Services to Overseas Clients via Foreign Subsidiaries: If Not Exports, Then What?

A recent ruling by the Hon’ble CESTAT Bangalore could potentially initiate new litigation.

Hon’ble Court upheld the denial of export refunds on the ground that services provided by an Indian entity (to its foreign customers) through its foreign subsidiary of do not qualify as exports.

Key observations from the ruling;

– To be considered export services, they must be provided from India, even if utilized abroad.

– Services rendered by the appellant’s subsidiaries in Australia, USA, and China were not provided from India, thus failing to qualify as export services.

– Remittances for services performed by entities outside India were not received in India, failing to meet the condition of earning convertible foreign exchange for the country.

– The appellant and its foreign subsidiaries are distinct entities; services by the subsidiaries cannot be considered as rendered by the appellant.

– The legislative intent behind refunding unutilized credit is to reward industries that generate foreign exchange, not to facilitate the diversion of foreign exchange under the pretext of paying for services by subsidiary units.

While I would refrain myself from commenting on the ruling’s correctness, it appears this decision may pave the way for new litigation areas and potential refund rejections in scenarios where Indian entities deliver services to overseas clients via their foreign units.

Let’s see…..