Whether GST is applicable on Reimbursement of salary on behalf of foreign entity?

PJ/Case Law/2018-2019/3522

Case: DRS Marine Services Pvt Ltd
Citation: GST–ARA–34/2018-19/B-99 dated 24 August 2018.
Issue: Whether GST is applicable on Reimbursement of salary on behalf of foreign entity?
Brief Facts: The applicant for the advance ruling was a crew recruitment and placement agency. It selected and recruited shipping personnel on behalf of another company (the principal) domiciled in Bermuda, which was also a foreign ship-owner.
The applicant charged administration fees for its recruitment and placement services and paid GST on such charges. The applicant was reimbursed for the value of the salaries disbursed to the principal's crew members (i.e., employees). The applicant filed an advance ruling application before the AAR in Maharashtra regarding whether the reimbursed salary was liable to GST.
Appellant’s contention: The Reserve Bank of India vide its "Circular No. 15, dt. 24-9-2015" has allowed for opening of Foreign Currency Account by Ship Manning/Crew Management Agencies. According to the circular the credit to such foreign currency account would be through normal banking channels from the overseas principal and the debits would be towards various local expenses in connection with the management of Ships/Crew in the ordinary course of business.
In light of the RBI's circular, the applicant was responsible for paying the crew members' salaries on behalf of the principal. After the applicant paid these salaries, the principal would reimburse the same to the applicant in a single remittance. The applicant would then instruct the bank to disburse the money to the crew members' bank accounts, as per details provided by the principal.
To complete this activity, the applicant charged service charges and GST. These charges did not deduct any charges from the amount of salary received for disbursement. The applicant referred to the Central GST Rules 2017(33) according to which "the expenditure or costs incurred by a supplier as a 'pure agent' of the recipient of supply shall be excluded from the value of the supply" and the applicant argued that it would not be taxable as GST in view of the rules.
A 'pure agent', as defined by law, must enter into a contract to act as a pure agent and cannot intend to hold title to the goods or services or use the goods or services for its own interest. Further, a pure agent receives only the actual amount incurred.
Reasoning of Judgment: The AAR observed that the activity was carried out on the principal's behalf and the applicant did not deduct any charges from the amount of salary received for disbursement. Moreover, no amounts from the said receipt will be used by the applicant for his own interest. In fact, for performing as a pure agent they will also be receiving compensation separately in the form of fixed fees to be charged as service charges.
Decision:In favour of assessee
Comment: Rule 33 of the CGST Rules, 2017 is very clear in itself regarding no tax liability on the services provided as mere agent and in this case too we observed the provisons being examined by the honourable bench and their observation being the service of reimbursement of salary purely as an agent is well covered under the ambit of the said rule.
An in-depth analysis of the contractual arrangement between the parties and the nature of the activity being undertaken (against which reimbursement is being made) becomes critical in taking a decision about whether such reimbursement should be subject to GST.
Prepared by – Shubhanshu P. Jain

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PJ/Case Law/2018-2019/3522

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