GST and FEMA Triparty transaction

[ROHAN THAKKAR]

Company 'C' Indian Company get order for the manufacture of machines from Company 'B' resident in Germeany, then company 'C' need to supply the machine to Company 'A' which is also resident Indian compnay. Now 'C' will get money from 'B' and 'B' will get money from 'A'. the mchines remians in India only from C to A. please explain how the billing will be made from the prospective of GST, FEMA.

[YAGAY andSUN]

The transaction under consideration involves Company C (India) manufacturing and supplying machinery to Company A (India), pursuant to an order placed by Company B (Germany), with consideration flowing from B to C and from A to B.

Under the Central Goods and Services Tax Act, 2017 read with the Integrated Goods and Services Tax Act, 2017, the supply by C to A constitutes a taxable domestic supply. In terms of Section 7 of the CGST Act, supply includes all forms of supply for consideration in the course or furtherance of business, irrespective of the person making payment. Further, Section 2(31) expressly permits consideration to flow from a third party.

The place of supply, in terms of Section 10(1)(a) of the IGST Act, is the location where movement of goods terminates for delivery, i.e., within India. As the goods do not cross the territorial boundaries of India, the essential condition of "export of goods" under Section 2(5) of the IGST Act remains unfulfilled. Consequently, the transaction does not qualify as a zero-rated supply. Company C is, therefore, obligated to raise a tax invoice on Company A and discharge applicable GST (CGST and SGST or IGST, as the case may be).

From a foreign exchange perspective, the arrangement is governed by the Foreign Exchange Management Act, 1999 and extant RBI guidelines on third-party payments. Such payments are permissible provided the underlying transaction is bona fide and supported by a contractual arrangement, typically in the nature of a tripartite agreement or clear documentation evidencing that payment by B is on behalf of A. Compliance requirements include KYC of the remitter, proper invoicing, and satisfaction of the Authorised Dealer bank regarding the legitimacy of the transaction.

Notably, since the goods are neither exported nor intended for export, the remittance received by C from B cannot be characterised as export proceeds. It is treated as a permissible inward remittance against a domestic supply.

In sum, the settled legal position is that GST liability attaches as a domestic taxable supply between C and A, unaffected by the foreign source of consideration, while FEMA permits receipt of funds from B subject to regulatory compliance, without conferring the character of an export transaction.

AI Summary

GST and FEMA issues in a triparty machine supply arrangement with cross-linked billing and payment flow. A triparty transaction is described in which an Indian manufacturer receives an order from a German resident company but supplies the machines to another Indian company, with the machines remaining in India. The payment flow is stated to run from the German company to the Indian manufacturer and from the Indian buyer to the German company. The issue raised is how billing should be structured under GST and FEMA, and the text does not state any concluded legal position.