Partial Payment of Invoice for Raw Materials to Oversea Supplier

[Danish Azfar]

Dear Experts, 

We’ve one situation in which need your help.

We have imported some raw materials from oversea supplier. We have found some pcs of Raw material NG at the Incoming quality check and supplier agree to not pay for that NG Qty.

Now we are doing the payment to Supplier after the deduction of the NG material Value, but bank is not processing the partial payment, they are saying we need to do Full invoice value payment.  

But as per our understanding, various other companies is importing the material from oversea suppliers and facing the same issue and obviously need to do the payment after deduction.

Please help us on this situation by providing your guidance.

[Sadanand Bulbule]

Obtain a formal Credit Note from the overseas supplier for the rejected (NG) quantity, duly referring to the original invoice. On submission of the invoice, credit note and bill of entry, the bank is legally empowered to process net remittance after deduction. In the absence of a supplier-issued credit note or revised invoice, partial payment is impermissible under FEMA, and the bank is justified in insisting on full invoice value payment. 

[Danish Azfar]

Dear Sir, 

Thanks a lot for your reply and providing the way forward on the matter. Thanks.

[Shilpi Jain]

Ideally the banker should not insist for payment of full amount since there is no provision under FEMA that the payment has to be done for the full invoice value. Though there is a time limit for making the import payment, which needs tobe adhered to

As suggested by sir above, do take a credit note and basis that this payment can be made without hassel.

[YAGAY andSUN]

Banks are refusing partial remittance due to compliance requirements under the Foreign Exchange Management Act and RBI guidelines. As per these regulations, the import invoice value declared in the Bill of Entry must align with the remittance made. Any short payment is treated as a discrepancy unless supported by valid documentary evidence.

From the bank's perspective, if the invoice reflects USD 100,000 and the remittance is USD 90,000, the difference must be formally justified.

To resolve this, the following options are recommended:

1. Obtain a Credit Note (Preferred Approach):
   Request the overseas supplier to issue a Credit Note for the rejected (NG) quantity, clearly referencing the original invoice and stating the reason. The payable amount will then be the net of Invoice minus Credit Note. Submission of both documents generally satisfies bank requirements.

2. Revised Invoice:
   Alternatively, the supplier may issue an amended invoice reflecting the reduced payable value.

3. Supporting Documents (Limited Acceptance):
   Documents such as inspection reports, debit notes, and email confirmations may be submitted; however, banks typically do not accept these without a supplier-issued Credit Note or revised invoice.

4. Full Payment with Adjustment (Last Resort):
   If the bank does not permit partial payment, remit the full invoice value and adjust the rejected amount through future credit, refund, or subsequent shipments.

Banks also reconcile transactions through Bill of Entry matching and IDPMS; any mismatch without proper documentation may trigger compliance issues.

Recommended Practice:
Obtain a formal Credit Note from the supplier and submit it along with the invoice to process the net payment without regulatory concerns.

[YAGAY andSUN]

Under Indian exchange control law, there is no single clause that literally states "full payment only"; however, the combined reading of FEMA provisions and RBI directions makes it mandatory that any deviation from the invoiced amount (including short payment) must be duly supported and justified with documentary evidence.

1. FEMA Provision

Under Foreign Exchange Management Act:

• Section 10(4): Authorised Dealers (banks) are required to ensure that all foreign exchange transactions are in compliance with RBI directions and are supported by proper documentation.

• Section 11(1): RBI is empowered to issue directions, and all import remittances must strictly adhere to such directions.

Implication: Banks cannot permit short remittance unless adequately supported and compliant with RBI rules.

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2. RBI Master Direction - Import of Goods and Services

As per RBI Master Direction on Import of Goods and Services:

• Para C.1 (General Guidelines):
  AD banks must ensure that payments for imports are made against bona fide transactions and are supported by appropriate import documents (invoice, Bill of Entry, etc.).

• Para C.2 (Obligation of Importer):
  Importers must submit evidence of import, and the value declared should correspond with the remittance made.

• Para C.3 (Operational Guidelines for AD Banks):
  Banks are required to match the remittance with the import documents (Import Invoice, BOE etc.) and ensure there is no discrepancy in value unless properly explained.

• IDPMS Guidelines (under the same framework):
  The system flags short payment / excess payment as exceptions, which can only be closed upon submission of valid documents such as credit note, revised invoice, or supplier confirmation.

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Legal Position (Summary)

• Full invoice value is expected to be remitted as per import documents

• Any short payment is permissible only when supported by:

  • Supplier-issued Credit Note, or

  • Revised Invoice, or

  • other acceptable documentary justification

Without such documents, the bank is legally bound to refuse partial remittance to remain compliant.

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AI Summary

Import remittance compliance requires a supplier credit note or revised invoice before banks process partial payment of an import invoice. Partial remittance of an import invoice for raw materials rejected at incoming quality check requires documentary support under FEMA and RBI import remittance compliance. Banks may refuse to process a short payment where the invoice value, Bill of Entry value and remittance do not match, unless the difference is justified by acceptable documents. A supplier-issued credit note for the rejected quantity is the preferred basis for net payment; a revised invoice may also support reduced remittance.