GST Export Refunds When Receivables Are Netted Against Overseas Payables

By CA Rupesh Reddy and CA Mithilesh Sai Sannareddy, Founder and CEO, Steadfast Business Consulting LLP | Indirect Tax Litigation / Controversy

Quick answer

A bank-approved and legally documented set-off can be relevant evidence of settlement of export receivables, but a ledger netting entry alone is not enough. The supplier must establish the applicable RBI permission, the validity of the settlement, the corresponding import payable and satisfaction of the GST export-of-services conditions. Separate reconciliation of invoices, net receipts and bank reporting is essential.

Key takeaways

• Section 2(6) of the IGST Act sets five cumulative conditions for export of services, and one of them is that payment is received in convertible foreign exchange or in Indian rupees where the Reserve Bank permits it.
• A ledger netting entry alone does not prove realisation; a set-off permitted by the authorised dealer bank under RBI rules, against a genuine and enforceable import payable, is the evidence that matters.
• The RBI set-off framework changed on 1 October 2026, when the Foreign Exchange Management (Export and Import of Goods and Services) Regulations, 2026 (Notification No. FEMA 23(R)/2026-RB, 13 January 2026) replaced the 2015 export regulations; the rule in force on the settlement date applies.
• The Gujarat High Court has set aside refund rejections based only on the absence of FIRCs where a CA certificate and RBI-approved netting records proved receipt (Kuehne + Nagel, reported November 2025).
• The refund file should bridge each export invoice to the set-off agreement, the import payable, the bank confirmation and the GST returns, invoice by invoice.

Practice illustration: Netting of cross-border service receivables

Issue. An export-of-services refund claim was questioned because contract receivables were settled through a netting arrangement.

Approach. The response examined the applicable foreign-exchange permissions, authorised-dealer records and invoice-level matching of receivables and payables.

Reported position or outcome. The refund claim was defended on the basis of the permitted settlement mechanism and corresponding records. No final sanction or payment of the refund is claimed.

Practical lesson. An accounting set-off by itself is not evidence of permitted realisation.

This illustration is deliberately generalised and must not be used to identify a taxpayer or matter.

Introduction

Cross-border groups regularly settle intercompany balances on a net basis. One group entity may owe service fees to an Indian company while another balance runs in the opposite direction. Instead of remitting the gross amounts twice, the group settles the difference through a controlled arrangement and records the set-off.

That treasury process may be commercially sensible and permitted under the applicable foreign exchange rules. Yet a GST refund officer reviewing an export-of-services claim can ask why the full invoice value is not supported by a separate foreign inward remittance certificate. The resulting dispute is not simply about a missing certificate. It is about whether the statutory receipt condition is satisfied and what evidence proves realisation.

A defensible refund file requires three records to agree: the contractual right to payment, the permitted netting arrangement and the invoice-level treatment in the GST refund working. This article sets out how to build that proof without assuming every internal journal entry constitutes receipt.

1. The export-of-services conditions are cumulative

Section 2(6) of the IGST Act defines export of services through separate conditions addressing supplier location, recipient location, place of supply, receipt of payment in permitted foreign exchange or rupees and the relationship between establishments. Fulfilling four of the five does not excuse the remaining condition.

The realisation requirement must be examined in the light of RBI permissions and the legal form of settlement. Classification as an export also requires a correct place-of-supply analysis. A refund application cannot be defended solely by proving that the customer is located overseas.

2. Netting is not synonymous with waiver or write-off

A valid set-off extinguishes an export receivable by applying it against a genuine corresponding payable under an enforceable arrangement. A commercial waiver, credit note, unapproved internal offset or later accounting write-off may have different consequences. The distinction must be demonstrated.

Describe the gross receivable, the gross payable, parties involved, settlement currency, agreement and date of discharge. Explain whether the Indian entity dealt with the same overseas counterparty or a group netting centre and whether the structure meets the particular RBI permission relied upon.

3. The RBI framework is a legal gateway

The RBI directions on set-off of export receivables against import payables provide specified conditions under which authorised dealer banks may permit bilateral and qualifying group settlements. Conditions include oversight by an authorised dealer bank, genuine underlying transactions and applicable reporting requirements.

Do not assume that every multilateral treasury netting programme qualifies. Some restrictions concern the category of imports and exports, counterparty arrangements, outstanding periods and documentary requirements. The instrument in force on the date of settlement should be checked. The RBI circular of 4 December 2020 (A.P. (DIR Series) Circular No. 08) applied to earlier settlements; from 1 October 2026 the Foreign Exchange Management (Export and Import of Goods and Services) Regulations, 2026 (Notification No. FEMA 23(R)/2026-RB dated 13 January 2026), which supersede the 2015 export regulations, apply, with Regulation 7 dealing with set-off.

4. What a bank confirmation should actually say

A generic letter confirming a bank relationship adds little. Useful evidence identifies that the authorised dealer permitted the relevant set-off arrangement, the entities or group scheme involved, the invoice or settlement statements, and how the export and import legs were reported and closed.

Where an AD bank issues settlement advice or other confirmation, reconcile it against the company’s ledger and the group netting statement. If bank reporting remains incomplete, obtain clarification rather than treating the accounting entry as conclusive proof that foreign exchange requirements were satisfied.

5. The GST refund formula requires separate working

An application for refund of accumulated input tax credit under section 54 and the relevant rules uses prescribed turnover and eligible credit computations. These are not identical to a list of issued export invoices. Amounts realised in the relevant period and the statutory definition of export turnover must be addressed.

For services, refund rules call for documentation linking invoices to realisation. The CBIC refund rules resource describes invoice and bank-realisation evidence. Verify the latest notified rule text and portal instructions for the claim period.

6. Build an invoice-by-invoice settlement bridge

The reconciliation should contain export invoice number, date, customer, amount, currency, contract, outstanding balance, related import payable, set-off agreement reference, settlement period, bank confirmation, cash remittance if any, amount shown as realised, and any adjustment or credit note.

A single summary figure may conceal unapplied advances, reversals, duplicate settlement entries or transactions outside permitted netting. Reconcile the schedule to GSTR-1, GSTR-3B, books, foreign currency ledgers, bank records and the refund statement. Explain every difference.

7. The import leg should be real and independently evidenced

The credibility of set-off depends on the existence of an enforceable payable. Preserve invoices for the relevant import of goods or services, tax documentation, contract, receipt of service or goods, books and bank reporting. Where GST reverse charge applies, its treatment should be reconciled separately.

A netting arrangement cannot rescue an export-realisation claim where the supposed import payable is merely an unsupported journal provision or a balance between parties that do not fall within the relevant RBI permission.

8. Limitation, deficiency memos and appeal strategy

A refund notice often identifies absence of FIRCs as the shortcoming. Respond by explaining the alternative permitted settlement mechanism and providing a source-indexed evidence set. Where the officer disputes legal eligibility, isolate the statutory issue from a curable document deficiency.

Preserve prescribed response and appeal deadlines and maintain a timeline of refund filing, deficiency memos, supporting records and sanction or rejection orders. Interest and consequential re-credit issues should be reviewed independently after any favourable appellate outcome.

9. Treasury controls that prevent future refund disputes

Before implementing group netting, the treasury team should obtain tax and foreign-exchange clearance for the specific entities and transaction classes. Document the bank-approved method, use monthly invoice mapping and retain settlement statements in an audit-ready location.

Export GST compliance should receive the bank closure confirmation contemporaneously. A treasury settlement that cannot be reconstructed twelve months later may be valid commercially yet expensive to defend in a refund examination.

The RBI set-off framework changed on 1 October 2026

The Reserve Bank notified the Foreign Exchange Management (Export and Import of Goods and Services) Regulations, 2026 on 13 January 2026 (Notification No. FEMA 23(R)/2026-RB), with effect from 1 October 2026, superseding the 2015 export regulations without affecting things done before that date. Regulation 7 allows an authorised dealer bank to permit set-off of export receivables against import payables with the same overseas buyer or supplier, or with its overseas group or associate companies, within the period allowed for realisation of export proceeds or any extension granted by the bank. Commentary notes that set-off between goods and services legs, which the December 2020 circular did not allow, is now permitted. The RBI consolidated text, as amended up to 22 September 2026, also shows revised realisation periods for services exports, which should be confirmed from the notified amendment.

For a GST refund, the practical consequence is that the applicable instrument depends on the date of each settlement. Settlements up to 30 September 2026 were tested against the 2020 circular, which among other things required one authorised dealer bank to supervise the arrangement, a verifiable agreement or consent, gross reporting of each export and import leg, and legs falling within the same calendar year. Settlements from 1 October 2026 are tested against the 2026 Regulations and the bank’s internal policy. A multi-year refund file may need to deal with both.

How courts have treated FIRC requirements where netting is permitted

Rule 89(2)(c) of the CGST Rules requires a statement of invoices with the relevant Bank Realisation Certificates or Foreign Inward Remittance Certificates for export of services. Where there is no remittance of the net sum because the receivable was set off, an FIRC may not exist for the full invoice value. In Kuehne + Nagel Pvt. Ltd. v. Union of India, reported from the Gujarat High Court on 6 November 2025, exports were made under an RBI-permitted gearing account that allowed netting of foreign-currency receivables and payables. Refunds were rejected because FIRAs were produced instead of FIRCs and a CA certificate was treated as inconsistent. The High Court set aside the rejection, holding that an FIRC is not the only mode of proving foreign exchange realisation, that a CA certificate based on books and records must be considered, and that a circular cannot override undisputed evidence. A Gujarat High Court decision reported in July 2025 reached a similar result for a logistics business operating an RBI-approved netting mechanism.

These decisions help, but they turned on their own records, and the Court’s concern was that receipt was not in doubt. A taxpayer should not read them as removing the burden of proof. In particular, the Delhi High Court’s 2024 decision that BRCs are not a necessary condition rests on Circular No. 125/44/2019-GST, which concerns goods exports and does not carry over to services.

Limitation, documents and common mistakes

A claim for refund must be filed within two years of the relevant date under section 54 of the CGST Act. For services exported without payment of tax, the relevant date is generally the date on which payment is received in convertible foreign exchange or permitted rupees, so the date on which a set-off validly discharged the receivable should be established and recorded rather than assumed to be the invoice date. A refund rejection is appealable to the first appellate authority under section 107 and then to the GST Appellate Tribunal under section 112; the Tribunal was launched on 24 September 2025 and, per commentary, began hearing cases on 16 February 2026, with State Benches being added through 2026.

The documents to assemble are the export contract, the invoices and the GSTR-1 and GSTR-3B mapping; the set-off agreement and the authorised dealer’s permission or confirmation; the import-side contracts, invoices and evidence of receipt of service or goods; the gross export and import reporting in the RBI systems; the net settlement statement; and a CA certificate reconciling these to the refund claim. Common mistakes are relying on a summary schedule, mixing goods and services legs, treating a credit note or write-off as set-off, ignoring a difference between the realised and invoiced amounts, and failing to align the refund statement with the period in which payment was realised.

Conclusion

Cross-border netting cases turn on a distinction between accounting settlement and legally supported realisation. Treating every netting entry as a remittance is too broad; treating every arrangement without an individual FIRC as unrealised is equally simplistic.

The strongest refund file brings together the RBI authority, contractual netting mechanism, authorised dealer records and invoice-level GST reconciliation. That evidence needs to exist while the arrangement operates, not be invented after a deficiency memo.

Frequently asked questions

1. Does a journal entry establish receipt of export proceeds?

Not by itself. The legal settlement and applicable RBI permission must be demonstrated.

2. Are all multilateral group netting arrangements permitted?

No. The applicable RBI requirements, bank oversight and entity/transaction conditions must be checked.

3. Does an export invoice automatically qualify for refund turnover?

No. The relevant refund formula and realisation conditions must be applied.

4. Can a bank letter help defend netting?

Yes, especially where it specifically identifies the permitted arrangement and reconciles settlement records.

5. What is the best evidence to present first?

An invoice-level reconciliation tying contracts, set-off documents, authorised dealer evidence and GST returns together.

6. Is an FIRC mandatory for a GST refund on export of services?

Rule 89(2)(c) of the CGST Rules requires a statement of invoices with the relevant BRCs or FIRCs for export of services. Courts, including the Gujarat High Court in November 2025, have set aside rejections based only on a missing FIRC where a CA certificate and RBI-approved netting records proved receipt of foreign exchange. Each case turns on its evidence.

7. Can export receivables be netted against import payables under FEMA?

Yes, within limits. Under Regulation 7 of the Foreign Exchange Management (Export and Import of Goods and Services) Regulations, 2026, in force from 1 October 2026, an authorised dealer bank may permit set-off with the same overseas buyer or supplier or with overseas group or associate companies. Earlier settlements were governed by RBI’s December 2020 circular, which was more restrictive.

8. What is the time limit for a GST refund of unutilised ITC on export of services?

A refund application must be filed within two years from the relevant date under section 54 of the CGST Act. For services exported without payment of tax, the relevant date is generally the date of receipt of payment in convertible foreign exchange or permitted rupees. Where proceeds are netted, the date of a valid set-off should be recorded and supported.

9. Is payment in Indian rupees accepted as export of services under GST?

Yes, where the Reserve Bank permits it. Section 2(6)(iv) of the IGST Act accepts payment in Indian rupees wherever permitted by the RBI, and CBIC Circular No. 202/14/2023-GST dated 27 October 2023 clarifies that export proceeds received through a Special Rupee Vostro Account satisfy the condition, subject to the Foreign Trade Policy and RBI conditions.

Talk to SBC’s tax team

If an export refund is held up because proceeds were netted or no FIRC is available, an invoice-level review of the set-off permission, the import payable and the bank evidence can show where the file stands before a reply is due. Our GST team can discuss the facts. Explore our GST services | Contact SBC

Disclaimer

This article is general professional commentary and not advice on any particular facts. Applicable law, RBI directions, procedural requirements and statutory amendments must be verified for the relevant tax period. It is not a description of an identifiable client engagement.

Employee Secondment and GST: Reading Northern Operating Systems with the CBIC Clarifications

By CA Rupesh Reddy and CA Mithilesh Sai Sannareddy, Founder and CEO, Steadfast Business Consulting LLP | Indirect Tax Litigation / Controversy

Quick answer

A cross-border secondment is not automatically a taxable manpower supply merely because the foreign group company processes payroll. Nor is every recharge outside GST. Characterisation follows the contracts, control, employment obligations and actual conduct. Where an import of services between related persons is established, valuation and full-credit treatment require a separate examination under the governing rules and CBIC guidance.

Key takeaways

• The Supreme Court’s decision in Northern Operating Systems (19 May 2022) was rendered under service tax and turned on its own facts, and CBIC Instruction No. 05/2023-GST dated 13 December 2023 tells officers not to apply it mechanically to GST.
• Services by an employee to an employer in the course of employment are outside GST under paragraph 1 of Schedule III to the CGST Act, so the genuineness of the employment relationship is the primary question.
• Circular No. 210/4/2024-GST dated 26 June 2024 deals only with valuation: where a related-party import of services is made to a recipient with full input tax credit, the invoice value is accepted and a nil value is accepted where no invoice is issued.
• High Courts have applied the employment and valuation reasoning in the taxpayer’s favour on the facts before them, including the Delhi High Court in Metal One (2024) and the Karnataka High Court in Alstom Transport India (2025) and Huawei (reported 2026).
• An employee-wise evidence matrix reconciled to payroll, books and bank records is the strongest response to a secondment notice.

Practice illustration: Taxability of employee secondment arrangements

Issue. A GST notice questioned whether employees working for an Indian enterprise were supplied by an overseas group entity.

Approach. The response relied on employment contracts, actual supervision, payroll records, statutory withholding and alternative valuation analysis.

Reported position or outcome. The response contested the secondment allegation and addressed the exposure using employment and payroll evidence. No departmental acceptance, withdrawal of the notice or completed adjudication is claimed.

Practical lesson. Characterisation must be established before discussing valuation.

This illustration is deliberately generalised and must not be used to identify a taxpayer or matter.

Introduction

A secondment dispute often begins with a seemingly simple fact: employees working in India are paid by an overseas group company, and some or all of the cost is recharged to the Indian entity. The department may view the arrangement as a supply of personnel services, while the taxpayer may contend that the individuals are, in substance, its own employees.

The Supreme Court’s decision in Northern Operating Systems became a focal point for such disputes. Yet treating it as a universal declaration that every secondment is taxable is no more accurate than treating salary reimbursement as a universal exemption. The inquiry is highly dependent on the employment structure and the law applicable to the period.

The CBIC issued instructions after that decision and later clarified the valuation of certain related-party imports of services where the Indian recipient is entitled to full input tax credit. Those developments should be read together, but they address different questions and must not be collapsed into one defence.

1. What Northern Operating Systems decided and what it did not

The Supreme Court examined a particular employment arrangement under the service tax law, including the foreign entities’ continued roles, the contracts and the treatment of consideration. Its reasoning requires attention to the full factual structure. The case cannot simply be copied into a GST show-cause notice without testing the charging provisions and facts of the assessee under examination.

The pre-GST statutory setting and the post-2017 GST architecture are not identical. A proper submission identifies the taxable period, the nature of the alleged supply and the statutory mechanism said to create the liability before discussing the Supreme Court decision.

2. The department must identify the alleged supply

A notice should explain who supplied what, to whom, and against which consideration or statutory deeming provision. If a host company genuinely employs workers who operate under its direction and are integrated into its organisation, the contractual and functional evidence may support its position that the services of employees to the employer are outside the charge under Schedule III.

Where the foreign enterprise undertakes to provide skilled personnel or deliver specified services while retaining employer-like obligations and commercial responsibility, the analysis may point in another direction. Payment through foreign payroll is one fact, not the charging provision.

3. Why the employment documents matter

Compare the secondment agreement with appointment letters, visas, local HR policies, appraisal records, leave approval, termination rights, reporting lines, disciplinary authority, insurance and compensation obligations. Identify who controls the employee’s day-to-day work and who bears the consequences if it is not performed.

A secondment letter calling the host “employer” may be contradicted by the real arrangement. Conversely, an overseas payroll slip should not outweigh substantial evidence that the employee works under the host’s exclusive employment control during the period.

4. CBIC Instruction 05/2023: no mechanical invocation of the judgment

The CBIC issued Instruction No. 05/2023-GST on 13 December 2023 on the departmental treatment of the Supreme Court’s decision of 19 May 2022 in Northern Operating Systems in secondment cases. Practitioners should read the complete instruction, including its case-specific caution and directions about investigation.

The instruction is useful to insist on a proper factual inquiry. It is not a statutory declaration that all secondments are exempt. In an audit, the taxpayer should provide enough contemporaneous evidence for the officer to evaluate the arrangement actually implemented.

5. Related-party services and Schedule I

Under Schedule I of the CGST Act, certain imports of services from related persons or other establishments in the course or furtherance of business may be treated as supplies without consideration. That provision should be considered only once the alleged nature and source of the service are properly identified.

It is important to avoid circular reasoning: merely because the companies are related does not establish that a distinct overseas entity supplied manpower services on every occasion when salary costs were borne or reimbursed. The department still needs a coherent account of the supply relied upon.

6. What Circular 210/4/2024 addresses

Circular No. 210/4/2024-GST dated 26 June 2024 addresses valuation of import of services by a related person where the recipient is eligible for full input tax credit; its paragraph 3.7 treats the value declared in the recipient’s invoice as the open market value and accepts a nil value where no invoice is issued. It provides important guidance on the application of the valuation rules, including the significance of invoicing and the circumstances described in the circular.

The circular operates at the valuation stage. It does not eliminate the need to identify the supply or decide the applicability of Schedule III. Nor should full input tax credit be asserted without verifying the recipient’s actual eligibility and any blocked, exempt or mixed-use credit restrictions.

7. Zero valuation, full credit and evidentiary burden

A taxpayer may rely on the CBIC treatment where the conditions of the circular are satisfied. The assessment file should demonstrate eligibility to full input tax credit for the relevant supply and tax period and explain how invoices or absence of invoices were dealt with.

A demand based on a hypothetical payroll figure should be challenged with the correct valuation framework rather than an unsupported assertion that reimbursements never constitute consideration. Keep the primary classification and the alternative valuation arguments distinct.

8. Prepare an employee-wise evidence matrix

The matrix should list employees, home entity, host entity, employment agreements, local reporting manager, salary bearer, recharge basis, contractual termination and control rights, relevant dates, local tax withholding and any intercompany invoicing. Reconcile these data to payroll, general ledger and bank records.

Add a separate tab setting out the department’s factual allegation against the supporting or contradictory document. The strongest defence generally explains concrete inconsistencies in the notice, not simply quotes a court decision or a circular at length.

9. Procedural defence and alternative tax computation

If the show-cause notice is vague about the service or valuation, raise that defect expressly. At the same time, put forward the primary submission that no distinct taxable supply arose where the evidence supports it. Then, without concession, explain the alternative treatment if the authority finds a supply under Schedule I.

Any claimed interest, penalty or extended-period demand requires its own factual test. Do not concede suppression merely because the taxpayer used a different legal characterisation. Full disclosure in audited records and contemporaneous correspondence may be relevant to the limitation and penalty discussion.

What the Supreme Court decided in Northern Operating Systems, and what followed

In the Commissioner of Customs, Central Excise and Service Tax, Bangalore (Adjudication) v. Northern Operating Systems Pvt. Ltd. (Civil Appeal Nos. 2289-2293 of 2021, decided on 19 May 2022), the Supreme Court held, under the service tax law, that the Indian company was the recipient of manpower supply services from overseas group companies and was liable to service tax under reverse charge. The Court looked at the substance of the arrangement over its form, including control over the seconded employees and who gained economically from their work, and said that no single factor is conclusive.

After that decision, field formations began issuing GST notices on secondment arrangements. The CBIC responded with Instruction No. 05/2023-GST of 13 December 2023, which says that secondment is not only a service tax issue, that each arrangement must be examined on its facts, that the judgment should not be applied mechanically, and that the extended period under section 74(1) cannot be invoked merely because GST was not paid. Circular No. 210/4/2024-GST of 26 June 2024 then addressed valuation of related-party imports of services where the recipient has full input tax credit.

How High Courts have applied these clarifications

In Metal One Corporation India Pvt. Ltd. v. Union of India, decided by the Delhi High Court on 22 October 2024, the Court applied the second proviso to Rule 28(1) of the CGST Rules and the Circular, holding that where no invoice is raised and the Indian company has full credit, the value of the related-party service may be treated as nil. In Alstom Transport India Ltd., decided by the Karnataka High Court on 15 July 2025, expatriates on the Indian payroll and under the Indian entity’s control were held to be employees, so the arrangement fell outside supply under Schedule III; the Court added that even if a supply existed, the absence of an invoice meant a nil value under the Circular. In Huawei Technologies India Pvt. Ltd., reported in February 2026, the Karnataka High Court quashed a notice on similar reasoning that the individuals were employed directly.

These are decisions on their own records, and the Revenue can still rely on Northern Operating Systems where the overseas entity retains control, a mark-up is charged, or the employment is in substance with the foreign company. They show, however, that courts examine the employment documents and the payroll flow closely.

A practical evidence checklist and common mistakes

A useful file contains, for each individual: the secondment or assignment agreement; the Indian appointment letter and any foreign contract; visa and work permit sponsor; the reporting line and performance records kept in India; the entity with disciplinary and termination rights; payroll and income-tax withholding records (for example Form 16 and Form 12BA); social security and insurance arrangements; and the intercompany recharge schedule with the basis of computation and any mark-up. These should be reconciled to the general ledger and bank statements, and the department’s allegation should be set against each document in a separate column.

Common mistakes are quoting the judgment without the employee-wise facts, calling every recharge a reimbursement without testing for a mark-up or a management fee, asserting full input tax credit without checking blocked or exempt-use credits, running the primary and alternative arguments together so that one reads as a concession of the other, and conceding suppression because a different legal characterisation was adopted. The evidence should be assembled while the arrangement is running; a reconstruction created after the notice carries less weight.

Conclusion

Secondment disputes are decided by their commercial and employment facts. The Supreme Court decision supplies important guidance, while the CBIC instruction and valuation circular define how officers should approach particular questions in the GST framework.

A credible defence separates the threshold supply question from related-party valuation and builds both positions from documents that existed during the arrangement.

Frequently asked questions

1. Does Northern Operating Systems make every secondment taxable?

No. The facts and statute relevant to the actual secondment must be examined.

2. Is a payroll recharge always consideration for a service?

No universal conclusion follows from recharge alone; contractual and functional substance matter.

3. What is the importance of CBIC Instruction 05/2023?

It directs attention to the proper assessment of the judgment and facts rather than an indiscriminate approach.

4. Does Circular 210/4/2024 resolve secondment characterisation?

No. It addresses related-party import-of-service valuation in the circumstances covered by the circular.

5. Can full input tax credit be assumed merely because the recipient is registered?

No. Actual full-credit eligibility must be established under the governing provisions.

6. Is GST payable on salary reimbursed to a foreign parent for seconded employees?

Not automatically. If the individuals are in substance employees of the Indian entity, their services fall under Schedule III of the CGST Act and are not a supply. If the overseas company supplies manpower, an import of services may arise. Where it does, Circular 210/4/2024-GST may allow a nil value if no invoice is issued and full input tax credit is available.

7. What did the Karnataka High Court hold in Alstom Transport India on secondment?

On 15 July 2025, in W.P. 1779 of 2025, the Karnataka High Court quashed a GST demand on expatriate secondment, holding that employees on the Indian payroll and under the Indian entity’s control were in an employment relationship outside supply, and that even if a supply existed the value was nil under Circular 210/4/2024-GST. The reasoning is specific to its facts.

8. Can the extended limitation period be invoked in secondment cases?

Not merely because GST was not paid. CBIC Instruction No. 05/2023-GST states that section 74(1) of the CGST Act applies only where there is fraud, wilful misstatement or suppression of facts to evade tax, and that the evidence must be set out in the show cause notice. The facts of each case, including disclosure in audited accounts, remain relevant.

9. Does Circular 210/4/2024-GST apply to all secondment arrangements?

No. It deals with the valuation of an import of services between related persons, and does not mention secondment. It applies only after a supply from a foreign related person is established, and only where the Indian recipient is eligible for full input tax credit. Whether the secondment is a supply at all is decided first, on the employment facts.

Talk to SBC’s tax team

If a show cause notice or audit query treats seconded or expatriate staff as a supply of manpower, a review of the employment documents and the payroll flow against the points above is a sensible starting point. Our GST team can discuss the facts of your arrangement. Explore our GST services | Contact SBC

Disclaimer

This article is general professional commentary and not advice on any particular facts. Applicable law, procedural requirements, circulars and statutory amendments must be verified for the relevant tax period. It is not a description of an identifiable client engagement.

The 180-Day Payment Condition: Why an ERP Clearing Date Is Not a Payment Date

By CA Rajesh Vaishnav, Partner and CA Mithilesh Sai Sannareddy, Founder and CEO, Steadfast Business Consulting LLP | Indirect Tax Litigation / Controversy

Quick answer

Rule 37 of the CGST Rules requires reversal of input tax credit, proportionate to the amount unpaid, only where the recipient has not actually paid the supplier within 180 days of the invoice date (second proviso to section 16(2)). An ERP clearing date is an accounting entry, not proof of non-payment; the invoice-level settlement evidence, including banking records where applicable, decides the question.

Key takeaways

• Rule 37 of the CGST Rules requires reversal of input tax credit only where the recipient has failed to pay the supplier the value and tax within 180 days of the invoice date; an accounting entry is not that failure.
• Since 1 October 2022 the reversal is proportionate to the amount unpaid (Notification No. 19/2022-Central Tax and No. 26/2022-Central Tax), and the credit can be re-availed under Rule 37(2) once the supplier is paid.
• Reverse charge supplies, supplies without consideration under Schedule I and amounts added to value under section 15(2)(b) are outside the reversal.
• The practical answer to an ERP-driven allegation is an invoice-level reconciliation of the department’s own list to bank value dates, with a systems note explaining how clearing dates were generated.
• Rule 37 is different from Rule 37A, which deals with ITC where the supplier has not paid tax to the government, and the 180-day condition is itself under constitutional challenge in the Gujarat High Court.

Practice illustration: An ERP clearing date was mistaken for a payment date

Issue. A GST audit used accounting-system entries to infer delay in settlement of supplier invoices.

Approach. The response reconciled invoices, supplier accounts, banking records and system-migration entries against the 180-day statutory condition.

Reported position or outcome. The broader audit closed without a show cause notice, subject to a limited adjustment. This article addresses the Rule 37 question only, not every allegation considered in that audit.

Practical lesson. The evidence must establish actual payment rather than reliance on a single system field.

This illustration is deliberately generalised and must not be used to identify a taxpayer or matter.

Introduction

Input tax credit under GST is conditional. One of the conditions is commercial rather than documentary: the recipient must actually pay the supplier, and must do so within a prescribed period running from the invoice date. If it does not, the credit attributable to the unpaid amount has to be reversed, with interest, and re-availed only when payment is eventually made. The condition exists to prevent credit being taken on invoices that are never settled.

The allegation that the condition has been breached has become a standard audit finding, and it is almost always a data problem rather than a compliance failure. It surfaces most often after an enterprise system migration, when historical payments are carried across with system generated dates that bear no relationship to the underlying bank transactions. The answer is an invoice level reconciliation against bank records, and a submission that makes the statutory point explicitly rather than assuming it.

This note deals with the audit allegation that now arises most often under that condition, which is not that a supplier went unpaid but that the taxpayer’s own accounting records appear to say so. It covers the statutory condition and the current text of the rule, why an accounting clearing date is not evidence of payment, the invoice level reconciliation that answers the allegation, the partial payment and retention cases where a genuine exposure does arise, the interest computation, and the controls that prevent the issue arising at all.

1. The statutory condition

The second proviso to section 16(2) of the CGST Act provides:

Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be paid by him along with interest payable under section 50, in such manner as may be prescribed:

The closing words were substituted by the Finance Act 2023 with effect from 1 October 2023, replacing the earlier formulation under which the amount was added to the recipient’s output tax liability. The third proviso preserves the right to re-avail the credit on subsequent payment, and the words “to the supplier” were inserted into it by the same Act from the same date.

Three features of the proviso decide most disputes. The trigger is a failure to pay to the supplier, which is a factual question about money. The period runs from the date of issue of the invoice, not from the accounting date or the goods receipt date. And reverse charge supplies are expressly outside the condition.

2. The current text of Rule 37

Rule 37 was substituted by Notification No. 19/2022-Central Tax dated 28 September 2022, with effect from 1 October 2022. It was further amended by Notification No. 26/2022-Central Tax, which is dated 26 December 2022 but also takes effect from 1 October 2022. Sub-rule (3) was omitted. The current text provides:

(1) A registered person, who has availed of input tax credit on any inward supply of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, but fails to pay to the supplier thereof, whether wholly or partly, the amount towards the value of such supply along with the tax payable thereon, within the time limit specified in the second proviso to sub-section (2) of section 16, shall pay or reverse an amount equal to the input tax credit availed in respect of such supply proportionate to the amount not paid to the supplier, along with interest payable thereon under section 50, while furnishing the return in FORM GSTR-3B for the tax period immediately following the period of one hundred and eighty days from the date of the issue of the invoice:

Provided that the value of supplies made without consideration as specified in Schedule I of the said Act shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16:

Provided further that the value of supplies on account of any amount added in accordance with the provisions of clause (b) of sub-section (2) of section 15 shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16:

(2) Where the said registered person subsequently makes the payment of the amount towards the value of such supply along with tax payable thereon to the supplier thereof, he shall be entitled to re-avail the input tax credit referred to in sub-rule (1).

(4) The time limit specified in sub-section (4) of section 16 shall not apply to a claim for re-availing of any credit, in accordance with the provisions of the Act or the provisions of this Chapter, that had been reversed earlier.

The emphasis in sub-rule (1) is added. The words “whether wholly or partly”, “or reverse” and “proportionate to the amount not paid to the supplier” were inserted by Notification No. 26/2022-Central Tax, and they are the words that convert the reversal from an all or nothing consequence into a proportionate one.

The 2022 substitution made two changes that matter in practice. Reversal is now proportionate to the unpaid value rather than of the whole credit on the invoice, which is significant where an invoice is partly settled or partly in dispute. And the amount is paid directly rather than added to output tax liability, which affects how it is reported and reconciled.

The two provisos are worth noting because they are routinely forgotten. Supplies made without consideration under Schedule I are deemed paid, which disposes of the question for related party supplies made without a payment. So are amounts added to value under section 15(2)(b), which covers amounts the recipient was liable to pay that were incurred by the supplier.

3. Why an ERP clearing date is not a payment date

The allegation in a typical audit runs as follows. The department extracts payment dates from the taxpayer’s system, compares them against invoice dates, identifies invoices where the gap exceeds the prescribed period, and proposes reversal of the credit on those invoices with interest across several years.

The flaw is in the first step. A clearing date in an enterprise system records when an accounting entry was posted or cleared, which is a book-keeping event. It is affected by the posting calendar, by batch processing, by period end procedures and, most dramatically, by a system migration in which historical transactions are loaded with the migration date or with a default. None of those is the date the supplier was paid.

The statutory condition is not drafted by reference to anything in the recipient’s accounting system. It asks whether the recipient failed to pay. Payment is a transfer of funds, and it is evidenced by the bank. Where bank records show that the supplier received the money within the period, the condition is not satisfied and no reversal arises, whatever the ledger says.

Framed that way, the dispute becomes evidential rather than legal, and the taxpayer holds the better evidence.

4. The reconciliation

The reconciliation has to be at invoice level. A summary comparison of aggregate payables against aggregate payments does not answer an allegation made invoice by invoice, and offering one invites the response that the taxpayer has not addressed the specific transactions identified.

The working should link, for each invoice in the department’s list:

1. The supplier invoice, with its number, date and value, and the tax charged.
2. The entry in the vendor ledger, with the system clearing date that the department has relied on.
3. The bank statement line showing the outward remittance, with its value date.
4. The payment advice or remittance reference tying the bank line to the invoice.
5. The computed interval between the invoice date and the bank value date, and whether it falls within the period.
6. Where a payment covered several invoices, the allocation applied and its basis.

Two supporting documents materially strengthen the submission. A short note from the systems team explaining how clearing dates were generated during the migration, with an illustration, converts the explanation from an assertion into a documented account of what happened. And a sample of supplier confirmations, acknowledging receipt on the dates claimed, corroborates the bank evidence from the other side of the transaction.

5. The partial payment and disputed invoice cases

Since the 2022 substitution, reversal is proportionate to the unpaid value. That matters in two common situations.

Retention and holdback. Where a contract provides for a retention released on completion or after a defect liability period, the retained amount is unpaid within the meaning of the proviso until it is released. The credit attributable to the retained portion is reversible, and it is re-availed on release under Rule 37(2). The right answer is to track retentions as a class and reverse proportionately rather than to argue that the whole invoice is paid.

Disputed amounts. Where part of an invoice is withheld pending resolution of a dispute, the same analysis applies to the withheld portion. A credit note issued by the supplier is a different matter, because it reduces the value of the supply rather than leaving it unpaid, and the treatment follows the credit note provisions instead.

In both cases the position should be computed and disclosed rather than left for an auditor to find. A taxpayer who has reversed proportionately on retentions, voluntarily and with workings, is in a very different position from one who has not considered the question.

6. A worked example

A manufacturer migrates its enterprise system during a financial year. In a departmental audit covering four years, the officers extract vendor clearing dates, identify a population of invoices where the interval from invoice date to clearing date exceeds the prescribed period, and propose reversal across all four years with interest.

Step one. Obtain the department’s working, invoice by invoice. A reconciliation cannot be built against an allegation stated in aggregate.

Step two. For each invoice, extract the bank value date and the remittance reference. Where the payment was made by a batch run covering multiple invoices, obtain the batch detail and the allocation.

Step three. Build the reconciliation table, showing the clearing date, the bank value date and the interval on each basis. The pattern that usually emerges is that the clearing dates cluster around the migration date while the bank dates are spread normally, which is itself persuasive.

Step four. Prepare the systems note explaining how the clearing dates were generated, with one worked illustration traced end to end.

Step five. Make the statutory argument explicitly. The proviso and Rule 37(1) are triggered by a failure to pay. Payment is evidenced by the bank. An accounting date that does not correspond to the transfer of funds is not evidence of non payment.

Step six. Identify any invoices that genuinely were paid late, compute the proportionate reversal with interest, and disclose it. A submission that concedes the small true exposure is considerably more persuasive on the rest than one that contests everything.

7. Interest, which is often the larger number

Where a reversal is genuinely due, the interest can exceed the tax, because the period runs from the date the credit should have been reversed to the date it is paid, and audits reach back several years.

Three points are worth making in any submission that concedes part of the population. The interest runs under section 50, and the rate and the period should be computed rather than accepted as stated in the notice, because departmental computations frequently run interest from the invoice date rather than from the end of the period in which the reversal fell due. Where credit has been re-availed on subsequent payment, interest runs only for the intervening period and not beyond, and a computation that ignores re-availment overstates the liability. And where the reversal is proportionate, the interest is proportionate too, which a computation built on the full invoice value will miss.

It is worth preparing the taxpayer’s own interest computation and putting it in the submission rather than contesting the department’s in the abstract. A notice that proposes tax and interest, met by a response that concedes a small tax figure with a worked interest computation attached, is very often closed at that stage.

8. Credit notes, which are a different question

A reduction in the amount payable is not always a failure to pay, and the distinction decides which provision applies.

Where the supplier issues a credit note reducing the value of the supply, the value itself falls. There is no unpaid amount to trigger the proviso, and the consequences follow the credit note provisions instead, including the requirement that the recipient reverse the corresponding credit. Where the recipient simply withholds part of the invoice without a credit note, the value is unchanged and the withheld portion is unpaid, so the proportionate reversal applies.

The practical problem is that commercial teams often treat a disputed invoice and a credit noted invoice as the same thing, and the accounting may not distinguish them. A response that applies the wrong provision to either category invites a correction on a point the taxpayer could have got right.

9. What the department is working from

It helps to understand the shape of the extraction, because it explains both the allegation and the answer.

The typical working is built from two tables: the purchase register or vendor ledger, and a payments extract. The invoice date comes from the first, the payment date from the second, and the interval is computed between them. Nothing in that process looks at a bank statement, and nothing in it distinguishes a posting date from a value date.

That has two consequences for the response. The first is that the error is systematic rather than random, so it will affect a whole class of transactions in a recognisable pattern, and demonstrating the pattern is more persuasive than contesting invoices one at a time. The second is that the department’s own extract is the right starting point: asking for it, reconciling against it line by line, and returning it with two additional columns showing the bank value date and the corrected interval is far more effective than submitting a reconciliation built on the taxpayer’s own schedule, which the officer then has to map back to the allegation.

10. Where these responses go wrong

First, the response is a legal argument without a reconciliation. The point is correct and the officer will not accept it unsupported.

Second, the reconciliation is at summary level. It must be at invoice level and it must address the department’s own list.

Third, the taxpayer contests the entire population. Where some invoices were genuinely paid late, contesting them costs credibility on the rest.

Fourth, retentions are not considered. This is the most common genuine exposure in the area, and a response that does not address retentions leaves an open flank.

Fifth, reverse charge supplies are included in the population. They are expressly excluded by the proviso and by Rule 37(1), and their presence in the department’s list should be pointed out.

Sixth, the Schedule I and section 15(2)(b) provisos are overlooked, with the result that related party supplies made without consideration are treated as unpaid.

Seventh, re-availment is not tracked. Where credit has been reversed and the supplier is later paid, the credit is re-available under Rule 37(2), and a taxpayer that reverses without tracking re-availment pays twice. Rule 37(4) is important here and is frequently overlooked: the time limit in section 16(4) does not apply to a claim for re-availing credit that was reversed earlier, so a reversal made in an earlier year does not become irrecoverable merely because the ordinary time limit for taking credit has passed.

11. Preventing the allegation

The exposure is systemic and so is the fix. Three controls remove most of it.

An ageing report run on invoice date. Most payables ageing is run on due date or on posting date. A report run on invoice date, flagging invoices approaching the prescribed period, identifies the exposure before it crystallises.

A documented mapping between the bank and the ledger. Where the enterprise system holds a payment date field that is populated from the bank rather than from the posting run, the entire dispute disappears. Where it does not, the reconciliation should be maintained as a standing control rather than built under audit pressure.

A retention register. Retentions tracked as a class, with proportionate reversal and scheduled re-availment, convert the single largest genuine exposure into a routine computation.

Where a system migration is planned, the treatment of historical payment dates should be specified as a requirement before the migration rather than discovered afterwards. The cost of specifying it is trivial. The cost of reconstructing four years of payment dates under audit is not.

Practitioner’s perspective

This issue illustrates something broader about how GST audits are now conducted. The department works from extracted data, and the data it extracts is the data the taxpayer’s system happens to hold. Where a field means something different from what its name suggests, the extraction produces a false positive, and the burden of explaining it falls on the taxpayer.

On the statutory construction there is little room for argument. Rule 37 and the second proviso to section 16(2) are triggered by a failure to pay the supplier, and a clearing date is not a payment. What makes the difference between a response that closes the issue at audit stage and one that proceeds to a show cause notice is whether the reconciliation exists and whether it is at the right level of granularity.

For businesses with large payable populations, the right investment is in the controls rather than in the defence. An ageing report on invoice date and a documented bank to ledger mapping cost very little and remove the issue entirely. For businesses already facing the allegation, concede the genuine late payments, compute the proportionate reversal, and contest the rest on evidence.

Rule 37A and the pending challenge to the 180-day condition

Rule 37 should not be confused with Rule 37A. Rule 37 deals with the recipient’s own failure to pay the supplier within 180 days. Rule 37A was inserted by Notification No. 26/2022-Central Tax dated 26 December 2022, following the 48th GST Council meeting, and deals with a different default: where the recipient has taken credit but the supplier has not furnished the return in Form GSTR-3B for the corresponding period by 30 September following the end of the financial year, the credit must be reversed, through Form GSTR-3B, on or before 30 November following the end of that financial year, with interest under section 50. It first applied to financial year 2022-23. The credit can be re-availed if the supplier later files the return. The two rules have different triggers, evidence and timelines, and a notice that cites one should be checked against the facts of the other.

Two further developments are worth tracking. First, the 180-day condition in the second and third provisos to section 16(2) is under constitutional challenge before the Gujarat High Court in Priya Blue Industries v. Union of India, in which notice was reported in November 2025; no stay of the provisos was reported, so the provisions and Rule 37 continue to apply and should be complied with. Any later amendment must be checked for the actual tax period involved; an ongoing constitutional challenge by itself does not suspend the statutory obligation.

Appeals against an adjudication order that confirms a Rule 37 demand lie first to the first appellate authority under section 107 of the CGST Act and then to the GST Appellate Tribunal under section 112. The Tribunal was launched on 24 September 2025 and, per commentary, began hearing cases on 16 February 2026, with benches being added through 2026. The pre-deposit and time limits for each stage should be confirmed from the statute and the GSTAT portal at the time of filing.

Conclusion

The test for Rule 37 is payment and the supporting records, not the ERP clearing field. A defensible response reconciles each invoice and distinguishes genuine overdue payments from migration or posting artefacts.

Frequently asked questions

1. What triggers reversal under Rule 37?

A failure to pay the supplier the value of the supply together with the tax within the period specified in the second proviso to section 16(2), being one hundred and eighty days from the date of issue of the invoice. Supplies on which tax is payable under reverse charge are excluded.

2. Is the reversal of the whole credit or only part?

Proportionate. Rule 37(1) requires payment or reversal of the credit availed on the supply proportionate to the amount not paid to the supplier, following the amendments that took effect from 1 October 2022. It is no longer an all or nothing reversal of the credit on the whole invoice.

3. From what date does the period run?

From the date of issue of the invoice by the supplier. Not from the goods receipt date, the accounting date or the due date under the contract.

4. Is an ERP clearing date evidence of the payment date?

No. A clearing date records an accounting event. The statutory condition looks to whether the recipient paid the supplier, which is evidenced by the bank. Where bank records show payment within the period, no reversal arises.

5. How should the reversal be reported?

Rule 37(1) requires the amount to be paid along with interest under section 50 while furnishing the return in Form GSTR-3B for the tax period immediately following the one hundred and eighty day period. Since the Finance Act 2023 amendment effective 1 October 2023 the amount is paid rather than added to output tax liability.

6. Can the credit be taken back if the supplier is paid later?

Yes. Rule 37(2) entitles the recipient to re-avail the credit on subsequently making payment of the value together with the tax to the supplier, and the third proviso to section 16(2) preserves that right. Rule 37(4) provides that the time limit in section 16(4) does not apply to a claim for re-availing credit reversed earlier.

7. How are retentions treated?

A retained amount is unpaid until released, so the credit attributable to it is reversible proportionately and re-availed on release. Retentions should be tracked as a class and reversed voluntarily with workings.

8. Do related party supplies made without consideration attract reversal?

No. The first proviso to Rule 37(1) deems supplies made without consideration as specified in Schedule I to have been paid for the purposes of the second proviso to section 16(2).

9. What about amounts the supplier incurred that the recipient was liable to pay?

The second proviso to Rule 37(1) deems amounts added to value under section 15(2)(b) to have been paid, so they do not trigger reversal.

10. What controls prevent this becoming an audit issue?

A payables ageing report run on invoice date, a documented mapping between the bank and the ledger so that the system holds a true payment date, and a retention register with scheduled re-availment.

11. What is the difference between Rule 37 and Rule 37A of the CGST Rules?

Rule 37 requires the recipient to reverse input tax credit if it has not paid the supplier within 180 days of the invoice. Rule 37A requires reversal where the supplier has not filed its GSTR-3B for the period by 30 September following the financial year. Both allow re-availment once the default is cured, but their triggers and evidence differ.

12. What interest is payable when ITC is reversed under Rule 37?

Rule 37(1) requires the reversal to be made along with interest under section 50 of the CGST Act. The rule does not state the start date or the rate, and commentary is divided on whether 18 per cent under section 50(1) or 24 per cent under section 50(3) applies. The computation should be worked out and disclosed rather than accepted from a notice without checking.

13. Is the 180-day rule for ITC under challenge in any High Court?

Yes. The Gujarat High Court issued notice in November 2025 in Priya Blue Industries v. Union of India on the second and third provisos to section 16(2) of the CGST Act. No stay was reported, so the provisions and Rule 37 remain in force. The current status of the petition should be confirmed before relying on it.

14. Does an ERP clearing date prove that a supplier was paid late for GST purposes?

No. The second proviso to section 16(2) asks whether the recipient paid the supplier within 180 days of the invoice date. A clearing date records when an accounting entry was posted, which can differ from the bank value date, especially after a system migration. An invoice-level reconciliation to bank statements answers the allegation.

Talk to SBC’s tax team

If a GST audit has proposed reversal of credit on supplier payments, the first step is usually to obtain the department’s invoice list and test it against bank records. Our GST team can walk through what the reconciliation should contain. Explore our GST services | Contact SBC

Disclaimer

This article is for general information and does not constitute professional advice. It reflects the law as understood at the date of publication and does not take account of later developments. Rule 37 was substituted with effect from 1 October 2022 and the second proviso to section 16(2) was amended with effect from 1 October 2023, so the applicable text depends on the period concerned. Outcomes turn on the specific facts and the documentary record. No reader should act on the basis of this article without taking advice on their own circumstances.

Intermediary or Principal? How Section 2(13) IGST Decides Zero Rating of Service Exports

By CA Rajesh Vaishnav, Partner and CA Mithilesh Sai Sannareddy, Founder and CEO, Steadfast Business Consulting LLP | Indirect Tax Litigation / Controversy

Quick answer

Under section 2(13) of the IGST Act, an intermediary arranges or facilitates a supply between two other persons and does not supply on its own account. A provider that contracts directly with an overseas customer and performs the work itself is a principal. Section 13(8)(b) was omitted from 30 March 2026, so earlier periods still turn on this classification.

Key takeaways

• Section 2(13) of the IGST Act applies only where there are at least three persons, two distinct supplies, and a person who arranges the main supply between the other two without supplying it on its own account (Circular No. 159/15/2021-GST dated 20 September 2021).
• A sub-contractor that performs the main service itself is not an intermediary, so working alongside other contractors on a customer’s project does not by itself create intermediary status.
• Section 13(8)(b) of the IGST Act was omitted by section 157 of the Finance Act 2026, with effect, according to published commentary, from Presidential assent on 30 March 2026; intermediary services now follow the recipient-location rule in section 13(2).
• For supplies before 30 March 2026 the classification remains decisive, and High Court decisions in 2025 and 2026 (Bombay, Delhi) have favoured exporters who supply on their own account to foreign recipients.
• The omission creates an import-side exposure: a foreign agent or introducer supplying an Indian recipient now has its place of supply in India, so reverse charge may apply.

Practice illustration: Own-account service versus intermediary classification

Issue. A service exporter was challenged on whether it made its own supply or merely facilitated a transaction between others.

Approach. The defence distinguished the principal supply from any alleged facilitation, tested the contracts and applied the export-of-services conditions.

Reported position or outcome. The own-account service characterisation and related export position were preserved in the matter. The result is fact-specific and is not a precedent applying automatically to other arrangements.

Practical lesson. The distinct underlying supplies and the provider’s own obligations are decisive.

This illustration is deliberately generalised and must not be used to identify a taxpayer or matter.

Introduction

An intermediary, in GST, is not simply a business that sits between two others. The term has a statutory definition, and the definition describes a particular commercial structure: a person who brings about a supply between two other parties while not making that supply itself. A great many businesses operate within a chain of parties without answering that description, and the distinction between facilitating someone else’s supply and making one’s own is the question on which the classification turns.

What turns on the classification is the whole of the export position. If it is sustained, the place of supply shifts, zero rating is denied, accumulated credit becomes unrefundable, and the exposure is retrospective across open periods. The defence is contractual and functional, and it is built before the refund application rather than after the objection.

This note deals with establishing the distinction for a service provider exporting to overseas customers. It covers the statutory definition, the five prerequisites the Board has set out, the contractual and functional evidence that establishes principal status, the export conditions that must independently be satisfied, and the change in the place of supply rule that alters the analysis for periods going forward while leaving earlier periods untouched. It also covers the new liability that change creates on the import side. For the related question of sourcing a supply connected with an overseas event, see our note on place of supply for events held outside India.

1. The definition

Section 2(13) of the IGST Act provides:

“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;

The definition has not been amended since the Act came into force. Every word of the exclusion matters, and the exclusion is where most defences are won.

2. What the Board’s circular requires

Circular No. 159/15/2021-GST dated 20 September 2021 sets out the prerequisites for intermediary status, and it is the most useful single document in the area because it is the department’s own statement of the test.

1. A minimum of three parties. Two principals transacting with each other, and the intermediary who arranges or facilitates that transaction. An arrangement between two parties cannot produce an intermediary.
2. Two distinct supplies. The main supply between the two principals, and an identifiable ancillary supply of facilitation. Both must exist.
3. The character of a broker or agent. The person must act in a subsidiary capacity in relation to the main supply, not as a party to it.
4. No supply on one’s own account. A person supplying the main service on a principal to principal basis, in whole or in part, is excluded.
5. Sub-contracting is expressly outside the definition. A sub-contractor who performs the main service is not an intermediary.

The fifth point is frequently decisive and frequently overlooked. A department that characterises a service provider as an intermediary because it works within a larger project, alongside contractors engaged by the customer, is characterising a sub-contractor, and the circular says in terms that a sub-contractor is not an intermediary.

3. Building the defence

The analysis is contractual first and functional second, and the two must agree.

Identify the parties and the supplies. The submission should state, in a short numbered passage, who the parties are, what each supplies to whom, and where the alleged main supply between two other persons is said to be. Very often this exercise alone disposes of the allegation, because the department has not identified a main supply at all. It has identified a service provider working in a complex environment and inferred facilitation from the complexity.

Show that the provider contracts on its own account. The evidence is the agreement: who the counterparty is, what obligations are assumed, what the deliverables are, who is liable for defective performance, who carries the risk of non performance, and how consideration is determined. A provider paid for its own output at its own price is not earning a facilitation fee.

Show that the provider performs the service. Resource deployment, personnel, methodology, the deliverables themselves. A person who arranges a supply does not produce the work product.

Address the pricing structure. Remuneration on a commission basis, or calculated as a percentage of the value of a transaction between two other parties, is an indicator of facilitation. A fee for the provider’s own services, computed on its own cost base or on a defined scope, is not.

Deal with the counter indicators directly. Where the provider coordinates with third party contractors, attends meetings on the customer’s behalf, or holds a role described in the agreement as coordination or liaison, those facts will be in the notice. They should be addressed and explained rather than left for the department to emphasise. Coordination performed as part of delivering one’s own scope is not facilitation of someone else’s supply.

4. The export conditions, which must also be satisfied

Defeating the intermediary allegation is necessary but not sufficient. Section 2(6) of the IGST Act defines export of services, and all five conditions must hold:

(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 or in Indian rupees wherever permitted by the Reserve Bank of India; 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.

Two points on these. The words permitting receipt in Indian rupees were inserted by the IGST (Amendment) Act 2018 with effect from 1 February 2019, and Circular No. 202/14/2023-GST dated 27 October 2023 confirms that rupees received through a Special Rupee Vostro Account under the Reserve Bank’s framework satisfy the condition. The fifth condition is the one that catches captive arrangements: where the Indian supplier and the overseas recipient are merely establishments of the same person, the transaction is not an export however it is contracted.

Zero rating itself flows from section 16 of the IGST Act, and the structure of that provision changed with effect from 1 October 2023. Following the substitution of section 16(3) by the Finance Act 2021, the general route is supply under bond or letter of undertaking without payment of tax, with refund of unutilised credit under section 54 of the CGST Act. The route of paying tax and claiming refund is now available only to a class of persons or a class of goods or services notified under section 16(4) as amended by the Finance (No. 2) Act 2024. Section 16(5), inserted by the same Act, bars refund of unutilised credit or of tax paid on zero rated supply of goods subject to export duty. A submission that describes the two routes as freely interchangeable is describing the pre-2023 position.

5. The place of supply rule has changed

For the whole of the period in which this dispute has been litigated, section 13(8)(b) of the IGST Act placed the supply of intermediary services at the location of the supplier. That is what made the classification so consequential: an Indian provider held to be an intermediary had its place of supply in India, and the export fell away.

The constitutional challenge produced a divided answer. In Dharmendra M. Jani v. Union of India, Writ Petition No. 2031 of 2018, a Division Bench of the Bombay High Court delivered a split verdict, one judge holding the provision ultra vires and the other upholding it. On reference, the third judge held the provision valid and constitutional but confined in its operation to the IGST Act alone, so that it could not found a levy under the central and state legislation, and held that the petitioners’ transactions were exports under section 2(6).

The provision has since been omitted. Section 13(8)(b) was omitted by the Finance Act 2026. The consequence is that intermediary services fall to the default rule in section 13(2), under which the place of supply is the location of the recipient.

One point of detail should be settled against the gazette before any position is taken for supplies made in the early part of 2026. Published commentary treats the omission, made by section 157 of the Finance Act 2026, as effective from Presidential assent on 30 March 2026, because that section falls outside the commencement clauses of section 1(2) of the Act and carries no separate commencement date. The enacted text, and any later notification or clarification, should still be checked for supplies made around that date, particularly where an invoice or payment straddles 30 March 2026.

Three practical consequences follow, and they pull in different directions.

• For periods from 30 March 2026, the classification question loses most of its force in the export context. A provider characterised as an intermediary, supplying an overseas recipient, now has its place of supply outside India under section 13(2) and the export analysis proceeds on the remaining conditions in section 2(6).
• For earlier periods, nothing has changed. Open assessments, pending refund rejections and appeals for periods before the omission continue to be governed by section 13(8)(b), and the classification remains determinative. The omission is not expressed to be retrospective, and whether pending demands and refund rejections for earlier periods are affected remains open to argument before the forum concerned, so earlier periods should still be defended on the law as it stood.
• The classification still matters for other purposes, including the identity of the person liable, documentation and the treatment of domestic arrangements. The definition in section 2(13) is unchanged.

There is a consequence running the other way, and for many Indian businesses it is the more important one. Because the place of supply for intermediary services now follows the general rule in section 13(2) and is the location of the recipient, a foreign intermediary supplying an Indian recipient now has its place of supply in India. That makes the supply an import of services, on which the Indian recipient is liable to discharge integrated tax under reverse charge, with credit available where the recipient is otherwise eligible.

Indian businesses that pay overseas agents, introducers, placement agents or similar facilitators should therefore review those arrangements. Under the previous rule those payments attracted no Indian tax because the place of supply was the overseas supplier’s location. A business that reads the omission only as relief for its own exports, and does not look at what it buys, may acquire a reverse charge liability it has not budgeted for.

6. A worked example

An Indian company supplies specialised infrastructure support services, including system design optimisation, operational performance monitoring and infrastructure planning, to overseas group companies running large projects abroad. It contracts directly with those companies, treats the supplies as exports and claims refund of accumulated credit. During scrutiny the department alleges that the company is an intermediary facilitating services between the overseas project developers and the engineering contractors working on those projects.

The three party test. The submission identifies the parties: the Indian company and the overseas recipient. It then asks the department to identify the main supply between two other persons that the Indian company is said to arrange. Where the department points to the relationship between the overseas developer and its contractors, the answer is that the Indian company is not a party to that relationship, does not arrange it, and is not remunerated by reference to it.

Own account. The agreement records a defined technical scope, deliverables, liability for defective performance and a fee for the Indian company’s own services. Those terms are inconsistent with a facilitation role.

Performance. Engineering personnel, methodology and the deliverables themselves establish that the company performs the service rather than procuring it from someone else.

Sub-contracting. Where the department’s real complaint is that the company works alongside other contractors on the customer’s project, Circular 159 answers it: a sub-contractor performing the main service is not an intermediary.

Export conditions. Each of the five conditions in section 2(6) is addressed separately, with the banking evidence for the consideration condition and the group structure addressed for the distinct person condition.

Period. The submission states the periods in issue and, where any fall after 30 March 2026, makes the further point that the place of supply would in any event be outside India under section 13(2).

7. Where these defences are weak

First, the agreement uses agency language. Words such as coordinate, liaise, facilitate, on behalf of and arrange appear in commercial drafting without anyone intending their legal consequence, and they are the first thing quoted in the notice.

Second, remuneration is commission based or linked to the value of a third party transaction. This is the single strongest indicator against the taxpayer and it is very difficult to explain away.

Third, the main supply is not identified and the taxpayer does not force the point. The burden of establishing the three party structure is on the department, and a submission that argues only about its own role concedes the frame.

Fourth, the export conditions are assumed rather than proved. Refund rejections frequently rest on the consideration condition or the distinct person condition rather than on classification at all.

Fifth, positions differ across group entities. Where a comparable entity elsewhere in the group has been treated as an intermediary, the inconsistency will be found.

Sixth, the pre and post omission periods are run together. A single submission covering several years has to distinguish the periods, because the place of supply analysis differs.

8. A review checklist

6. List the parties and the supplies, and identify whether any main supply exists between two other persons.
7. Read every agreement for agency language, and renegotiate it at the next renewal.
8. Check whether remuneration is for the provider’s own scope or is calculated by reference to a third party transaction.
9. Assemble evidence of performance: personnel, methodology, deliverables.
10. Test the facts against each of the five prerequisites in Circular 159, and record the conclusion on each.
11. Consider whether the sub-contracting exclusion applies, and say so if it does.
12. Verify each of the five conditions in section 2(6) separately, with evidence for the consideration and distinct person conditions.
13. Confirm the zero rating route actually used, and that it is available under section 16 as it now stands.
14. Identify the periods in dispute and apply the correct place of supply rule to each.
15. Reconcile refund claims to the credit ledger and the returns, and verify the computation under Rule 89(4).
16. Check the position taken by other group entities in India and abroad.
17. Where an adverse position has been taken for an earlier period, decide whether to contest it before it becomes a precedent within the group.

Practitioner’s perspective

The intermediary classification has been among the most actively litigated questions in Indian indirect tax, and the reason is structural: a broadly worded definition was coupled with a place of supply rule that produced a severe consequence. The omission of that rule removes much of the sting for periods going forward, and it is a welcome and overdue change for India’s services export sector.

It changes nothing for the periods already in dispute, and those periods will take years to work through. For a business with open refund claims or pending appeals, the classification defence remains exactly as important as it was, and it remains a defence built on contractual and functional evidence rather than on argument.

The practical lesson is the one that applies across this area. The words used in the commercial agreement are read as legal terms, whatever the parties intended by them. A clause describing a provider as coordinating on behalf of a customer costs nothing to draft and a great deal to defend. Reviewing agreements for that language, and changing it at renewal, is the cheapest risk reduction available in this area.

What courts have said since 2025 on exporters who supply on their own account

For periods before 30 March 2026, the classification still decides the refund, and recent decisions show how High Courts approach it. In Union of India v. KC Overseas Education Pvt. Ltd., the Bombay High Court held that an Indian provider of recruitment and referral services, paid in convertible foreign exchange by foreign universities, was not an intermediary and had made an export of services; the Supreme Court dismissed the Revenue’s special leave petition in 2025. The Delhi High Court reached a similar view in Commissioner of Delhi GST v. Global Opportunities Pvt. Ltd., and the Supreme Court declined to interfere on 27 January 2026.

In Fateh Education Consulting Pvt. Ltd. v. Assistant Commissioner, decided on 8 May 2026, the Delhi High Court set aside a refund rejection that rested on the intermediary ground, directed the refund with statutory interest, and noted that the respondents did not dispute the legal position. These are decisions on their own facts, and a dismissal of a special leave petition is not itself a declaration of law, so the reasoning of the High Court judgments is what a taxpayer should cite. They do, however, show that contracting with the foreign recipient, invoicing it and being paid by it are weighty facts.

Where a refund has been rejected, the usual route is an appeal to the first appellate authority under section 107 of the CGST Act and then to the GST Appellate Tribunal (GSTAT) under section 112. The GSTAT was inaugurated on 24 September 2025 and, according to commentary, started hearing cases from 16 February 2026, with State Benches being brought into operation through 2026 and an e-filing portal in use. The window for appealing older orders was extended to 31 July 2026, so any rejection order not yet appealed should be checked for limitation immediately; the current position of the bench covering your State should be confirmed on the GSTAT portal.

Reviewing the import side after the omission

Because section 13(8)(b) no longer applies, a supply of intermediary services by a foreign agent to an Indian recipient has its place of supply in India under section 13(2). The supply is then an import of services, and the Indian recipient is liable to pay integrated tax under reverse charge, issue a self-invoice and claim credit only if the underlying use is eligible. Businesses in sectors where credit is restricted or blocked, such as some financial and hospitality businesses, should model the cost of this change.

A practical review has four steps. List every overseas payee described as an agent, introducer, placement agent, sourcing agent or commission recipient. For each, read the agreement to see whether the payee arranges a supply between the Indian business and a third party (an intermediary) or supplies a service on its own account. Identify the time of supply by reference to the invoice and payment dates, since commentary treats services supplied on or after 30 March 2026 as governed by the amended rule. Finally, decide whether past payments for periods before 30 March 2026 need any attention, which is generally a question of the old place-of-supply rule rather than of the amendment.

Frequently asked questions

1. What is the statutory test for an intermediary?

Section 2(13) of the IGST Act defines an intermediary as a broker, agent or other person who arranges or facilitates the supply of goods, services or securities between two or more persons, excluding a person who supplies those goods, services or securities on his own account.

2. How many parties are needed before the definition can apply?

At least three. Circular No. 159/15/2021-GST requires two principals transacting with each other and the intermediary who arranges or facilitates that transaction. An arrangement between two parties cannot produce an intermediary.

3. Is a sub-contractor an intermediary?

No. Circular No. 159/15/2021-GST states expressly that sub-contracting is excluded, because a sub-contractor performs the main service rather than arranging it.

4. Does working alongside other contractors make a provider an intermediary?

Not by itself. Coordination performed as part of delivering one’s own contractual scope is not facilitation of a supply between two other persons. The department must identify the main supply said to be arranged.

5. What is the significance of commission based remuneration?

It is a strong indicator of facilitation, because a fee calculated as a share of the value of a transaction between two other parties suggests the provider is remunerated for bringing that transaction about rather than for its own output.

6. What happened to section 13(8)(b)?

It placed the supply of intermediary services at the location of the supplier. It was omitted by the Finance Act 2026, so intermediary services now fall to the default rule in section 13(2), under which the place of supply is the location of the recipient. Published commentary treats the omission as effective from Presidential assent on 30 March 2026, because section 157 of the Finance Act 2026 has no separate commencement date; the enacted text should be checked for supplies made around that date.

7. Does that omission help periods already under dispute?

No. The omission operates prospectively. Open assessments, refund rejections and appeals for earlier periods continue to be governed by section 13(8)(b), and the classification remains determinative for them.

8. Does the omission create any new liability?

Yes, on the import side. Because the place of supply now follows the recipient’s location under section 13(2), a foreign intermediary supplying an Indian recipient has its place of supply in India. The supply is an import of services on which the Indian recipient discharges integrated tax under reverse charge, with credit where otherwise eligible. Payments to overseas agents and introducers should be reviewed on that footing.

9. What did the Bombay High Court decide in Dharmendra M. Jani?

A Division Bench split, one judge holding section 13(8)(b) ultra vires and the other upholding it. On reference the third judge held the provision valid but confined in its operation to the IGST Act alone, so that it could not found a levy under the central and state legislation, and held the transactions to be exports under section 2(6).

10. What are the conditions for export of services?

Section 2(6) of the IGST Act requires that the supplier is in India, the recipient is outside India, the place of supply is outside India, payment is received in convertible foreign exchange or in Indian rupees where permitted by the Reserve Bank, and the supplier and recipient are not merely establishments of a distinct person.

11. Can export be made with payment of tax and refund claimed?

Only for a notified class of persons or a notified class of goods or services. Following the substitution of section 16(3) with effect from 1 October 2023, the general route is supply under bond or letter of undertaking without payment of tax with refund of unutilised credit under section 54 of the CGST Act, and the with payment route is available under section 16(4), as amended by the Finance (No. 2) Act 2024, only as notified.

12. Is an intermediary service an export of service after the Finance Act 2026?

It can be. Section 13(8)(b) of the IGST Act was omitted with effect from 30 March 2026, so intermediary services follow section 13(2) and the place of supply is the recipient’s location. If the recipient is outside India and the other conditions of section 2(6) are met, including payment in convertible foreign exchange or permitted rupees, the supply can be an export. Earlier periods follow the old rule.

13. Is GST payable on commission paid to a foreign agent after section 13(8)(b) was omitted?

It may be. Where the foreign agent is an intermediary supplying an Indian recipient, the place of supply is now in India, so the supply is an import of services and the Indian recipient pays IGST under reverse charge. Input tax credit is available only if the recipient is otherwise eligible. Each agreement should be read to confirm that the payee is in fact an intermediary.

14. Does section 2(13) of the IGST Act still matter after 2026?

Yes. The Finance Act 2026 omitted only the place of supply rule in section 13(8)(b) and left the definition in section 2(13) unchanged. The classification still governs disputes for supplies before 30 March 2026 and may matter for other provisions that refer to intermediaries, so the three-party test in Circular 159/15/2021-GST remains relevant.

15. What did the Supreme Court do in the KC Overseas Education case?

The Supreme Court dismissed the Revenue’s special leave petition against the Bombay High Court, which had held that referral services supplied to foreign universities and paid for in foreign exchange were an export of services and not intermediary services. A dismissal of a special leave petition is not a declaration of law, so the High Court’s reasoning is what is usually cited.

Talk to SBC’s tax team

If an intermediary allegation or a refund rejection is open for your export of services, a document review of the contracts and the performance record is the usual first step. Our GST team can discuss the position for each period. Explore our GST services | Contact SBC

Disclaimer

This article is for general information and does not constitute professional advice. It reflects the law as understood at the date of publication and does not take account of later developments. The place of supply rule applicable to intermediary services changed during 2026, so the analysis depends on the period in question, and the classification of any arrangement turns on its contractual terms and the functions actually performed. No reader should act on the basis of this article without taking advice on their own circumstances.