Supervisory Charges are liable to GST| H & T Contractor charges collected on actual basis is not liable to GST

The Authority of Advance Ruling, Karnataka decided in the matter M/s Karnataka State Warehousing Corporation (judgement No. KAR ADRG 14/2021) wherein the applicant has provided the supervision services of loading, transportation and unloading of agriculture produce to the various depositors including Food Corporation of India (FCI). For this purpose, the applicant in turn obtains services of Handling & Transport Contractors. The applicant charges H & T Contractor charges on actual basis alongwith his supervisory charges of 8% of H & T Contractor amount. 

The applicant seeks advance ruling that whether the supervision charges collected by the applicant @ 8% of H & T Contractor charges is liable to GST?

The Applicant contended that supervisory services collected by him are not covered under loading, unloading, packing, storage or warehousing of agricultural produce and therefore, same is not covered under exempted services.

Hon’ble Authority of Advance Ruling held that H & T Contractor charges collected by the applicant on actual basis are not liable to GST as applicant is acting as “Pure Agent” to the extent of such amount. However, supervisory charges collected @ 8% are covered under “Other service” and are liable to GST @ 18%.

In this article,  we have made a detailed analysis of the Advance ruling.

1. Brief facts of the case: 

1. M/s Karnataka State Warehousing Corporation (KSWC) (“The Applicant”) is registered under GST in the state of Karnataka. The applicant is a state government undertaking owned by Central Warehousing Corporation and Government of Karnataka in equal proportion.
2. Among various other services, The applicant is also engaged in providing services of handling & transport, loading & unloading of agricultural produce.
3. The Handling and transport work includes handling of stock at the railhead, transportation to the warehouses, unloading and proper stacking inside the godowns, re-bagging, salvaging, standardization as may be necessary and de-stacking and loading the same at the time of delivery.
4. For the purpose of providing such service, the applicant in turn obtains services Handling & Transport (H&T) contractors.
5. The applicant provides his services to various depositors including Government/ quasi-government/public sector companies/private companies. One of the depositor is Food Corporation of India (“FCI”), to whom applicant provides services.
6. For providing services, the applicant charges an amount which is equal to the amount charged by H&T contractors along with his markup of 8%. Therefore, The applicant claims the following charges from Depositor:
   1. Actual payment made to the H&T contractor’s for different operations such as cost of gunnies, jute twine package etc., if it is not supplied by the depositor.
   2. Supervisory Charges @ 8%  of the bills of H & T contractors and other incidental expenses incurred on behalf of the depositor.

2. Question before Hon’ble AAR:

The applicant sought Advance ruling with respect to following question:

1. Whether ‘supervisory charges’ charged by the applicant towards supervision of loading, transportation and unloading of agricultural produce at the rate of 8% on the amount billed by ‘Handling and Transportation’ Contractors is chargeable to tax under the CGST/ KSGST Acts, 2017?
2. If yes, what is the applicable rate of tax and the HSN/ SAC code applicable thereto?

3. Legal Extract:

1. Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017 contains list of services exempted from GST. Entry No. 24(1)(e) is reiterated below:

“…

“

2. Storage and Warehousing service as explained by CBEC in F.No.B11/1/2002-TRU, dated 01-08-20002, is as follows:

“Storage and Warehousing Service for all kinds of goods are provided by public warehouses, private warehouses, by agencies such as the Central WareHousing Corporation, Airport Authorities, Railways, Inland Container Depots, Container Freight Stations, storage godown and tankers operated by private individuals etc.”

3. Definition of “Pure Agent” as per explanation to Rule 33 of CGST Rules, 2017 is as follows:

“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.”

4. Contention of the Applicant

The applicant made following contentions:

1. As per Notification No. 12/2017-Central Tax (Rate) under Entry No. 24 or SAC 9986, exemption is available only with respect to loading, unloading, packing, storage or warehousing of agricultural produce and not in respect of supervisory charges.
2. Further, the supervisory charges are not covered in definition of “storage and warehousing services” given under explanation in CBEC in F.No. B11/1/2002-TRU, dated 01-08-2020. 
3. Therefore, Supervisory charges are covered under Entry No.  998619 “Other support services to agriculture, hunting, forestry and fishing” or under the SAC 996799 “Other supporting transport services n.e.c” or under the SAC 999799 “Other services n.e.c” and therefore, such charges would be liable to GST @9% CGST and 9% KGST or 18% IGST.

5. Findings and Discussions of AAR

Hon’ble AAR observed following points:

1. As per agreement between the applicant and depositor, the applicant raises invoice with markup of 8% of the amount charged by H&T Contractor. As applicant is in receipt of consideration, therefore, it is a supply of services in hand of applicant.
2. Also, as per contract entered between the applicant and the depositor, there is no contractual agreement between the H & T Contractor and the depositor and also the applicant is principally providing the H&T Services to the depositor. 
3. As per one of letter issued by FCI (The depositor), it communicated that supervisory charges payable to the State warehousing corporation (“SWC”) has been increased from 5% to 8% w.e.f. 1st April, 2004. The applicant is also one of SWC.
4. Further, Hon’ble AAR clarified the meaning of a valid contract as under:
   1. A contract is an agreement between two or more parties.
   2. A contract can either be written or partial written or oral. Oral agreement or partial written agreement are as valid as written agreement. 
   3. The existence of a contract requires the factual elements of (i) an offer, (ii) an acceptance of that offer which results in a meeting of the minds, (iii) a promise to perform, (iv) a valuable consideration, (v) a time or event when performance must be made (meet commitments), (vi) terms and conditions for performance including fulfilling promises and (vii) performance.
5. The letter provided by FCI qualifies to be a contract and is nothing but the contractual agreement between the applicant and the FCI. As per letter, the applicant procures the H&T services on behalf of the FCI and also charges the H & T Contractor charges separately in his invoice alongwith his supervisory charges.
6. Thus, the applicant without any doubt qualifies to be a pure agent of FCI in this instant Case.
7. Further, applicant is providing supervision services from railhead to warehouse.  Therefore, Hon’ble AAR determined the classification of supervisory services provided by the applicant.
8. Services provided by the applicant are covered under SAC 999799-Other Service n.e.c.

7. Judgement:

As per the aforesaid mentioned analysis the Hon’ble Authority of Advance Ruling concluded that:

1. Services provided by the applicant to FCI are the services covered under SAC 999799 and such category is not covered under any exemption. Therefore, amounts equivalent to 8% of the sum of the actual amount paid to H&T Contractors are exigible to GST @18% as per the Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017.
2. Further, H & T Charges collected on an actual basis are not liable to GST being the applicant acting in the capacity of “Pure Agent”.