Pradeep Jain - Chartered Accountant

Query

(jagmohan) Posted On: 18 Feb, 2013

service receiver company engaged an professional firm of Corporate social responsibility to execute company's CSR Plan and provided a fund to incur it using his expert knowledge in the field of CSR. The firm is working as a pure agent and they will charge only professional fee and expenses incured in relation to CSR will be reimbursed by company or credited against advance deposited in a separate bank account. The firm further gives contracts to various contractor to execute different job like water pipe line, renovation of school etc. IN THIS CASE WHO WILL AVAIL CENVAT CREDIT FOR THE SERVICE TAX CHARGED BY SUCH CONTRACTOR ON THEIR BILLS. PRACTICALLY I THINK COMPANY SHOULD AVAIL THE CREDIT. BUT HOW COMPANY WILL AVAIL IF BILLS RAISED BY CONTRACTORS ON THE PROFESSIONAL FIRM. HOW THE PROCESS WILL WORK SO THAT CENVAT CREDIT CHAIN NOT BREAK AND COMPANY COULD AVAIL CENVAT CREDIT. PLEASE EXPLAIN

Pure agent has been defined in Explanation to sub-rule 2 of Rule (5) of the Valuation Rules as a person who- “1• enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service; 2• neither intends to hold nor holds any title to the goods or services so procured or provided as pure agent of the recipient of service; 3• does not use such goods or services so procured; and 4• receives only the actual amount incurred to procure such goods or services.” The above definition of Pure agent makes it clear that the invoice for services received as pure agent should be in name of principal not in name of pure agent and pure agent can’t use these service(point no. 2 & 3). In the instant case, If CSR Firm is covered under the definition of pure agent (i.e. the above 4 conditions satisfy) then credit of service tax will be allowed to the company on expenditure incurred by CSR Firm on behalf of company. In such case value of service provided by CSR firm will be equal to professional fess only and service tax will be charged only thereon i.e. service tax will not be charged on reimbursed amount. But if the above conditions not satisfied then CSR Firm will not covered under the definition of pure agent and service tax will be leviable on whole amount charged by CSR i.e. Professional Fees + Expenditure reimbursed and in such case credit of expenditure incurred by CSR will be allowed to CSR Firm and not to Company. However credit of service tax charged by CSR Firm on Total Amount (i.e. Professional Fees + Expenditure reimbursed) will be allowed to the company. As you are saying that bills of Contractors are raised in the name of CSR Firm therefore CSR Firm is not treated as pure agent and credit will not be allowed. The arrangement should be done as to that the CSR firm will cover under the definition of pure agent and then credit will be allowed to the company. Further in case of CHAMUNDI TEXTILES (SILK MILLS) LTD. [2010 (20) S.T.R. 219 (Tri. - Bang.)] it has been decided that credit of service tax levied on expenditure incurred by pure agent on behalf of principal, will be allowed if reference of principal is given in the invoice.

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