Staffing Firms Must Pay GST on Trainee Stipends, Rules AAR, Denying Pure Agent Claim [Read Order]

In a significant ruling that clarifies the tax treatment of stipend payments, the Tamil Nadu Authority for Advance Ruling (AAR) has held that amounts received by a staffing firm from corporate clients for disbursement as trainee stipends are subject to Goods and Services Tax (GST). The AAR rejected the applicant's claim to be treated as a 'pure agent', a status that would have excluded these amounts from the taxable value of their services.

The ruling was delivered on an application filed by Logskim Solutions Private Limited, a company acting as a third-party aggregator to mobilise and manage trainees for various industry partners. The company facilitates apprenticeship programs under schemes like the National Apprenticeship Training Scheme (NATS). As part of its operations, Logskim receives a service charge from its industry partners and also receives funds specifically to pay stipends to the trainees. The company argued that when it merely passes on the stipend without any deduction or markup, it acts as a ‘pure agent’ of the industry partner, and thus the stipend amount should not be included in the value of its taxable supply.

After a detailed examination, the AAR bench disagreed. The authority meticulously analysed Rule 33 of the CGST Rules, 2017, which defines a 'pure agent' and allows for the exclusion of certain reimbursements from the taxable value. The bench found that for a supplier to qualify as a pure agent, the expenditure must be incurred on behalf of the client and paid to a third party for a supply procured. The AAR observed that the stipend is not an 'expenditure or cost' incurred by Logskim itself. Instead, the company acts merely as a conduit for the transfer of funds from the industry partner to the trainee, with no procurement of any service from a third party involved. Consequently, key conditions of Rule 33 were not fulfilled.

Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here

The ruling also addressed the taxability of the sale of uniforms, shoes, and insurance to the industry partners. While the original application query mentioned these items being sold "at cost," the company’s authorised representative clarified during the personal hearing that all expenditures except the stipend included a markup. Given this admission and the failure to meet the 'pure agent' criteria, the AAR ruled that these supplies are also chargeable to GST.

In its decision, the AAR considered a precedent from Karnataka (2022) where a similar denial of 'pure agent' status for stipend disbursement was upheld by the Appellate Authority. The bench distinguished other rulings cited by the applicant, noting that the specific question of whether a stipend constitutes an 'expenditure' by the supplier was not deeply examined in those cases.

The ruling was delivered by a bench comprising Balakrishna S, I.R.S., Additional Commissioner (CGST), and B. Suscel Kumar, Joint Commissioner (SGST). The AAR refrained from answering a third, more generic question from the applicant regarding the interpretation of law, stating that such queries fall outside the specific scope of questions permissible for an advance ruling under the GST law. This decision provides crucial clarity for the staffing and skill development industry, establishing that stipend flows are part of the taxable service value unless all stringent conditions of a pure agent are met.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates