Afortune Trading Research Lab LLP Vs Additional Commissioner (Appeals I) (Madras high court)
Introduction: In a landmark decision by the Madras High Court, Afortune Trading Research Lab LLP vs. Additional Commissioner (Appeals I), a crucial ruling was made concerning the eligibility of exporters receiving payments via PayPal for Goods and Service Tax (GST) refunds. The case centered on the rejection of the petitioner’s refund applications by the GST authorities, which was based on the premise that the export proceeds credited in Indian Rupees through PayPal did not meet the criteria for foreign exchange earnings as per GST regulations.
Detailed Analysis: The crux of the matter revolved around the interpretation of “export of services” under Section 2(6) of the Integrated Goods and Services Tax Act, 2017 (IGST Act), particularly the requirement of receiving payments in convertible foreign exchange. The petitioner contended that their export proceeds were initially received in US Dollars through PayPal, a global payment gateway, and subsequently credited to their bank account in Indian Rupees after deduction of service charges by PayPal’s bankers.
The authorities’ rejection was primarily based on the assertion that the proceeds must be credited in freely convertible foreign exchange directly into the exporter’s account to qualify as “export of services”. However, the court found that the transactions conducted through PayPal complied with the Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2016, emphasizing that PayPal acted merely as an intermediary and that the initial receipt of payment in foreign currency met the regulatory requirements.
Conclusion: The Madras High Court’s decision underscores the significance of understanding the interplay between GST regulations and foreign exchange management laws. By ruling in favor of the petitioner, the court clarified that the mechanism of receiving export proceeds through intermediaries like PayPal does not disqualify exporters from claiming GST refunds, provided the initial receipt of payment is in convertible foreign exchange. This judgment not only provides relief to exporters using digital payment gateways for receiving foreign payments but also sets a precedent for similar cases, reinforcing the flexibility and adaptability of India’s tax and foreign exchange frameworks to accommodate modern digital transactions.
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
By the impugned Order in Appeal No.A.No.03-10/2020 (GSTA-I) (CN) (ADC) dated 27.08.2020, the first respondent as the Appellate Authority under the provisions of the respective GST enactments has rejected the appeals filed by the petitioner against eight separate Order-in-Original Nos.196 to 203/2019-RF all dated 06.11.2019 passed by the second respondent.
2. Operative portion of the impugned common order dated 27.08.2020 reads as under:-
“6. Coming to the first ground, the Appellant has not denied the fact that the export proceeds in this case were credited into their HDFC account in Indian Rupees. The Appellant has averred that the subscription amounts paid by their clients are paid through Pay Pal Account in US Dollars and Paypal being a payment gateway receives the amount in US Dollars and the same gets credited to CITI bank (Paypal’s bankers) and CITI bank transfers the amount to HDFC bank, which is the Appellant’s bank in INR after deduction of their service charges.
6(i). In this regard, the amended Para 2(k) of the Board’s Circular No. 88/07/2019-GST, dated 01-02-2019 is reproduced below:
3.2 Amended Para 2(k)
Realization of export proceeds in Indian Rupee :
Attention is invited to para A(v)Part-I of RBI Master Circular No. 14/2015-16, dated 1st July, 2015 (updated as on 5th November, 2015), which states that “there is no restriction on invoicing of export Contracts in Indian Rupees in terms of the Rules, Regulations, Notifications and Directions framed under the Foreign Exchange Management Act, 1999. Further, in terms of Para 2.52 of the Foreign Trade Policy (2015-2020), all export contracts and invoices shall be denominated either in freely convertible currency or Indian rupees but export proceeds shall be realized in freely convertible currency. However, export proceeds against specific exports may also be realized in. rupees, provided it is through a freely convertible Vostro account of a non‑resident bank situated in any country other than a member country of Asian Clearing Union (ACU) or Nepal or Bhutan”. Further, attention is invited to the amendment to section 2(6) of the IGST Act. 2017 which allows realization of export proceeds of services in INR, wherever allowed by the RBI.
Thus, from the above Circular it is clear that the export proceeds can be realized in rupees provided it is through a freely convertible Vostro account of a non-resident bank. Apparently, in this case, the Appellant has not realized the amount according to the above terms and conditions.
6(ii). This apart, as per Section 2(6)(iv) of the IGST Act, 2017, for export of services, the payment for the service has to be received by the supplier of service in convertible foreign exchange. Since in the instant case, the Appellant had not received the payment in foreign exchange and it was Paypal payment services who is acting as a gateway are the ones that are actually receiving the payment from the subscribers in foreign currency in India and they are transferring this in Indian currency to the Appellant, there is a violation of the Section 2(6) ibid of the IGST Act as well as violation of the above stated Board’s Circular as well as RBI directions.
6(iii). Hence, in view of the foregoing statutes and Circulars, on the first ground itself the refund in these cases cannot be entertained in as much as the major condition for export of services has not been satisfied.
7. Now, coming to the second ground, admittedly, the Appellant had not produced any export invoices in these cases. Section 31 of the CGST Act, 2017 provides that a registered person shall issue a tax invoice and also in case of export of goods or services, the invoice shall carry the requisite endorsements. Further, Section 2(6) of the IGST Act, 2017, states that “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; (ii) the place of supply of service is outside India; (iv) the payment for such service has been received by the supplier of service in convertible foreign exchange. ‘However, since the Appellant had not produced the tax invoices, the location of the service recipient could not be ascertained to establish that the recipient of the services are located outside India and thus the condition number (ii) mentioned in Section 2(6) ibid has not been established in these cases. Thus, in the absence of invoices, the claims can certainly not be entertained.
7(i). The Appellant themselves have stated that they had submitted the following documents before the Respondent viz. RFD-01A, LUT, Letter of declaration, proof of ITC (invoice copies), copy of GSTR2A, copy of electronic credit and debit ledgers, copy of Statement 3 and copy of FIR C advice from CITI bank. Thus, it is clear that they had not provided copies of tax invoices, if any, raised by them. Also they had not produced any FIRC or BRC copies since no invoices had been raised by them. The copies of FIRC advice submitted by them from CITI bank cannot be considered as a valid document in lieu of the FIRC since it is only an FIRC advice and cannot be treated as FIRC. In fact, the bank themselves have given this declaration clearly stating that “This is an Advice and Not to construed as an FIRC”. The copies of ITR/Balance sheet filed by the Appellant also, unfortunately does not come to their rescue in these cases.
7(ii). Thus, in view of the fact that no invoices were raised by the Appellant nor were they able to submit FIR C/BRC in these cases, the refunds require to be rejected in as much as none of the conditions mentioned in Section 2(6) of the IGST Act, 2017 have been established to have been satisfied.
8. In an identical situation, the Advance Ruling Authority under GST, Rajasthan, in the case of Thinklab Edusoft LLP reported in 2020 (37) G.S.T.L. 106 (A.A.R GST – Raj.) had held as follows:
BEFORE THE AUTHORITY FOR ADVANCE RULING UNDER GSI, RAJASTHAN
S/Shri J.P. Meena, Member (Central Tax) and Hemant Jain, Member (State Tax)
IN RE: THINKLAB EDUSOFT LLP
Advance Ruling No. RAJ/AAR/2019-20/35, dated 13-3-2020
“Advance Ruling application – Maintainability of – Advance ruling sought on questions as to availability of FIRC in respect of export proceeds with respect to services for funds received through service providers like Paypal, World remit, etc., Documents required for export without payment of tax to prove receipt of proceeds in foreign currency in case FIRC is not receivable in case of such transactions; and the measure to be followed in case any refund proceedings are due to non-availability of FIRC or any other supporting documents being relied upon by the GST Department -Question sought by applicant outside the scope of Section 9 7(2) of. Central Goods and Services Tax Act, 2017 therefore, the application is liable for rejection without going in to the merit of the case under Section 98(2) of Central Goods and Services Tax Act,2017. [paras 2, 5]”
8(i). Further, in the case of Kobelco Machinery India Pvt. Ltd vs CST, Kolkatta, reported in 2017 (3) GSTL 260 (Tri. – Kolkata), the Tribunal had held as follows: “Refund – Service Tax paid on input services used for export of goods/services -Denial of – Non-receipt of remittances in convertible foreign exchange – Refund not admissible if remittances received in Indian Rupees and Foreign Inward Remittance Certificate (FIRC) not produced – Rule 5 of Cenvat Credit Rules, 2004 read with Rule 3 of Export of Services Rules, 2005 and Notification No. 5/2006-C.E.“
9. Therefore, in view of the various discussions and findings, the Impugned Orders are upheld in toto and the appeals of the Appellant merit rejection.
10. Appeals rejected.”
3. The petitioner is engaged in the business of providing opinions on equity and futures market, trading stocks, options based on stock and share markets.
4. The petitioner has remitted Goods and Service Tax (GST) for the services rendered to its clients/customers. According to the petitioner, predominantly all the clients/customers of the petitioners are from the U.S and the neighboring countries.
5. Under these circumstances, the petitioner has treated the above supply of services rendered to its clients/customers as “export of service” within the meaning of Section 2(6) of the Integrated Goods and Services Tax Act, 2017. Section 2(6) of the Integrated Goods and Services Tax Act, 2017 reads as under:-
2. In this Act, unless the context otherwise requires,–
(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 outside India;
(iv) the payment for such service has been received by the 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;
6. It is further submitted that the export of service effected by the petitioner to its clients/customers also qualifies as “zero rated supply” within the meaning of Section 16 of the Integrated Goods and Services Tax Act, 2017 and therefore the petitioner filed application under Section 54 of the IGST Act read with Rule 89(2) of the Central Good and Services Tax Rules, 2017 for refund.
7. It is submitted that the petitioner has complied with all the requirements of the aforesaid provision as there was an export of service within the meaning of Section 2(6) of the Integrated Goods and Services Tax Act, 2017.
8. The transactions of the petitioner is captured in the following paragraphs from the affidavit filed in support of the writ petitioner:-
“As stated earlier, the business model of the petitioner is such that Paypal receives the subscription fee from the subscribers in US dollars. Subsequently, after deducting the service charges, Paypal credits the said amount to the petitioner in Indian Rupee. This is in accordance with The RBI guidelines clearly indicate that Paypal cannot receive the amounts in US dollars. Paypal therefore has to ensure that the amount received is not in non-convertible foreign currency, but rather in Indian currency, when it reaches the bank account of the Petitioner. Therefore, the entire transaction was done in accordance with the RBI regulations. The following flow-chart elucidates the transaction that took place.”
