Non-Production of BRCs cannot be used for Rejecting GST Refund Claim when details available with Dept: Karnataka HC allows Refund [Read Order]

The Karnataka High Court has set aside the rejection of a GST refund claim relating to export of services, holding that the authorities had misapplied Rule 89(2) of the CGST Rules, misconstrued the concept of intermediary services under Section 2(13) of the IGST Act, and ignored the statutory scheme governing zero-rated supplies.

The Court observed that the denial of refund was based on untenable assumptions regarding realisation of export proceeds and an incorrect understanding of the nature of the underlying software development services.

The petitioner, Mavenir Systems Private Limited, had approached the High Court after the adjudicating authority rejected its refund on the grounds that the petitioner had failed to furnish Foreign Inward Remittance Certificates (FIRCs), had not established receipt of payment in convertible foreign exchange, and had rendered intermediary services rather than export services.

The petitioner’s case claimed that the GST authorities adopted a hyper-technical approach by insisting on documents no longer issued by the Reserve Bank of India, despite the petitioner having supplied Foreign Inward Remittance Advices (FIRAs) and bank confirmations of payment.

The petitioner argued that the authorities ignored the endorsements of the Range Superintendent and the SEZ Development Commissioner, both of whom had verified the export of services, and rejected the claim solely on a misunderstanding of the statutory framework.

The petitioner further contended that the services performed were software development, engineering and support services rendered on a principal-to-principal basis to an overseas affiliate, with no role of facilitation, no third party involved and no two supplies.

It was asserted that the misclassification, coupled with the insistence on discontinued documents, rendered the refund rejection contrary to Sections 54 and 16 of the CGST and IGST Acts.

Opposing the petition, the department argued that the petitioner had not properly established receipt of export proceeds in foreign currency and that only FIRCs could serve as valid evidence of realisation. It further claimed that the petitioner was acting as an intermediary between its foreign affiliate and ultimate customers, and that the services did not qualify as export of services under Section 2(6) of the IGST Act. The department maintained that the petitioner had failed to comply with Rule 89(2), rendering the refund inadmissible.

After examining the record, the Bench comprising Justice S. R. Krishna Kumar, held that the department's insistence on FIRCs was contrary to RBI Circular No. 74 dated May 26, 2016, under which FIRCs were discontinued and replaced by FIRAs.

It observed that the refund sanctioning officer had initially accepted the FIRAs and therefore the later rejection on the same ground was unsustainable. The Court clarified that Rule 89(2) must be interpreted harmoniously with Section 54(3) of the CGST Act, which recognises refund of accumulated credit on zero-rated supplies, and that an administrative rule cannot override the substantive statutory right granted by the Act.

On the intermediary issue, the Court held that since the activities were software development functions executed entirely on the petitioner’s own account, the classification as intermediary services was incorrect.

The Court relied on CBIC Circular and judicial precedents affirming that captive development centres and back-end service providers cannot be treated as intermediaries unless all essential statutory requirements are fulfilled.

The Court also noted that statutory authorities, including the Range Superintendent and the SEZ Development Commissioner, had certified that the services constituted exports, and their endorsements could not be brushed aside without cogent reasoning.

Holding that the impugned orders were contrary to the CGST and IGST framework and based on a misreading of Rule 89(2), the High Court quashed the refund rejection, demand notice and recovery proceedings.

The matter was remanded for fresh consideration strictly in accordance with the statutory scheme governing export of services and zero-rated supplies.

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