In order to facilitate and promote the export of Goods and Services from India and make it hassle-free, CBIC has issued three nos. of clarification circulars dt. 20.09.2021 to clarify certain issues which are being litigated/disputed by the department and field officers. The issues being clarified are as below:

1. Refund of un-utilized Input in case of goods having NIL rate of Export Duty

As per the provision of section 54 of the CGST Act, refund of unutilized Input Tax Credit (ITC) is allowed in two cases only, which includes Zero-rated supply made without payment of tax i.e export and ITC accumulated due to inverted duty structure.

Refund of ITC in case of export is a subject condition that no refund of ITC shall be allowed if the goods exported is subjected to export duty. This means that if a good is exported out of India on which export duty is payable by the exporter, then he shall not be eligible to claim a refund of ITC in that case.

However, this issue has also been litigated by the department claiming that in case of some goods, they are subjected to NIL rate of duty in the tariff and as per a landmark judgment of Hon’ble Supreme Court, NIL rate is also a rate and therefore the item exported is subject to export duty. Hence not eligible to claim a refund of unutilized ITC. However, this issue was litigated as it was not acceptable to us.

The issue has now been clarified vide clarification circular which says

1. The term ‘subjected to export duty’ used in the first proviso to section 54(3) of the CGST Act, 2017 means where the goods are actually leviable to export duty and suffering export duty at the time of export. Therefore, goods in respect of which either NIL rate is specified in Second Schedule to the Customs Tariff Act, 1975 or which are fully exempted from payment of export duty by virtue of any customs notification or which are not covered under Second Schedule to the Customs Tariff Act, 1975, cannot be considered to be subjected to any export duty under Customs Tariff Act, 1975.

2. Accordingly, it is clarified that only those goods which are actually subjected to export duty i.e., on which some export duty has to be paid at the time of export, will be covered under the restriction imposed under section 54(3) from availing of refund of accumulated ITC. Goods, which are not subject to any export duty and in respect of which either NIL rate is specified in Second Schedule to the Customs Tariff Act, 1975 or which are fully exempted from payment of export duty by virtue of any customs notification or which are not covered under Second Schedule to the Customs Tariff Act, 1975, would not be covered by the restriction imposed under the first proviso to section 54(3) of the CGST Act for the purpose of availing of refund of accumulated ITC.

2. Decoding of condition for Export of Service – Supplier and Recipient are not merely establishments of a distinct person

For the purpose of export of service and to avail the benefits of export as provided in GST law, the transaction should be 1st covered within the definition of ‘export of services’ as provided in clause (6) of section 2 of the IGST Act. The definition provides five conditions, to be satisfied for a supply of service to be considered as export of service. Out of these five conditions, one condition mentions that:

(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;

There are various foreign companies having an office in India or vice-versa wherein Indian companies having offices outside India. These offices are either operating as a branch office of the principal office in another country or as an office of another company incorporated in India or a foreign country as per their law.

The above-mentioned condition has created huge confusion amongst trade about the meaning of ‘establishment of distinct persons’. Whether an Indian company conducts business in a foreign country by incorporating a company as per the law of that country will be treated as the establishment of a distinct person. In another case, if the company is conducting business in a foreign country with a branch office there, then whether It will be treated as the establishment of a distinct person.

This issue has been discussed in length and clarified that:

5.1 In view of the above, it is clarified that a company incorporated in India and a body corporate incorporated by or under the laws of a country outside India, which is also referred to as a foreign company under the Companies Act, are separate persons under CGST Act, and thus are separate legal entities. Accordingly, these two separate persons would not be considered as “merely establishments of a distinct person in accordance with Explanation 1 in section

5.2 Therefore, supply of services by a subsidiary/ sister concern/ group concern, etc. of a foreign company, which is incorporated in India under the Companies Act, 2013 (and thus qualifies as a company’ in India as per Companies Act), to the establishments of the said foreign company located outside India (incorporated outside India), would not be barred by the condition (v) of the sub-section (6) of section 2 of the IGST Act 2017 for being considered as export of services, as it would not be treated as supply between mere establishments of distinct persons under Explanation 1 of section 8 of IGST Act 2017. Similarly, the supply from a company incorporated in India to its related establishments outside India, which are incorporated under the laws outside India, would not be treated as supply to merely establishments of a distinct person under Explanation 1 of section 8 of IGST Act 2017. Such supplies, therefore, would qualify as ‘export of services, subject to fulfilment of other conditions as provided under sub-section (6) of section 2 of the IGST Act.

3. Meaning and scope of Intermediary Services

An intermediary is a person who is engaged in case of transactions of export/import of goods or services. He acts as a broker for the foreign party and facilitates the procurement of goods from an Indian supplier and the export of such goods or services from India. The Indian supplier issues export invoices directly to the foreign buyer. Similarly in the case of Imports also, the broker helps in finding buyers for the foreign party and the goods are imported directly in the name of the Indian buyer. The broker in India helps in facilitating and completion of export/import and finally raises invoices on the foreign seller/buyer for the service provided by him. This service has been covered in the GST law under the definition of Intermediary service which is as below:

Clause (13) of section 2 of IGST Act, 2017

“intermediary” means a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account;

It is a common perception that the service provided by the broker to foreign party should be termed as export, as the billing is done to foreign party and payment is also received from them in foreign currency. This needs to be verified from GST Law and it is covered in section 13 of IGST Act wherein it has been mentioned that in case of an Intermediary service supplied by a person in India for a foreign party shall be deemed to have been provided in India only and shall be liable for payment of GST in India. This service shall not be treated as export of service, even if all the characteristics of this service like billing, recipient, payment, etc is similar to export of service.

This issue has been discussed in the clarification circular with various situations and clarified that Intermediary shall include only the person who acts as broker and facilitates export / import. It shall not include the person supplying goods or services on his own account. It is mentioned therein that:

Does not include a person who supplies such goods or services or both or securities on his own account: The definition of intermediary services specifically mentions that intermediary “does not include a person who supplies such goods or services or both or securities on his own account”. Use of word “such” in the definition with reference to supply of goods or services refers to the main supply of goods or services or both, or securities, between two or more persons, which are arranged or facilitated by the intermediary. It implies that in cases wherein the person supplies the main supply, either fully or partly, on principal-to-principal basis, the said supply cannot be covered under the scope of “intermediary”.

The above clarifications were much needed to bring clarity among trade and department. This will settle various litigations and promote ease of doing business.