Goods & Services Tax (GST) in IndiaMADRAS HIGH COURT CLARIFIES GST REFUND ELIGIBILITY FOR EXPORTERS RECEIVING PAYMENTS VIA PAYPAL

The Hon’ble Madras High Court, in the case of Afortune Trading Research LLP v. Additional Commissioner (Appeals I),[W.P. No. 2849 of 2021, Madras High Court (2024)] decided on 16.02.2024, held that the receipt of export proceeds through an intermediary like PayPal in convertible foreign exchange and transfer of the same in Indian Rupees to the exporter’s account satisfied the requirement of ‘export of services’ under Section 2(6) of the Integrated Goods and Services Tax Act, 2017 (hereinafter referred to as the “IGST Act”) for claiming GST refunds.

FACTS

Afortune Trading Research Lab LLP (hereinafter referred to as “the Petitioner”) appealed the Additional Commissioner (Appeals I) (hereinafter referred to as “the Respondent”) for refund of Input Tax Credit (hereinafter referred to as “ITC”) on exported services, the same was denied by the Respondent.

The Petitioner is engaged in the  business of providing investment option services, primarily to clients in the United States (hereinafter referred to as the “US”). The Petitioner’s clients subscribe to plans on the Petitioner’s website (www.tradingwiser.com) and make payments through an intermediary PayPal which an international payment intermediary and allows seamless interactional transaction in the respective currencies of the buyer and seller. In this case the Petitioner’s clients pay through PayPal in USD, and received by the Petitioner in INR after deducting a service charge.

Accordingly, the Petitioner filed for refund of ITC on exported services and the tax paid on such services under Section 54 of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as “CGST Act”) read with Section 16 of the IGST Act. The tax refund claim was rejected by the GST authorities based on two main grounds: (1) Export proceeds were received in INR, not in accordance with RBI directions, and (2) The lack of invoices in violation of Section 31 of the CGST Act.

ISSUES

1. Whether receipt of export proceeds through an intermediary in convertible foreign exchange and transfer in Indian Rupees to the exporter qualifies as ‘export of services’ under Section 2(6) of the IGST Act?
2. Whether the Petitioner is entitled to refund of ITC for IGST paid on exported services?

CONTENTIONS OF THE PARTIES

The Petitioner argued that  the supply of services to its overseas clients is “export of service” under Section 2(6) of the IGST Act and claimed refund of ITC under Section 16(3) of the IGST Act on exports made without payment of tax, and refund of tax paid on export of services made on payment of tax under Section 16(4) of the IGST Act read with Section 54 of the CGST Act.

The Petitioner contended that it had complied with all the requirements of the aforesaid provisions, as there was an export of service within the meaning of Section 2(6) of the IGST Act.

The Petitioner submitted that the payments were received in accordance with the provisions of the Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2016 (hereinafter referred to as “FEMA Regulations”), specifically Regulation 3, which allows receipt of export proceeds from a third party (other than the buyer) as per the guidelines issued by the Reserve Bank of India (hereinafter referred to as “RBI”).

The Petitioner argued that merely because the receipts were routed through an intermediary and received in Indian currency, it does not mean that the Petitioner had not exported services within the meaning of Section 2(6) of the IGST Act.

While, the Respondents contended that the Petitioner’s refund claims were rejected on two grounds:

1. Export proceeds were received in Indian Rupees, which was not in accordance with RBI directions stating that export proceeds may be realized in Rupees only if it is through a freely convertible Vostro account of a non-resident bank situated in any country other than a member country of the Asian Clearing Union, Nepal, or Bhutan. The Petitioner failed to establish that the amount received in Indian Rupees was through a freely convertible Vostro account as per the RBI directions.
2. The Petitioner had not produced any export invoices, violating Section 31 of the CGST Act, which provides that a registered person shall issue a tax invoice with requisite endorsements in case of export of goods or services. In the absence of tax invoices, the location of the service recipient could not be ascertained to establish that the recipient of the services was located outside India, thereby not satisfying the condition under Section 2(6)(ii) of the IGST Act.

The Respondents relied on Circular No. 88/07/2019-GST dated 1-2-2019 to conclude that the Petitioner had not realized the amount in freely convertible foreign exchange and, therefore, was not entitled to a refund.

The Respondents argued that the Petitioner had not furnished necessary supporting documents evidencing proof of receipt of export proceeds in convertible foreign exchange and had not furnished details of export invoices, making all the refund claims ineligible.

DECISION AND FINDINGS

The Hon’ble Court analysed the relevant provisions of the IGST Act, particularly Sections 2(6) and 16 of the Act, which deals with the definition of “export of services” and “zero-rated supply,” respectively. The Hon’ble Court also examined Section 54 of the CGST Act, which provides for the refund of tax on exports.

The Hon’ble Court found that the routing of payment by the intermediary, PayPal, from its CITI Bank account to the Petitioner’s HDFC Bank account in Indian Rupees is in accordance with the provisions of the FEMA Regulations. The Hon’ble Court also noted that as per Regulation 3(2) of the FEMA Regulations, in respect of an export from India, receipt shall be made in a currency appropriate to the place of final destination as mentioned in the declaration form. Furthermore, Regulation 3(3) of the FEMA Regulations permits authorized dealers to allow receipts for export of goods/software to be received from a third party as per the guidelines issued by the Reserve Bank of India.

The Hon’ble  Court held that merely because the receipts were routed through an intermediary and received in Indian currency does not mean that the Petitioner had not exported services within the meaning of Section 2(6) of the IGST Act. The Hon’ble Court observed that the Petitioner had provided export services within the meaning of the IGST Act and that PayPal acted as an intermediary who received the remittances in freely convertible foreign exchange and was required to comply with the requirements of foreign exchange regulations.

AMLEGALS REMARK

This judgment is significant as it clarifies the position on the eligibility of exporters to claim GST refunds when export proceeds are received through intermediaries like PayPal. The decision highlights the importance of interpreting GST provisions in harmony with foreign exchange regulations.

The Hon’ble Madras High Court’s ruling provides relief to exporters who use digital payment gateways for receiving foreign payments, ensuring that such transactions do not disqualify them from claiming GST refunds, if the initial receipt of payment is in convertible foreign exchange.

The decision sets a precedent and reinforces the adaptability of India’s tax and foreign exchange frameworks to accommodate modern digital transactions. It emphasizes the need for tax authorities to consider the practical realities of international trade and the role of intermediaries in facilitating cross-border transactions.

– Team AMLEGALS assisted by Mr. Satish Chandra Chitrapu (Intern)