AGENCY IN GST

AGENCY UNDER CONTRACT ACT

Agency is a
special contract recognised under the Contract law. Section 182 of the Indian
Contract Act, 1872 defines an ‘agent’ as a person employed to do any act for
another, or to represent another in dealings with third persons. The person for
whom such act is done or who is so represented is called the ‘principal’.
Agency can be established either by an express oral / written agreement or even
from surrounding circumstances (section 187).

Thus, the test
of establishment of a contract of agency is a mixed question of law and facts.
An express contract is not an essential ingredient of agency but, on the other
hand, agency should not be concluded by the mere use of a terminology in an
arrangement. It is more behavioural rather than contractual in the sense that
mere terms do not automatically form the basis of agency. The Supreme Court in Assam
Small Scale Ind. Dev. Corp. vs. JD Pharmaceuticals 2005 (10) TMI 494
observed:

‘The
expressions “principal” and “agent” used in a document are not decisive. The
nature of transaction is required to be determined on the basis of the
substance there and not by the nomenclature used. Documents are to be construed
having regard to the contexts thereof wherefor “labels” may not be of much
relevance.’

The principles
of agency are to be examined with reference to the authorities exercised by a
person while engaging with a third party. An agent functioning within the
authority granted to it would be in a position to bind its principal by its
acts as against a third party (section 226). This forms the core of an agency
relationship under general law. To the extent that an agent surpasses its
authority, the third party would have to exercise its right against the agent,
in its personal capacity, without any recourse to the principal (section 227).
In fact, if the excessive authority is not separable from the original
authority, the whole contract can be repudiated by the principal (section 228)
and the remedy available to the third party is limited only against the agent.

A principal can
disown any acts beyond the agent’s authority in which case all implications
would fall upon the agent in its personal capacity (section 196).
Alternatively, the principal with knowledge of material facts can either
expressly or impliedly ratify the acts of the agent and all consequences of
agency would follow on such ratification (section 199). These are the critical
provisions which govern principal-agent contracts in general.

AGENCY UNDER SALE OF GOODS ACT

The Sale of Goods Act governs the principal-agency relationship on
matters involving sale or purchase of goods. The Act defines a ‘mercantile
agent’ as having in the customary course of business such authority either to
sell goods, or to consign goods for the purpose of sale, or to buy goods, or to
raise money on the security of goods. In contradistinction to the Contract Act,
the Sale of Goods Act narrowed down the authority under the agency
transactions, for its purpose, as those which have a reference to sale or
purchase of goods. A mercantile agent under the Sale of Goods Act is one who
has control and / or possession over the goods and the authority from the
owner-principal to pass the property in goods to a third party.

Section 27 of
the Sale of Goods Act acknowledges transfer of valid title on sales performed
by a mercantile agent even though such agent may not himself possess the title
over the goods. This comes with the obvious rider that such agent should act
within its authority and the buyer of such goods acquires the title in good
faith with knowledge about this authority. Section 45 grants rights to the
agent to step into the shoes of its principal as an unpaid seller and enforce
such rights as against the buyer for recovery of the price of the goods due to
it and accountable to its principal.

AGENCY ERSTWHILE VAT / CST LAW

Sale under the
VAT / CST laws was nomen juris, i.e. understood as per the prevailing
Sale of Goods Act, 1932 – involving transfer of title in goods. Accordingly,
transfer of goods by the principal to its agent was normally considered as a
delivery / stock transfer and not a transaction of sale. The Supreme Court in Sri
Tirumala Venkateswara Timber and Bamboo Firm vs. Commercial Tax Officer,
Rajahmundry [(1968) 2 SCR 476] explained the distinction between a
contract of sale and agency as follows:

‘As a matter of
law there is a distinction between a contract of sale and a contract of agency
by which the agent is authorised to sell or buy on behalf of the principal and
make over either the sale proceeds or the goods to the principal. The essence
of a contract of sale is the transfer of title to the goods for a price paid or
promised to be paid. The transferee in such a case is liable to the transferor
as a debtor for the price to be paid and not as agent for the proceeds of the
sale. The essence of agency to sell is the
delivery of the goods to a person who is to sell them, not as his own
property but as the property of the principal who continues to be the owner of
the goods and will therefore be liable to account for the sale proceeds. The
true relationship of the parties in each case has to be gathered from the
nature of the contract, its terms and conditions, and the terminology used by
the parties is not decisive of the legal relationship.’

Under Sales
Tax, the transaction through the medium of agents takes into account two
phases, (a) that which takes place between the agent and principal on one part,
and (b) that which takes place between the agent (on behalf of the principal)
on one part and the third person (a seller or purchaser) on the other part.
Therefore, the true test of whether two persons were under a
principal-to-principal relationship or under a principal-agent relationship was
to ascertain whether there was any inter se transfer of property in
goods between such persons. If after the transfer the risks of loss or injury
over goods would be that of the buyer to the exclusion of the seller, such
relationships would not be a principal-agency relationship.

Yet, in VAT
laws the definition of ‘sale’ included transfer of goods by the principal to
its selling agent or by the purchasing agent to its principal in cases of (a)
difference in the sale price being accounted back to the principal; (b)
non-accountal of all collections to its principal; (c) acting on behalf of
fictitious or non-existent principal. This was perhaps only done to address the
cases of tax frauds or sham transactions where terms of agency were used to
camouflage the transaction of sale.

Sales tax laws
also made reference to the relationship of agency while setting the scope of
the phrase ‘dealer’. This was done in order to acquire powers to make
assessments over mercantile agents dealing in respect of non-resident dealers
and enforce joint or several liability over transactions of the agent on behalf
of its principal.

AGENCY UNDER ERSTWHILE SERVICE TAX

The Service Tax
law had adopted a different understanding of agency. Until the negative list
regime, agency was identified as a service to its principal, say advertising
agent, insurance agent, air travel agent, custom house agent, real estate
agent, etc. The objective was to tax the inter se services rendered by
the agent (on its own account) to its principal. The general law prevailed on
services rendered by the principal through its agent and all consequences of
agent’s action would flow back to the principal in entirety without any
fictional element.

Even after the
introduction of the negative list scheme, the definition of ‘assessee’ included
an agent. With this as the basis, taxes discharged by agencies were considered
as sufficient compliance in the hands of the principal [Zaheer R. Khan
vs. CST 2014 33 STR 75 (Tri-Mum) and Reliance Securities Ltd. vs. CST 2018 (4)
TMI 1335 (Tri-Mum)]. The Tribunal also held that once the entire value
in a transaction chain has been taxed, additional tax on the principal would
amount to double taxation of the same amount which is impermissible.

AGENCY UNDER THE GST LAW

Schedule 1 to
section 7 of the GST law deems a supply of goods by a principal to its agent
for subsequent sale and a purchase of goods by an agent to its principal even
though without consideration, as a supply liable to tax. Effectively, Schedule
I treats the principal and agent as different persons for the purposes of the
Act. It treats a mere movement by the principal to its agent or vice versa
as a supply – equivalent to a buy-sell transaction. It is in this context that
section 2(5) defines an agent as follows:

‘(5) “agent”
means a person, including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile
agent, by whatever name called, who carries on the business of supply or
receipt of goods or services or both on
behalf of another;’

The definition
u/s 2(5) triggered off a controversy initially over the inclusion of factors,
brokers, commission agents, etc., which are specifically mentioned in the
definition of agent but do not have authoritative scope on representing and
concluding contracts on behalf of their principals. For example, a broker is
one who has limited authority to identify buyers / sellers of goods and a
commission agent is one whose only interest is to receive a commission for
fixing a supply contract between its principal and a third party; both these
persons would not possess the authority of concluding supply contracts with a
third party and binding the principal with their actions.

On a careful
reading of the definition one would observe that the necessary ingredient of
agency under GST is the authority to effect
a supply / receipt on behalf of its principal. This is because under
general law the scope of functions of the agent could take various forms such
as logistics, liaising, negotiations, etc., but the GST law has narrowed the
scope of agency u/s 2(5) to only functions w.r.t. effecting a supply or receipt
of goods on behalf of the principal. Section 2(5) also uses the phrase ‘or any
other mercantile agent’, implying that the preceding categories of agent are of
the type who have satisfied the condition of being a mercantile agent (as
understood under the Sale of Goods Act) though they are called by different
names. The phrase ‘whatever name called’ only reinforces the accepted practice
of looking into the substance of the relationship and not just the form.
Therefore, a person may be termed as a ‘factor’ or ‘a commission agent’ in
trade / general law parlance but would acquire agency u/s 2(5) only if he
possesses the power to enter into binding supply arrangements on behalf of his
principal. It is also possible to interpret that only those cases of agency
would be applicable to Schedule I which involve a delivery of goods to / from
the selling / buying agent and such agent possesses the authority to effect the
supply on behalf of its principal.

This
interpretation was also acknowledged by the CBEC Circular No. 57/31/2018-GST
which read as follows:

‘7. It may be
noted that the crucial factor is how to determine whether the agent is wearing
the representative hat and is supplying or receiving goods on behalf of the
principal. Since in the commercial world, there are various factors that might
influence this relationship, it would be more prudent that an objective
criteria (sic) is used to determine whether a particular
principal-agent relationship falls within the ambit of the said entry or not.
Thus, the key ingredient for determining relationship under GST would be
whether the invoice for the further supply of goods on behalf of the principal
is being issued by the agent or not. Where the invoice for further supply is
being issued by the agent in his name then, any provision of goods from the
principal to the agent would fall within the fold of the said entry. However,
it may be noted that in cases where the invoice is issued by the agent to the
customer in the name of the principal, such agent shall not fall within the
ambit of Schedule I of the CGST Act. Similarly, where the goods being procured
by the agent on behalf of the principal are invoiced in the name of the agent
then further provision of the said goods by the agent to the principal would be
covered by the said entry. In other words, the crucial point is whether or not
the agent has the authority to pass or receive the title of the goods on behalf
of the principal.’

Though the
aspect of representative authority has been affirmed by the CBEC, it has
questionably used the manner of raising the invoice as the ‘objective criteria’
for ascertaining the representative authority. From the perspective of substance
over form, a mere mention of a name in the invoice cannot decide the presence
or absence of agency. Nevertheless, this appears to have been done from a
practical standpoint to overcome possible procedural challenges with place of
supply, credit flow and inter-government settlements.

While this is
the contextual understanding of agency under Schedule I, there is another type
of agency which has been subtly recognised under the GST law. The phrase
‘agent’ has also been used in the definition of supplier, principal, place of
business, output tax, etc. The consequence of this is that all activities of an
agent would merge into the assessment of the principal and treated as being
concluded by the principal for the purposes of GST. For example, output tax and
supplier have been defined as follows:

‘(82) “output
tax” in relation to a taxable person, means the tax chargeable under this Act
on taxable supply of goods or services or both made by him or by his agent but
excludes tax payable by him on reverse charge basis’.

‘(105)
“supplier” in relation to any goods or services or both, shall mean the person
supplying the said goods or services or both and shall include an agent acting
as such on behalf of such supplier in relation to the goods or services or both
supplied;’

The above
definition implies all taxes charged in agency capacity would be included in
the assessment of the principal. Moreover, a person would be considered to be a
supplier even though the goods are in fact being supplied by its agent.

This leads to a
head-on collision with the Schedule I situation discussed above. Ordinarily
speaking, after applying Schedule I and treating the principal and agent as
different persons under the law, one would have expected that all supplies of
the agent would be delinked from the principal’s activities for all purposes of
the Act. One would have expected that the deemed supply by the principal to the
agent would terminate all responsibilities of the principal over the subject
goods for the limited purpose under GST. All assessments of tax would be
conducted in the hands of the agent in its fictional capacity of a buyer of
goods. The inclusion of the agent’s turnover in the hands of the principal u/s
2(82) / 2(105) apparently conflicts with the consequence of agency under
Schedule 1. It would result in a turnover being taxed twice, (a) once in the
hands of the agent (by virtue of Schedule I), and (b) again in the hands of the
principal (by virtue of the definitions such as output tax, supplier, etc.).

This deadlock can be resolved through two theories: (A) The phrase ‘on
behalf of’ has been commonly used only in section 2(5) and Schedule I.
Moreover, Schedule I is only limited to supply of goods and not services.
Therefore, one could view section 2(5) as directly applicable to Schedule I
transactions and not beyond. All other references to agent in the Act are only
for supply of services and not for supply of goods, in which case their
turnover would continue to still be included in the hands of the principal.
This school of thought suffers from a very critical deficiency that the
definition of agency has been used with reference to goods and / or services
and it would not be correct to ignore the specific mention of services while
interpreting the definitions in the context of the agent’s activities; (B) An
agent could acquire representative capacity for various purposes such as making
/ receiving supply, making / receiving payments, etc. Of the various
authorities which an agent can acquire from its principal, section 2(5) read
with Schedule I is limited to agency exercising the authority to effect supplies on behalf of the principal w.r.t. supply
of goods. Where the agent has other representative authorities (such as
carrying, forwarding, consignment agents, ancillary activities to enable a
supply of goods, etc.), the activities would be considered to have been made by
the principal itself and all consequences would follow therefrom. For services,
in the absence of a parallel Schedule I situation, all agents’ actions would be
assessed in the hands of the principal directly.

The consequence
of the latter interpretation may be as follows: For example, Steel Authority of
India appoints an agent for receiving supplies, storing them, procuring orders
and selling these goods to third parties, giving the principal a true account
of the sale proceeds for a commission. Here, the agent has the authority to
negotiate the price, bind SAIL with the price negotiated (of course within
authority) and effect the sale on behalf of SAIL. SAIL would be considered to
have made a Schedule I supply to its agent at the time of dispatch of the goods
and the agent will be considered to have received the goods and making a
subsequent supply to third parties. In effect, there are two supplies in this
arrangement and the agent, though only a medium, will be treated as a buyer for
all purposes of the Act. In such a scenario, the consequence of pricing,
assessment, input tax credit at the principal and agent’s end would have to be
viewed independently.

In contrast to
this, another case could be of Indian Oil Corporation appointing ‘carrying and
forwarding agents’ for receiving, storing and dispatching the goods on behalf of
IOCL. Here the carrying and forwarding agent would not have the authority to
negotiate and / or conclude contracts on behalf of IOCL. The instruction for
movement is also given by IOCL and the agent merely arranges for logistics and
ancillary functions associated with the main supply. In such a scenario, the
law states that even if the tax invoice is raised in the name of the agent on
behalf of IOCL, the supply having taken place by IOCL, the output tax,
turnover, etc., would have to be included in the assessment of IOCL. In such a
scenario there is only one supply, i.e., by the C&F agent under the IOCL’s
authority to the third party which would be assessed in the hands of IOCL
directly. The crucial difference is that the SAIL agent has the authority to bind
its principal under general law with the transactions of supply, while the IOCL
agent was not granted the authority to bind IOCL with its sale transaction and
had limited authority of possession and / or dispatch of the goods.

While these are
simplistic models, real-life transactions pose considerable challenges. One
would have to appreciate the true purport of commonly-used terms such as
factor, del credere agent, commission agent, consignment agent, etc.

(a)        Commission agent – is a mercantile agent who sells or disposes goods by exercising
authority to conclude contracts on behalf of its principal.

(b)        Factor – is generally
a mercantile agent who sells or disposes goods by taking possession or control
over the goods which are entrusted to him by the principal.

(c)        Del credere agent / Pukka arhatia – is one who guarantees that the price of the goods sold would be
recovered and indemnifies against any loss caused on account of non-recovery of
sale price.

(d)        Broker / Kutcha arhatia – is one who mediates a transaction between two principals but does not
acquire or transfer any title over the goods on anyone’s behalf. The broker
acts as a negotiator for each end of the transaction but cannot bind anyone to
the transaction. It is famously stated that all agents are brokers but all
brokers may not be agents.

(e)        Auctioneer – is one who
exercises authority to conclude the price of the goods under sale on the drop
of the hammer.

One may refer
to the principle outlined by the Supreme Court in Commissioner of Sales
Tax vs. Bishamber Singh Layaq Ram [1981] 47 STC 80 while
differentiating an authoritative agent and a general agent as follows:

‘The crucial
test is whether the agent has any personal interest of his own when he enters
into the transaction or whether that interest is limited to his commission
agency charges and certain out of pocket expenses, and in the event of any loss
his right to be indemnified by the principal. This principle was applied in the
case of pakki arhat by Sir Lawrence Jenkins, C.J., in Bhagwandas Narottamdas vs. Kanji Deoji [1906] ILR 30 Bom. 205 and approved of by the Judicial Committee in Bhagwandas Parasram vs. Burjorji Ruttonji Bomanji (1917-18) LR 45 IA 29 and by this Court in Shivnarayan Kabra vs. State
of Madras [1967] 1 SCR 138.’

The other
relevant decision is the case of Kalyanji Kuwarji vs. Tirkaram Sheolal
AIR 1938 Nag. 254:

‘The test to my
mind is this: does the commission agent when he sells have authority to sell in
his own name? Has he authority in his own right to pass a valid title? If he
has then he is acting as a principal vis-a-vis
the purchasers and not merely as an agent and therefore from that point on he
is a debtor of his erstwhile principal and not merely an agent. Whether this is
so or not must of course depend upon the facts in each particular case.’

The above
variants of mercantile agents u/s 2(5) of the GST law should be contextually
understood as those which have the authority to conclude the supply on behalf
of the principal supplier. Any other arrangement which as termed in the manner
specified above would not be considered as agency under GST law, and the latter
school of thought would accordingly apply.

CHALLENGES UNDER AGENCY RELATIONSHIP

Whether secretly
accounted profits / collections liable to GST as an independent activity?

A critical
dimension to the aspect of agency is that the agent is obligated to account for
all the collections to the principal. The agent is permitted to retain the
commissions, expenses and service fee due to it under the agency contract but
cannot secretly profit from the agency. The secreted profits of agency are held
without the knowledge of both the third party as well as the principal. Going
by the previous discussion, agency would take two forms under GST – (a)
Schedule I scenario where agents are treated on par with a principal, (b) the
other scenario where the agent’s functions are assessed in the hands of the
principal in entirety without any fiction.

In the former
scenario, if an agent procures the product at a deemed value of Rs. 85 and
supplies the product at a final price of Rs. 100 and accounts only Rs. 95 as
the collection to the principal, the secreted profit of Rs. 5 may not be a
discernible supply to anyone. It is a profit which has been retained by the
agent from its gross collections and not as a consideration for the agency
services. While the agent may have committed a breach under general law (which
is subject to ratification by the principal himself), tax laws would have to
implement this in its narrow sense. The secreted profit cannot be termed as a
consideration for any identifiable supply and hence may not be taxed at all.
Viewed from another angle, when the entire Rs. 100 has already been taxed as a
consideration of the sale price of goods to the third party, there is nothing
left to tax and Revenue cannot contend that Rs. 5 has escaped the tax net
altogether.

In the latter
scenario, where assessments are made in the hands of the principal, the secreted
profit of Rs. 5 would not be disclosed to the principal, resulting in short
reporting of the tax liability in the hands of the principal to this extent.
But even in such a scenario, the Rs. 5 cannot be taxed in the hands of the
agent as an identifiable supply activity. In contrast to the former scenario,
though there is a net shortfall in payment, the shortfall in payment cannot be
fixed as the liability of the agent for its agency function. At the principal’s
end, the said amount does not accrue to the principal, cannot be termed as a
consideration due to the principal and hence may not form part of the taxable
value of the supply.

The important
principle emerging from this example is that any surplus does not automatically
acquire the character of a supply unless there is a consensus over the activity
between both parties and such parties identify the consideration for such
consensual activity.

Whether
e-commerce activity makes the market place website ‘an agent’?

E-commerce
market place models have multiple variants. In today’s e-commerce business
models where a substantial part of the transaction is concluded by the
e-commerce company on behalf of the seller, there is a challenge in identifying
the relevant basket of agency, i.e. mere C&F agent or a mercantile agent.
Websites such as Amazon, Flipkart, etc., provide multiple facilities to sellers
such as (a) product hosting services, (b) fulfilment centres offering
warehousing, logistics, packing, etc., (c) direction over promotional schemes
for products, (d) incentives and price support to portal sellers, and (e)
collection of payments, etc. The web portal clearly depicts the name of the
seller and the prices offered by the seller which are accepted by the buyer at
the click of a button on the portal. The final invoice is raised in the name of
the seller of goods with the branding, logo and packaging of the web portal but
the payments are made to the web portal. The portal also hosts product
descriptions, customer reviews, seller rating, etc., of the product.

One may contend
that the web portal has portrayed itself as an agent of the seller and the
seller having accepted such a portrayal has impliedly accepted this
principal-agency relationship. By such implicit actions, the marketplace web
portal may be treated as an agent of the principal and effecting supplies on
their behalf. Hence, the transaction would be covered under Schedule I. The
other view may be that these are a host of services provided by a marketplace
web portal and the web portal does not hold out to make warranties /
representations over the product pricing, quality, description, etc. Moreover,
the GST law has imposed TCS provisions for e-commerce operators and treating
them as a separate class of persons who effect collections on behalf of
sellers. Hence, the web portals are not agents as defined in section 2(5) read
with Schedule I. At the most they may be termed as brokers who merely connect
the buyer and the supplier over an e-commerce platform but are not effecting a supply on behalf of the
seller. The issue is wide open and one would have to await clarity on this
front in the years to come.

Intermediary
services under place of supply for goods / services

Agency has also
been used in a different form in the IGST Act. Section 2(13) defines
‘intermediary’ to mean a broker, an agent or any other person, by whatever name
called, who arranges or facilitates the supply of goods or services or both, or
securities, between two or more persons, but does not include a person who
supplies such goods or services or both or securities on his own account. This
phrase is a legacy from the service tax era and has been used in the context of
determining the interstate character of supplies in overseas trade or commerce.

The said
definition includes similar terms such as broker, agent, etc. The important
distinctions between the definition of agent and intermediary are as follows:

1.         Intermediary definition is applicable
for the limited context of ascertaining the place of supply of services being
rendered by the intermediary as a principal and not for;

2.         Agent u/s 2(5) enlists categories of
‘mercantile agents’ while intermediary u/s 2(13) enlists categories of ‘agents’
in general. This is critical as one can contend that where one acquires the
status of a mercantile agent the element of intermediary does not arise in view
of the deeming fiction in Schedule I.

3.         The definition of intermediary excludes
supply of goods / services ‘on own account’. This probably implies that goods
which are supplied on own accounts, including those deemed as a supply by the
agent under Schedule I, would stand excluded from the scope of this definition.

4.         Therefore, the concept of intermediary
has to be distinguished from the concept of agency u/s 2(5) and the obscure
line of difference is the extent of authority granted to the person concerned.

As it appears, the principles of agency under GST
are multi-faceted with the same term having contextual meanings. This makes the
job of tax advisers a precarious walk over a tight rope. Apart from the concept
of agency, one may also need to address certain other relationships (such as
master-servant, bailee-bailor, brokers, consignment agents, etc.) which fall on
the peripheries of an agency relationship and draw a line of distinction while
interpreting these terms. This can be taken up in a separate article.