GST Not Payable On Reimbursement Of Tree Cut Compensation Paid To Farmers By Pure Agent: Karnataka AAR

The Karnataka Authority for Advance Ruling (AAR) has ruled that a pure agent is not liable to pay GST on reimbursement of compensation amounts paid to farmers and landowners.

The two-judge bench of M.P. Ravi Prasad and Kiran Reddy T. has ruled that reimbursement of land compensation amounts paid to farmers and landowners during the course of work is subject to GST if the applicant does not qualify as a pure agent.

The applicant executes government projects on a tender basis, and their main area of expertise is water supply and underground drainage works. The applicant was awarded a contract for the establishment of a sub-station at B.V. Halli in Channapatna taluk from Karnataka Power Transmission Corporation Limited (KPTCL). The amount is paid as compensation to the affected persons, i.e., landowners and farmers, by the applicant as per the contract, wherein tree cutting, tree cut compensation, and crop compensation is reimbursed by the KPTCL as per actuals.

As per the agreement, the work order amount does not include the compensation paid to farmers and is being paid merely as reimbursement. The reimbursement bills are raised with KPTCL by the applicant during the execution of the project, and the compensation amount is not included in the contract amount. The applicant submits a bill to KPTCL with the necessary proofs and documents for reimbursement.

The applicant sought an advance ruling on the issue of whether the GST is applicable to the reimbursement of compensation amounts paid to farmers and landowners during the course of the execution of work.

The AAR noted that the applicant is acting as a pure agent only to the extent of reimbursement of tree-cutting compensation. But the applicant is not acting as a pure agent to the extent of reimbursement of land compensation, as the Special Conditions of Contract do not mention land compensation. There is no contractual agreement with the recipient of supply to act as his pure agent to incur expenditures or costs in the course of the supply of services to the extent of land compensation. However, if the special contract conditions are not included in the main agreement, the issued advance ruling will not apply.

Applicant’s Name: Sree Subha Sales

Date: 27/10/2022

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