursement of expenses given below for determinat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king into consideration facts as elaborated in annexure, submission and contentions vide annexure II and contractual agreement, submission on part of jurisdictional authority is as follows: 1. Issue whether GST is to be levied on reimbursement of expenses from the lessee by the lessor at actuals? Reply: YES GST is leviable on reimbursement of expenses from the lessee by the lessor, at actuals. Applicant has submitted that as per rule 33 of CGST Rules, 'Determination of value of supply rules', reimbursements are not liable to GST if the same are incurred in the capacity of 'pure agent'. For ready reference, Rule 33 of CGST Rules is reproduced as follows: Rule 33. Value of supply of services in case of pure agent, Notwithstanding anything contended in the provisions of this Chapter, the expenditure or costs incurred by a pure agent of the recipient of supply 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 the payment to the third party on authorization by such recipient; (ii) The payment made by the pure agent on behalf of the recipie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from applicant and not from third party. Therefore for such supplies, applicant is not a 'pure agent' and corresponding reimbursed electricity, water charges even though charged separately in supply invoices are liable for tax under GST Act. About reimbursement Property Tax: Vide terms of Contractual agreement, applicant E-Square Leisure PVT LTD has himself agreed to bare the Property Tax. About reimbursement of cooking gas: In absence of supporting documents, the question can not be answered. 2. In case GST is to be levied, what is the rate of GST applicable to said reimbursed expenses? Supply of services- renting of premises and supply of electricity, potable water are, not naturally bundled nor are they supplied in conjunction with each other in ordinary course of business. Therefore, such supplies are not composite supply as per section 2(30) of the CGST Act. Further, as per terms of contractual agreement, electricity charges and water charges are charged in addition to rent. As per verbal contention, these charges are intended to be collected separately in the outward supply invoices, on as actual basis. Therefore, this is not a mixed supply, as provided under section 2(74 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but repayment of certain expenses incurred by a person on behalf of other and they do not have character of supply as defined under the GST Act. Alternatively, applicant is of the view that the reimbursement of expenses by them can qualify as an expenses incurred as a 'Pure Agent' and would not be considered in the value of supply for the levy of tax. In order to ascertain the true nature of transaction we feel it necessary to refer to certain clauses of the sample agreement as below: "Section - II - Recitals WHERE AS: I. The Lessor is the absolute, exclusive and lawful owner and is otherwise well and sufficiently entitled to the Theatre more particularly described in Schedule: I hereunder. II. The Complex including the Theatre is constructed in accordance with the sanctioned plans duly approved by the Pune Municipal Corporation (PMC) on the piece of land purchased by the Lessor from. Ms. Tara Gopalji Bhuta by executing Deed of Indenture dated 1.7.03.1987 registered at the office of the Sub-Registrar at Haveli No. I having registration number 3724/2/12 III. The Lessee has represented to the Lessor that, it owns and/or operates several Multiplex theatres in various cities a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ept as mentioned in this DEED. 7. RENT - On and from the Commencement Date, the lessee shall pay to the Lessor the following amounts towards Rent: Period (starting from the Commencement Dates) Monthly Rent Rs. For the first 3 Years 29,16,667/- 4th to 6th Year 38,54,167/- 7th Year to 9th Year 38,57,292/- 10th Year to 12th Year 44,35,885/- 13th Year to 15th Year 51,01,268/- 16th Year to 18th Year 58,66,458/- The Rent is exclusive of applicable GST and/or any other indirect Taxes or cesses by whatever name called which Lessor may require to pay either at the commencement of this DEED or any time during the Tenure of lease by reason of Lessor giving the Theatre to the Lessee on lease excluding any taxes levied on the Theatre building (property tax). The Rent shall be subject to deduction of tax at source in accordance with applicable laws. The Rent shall be paid by the Lessee to the Lessor on or before the say of the succeeding month i.e. in arrears. Lessor shall raise invoice for the Rent received 8. UTILITY CHARGES:- In addition to the Rent, the Lessee shall also be liable to pay the following: (i) electricity charges (including running cost of DG & HVAC) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liances/errors in the event, the non-compliance/ error is pot rectified in a timely manner, then the lessor shall have to pay the amount of GST charged along with the interest. Penalty and/or any other cost. 10 SECURITY DEPOSIT AND GST THEREON: a) The Lessee shall deposit with the lessor an amount of Rs. 57, 50,00,000/- (Rupees. Fifty Seven Crore Fifty Lakh only) towards interest, Free Refundable Security Deposit ("Security Deposit") in the following manner: (i) Rs. 8,62,50,000/- (Rupees Eight Crore Sixty Two lakh Fifty Thousand only) has already been paid by the Lessee to the lessor receipt whereof is hereby acknowledged by the Lessor; and (ii) Rs. 48,87,50,000/- (Rupees Forty Eight Crore Eighty Seven Lakh Fifty Thousand only) shall be paid simultaneously with the registration of Lease Deed. b) Lessor will seek advance ruling of the applicabiliL0fGST on the Security Deposit. In case, if the ruling states that GST is applicable on the Security Deposit or if there is a demand of GST from the concerned Government department, then lessee hereby agrees to forthwith reimburse the appropriate GST on the security deposit with interest and penalty, if any, and to indemnify and k ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cy or agencies (hereinafter referred to as "CAM Agency) entrusting them the responsibilities to provide the CAM Services. However, any such appointment shall absolve the Lessor from fulfilling its obligations towards the Lessee relating to CAM Services and in the event of default or deficiency on part of CAM agencies in fulfilling its obligations towards the lessee, the lessee shall be entitled to call upon the lessor to rectify the default or deficiency on the part of CAM Agencies by giving written notice and the lessor shall be bound to rectify any default or deficiency on the part of the lessor/ CAM Agencies in fulfilling its obligations towards the lessee within 72 hours from the date of notice. (b) if the services provided by Lessor or its nominated agency are deficient with respect to CAM Services for a continuous period of more than 7 (seven) days, then the Lessee shall have the liberty to do And deeds for and on behalf of the lessor and at the Lessor's cost to remove such deficiency. The lessee shall raise an invoice along with GST on the cost incurred on the lessor and lessor shall pay the same within 15 days of receipt of invoice. (c) Lessee shall pay to the Lessor/CA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exceeding 30 days. Such activity shall be done as per the mutual consent of the Parties. No structural changes will be permitted during such refurbishment, repairs and renovation without the written consent of the lessor, 14. PARKING AREA - 15. HOARDINGS/SIGNAGE - 16. LESSOR'S REPRESENTATIONS & COVENANTS: 18. LESSEE'S ASSETS" From the conjoint reading of above clauses of the agreement we find applicant has agreed to lease out the Theatre which is an immovable property to lessee to conduct and operate the Theatre for rent. As per entry no. 5 (a) of Schedule II - Activities of Transaction to be treated as supply of Goods or supply of Services; renting of immovable property is a supply of services and liable to tax under the provisions of GST Act. We strongly feel that Theatre business will not be organic unless it is accompanied with supply of power and water. The utilities such as electricity, supply and water supply are basic amenities subject to which competent authority will not issue' No objection Certificate' to conduct business of running a Theatre. As such applicant is providing more than two services such as renting of immovable property, supply of power through DG ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imbursement is construed as a supply under the GST Act, tax can not be levied as the expenses are incurred by them as 'pure agent'. Section 15 of CGST Act which has assigned meaning to the expression 'transaction value'. is reproduced as below: Value of taxable supply. (1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. (2) The value of supply shall include- (a) any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, the Central Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier; (b) any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both. (c) incidental expenses, including commission and packing, charged by the supplier to the recip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the recipient of service; and, (iii) The supplies procured by the pure agent from the third party as a pure agent of the recipient of the supply are in addition to the services he supplies on his own account. Explanation- For the purpose of this rule, the expression 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 supplied 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 in addition to the amount received for supply he provides on his own account. Therefore the issue before us is to decide whether on the facts of the transaction the applicant can be treated as a pure agent? Broadly speaking a pure agent is one who, whilst making a supply to the recipient, also receives and incurs expenditure on some other supply on behalf of the recipient and claims reimbursement (as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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