Reimbursement of the expenses at actual cost constitute ‘composite supply’ and liable for GST

Categories: Advance Ruling
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Fact: M/s. E-Square Leisure (P.) Ltd. (‘The Applicant’ or ‘the Company’) 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. Further, the Company intends to enter in to a contractual agreement of renting of immovable property that is to say “theatre” with the lessee for fixed rental. However, apart from rent, the applicant collects expenses of electricity, water charges, property tax and cooking fuel from the lessee at actual according to contract.

Issues Involved: Whether reimbursement of expenses from the lessee by the lessor at actual treated as supply under GST, if yes, then on which rate GST would be levied?

Applicant’s Interpretation of Law: Applicant contended that as per Rule 33 of CGST Rules, 2017, ‘Determination of Value of Supply Rules’, reimbursements are not liable to GST if same are incurred in capacity of ‘pure agent’.

Further, reimbursement is nothing but to repay for certain expenses incurred by the person on behalf of other i.e. 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 incurred towards services rendered as value for services is already charged but said expenses are incurred by service provider on behalf of their client.

Held: The Hon’ble AAR of Maharashtra vide its Order No. GST-ARA-71/2018-19/B-171 dated December 29, 2018 held that renting of immovable property would be the main supply and provision of other utilities such as electricity, and water supply, fuel etc. would be in the nature of ancillary supply which help in better enjoyment of the main supply that is theatre. Therefore, the utility charges in the nature of electricity charges and water reimbursed by the applicant from lessee forms part of composite supply.

Further the issue is whether on the facts of the transaction that the applicant can be treated as a pure agent. According to the terms of agreement and transaction, it is found that there is no authorization, obtained by applicant from recipient of the services, to act as pure agent and to make payment to third parties. Hence, the applicant has failed to establish themselves as a pure agent as defined under GST Valuation Rules and therefore expenditure or cost incurred by applicant and subsequent reimbursement thereof cannot be excluded from value of supply.

Therefore, it is observed that the reimbursement of expenses  are covered under composite supply i.e. comprising of two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply and chargeable to GST.

Citation: [2019] 104 taxmann.com 121 (AAR – MAHARASHTRA)