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The members of Gujarat Authority for Advance Ruling, Goods and Services Tax ruled that the applicant is liable to pay GST on reverse charge mechanism (RCM) for amount paid as interest on late payment of invoices of imported goods at the same rate of IGST leviable on the imported goods vide Advance Ruling No. GUJ/GAAR/R/01/2021 dated 20th January, 2021.

The details of the Advance Ruling are as under:

Brief Facts

  • The applicant M/s. Enpay Transformers Components India Ltd. (hereinafter referred to as Enpay, India) is engaged in the business of manufacturing and supplying Transformer components.
  • The applicant has stated that the company is importing goods from the holding company located at Turkey namely M/s. Enpay Endstriyel Pzarlama ve Yatirim A.S. (hereinafter referred to as Enpay, Turkey).
  • The payment term is 120 days from the date of invoice for import of goods.
  • If Enpay, India does not pay Enpay, Turkey on or before due date, the holding company charges interest on late payment.
  • The company has obtained bank credit facility from CITI Bank based on the Corporate Guarantee issued by holding company Enpay, Turkey.
  • Enpay, Turkey has paid Stamp tax in Turkey as per their land rules and has raised a reimbursement invoice to ENPAY India.
  • Enpay, India is importing goods on CIF basis (cost, insurance, freight) and the invoice, raised by the seller, clearly contains the amount of ocean freight.
  • It is also noted that at the time of Bill of Entry, the assessable value calculated for payment of IGST includes the value of ocean freight.
  • Hence, IGST is already paid on the value of ocean freight at the time of customs clearance.

Questions seeking Advance Ruling

  1. Whether liability to pay GST on Reverse Charge arises on amount paid as interest on late payment of invoices of imported goods? If yes, then at what rate?
  2. Whether liability to pay GST on Reverse charge arises on amount paid for reimbursement of Stamp tax paid as a pure agent by Enpay, Turkey on behalf of Enpay, India?
  3. Whether Entry No.10 of Notification No.10/2017 issued under IGST is applicable, if import of goods is made on CIF (Cost, Insurance, Freight) where the supplier is charging sea/ocean freight in his invoice itself and IGST is already paid at the time of Bill of Entry by including the same value of ocean freight in the assessable value?

Submissions and Additional Submissions by the Applicant

  • The applicant has submitted his view of interpretation of law on the above issues stating that the stamp tax is paid by Enpay, Turkey on behalf of Enpay, India for proceedings of Corporate Guarantee/Bank Guarantee and Enpay, Turkey has also raised an invoice for the reimbursement of the same.
  • The applicant has stated that the Explanation to Rule 33 of the GST Valuation Rules, 2017 gives following meaning of ‘Pure Agent’:

“Pure Agent” means a person who-  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;

(a) 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;

(b) does not use for his own interest such goods or services so procured; and

(c) 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.

  • The applicant has submitted that the Stamp duty is paid by Enpay, Turkey and they neither intends to hold any title for it nor use for their own interest.
  • Enpay, Turkey has received only the actual amount of stamp tax paid.
  • Considering the above facts, the value paid as a reimbursement to Enpay, Turkey should not be considered as import of services but be considered as a payment made to pure agent. Hence, no IGST on RCM should be liable to pay.
  • As regards the import of goods, the applicant has stated that the import of goods is made on CIF (cost, insurance, freight) where the supplier charges sea/ocean freight in his invoice and IGST is paid on the ocean freight at the time of Bill of Entry as the same is included in the assessable value.
  • Enpay, India does not directly pay amount of sea/ocean freight to the service provider.
  • Considering the above facts and considering that IGST is already paid on imports made on CIF basis, the entry No.10 of Notification No.10/2017 issued under IGST Act should not be made applicable. Hence, no IGST should be paid on it again under Reverse charge.
  • The applicant had given additional submission vide letter dated 09.01.2021 (received vide email on 11.01.2021) on being asked to furnish, during hearing, the details of stamp tax paid and clarification regarding whether any markup/profit had been charged by Enpay, Turkey from Enpay, India while making payment of stamp tax on their behalf.
  • Accordingly, they submitted copy of a clarification in writing from Enpay, Turkey stating that no mark up (profit) was charged for the reimbursement of stamp tax paid.
  • They submitted the table for Stamp Tax Collection as under:
Particulars
Corporate Guareantee Tax
Base Tax (USD)
1,500,000
Exchange Rate (USD/TL)
4.1358
Base Tax (TL)
6,203,700
Tax Rate
0.948%
Stamp Tax Charges (TL)
58,811.08
Stamp Tax Charges (USD)
14,220
  • Also, they submitted a receipt of stamp tax issued by the Stamp Tax office for reference along with copy of invoice raised by Enpay, Turkey.

Discussions and Findings

  • During the course of personal hearing, the representative of the applicant withdrew the third question of his application seeking Advance Ruling.
  • Further, during the course of personal hearing, the representative of the applicant was asked to submit a copy of contract signed between them and Enpay, Turkey in respect to the transactions between them.
  • However, no copy of the contract/agreement was submitted by the applicant.
  • The members of Authority for Advance Ruling proceeded to decide the issue on the basis of available records.
  • On going through the provisions of Section 7 of the CGST Act, 2017, they found as per Section 7(1)(d), the activities to be treated as supply of goods or supply or services are covered in Schedule II of the said Act.
  • On going through Schedule II of the said Act, and comparing the same to the issue in hand, they found that the foreign seller had tolerated the act (covered under the Supply of Services under Entry (e) of Schedule-II) of receiving payment after a lapse of a period of 120 days from the date of the invoice in respect of the goods supplied by them to the applicant for which interest is to be paid by the applicant.
  • Further, they found that as per Section-15(2)(d), value of supply also includes “interest or late fee or penalty for delayed payment of any consideration for any supply” and concluded that payment of interest by the applicant was liable to GST.
  • Additionally, as the interest paid for delay in payment was included as a part of the value of the said goods, the rate of GST payable on the aforementioned interest will be the same as that of the IGST applicable on the aforementioned goods.
  • Coming to the second question, They went through the letter dated 09.01.2021 issued by Enpay, Turkey to Enpay, India stating that no mark up (profit) was charged for the reimbursement of stamp tax paid against corporate guarantee issued to CITI Bank as security/collateral for funded/non-funded facility used by Enpay, India.
  • Other than that, they found that the applicant submitted certain documents which were in foreign language (perhaps Turkish), which they could not understand.
  • Further, since no English translation of the same was made available to them, they were not able to make out whether any of these documents pertain to receipt of stamp tax issued by Stamp Tax Office, Turkey or otherwise, as stated by the applicant.
  • The definition of ‘consideration’ clearly includes any payment made or to be made, in respect of supply of goods or services or both by the recipient or by any other person. It also includes the monetary 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 by any other person.
  • Comparing the aforementioned definition to the issue in hand, they found that in the instant case, the Bank Guarantee entered into by the supplier with the CITI Bank on behalf of the applicant, is in direct relation to the business connection/link that they had with the applicant by way of supply of goods to them and therefore, the payment of stamp tax made by them to the bank (on behalf of the applicant) and demanded by them from the applicant as reimbursement through issuance of a reimbursable invoice would be considered to be payment made in respect of (or in relation to) the supply of goods made by them to the applicant.
  • They also went through the provisions of Section 15 of the CGST Act, 2017 mentioned above which covers the aspect of valuation and found that ‘reimbursements’ were not covered in the excluded clauses of value as appearing in sub-section (3) of Section 15.
  • Therefore, the amount of stamp tax, which is paid as reimbursement by the applicant undoubtedly formed a part of the ‘consideration’ i.e. the value of the supply of goods provided by the supplier to the applicant and GST is liable on the same.
  • However, taking into consideration the provisions of Rule 33 of the CGST Rules, 2017, they found that the amount of stamp tax incurred by the supplier on behalf of the applicant, shall be excluded from the value of supply, if, and only if, the supplier i.e. M/s.Enpay, Turkey satisfied all the conditions envisaged in Rule 33(i) to (iii) as well as the conditions (a) to (d) envisaged in the Explanation to Rule 33 of the CGST Rules, 2017.
  • They, therefore, proceeded to examine as to whether the supplier i.e. Enpay, Turkey satisfied all the conditions mentioned hereinabove and satisfied the conditions of a pure agent, which are enlisted hereunder:

(i) the supplier acts as a pure agent of the recipient of the supply, when he makes the payment to the third party on authorisation by such recipient

  • No such document, agreement or contract has been produced by the applicant which proves that they have authorised the supplier to make payment to the third party.
  • In view of absence/non-submission of any such documents in this regard, they concluded that this condition was not satisfied.

(ii) the payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service;

  • In this regard, the applicant themselves submitted that the supplier had issued them a separate invoice mentioning the reimbursable amount therein.
  • They also found that the amount of stamp tax paid by the supplier on behalf of the applicant has been mentioned in a separate commercial invoice issued to the applicant.
  • However, in the condition mentioned above, there was no mention of issuance of any separate invoice regarding payment made by pure agent.
  • As per the said condition, the supplier was required to indicate the aforementioned payment amount (made on behalf of the recipient of supply), separately in the invoice issued by him to the recipient of service/goods i.e. it should form a part of the invoice (related to the supply of goods) issued by the supplier and should be indicated separately, therein.
  • The applicant did not submit any evidence to prove that the aforementioned amount paid as stamp tax by the supplier on behalf of the applicant has been indicated separately in the invoice related to the supply of goods made to them.
  • Hence, this condition was not satisfied.

(iii) the supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account:

  • In the instant case, the Bank Guarantee entered into by the supplier with the CITI Bank (the third party) on behalf of the applicant is in direct relation to the business connection/link that they are having with the applicant by way of supply of goods to them and are not in addition to the supply of services/goods that they provide to the applicant on their own account.
  • Hence, this condition was also not satisfied.
  • Further, as per Explanation to Rule 33 of the CGST Rules, 2017, the following conditions are also needed to be satisfied to qualify as a ‘pure agent’:

(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;

  • No such document, agreement or contract has been produced by the applicant which proves that they have entered 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.
  • Hence, this condition was not satisfied.

(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;

  • The applicant submitted that the stamp duty paid by the supplier Enpay, Turkey neither intends to hold any title for it nor uses for his own interest.
  • However, they did not provide any documentary evidence to prove that the supplier 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.
  • Hence, this condition was not satisfied.

(c) does not use for his own interest such goods or services so procured;

  • In the instant case, the services procured by the supplier were used for his own interest only as the Bank Guarantee entered into by them with the CITI Bank on behalf of the applicant was in direct relation to the business connection/link that they were having with the applicant by way of supply of goods to the applicant.
  • Hence, this condition was also not satisfied.

(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.:

  • The applicant submitted that the supplier Enpay, Turkey received only actual amount of stamp tax paid.
  • The applicant submitted a copy of letter dated 09.01.2021 issued by Enpay, Turkey to Enpay, India stating that no mark up(profit) was charged for the reimbursement of stamp tax paid.
  • The applicant also stated that they submitted a copy of receipt of the Stamp tax paid by the Stamp Tax Office, Turkey.
  • However, since the documents, other than those mentioned above, were in foreign language (perhaps Turkish), which was not understandable to them and since no English translation of the same was made available to them, they were not able to make out whether any of these documents pertained to receipt of stamp tax issued by Stamp Tax Office, Turkey or otherwise.
  • They emphasized that a mere letter issued by the supplier stating that no mark up(profit) was charged for the stamp tax paid by them or a receipt from the Stamp Tax Office, Turkey regarding Stamp Tax paid will not suffice to prove that no mark up was charged for the said reimbursement amount, but has to be backed up by proper documentary evidence such as financial records etc. of the supplier.
  • Since no such documents was produced by the applicant, they concluded that this condition was also not satisfied.
  • In view of the above discussions, they concluded that the supplier of the applicant did not fulfill/satisfy all the conditions required for being a ‘Pure agent’ in terms of the provisions of Rule 33 of the CGST Rules, 2017 and therefore, the expenditure or costs incurred by the supplier of the recipient of supply cannot be excluded from the value of supply in terms of the provisions of Rule 33 of the said rules and is liable to GST on reverse charge basis.

Ruling

  1. Whether liability to pay GST on Reverse Charge arises on amount paid as interest on late payment of invoices of imported goods? If yes, then at what rate?

    The applicant Enpay, India is liable to pay GST on reverse charge basis for amount paid as interest on late payment of invoices of imported goods for the reasons discussed hereinabove. The rate of GST will be the same as the rate of IGST leviable on the imported goods for the reasons discussed hereinabove.

  2. Whether liability to pay GST on Reverse charge arises on amount paid for reimbursement of Stamp tax paid as a pure agent by Enpay, Turkey on behalf of Enpay, India?

    The applicant is liable to pay GST on reverse charge basis on amount paid for reimbursement of Stamp tax paid by the supplier Enpay Turkey on behalf of the applicant, since the supplier of the applicant does not fulfil/satisfy all the conditions required for being a ‘Pure agent’ in terms of the provisions of Rule 33 of the CGST Rules, 2017 for the reasons discussed hereinabove.

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Relevant Provisions / References:

Section 7 of the CGST Act, 2017:

7. (1) For the purposes of this Act, the expression “supply” includes––

(a) all forms of supply of goods or services or both such as sale, transfer, barter, 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) import of services for a consideration whether or not in the course or furtherance of business;

(c) the activities specified in Schedule I, made or agreed to be made without a consideration; and

(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.

7. (2) Notwithstanding anything contained in sub-section (1),––

(a) activities or transactions specified in Schedule III; or

(b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services.

7. (3) Subject to the provisions of sub-sections (1) and (2), the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as—

(a) a supply of goods and not as a supply of services; or

(b) a supply of services and not as a supply of goods.

Schedule II of CGST Act, 2017 ACTIVITIES TO BE TREATED AS SUPPLY OF GOODS OR SUPPLY OF SERVICES

  1. Transfer

    (a) any transfer of the title in goods is a supply of goods;

    (b) any transfer of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services;

    (c) any transfer of title in goods under an agreement which stipulates that property in goods shall pass at a future date upon payment of full consideration as agreed, is a supply of goods.

  2. Land and Building

    (a) any lease, tenancy, easement, licence to occupy land is a supply of services;

    (b) any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.

  3. Treatment or process

    Any treatment or process which is applied to another person’s goods is a supply of services.

  4. Transfer of business assets

    (a) where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person;

    (b) where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, whether or not for a consideration, the usage or making available of such goods is a supply of services;

    (c) where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless—

    (i) the business is transferred as a going concern to another person; or

    (ii) the business is carried on by a personal representative who is deemed to be a taxable person.

  5. Supply of services

    The following shall be treated as supply of services, namely:—

    (a) renting of immovable property;

    (b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly,except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier. Explanation.—For the purposes of this clause—

    (1) the expression “competent authority” means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:—

    (i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972; or

    (ii) a chartered engineer registered with the Institution of Engineers (India); or

    (iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;

    (2) the expression “construction” includes additions, alterations, replacements or remodelling of any existing civil structure;

    (c) temporary transfer or permitting the use or enjoyment of any intellectual property right;

    (d) development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software;

    (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; and

    (f) transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration.

  6. Composite supply

    The following composite supplies shall be treated as a supply of services, namely:—

    (a) works contract as defined in clause (119) of section 2; and

    (b) supply, by way of or as part of any service or in any other manner whatsoever,of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.

  7. Supply of Goods

    The following shall be treated as supply of goods, namely:—

    Supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration.

Section 15 of CGST Act, 2017

15. (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 State Goods and Services Tax Act, the Union Territory 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 recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services;
(d) interest or late fee or penalty for delayed payment of any consideration for any supply; and
(e) subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments.
Explanation.––For the purposes of this sub-section, the amount of subsidy shall be included in the value of supply of the supplier who receives the subsidy.”
 

(3) The value of the supply shall not include any discount which is given––

(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and (b) after the supply has been effected, if—

(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and (ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.
 

(4) Where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed. (5) Notwithstanding anything contained in sub-section (1) or sub-section (4), the value of such supplies as may be notified by the Government on the recommendations of the Council shall be determined in such manner as may be prescribed. Explanation.—For the purposes of this Act,––

(a) persons shall be deemed to be “related persons” if––

(i) such persons are officers or directors of one another’s businesses; (ii) such persons are legally recognised partners in business; (iii) such persons are employer and employee; (iv) any person directly or indirectly owns, controls or holds twenty-five per cent. or more of the outstanding voting stock or shares of both of them; (v) one of them directly or indirectly controls the other; (vi) both of them are directly or indirectly controlled by a third person; (vii) together they directly or indirectly control a third person; or (viii) they are members of the same family;

(b) the term “person” also includes legal persons; (c) persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.

Rule 33 of CGST Rules, 2017

Value of supply of services in case of pure agent.-Notwithstanding anything contained in the provisions of this Chapter, the expenditure or costs incurred by a supplier as 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 authorisation by such recipient; (ii) the payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent 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 supply are in addition to the services he supplies on his own account.
 

Explanation.- For the purposes 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.

Section 2(31) of CGST Act, 2017

“Consideration” in relation to the supply of goods or services or both includes––

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

(b) the monetary 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 by any other person but shall not include any subsidy given by the Central Government or a State Government:

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;

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