Receipt of consideration in INR: Whether services can qualify as exports?

The benefit of zero rating (i.e., no tax on entire value chain) is available to export of services. Notably, not every service provided to a foreign party qualifies as export. The definition of “export of services” given under Section 2(6) of the IGST Act, 2017 lays down various conditions for a service to fall within the ambit of “exports”.

One of the conditions is that the payment for the services is received by the service provider in convertible foreign exchange[1]. ?

However, in certain instances, receipt of consideration in INR is considered as receipt of foreign exchange. This happens in cases where there is a corresponding reduction in the outflow of foreign exchange. Just as money saved is money earned, saving of foreign exchange is also equivalent to earning of foreign exchange. This principle has also been upheld by the Courts in the context of erstwhile Export of Service Rules, 2005. ?

In the case of Import Express India P Ltd.[2], the appellant was providing business auxiliary services to its foreign holding company. The services inter alia comprised of collection of payments from holding company’s customers, customer support services, etc. Instead of receiving commission from the holding company, the appellant deducted the service charge from the amount collected by it from the holding company’s customers and remitted the balance amount to the holding company.

Here, the Mumbai Tribunal held that since the outflow of foreign exchange has been reduced to the extent of service charge retained by the appellant within India, such retention has to be necessarily treated as saving of foreign exchange. The saving of foreign exchange is akin to receipt of monies in convertible foreign exchange.

The Delhi Tribunal in the case of National Engineering Industries Ltd. also noted that the object of export of service stands fulfilled when the foreign exchange which otherwise would have flown out of India has been conserved[3]. Similar views have been taken in various other cases.[4]

The Rajasthan High Court[5] has also upheld this view taken by the Tribunals.? ?

Thus, merely because the consideration is received/ retained in Indian Rupees, it cannot be simply concluded that the services will not qualify as exports. A closer look is required at the transactions involved to ascertain whether a service can still qualify as export of service or not.

Having said that, it must also be kept in mind that the place of supply of such services must necessarily fall outside India as per the provisions of the IGST Act, 2017 to qualify as export.

Please feel free to reach out to me for any clarification at +91-8800489350. ?

[1] Except in case where receipt in Indian Rupees is permitted by RBI such as in case of exports to Nepal and Bhutan.??

[2] 2018 (10) TMI 900 - CESTAT Mumbai

[3] 2011 (9) TMI 759 - CESTAT, New Delhi

[4] Pam Pharma & Allied Machinery Co. P. Ltd. [2015 (7) TMI 755 - CESTAT Mumbai]

M/s. Samit Enterprises Pvt. Ltd. [2016 (6) TMI 831 - CESTAT New Delhi]

[5] CCE v. National Engineering Industries Ltd. [2017 (10) TMI 1496 - Rajasthan High Court]