GST is applicable on reimbursement of Fuel Charges for the rental services of aircrafts

Introduction of GST is considered to be a significant step in the reform of indirect taxation in India. Amalgamating of various Central and State taxes into a single tax would help mitigate the double taxation, cascading, multiplicity of taxes, classification issues, taxable event, and etc., and leading to a common national market.

The Central Government, on the recommendations of the GST Council has notified that the GST rate, on the intra-State supply of certain services in Notification No. 11/2017-Central Tax (Rate) dated 28th June, 2017. According to Sr.No.10(ii) of the said Notification, Rental services of transport vehicles with or without operators will be taxable at 18% GST (9% SGST + 9% CGST). Let us refer to the case of Global Vectra Helicorp ltd. (GST AAR Gujarat), where the issue under consideration was amount recovered as reimbursement (at actual) from the customer, for the fuel procured on behalf of the Customer was required to be included in the value of services, which were in terms of Sr.No.10(ii) of Notification No. 11/2017-Central Tax (Rate) dated 28th June, 2017.

Facts of the Case:

• The applicant, Global Vectra Helicorp Ltd (GVHL) submitted that they held a Non-scheduled Operators Permit (NSOP) issued by the Directorate General of Civil Aviation (DGCA).
• It employed a fleet of around 30 helicopters (aircrafts) for providing services classifiable under HSN 996603 i.e. Rental services of aircraft including passenger aircrafts, freight aircrafts, and the like with or without operator) in terms of Annexure to Notification No. 11/2017-Central Tax (Rate) dated 28.6.2017 (Charter Hire Services).
• Under the charter hire services entered into by the applicant with various customers, the applicant was responsible for operating and maintaining the aircrafts.
• The applicant employed experienced and qualified pilots and qualified engineering crew in accordance with aviation standards and ensured that the Aircrafts were available and fully operational during the term of the contract.
• Aviation Turbine Fuel (ATF) was required for flying the Aircrafts.
• While in terms of the contracts, the applicant agreed to provide rental services of aircraft (with or without operator) in respect of the ATF, it was agreed that provision of the same for the purpose of flying of the aircrafts would be the responsibility of the Customers.
• However, at locations where the customer was unable to provide the fuel, in order to ensure continuity of flying, the contract required GVHL to procure the fuel on behalf of the Customer and subsequently the cost of the fuel was reimbursed by Customer at actual (without charging any mark-up).
• GVHL undertook the activity of procurement of fuel as a ‘pure agent’.

The applicant had put forward the following question on which Advance ruling was required:

Whether in terms of the valuation provisions under GST legislation, amount recovered as reimbursement (at actual) by the Applicant from the Customer, for the fuel procured on behalf of the Customer is required to be included in the value of services provided by the Applicant?

Observations of AAR on whether amount of ATF fuel, which was received as reimbursement by the applicant would form a part of the ‘consideration’ or not

AAR found that the applicant was providing “Rental services of aircraft including passenger aircrafts, freight aircrafts and the like with or without operator” classifiable under Heading 9966 of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 on which applicable GST is 18% (9% SGST + 9% CGST).

The said service is specifically classifiable under Heading No.996603 of Annexure to the Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017, which pertains to “Rental services of aircraft including passenger aircrafts, freight aircrafts and the like with or without operator.”

AAR referred to Section 2(31) of the CGST Act, 2017, which defined “consideration”. According to Section 2(31), consideration in relation to the supply of goods, services or both includes:

• 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, 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
• the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods, 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

In the instant case, the payment made or to be made by the recipient included payment towards the services rendered by the applicant as well as the payment towards fuel, which was filled by the applicant in the aircrafts.

This meant that payment made or to be made by the recipient to the applicant would not only include the payment for the supply of services i.e. “Rental services of aircraft including passenger aircrafts, freight aircraft and the like with or without operator” but would also include the amount for the fuel filled in the aircraft by the applicant.

Therefore, the amount of ATF fuel, which was received as reimbursement by the applicant would form a part of the ‘consideration’ i.e. the value of the services provided by the applicant and GST would be liable on the same.

Observations of AAR on the value of the taxable supply

The value of taxable supplies is provided under Section 15 of CGST Act, 2017.

According to Section 15, the value of a supply of goods, 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.

The value of supply shall include:

• any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than the CGST Act, the SGST Act, the UTGST Act and the GST (Compensation to States) Act, if charged separately by the supplier
• 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, services or both
• 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
• interest or late fee or penalty for delayed payment of any consideration for any supply; and
• subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments.

The value of the supply shall not include any discount which is given:

• 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
• after the supply has been affected, if:
  1. 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
  2. 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.

Contention of the applicant that provision of fuel cannot be included in the value of taxable supply

In the instant case, where the applicant and the customer were unrelated parties, the price actually paid or payable for the supply of services included the value of services i.e. “Rental services of aircraft including passenger aircrafts, freight aircraft and the like with or without operator” as well as the amount for the fuel filled in the aircraft by the applicant, which would be the sole consideration for the supply as per the said section.

Submissions by the Applicant were:

• The applicant referred to the provisions of Section 15(2) of the CGST Act, 2017 and stated that as per the provisions, the following were included in the value of supply (i) Incidental expenses charged by the supplier to the recipient of a supply and (ii) Any amount charged for anything done by the supplier in respect of the supply at the time of, or before supply of services.
• They recovered cost of fuel from their customers and the same was not covered under sub-clause (i) as recovery of fuel could not qualify as incidental expenses to the rental services provided by the applicant and the same also did not fall under sub-clause (ii) also as the recovery of fuel cost does not represent an amount charged for anything done by the applicant in respect of supply of rental services provided by the applicant.
• The provision of fuel cannot be considered as incidental to the main supply of Charter Hire services as the supply of fuel is not the responsibility of the applicant and is the responsibility of customers.
• Since the primary responsibility for provision of fuel for flying of the aircrafts was of the applicant’s customers’, provision of fuel by the applicant on behalf of the customer for ensuring uninterrupted provision of Charter Hire services could not be termed as an expense incidental to the main supply.
• Thus, the same could not be included in the value of services supplied by the applicant for computation of GST.

Observations of AAR on contention of the applicant that provision of fuel cannot be included in the value of services

• As per Section 15(2)(c), 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 would also form part of the value.
• In the instant case, the applicant was filling ATF fuel in the aircraft before the supply of services to the customer and the amount of the ATF fuel was being charged from the customer, which the applicant was receiving in the form of consideration, which was received by them as reimbursement.
• This act of the applicant would be considered as ‘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’ and would, therefore, form part of the value.
• Therefore, the contention of the assessee that the recovery of fuel cost does not represent an amount charged for anything done by the applicant in respect of supply of rental services provided by them was not valid.
• The applicant had submitted that the fuel costs recovered from the Customer was the actual cost of fuel and the applicant was acting as a pure agent of the customer and therefore reimbursement of fuel debit notes was not to be included in the value of taxable services provided by the applicant.

Contention of the Applicant on ‘Pure Agent’

Applicant also stated that a pure agent was one who while making a supply to the recipient, also received and incurred expenditure (on some other supply) on behalf of the recipient and claims reimbursement (as actual, without adding it to the value of his own supply) for such supplies from the recipient of the main supply and while the relationship between them (provider of service and recipient of service) in respect of the main service is on a principal to principal basis, the relationship between them in respect of the ancillary supply is that of a pure agent.

He further stated that he had satisfied all the conditions that had to be satisfied by a supplier to qualify as a pure agent in terms of Rule 33 of the CGST Rules, 2017.

Reference to Rule 33 of the CGST Rules, 2017 by AAR

Rule 33 pertains to value of supply of services in case of pure agent. According to Rule 33, 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:

• 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
• 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
• 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.

For the purposes of this rule, “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
• 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
• does not use for his own interest such goods or services so procured; and
• 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.

AAR, therefore, examined whether the applicant satisfied all the conditions of a pure agent

Condition 1 – 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

• As per the contract, the recipient had authorised the supplier to make payment to the third party at certain locations.
• It was also mentioned therein that ATF charges shall be reimbursed as per actual on production of original vouchers from the ATF supplier at Mumbai.
• However, for the applicant to qualify as a ‘pure agent’ the applicant was required to provide documentary evidence to prove that the reimbursement received from their customer is as per actual and without mark up.
• However, they did not produce the relevant documents to prove this point. Therefore, this condition was not satisfied.

Condition 2 – 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 cost of the fuel incurred on behalf of customers was not included in the taxable value indicated in the invoices issued by the applicant on customers for charter hire services.
• However, the same were charged through separate debit notes raised on Customers by the applicant.
• As per the condition, the applicant was required to indicate the payment of fuel made by him separately in the invoice issued by him to the recipient of service.
• However, the applicant had not indicated the payment of fuel made by him on behalf of the recipient of supply, separately on the invoice issued by him to the recipient of service.
• Hence this condition was not satisfied.

Condition 3 – 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 supplies procured by the applicant from the third party was that of ATF fuel, which he procured and filled in the aircrafts which are used to provide “Rental services of aircraft including passenger aircrafts, freight aircraft and the like with or without operator’.
• Therefore, the ATF fuel procured by the applicant for the aircraft was not in addition to the services he supplied on his own account, but only a part of the above service since as the ATF fuel filled in the fuel tank of the aircraft would enable the aircraft to fly and thus enable the applicant to provide the aforementioned service to their customer.
• Hence this condition was also not satisfied.

Condition 4 – 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;

• On going through the contract, it was seen that the applicant was authorised by the recipient i.e. ONGC to make arrangement for the ATF for locations other than that of Mumbai and Offshore and also in cases where ONGC is unable to supply ATF at Mumbai.
• It was also been mentioned therein that ATF shall be reimbursed as per actual on production of original vouchers from the ATF supplier at Mumbai.
• However, for the applicant to qualify as a ‘pure agent’ the applicant was required to provide documentary evidence to prove that the reimbursement received from their customer was as per actual and without mark up.
• However, they did not produce the relevant documents to prove this point. Therefore, this condition was not satisfied.

Condition 5 – 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;

• In the instant case, only the ATF fuel procured by the applicant and filled in the fuel tank of the aircraft would enable the aircraft to fly and thus enable the applicant to provide the “Rental services of aircraft including passenger aircrafts, freight aircraft and the like with or without operator” to their customer.
• Thus, the fuel so procured by the applicant was with the intention to enable him to supply the aforementioned service.
• Therefore, it could not be said that the applicant neither intended to hold nor held any title to the goods or services or both so procured or supplied as pure agent of the recipient of supply. Thus, the said condition was not satisfied.

Condition 6 – does not use for his own interest such goods or services so procured;

• In the instant case, the fuel was procured by the applicant for the aircraft through which he was providing “Rental services of aircraft including passenger aircrafts, freight aircraft and the like with or without operator”.
• Only the ATF fuel filled in the fuel tank of the aircraft would enable the aircraft to fly and thus enable the applicant to provide the aforementioned service to their customers.
• Therefore, the fuel so procured by the applicant was used for his own interest i.e. to enable the applicant to provide the aforementioned service to the customer.
• Thus, the said condition was not satisfied.

Condition 7 – 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

• On going through, the details/documents submitted by the applicant, it was seen that no evidence/documentary proof was submitted by the applicant to prove that he had received only the actual amount incurred to procure the ATF fuel for the aircrafts other than mentioning in their submission that the reimbursements were not treated as service income in their Profit and Loss Account, that they are treated as receivables from Customers and that on recovery, of such receivables, the amount recovered were adjusted against such receivables.
• In absence of relevant documents in this regard, AAR concluded that this condition was also not satisfied.

It was therefore ruled that in terms of the valuation provisions under GST legislation, amount recovered as reimbursement (at actual) by the applicant M/s. Global Vectra Helicorp ltd. from the customer, for the fuel procured on behalf of the Customer was required to be included in the value of services provided by the Applicant and GST will be applicable on the same in terms of Sr.No.10(ii) of Notification No. 11/2017-Central Tax (Rate) dated 28th June, 2017.

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