Export of services and receipt of consideration under GST

Background

In the GST law, the export of goods/services are zero-rated supplies under the IGST act. The intention of the Government is to promote exports from the Country to get valuable foreign exchange and to that end ensure that taxes are not sticking on exports. In the context of the export of services, there are conditions to be treated as export of services given in Section 2(6) of the IGST Act as under.

Export of services means the supply of any service when, -

1. The supplier of service is located in India;- Satisfied, when supplier of service is located in India.
2. The recipient of service is located outside India;- Satisfied, when recipient is located outside India.
3. The place of supply of service is outside India; Satisfied, when place of supply of service determined as per section 13(2)-(13) of IGST act is outside India.
4. The payment for such service has been received by the supplier of service in convertible foreign exchange [or in Indian rupees wherever permitted by the Reserve Bank of India]; and YesSatisfied, when paid in CFE or INR wherever permitted by RBI

(v)The supplier of service and the recipient of service are not merely the establishment of a distinct person in accordance with Explanation-1 in Sec 8.- Satisfied, when supplier and recipient are different legal entities. Similarly clarified in circular 161/17/2021-GST dated 20.09.2021. All the above conditions have to be cumulatively fulfilled in order to consider an activity to be export of service.

One of the benefits in GST provided to the exporters is Exports under LUT. Export of goods or services can be made without payment of integrated tax under the provisions of rule 96A of the Central Goods and Services Tax Rules, 2017 (the CGST Rules). Under the said provisions, an exporter is required to furnish a bond or Letter of Undertaking (LUT) to the jurisdictional Commissioner before effecting zero rated supplies. In which case export under LUT, not liable to pay GST on such services, also can avail eligible ITC related to such exports, alternately go for refund.

At this juncturewe would do good to recall that, one of the conditions for treatment as exported service is that the payment for such services is received by the supplier.

In this article the paperwriter has examined the validity of requirement to get payment of the consideration, in order to treat as export of service.

Discussion under GST of validity of requirement to receive payment for export of service

Rule 96A. Export of goods or services under bond or Letter of Undertaking.-

(1) Any registered person availing the option to supply goods or services for export without payment of integrated tax shall furnish, prior to export, a bond or a Letter of Undertaking in FORM GST RFD-11 to the jurisdictional Commissioner, binding himself to pay the tax due along with the interest specified under sub-section (1) of section 50 within a period of -

(a) fifteen days after the expiry of three months 3[or such further period as may be allowed by the Commissioner,] from the date of issue of the invoice for export, if the goods are not exported out of India; or

(b) fifteen days after the expiry of one year, or such further period as may be allowed by the Commissioner, from the date of issue of the invoice for export, if the payment of such services is not received by the exporter in convertible foreign exchange or in Indian rupees, wherever permitted by the Reserve Bank of India.

Based on the above Rule 96A (1)(b) for "export" of services, if the payment in convertible foreign exchange is not received then the supply cannot be export of service as the condition specified as per section 2(6) of the IGST Act, 2017 is not fulfilled.

This gives rise to the question can Rule 96A(1)(b) in the first instance be made applicable where the condition of receipt of payment for export of service as per section 2(6) is not fulfilled?

To answer the above, we need to understand levy of GST. As per Section 1(2) of IGST Act, 2017, extends to the whole of India. In the cases where Section 13(2) of the IGST Act, 2017 is applicable, Place of supply for export of services (such as say export of IT consulting service) shall be the location of recipient. In such case, if the location of the recipient is outside India, levy of IGST has been extended beyond the jurisdiction of India. This gives rise to another question, when GST is applicable only to the whole of India, can provisions of GST apply when place of supply is outside India?

Art. 245(1) of the Constitution prescribes the extent of laws made by the Parliament.245(1): Subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India. Article 245(2) declares that (2) No law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation.However, the principle enunciated above does not address the question as to whether the Parliament may enact a law "for" a territory outside the boundaries of India.

Hon’ble Supreme court in case of GVK Industries Ltd Vs ITO 2017 (48) STR 177 (SC) has held that it is constitutionally restricted from enacting legislation with extra-territorial jurisdiction, parliament does not have powers to make laws beyond the territory of India. At para 42:

Is the Parliament empowered to enact laws in respect of extra-territorial aspects or causes that have no nexus with India, …..? The answer would have to be no.

There were also numerous decisions during service tax regime, wherein it was held that when services were provided and used outside India, the same could not be taxed in India.

• Infosys Ltd Vs CST 2015 (37) STR 862 (Tri-Bang),
• KPIT Cummins Infosystems Ltd Vs CCE 2014(33) STR 105 (Tri Mumbai)
• Intas Pharmaceuticals Ltd Vs CST 2009 (16) STR 748 (Tri-Ahmd)

A combined reading of the said provisions makes it clear that what is taxable is only the supplies made in India and not otherwise. It is further relevant to note that what is taxable is services provided within the country and not services provided outside the country.

In other words, the services must be rendered in India or performed in India and the law cannot have extra territorial operation beyond the territory of India. When the charge fails, the levy fails. When the levy fails, the machinery fails and when the machinery fails the valuation fails, and so would the collection and recovery of tax. Therefore, the basis to collect tax in terms of 96A(1)(b) Rules, could be said to travel beyond the Act and ultra vires to that extent.

There have been few important rulings in service tax regime wherein levy of service tax on extra-territorial events have been held invalid. In the case of M/s. SAL Steels Ltd. v. Union of India [2020-TIOL-163-HC-AHM-ST], it was held that the provisions of the Finance Act, 1994, which is an Act of the parliament for levy of service tax, do not permit nor empower the Central Government to collect service tax on extraterritorial events, and the services which are rendered and consumed beyond the land mass of the country. Similar analogy can be taken in GST law as well as conditions with respect to export of services are similar. However, major difference being adding of definition of ‘export of services’ in IGST Act 2017 in GST regime whereas in service tax regime, the definition was part of rules.

Whether the demands made by revenue dept based on rule 96A are sustainable? There is no provision to levy tax in situation of non receipt of consideration for exported services within timelines set out. Rule 96A is only about binding oneself through bond / letter of undertaking to pay tax and it’s not a levy provision by itself.

Further Section 2(6) of the IGST Act defines what is said to be an export of service. Such definition does not provide for any time limit for receiving consideration. The only condition is that consideration should be received in CFE or Indian Rupees wherever permitted by RBI.

Rule 96A which provides the time limit for realization of consideration is going beyond the scope of the above provision and hence in paperwriter’s considered view would not apply.

Commissioner of Income-Tax, Madras Versus S. Chenniappa Mudaliar [1969 (2)TMI 10 - SC] that if a rule clearly comes into conflict with the main enactment or if there is any repugnancy between the substantive provisions of the Act and the Rules made therein, it is the rule which must give way to the provisions of the Act.

In the instant case, there is no condition of realization of proceeds within 15 days of 1 year of date of invoice in the IGST Act however, such condition exists in CGST Rules. Hence, the restriction in the Rule cannot override the provision of the act.

Delayed realisation of payment for exported service

Further, the rule is silent on the fact that, where the consideration is realized after discharging applicable tax after expiry of 1 year, whether the amount so paid would be refunded. In paper writers view, as long as the consideration is realized, the substantive benefits of exports should not be denied to an exporter.

Also the receipt of consideration within 1 year is a procedure and delay in receipt of consideration beyond one year is merely a procedural lapse and hence the transaction would still remain export if consideration is received even after expiry of 1 year.

There are several decisions of Tribunals in the past which lay down the principle that substantial benefits of exports should not be denied for minor procedural lapses:

• Convergys India Pvt. Ltd. - 2009 (16) STR 198 (Tri. - Del.) Affirmed in 2010 (20) STR 166 (Punjab & Haryana High Court)
• Manubhai & Co. - 2011 (21) STR 65 (Tri. - Ahmd.)

Further, attention is drawn to Circular No. 37/11/2018 - GST dated 15.03.2018 wherein it is clarified that if the registered person fails to comply the conditions mentioned in the Rule 96A, the Jurisdictional Commissioner may consider granting extension of time limit for export of goods or services even on post facto basis keeping in view the facts and circumstances of each case.

The relevant extract from the above circular is reproduced as under:

'It has been reported that the exporters have been asked to pay integrated tax where the goods have been exported but not within three months from the date of the issue of the invoice for export. In this regard, it is emphasised that exports have been zero rated under the Integrated Goods and Services Tax Act, 2017 (IGST Act) and as long as goods have actually been exported even after a period of three months, payment of integrated tax first and claiming refund at a subsequent date should not be insisted upon. In such cases, the jurisdictional Commissioner may consider granting extension of time limit for export as provided in the said sub-rule on post facto basis keeping in view the facts and circumstances of each case. The same principle should be followed in case of export of services.'

In support of the above clarification, Birender Kaur Bajra [2010 (255) ELT 511 (Del.)], the applicant had to realise the sale proceeds within the stipulated time. Ex post facto extension for realizing sale proceeds was granted by Reserve Bank of India subsequently. It was held that recovery of drawback granted cannot be made if sale proceeds were realised within extended period. It was immaterial that extension granted was ex post facto. This case was affirmed by the SC in 2017 (350) ELT A173 (SC).

Based on the above, it could be understood that the time limit for realisation of proceeds from outside India is just a procedural requirement, if delayed but received within the extended period allowed by the jurisdictional Commissioner, then the benefits associated with such realisation cannot be denied. Accordingly, if time extension (even if post facto) is taken by exporter of services, then the benefits of exports cannot be denied to assessee. Consequently, it could contend that all the export conditions are satisfied.

However, the department may not accept the above contention and could seek to deny the benefits on the basis of ground that export proceeds have not been realised in accordance with Rule 96A of The CGST Rules, 2017 despite of such provision being a mere procedural requirement under GST.

We would like to throw light on Circular No. 37/11/2018-GST and Circular No. 125/44/2019-GST which clarifies that the substantial benefits of zero-rating supplies should not be denied by the department, if it is established that the goods or services have been exported in terms of the relevant provisions.

To summarise, the demands of the Department may not be valid as the benefit of export of services cannot be denied to an exporter merely because there has been violation of a particular rule. Further, when the country has received CFE and hence the objective of the provision and export conditions are met.

Way ahead and Conclusion

There is no such requirement in the GST Act for furnishing LUT and receiving consideration within 1 year in respect of export of services and hence the Rules cannot override the law.

Further, receipt of consideration within 1 year, in the author’s considered view is a procedure and any procedural lapse should not deny the export benefits available to the exporter merely because these procedures were not complied.

If there is a dispute in this regard, the export benefit should not be denied, and the issue could be defended as given above.

The author can also be reached at roopa@hnaindia.com