Is Supply under Export, initially unearned revenue?

Anurag Tripathi

This article is basically a step towards illuminating an issue being faced by various Export Houses indulged in containerized export of goods. The main issue here is that, due to statutory requirements of Indian Customs law, we have to issue a Tax Invoice before filling of shipping bill to take the goods inside the customs area in Inland Container Depot (ICD) and usually the goods are procured after filing of shipping bill. The issue can be pictorially depicted as under:

Also, as per the provisions of the most awaited and most drastic indirect tax reform in independent India – Goods and Services Tax (GST) more specifically the provisions of Tax Invoice, Credit And Debit Notes given under Chapter – VII of the Central Goods and Services Tax Act, 2017 (hereinafter referred as CGST Act), the registered person supplying the goods have to issue a tax invoice/bill of supply, before or at time of – (a.) removal of goods for supply, where the supply involves movement of goods; or (b.) delivery of goods, in any other case. Relevant extracts of Section 31 are as under:

31. Tax Invoice.

(1) A registered person supplying taxable goods shall, before or at the time of,—

a. removal of goods for supply to the recipient, where the supply involves movement of goods; or

b. delivery of goods or making available thereof to the recipient, in any other case,

issue a tax invoice showing the description, quantity and value of goods, the tax charged thereon and such other particulars as may be prescribed:

(2)  ……

(3) Notwithstanding anything contained in sub-sections (1) and (2)––

a. ….

b. ….

c. a registered person supplying exempted goods or services or both or paying tax under the provisions of section 10 shall issue, instead of a tax invoice, a bill of supply containing such particulars and in such manner as may be prescribed:

Provided that the registered person may not issue a bill of supply if the value of the goods or services or both supplied is less than two hundred rupees subject to such conditions and in such manner as may be prescribed;

Further under provisions for Accounts and Records given under Chapter – VIII, every registered person shall keep and maintain, at his principal place of business, as mentioned in the certificate of registration, true and correct account of inward and outward supply of goods and services or both. Accordingly subsection (1) of Section 35 is being cited for reference hereunder as:

“35. Accounts and other records.

(1) Every registered person shall keep and maintain, at his principal place of business, as mentioned in the certificate of registration, a true and correct account of—

a. production or manufacture of goods;

b. inward and outward supply of goods or services or both;

c. stock of goods;

d. input tax credit availed;

e. output tax payable and paid; and

f. such other particulars as may be prescribed:”

The questions which need to be answered for removal of doubts and smooth business functioning without any matter of disputes under different regulatory and statutory bindings, so that no stone remains unturned, are as under:-

I. Can goods be sold before its purchase or possession?

II. Can revenue be recognised before purchase of goods?

III. Whether supply under export, initially “unearned revenue”? Can we reclassify “unearned revenue” as Revenue & recognise in Statement of P&L on its shipment?

The answers to the question discussed supra, which had been tried to resolve as a follows:

I. Following the legal rule Nemo dat quod non habet, literally meaning “no one gives what he doesn’t have” prima-facie we can say that goods cannot be sold prior to its purchase or which are not in our possession. Taking the discussion further, as there is issue with respect of sale of goods it is legitimate to corroborate with the provisions of  Sales of Goods Act, 1930 and accordingly provisions of subsections (3) & (4) of Section 4 are manifested herein for reference as under:

“4(3) Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.”

“4(4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred.”

For becoming sale of goods from an agreement to sell, the conditions are to be fulfilled in respect of property in goods are transferred. The conditions to be fulfilled are enumerated as under:

i. contract of sale is that there must be two parties, viz. – supplier/seller & buyer;

ii. the supplier shall have the possession as well as ownership of the goods;

iii. ownership over goods has to be transferred to the buyer by the seller; &

iv. there must be some price for the goods.

Thus, in a situation, where shipping bill is filled before procurement of goods, which is a common trade practice in case of containerised export of goods, the transaction on that date would be referred to as “agreement to sell” and not sale of goods. Hence, it is clear that we can’t sell the goods which are not purchased or not in our possession (i.e. of which we are not owner).

II. To answer the question in relation to recognition of revenue it would be proper to check the applicable Financial Reporting Framework. So, the reference to Ind AS 18 – “Revenue” is deemed necessary and accordingly Para 14 of the said Ind AS is cited here for reference as under:

“14 Revenue from the sale of goods shall be recognised when all the following conditions have been satisfied:

(a) the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;

(b)  the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

(c)  the amount of revenue can be measured reliably;

(d)  it is probable that the economic benefits associated with the transaction will flow to the entity; and

(e)  the costs incurred or to be incurred in respect of the transaction can be measured reliably.”

All the conditions are mandatorily to be fulfilled for recognition of revenue from sale of goods as required by the Ind AS 18. But in the current situation under consideration, following the principle of “Nemo dat quod non habet”, the entity cannot transfer the significant risks and rewards of the ownership of the goods, as because he himself does not possesses the ownership of the goods before its procurement. Also, before purchase, the cost incurred or to be incurred cannot be measured reliably.

Thus, the revenue from sale of goods cannot be recognised before purchase of goods as it is in contravention of Ind AS 18 – Revenue.

III. Since the initial transaction of Export (i.e. issue of invoice for filling of shipping bill) is prior to procurement/purchase of goods and hence the revenue from sale goods cannot be recognized, hence we can initially consider the supply under export as unearned revenue. The actual shipment when bill of lading is filled and goods are handed over to the person-in-charge (captain in case of ship) of the conveyance (vessel) shall be regarded as constructive delivery and the significant risk and rewards associated with ownership can now said to be transferred. Also, this unearned revenue shall be recognized as revenue from export sale of goods on the date of actual shipment/filling of bill of ladding, when the significant risks and rewards of ownership of goods being exported are transferred to the foreign buyer. Journal Entries which is needed to be passed in the scenario under consideration is discussed hereunder as:-

Entries to be passed in the Books of Accounts
1.	Foreign Debtor A/c                                    …Dr. To Unearned Revenue (P&L) A/c (Being tax invoice issued for supply under export order)	On the date of issue of Tax Invoice Transaction being routed through B/s
2.	Unearned Revenue (P&L) A/c             …Dr. To Export Sales A/c (Being goods shipped to foreign buyer)	On the date of actual shipment Effect taken in P & L A/c

Thus, supply of goods under export shall initially be treated as unearned revenue and on its shipment (kind of constructive delivery), when the significant risks & rewards of ownership is being transferred, the unearned revenue be reclassified and recognized as Revenue in the Statement of Profit and Loss.

Conclusion:  Form the above discussion, it can be clearly said that the issue faced by the Export Houses indulged in containerised export of goods is grossly a practical issue, but this also demands the legal provisions taking into consideration and statutory requirements of taxation law as well as law which governs the export related transaction cannot be neglected. Thus, the crux of above discussion is that –

• The initial transaction relating to export can be classified as an “agreement to sell”, which is a supply and hence tax invoice needs to be issued under GST law, but at this stage revenue cannot be recognized and hence treated as unearned revenue.
• The final shipment shall be regarded as the sale of goods and revenue shall be recognised upon final shipment where the significant risks and rewards related to ownership are being transferred to foreign buyer as shipment shall be treated as constructive delivery.

Disclaimer:  The views expressed herein above are solely author’s personal views/opinion. This is an informational article and should not be considered as legal opinion. The possibility of any errors and omissions in the article cannot be ruled out.

This article is drafted under able guidance of CA Sanjay Khandwe, practicing since last 20 years in the field of Indirect Taxation in Bhilai, Chhattisgarh and also having Branch Office at Raipur, Chhattisgarh. Special thanks to Ms. Aayushi Jain (CA Student) and Mr. Sandeep Mishra. The author is a financial and tax consultant practicing at Raipur, Chhattisgarh and can be reached at 10maniji@gmail.com or +91 77720 71680 for further querry/discussion.