Recently, the Authority for Advance Ruling (AAR), West Bengal in the case of Re: Prodip Nandi reported in [2022] 134 119 (AAR-West Bengal) has held that based on the terms of contract service provider is liable for payment of salary and service provider is not making payment of salary on behalf of service recipient. Thus, service provider is not acting as pure agent by merely disclosing wages and salaries separately.

Facts of the case: The Applicant is engaged in supplying manpower services to clients on daily/monthly basis for different jobs as required by clients on the basis of following terms:

  • Consolidated salary of the manpower and its components and divisions will be fixed by Principal viz. service recipient, the recruitment and retrenchment both will be at the decision of the Principal only.
  • Service Provider will prepare the salary bill, based on the attendance and other necessary details, provided by the service recipient
  • Client’s monthly payment shall also include- Service Provider’s service changes for manpower supply, at the agreed rate of 3% of the invoice.
  • Compliance to EPF, ESIC and any such statutory provisions Vis-à-vis the employee would be the responsibility of Service Provider
  • The client authorize the applicant to make payment of salary/wages on monthly basis to the personnel provided by the applicant.

The applicant, upon furnishing of copies of ‘Manpower Supply Agreement’, ‘Employment Agreement’ for manpower supply in respect of a particular client, invoice, bank statement, ‘Register of Wages’ in Form XVII under the Contract Labour (Regulation and Abolition) Central Rules, 1971, electronic challan cum return (ECR) under Employee’s Provident Fund, has contended that he qualifies as a pure agent as defined in rule 33 of the CGST Rules, 2017. Accordingly, the amount of salary/wages to be paid by the applicant on behalf of the client is eligible to be excluded from the value of supply and the applicant is liable to pay tax only on the value of service charge received by him from the client for supply of manpower services.

The AAR has observed that rule 33 of the CGST Rules, 2017 clearly states that one of the conditions that has to be satisfied for exclusion of expenditure or costs from the value of supply which has been incurred by supplier as a pure agent if the services procured by the service provider, as a pure agent, from the third party are in addition to the services which he provides on his own account.

In the instant case, the applicant first enters into an agreement to his client for supplying of manpower services and subsequently engages different work-men (third party) at the place of business of his clients and thereby supplies manpower services only. The AAR has find no other services other than manpower services are provided by the applicant to the recipient of service. Further, the AAR has found that by virtue of the ‘Employment Agreement’ made between the service provider and work-man, the applicant, being the employer is liable to make payment to the work-men/employee.

It has been finally concluded by the AAR that undisputedly the applicant is the person who is liable to pay salary/wages to the work-men employed by him under ‘Employment Agreement’ to provide manpower services to his clients and just showing such amount in a separate manner in the invoice doesn’t shift his liability on the recipient of services and makes him qualify as a ‘pure agent’ in terms of rule 33 of the CGST Rules, 2017.

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