Conflict Between ‘Deemed Supply’ and ‘Export Benefits’: High Court Directs CBIC to Clarify Taxability of Services Provided to Foreign Entity Without Consideration (Network Agreement)
ISSUE
Whether a service provided to a foreign entity without consideration (under a mutual network agreement), which is treated as a “Supply” under Section 7(1)(a) of the CGST Act, can be denied the status of “Export of Service” (Zero Rated Supply) solely because convertible foreign exchange was not received, thereby creating a situation where the assessee is forced to pay tax on a transaction that yields no revenue.
FACTS
The Arrangement: The Assessee had a ‘Network Agreement’ with a German company. Under this, the Assessee delivered shipments for the German company’s clients in India, and the German company delivered shipments for the Assessee’s clients in Germany.
No Consideration: Crucially, there was no payment of consideration between the two companies for these reciprocal services.
Tax Payment: The Assessee paid tax on these services, treating them as a “Supply” under Section 7(1)(a) (Supply includes barter/exchange) read with Schedule I (activities to be treated as supply even without consideration – Note: Schedule I typically applies to related persons; here it seems the argument was Section 7(1)(a) itself covering non-monetary consideration in the form of counter-services).
The Conflict:
The Assessee’s Plea: Since the recipient (German company) is outside India, this should be an “Export of Service” (Zero Rated Supply).
The Barrier: Section 2(6) of the IGST Act defines “Export of Service” with a mandatory condition: receipt of payment in convertible foreign exchange. Since no money was exchanged, this condition was not met.
The Result: The Assessee was stuck in a legal trap—the law forced them to pay tax because it was a “Supply,” but denied them the “Zero Rated” benefit (Refund/Exemption) because they didn’t receive forex.
HELD
The Anomaly: The High Court acknowledged the incongruity. While non-receipt of forex technically disqualifies the transaction from being an “Export of Service” (depriving the assessee of zero-rating benefits), taxing a service that effectively earns no revenue (but is a reciprocal export arrangement) requires judicial scrutiny.
Harmonious Interpretation: The Court observed that Section 7 of the CGST Act (Supply), Section 16(1)(a) of the IGST Act (Zero Rated Supply), and Section 2(6) of the IGST Act (Definition of Export) need to be harmoniously interpreted.
Direction to CBIC: Recognizing that various High Courts are seized of this matter, the Court directed the CBIC (Central Board of Indirect Taxes and Customs) to examine this specific issue and place its stand before the High Court.
Status: The matter was listed for further hearing to resolve this legislative knot. [In Favour of Assessee (Notice Issued/Matter Listed)]
KEY TAKEAWAYS
The “Barter” Trap: In international barter deals (Service A for Service B), GST law is tricky. It treats the service as a “Supply” (taxable) but often fails to recognize it as an “Export” because the definition of export is rigidly tied to “receipt of forex.”
Valuation Challenge: Even if taxable, the valuation of such supplies is complex. It is usually based on the Open Market Value of similar services.
CBIC Intervention: This order suggests that a policy clarification might be forthcoming to address situations where genuine exports happen via net-off or barter arrangements without physical forex remittance.