Consideration received in Indian Rupees for export of service under GST
One of the controversies or discrepancies attached with the Export of Service under the present taxation system for services is the receipt of consideration or payment in Indian Rupees . This article tries to put light on the ‘Status Quo’ and the effect under GST Regime.
In the present taxation system for services, in order to consider a service as export of service, conditions under Rule 6A of Service Tax Rules, 1994 has to be satisfied. Before the incorporation of Rule 6A, export of services were governed by Export of Service Rules, 2005. One of the conditions is that the payment for the services rendered has to be received in Convertible Foreign Exchange. In the real world of business there are entities who export service and bill the services rendered in INR and receive INR as consideration. In this case, the question arises that if all the conditions, except the condition relating to Convertible Foreign Exchange, get satisfied, will the service be considered as ‘Export of Service’?
In order to answer this question it is important to note some judgement of judicial authorities.
Sun-Area Real Estate Pvt. Ltd. Vs. Commissioner of Service Tax, Mumbai-I [ 2015 (5) TMI 885 – CESTAT MUMBAI] The tribunal in this case made the following observations.
Foreign Inward Remittance Certificate (FIRC) is issued only when in respect of Foreign Exchange as per Clause 3A.6(i) of Exchange Control Manual.
When a person receives in India, payment in rupees from the account of a bank situated in any country outside India maintained with an authorised dealer, the payment in rupees shall be deemed to have repatriated the realized foreign exchange to India as per para 4 of Notification No. FEMA 9/2000-RB, dated 3rd May 2000.
From Notification No. FEMA 14/2000-RB, dated 3rd May 2000, it is clear that payment in rupees from account situated in any country (other than a member country of Asian Clearing Union or Nepal or Bhutan) is a manner of receipt of foreign exchange.
Relying on the Judgement of the apex court in case of J.B. Boda and Company the authority has expressed an opinion that “when a foreign bank is maintaining Indian rupees in their account obviously, such Indian rupee was obtained in lieu of foreign exchange.”
The tribunal has held, in this case, that the amount received in INR from a foreign bank fulfils the condition regarding the receipt in foreign exchange.
Similar view was expressed by the CESTAT Mumbai in the case of AGM India Advisors Pvt. Ltd. Vs. Commissioner of Service Tax [ 2015 (10) TMI 2411 – CESTAT MUMBAI ].
Thus one can come to a conclusion that even though the payment is received in INR, the condition relating to foreign exchange is fulfilled if it is in line with the Notification No. FEMA 14 /2000-RB dated 3rd May 2000, Notification No. FEMA 9/2000-RB, dated 3rd May 2000.
Let’s now move to understand the effect under GST. In GST the Government has given a definition for ‘Export of Service’ under Section 2(6) of IGST Act. The said sub-section is reproduced below.
“(6) “export of services” means the supply of any service when,––
(i) the supplier of service is located in India;
(ii) the recipient of service is located outside India;
(iii) the place of supply of service is situated outside India;
(iv) the payment for such service received by supplier of service in convertible foreign exchange; and
(v) the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8”
It can be noted that the condition related to receipt in foreign exchange remains the same except the fact that it has been incorporated as definition. Further, no separate definition for ‘convertible foreign exchange’ has been given in the Act. When there is an absence of definition of some phrase in a particular act, it is standard practise that the definition from related act is considered. Hence, as explained above, when the RBI, through regulation under FEMA, treats the INR received in a particular manner to be the Convertible Foreign Exchange the condition of receiving the payment in foreign exchange should be satisfied even if payment received in INR.