Exports – Write-Off, Netting off Etc

Background

The
Foreign Exchange Management Act, 1999 (“FEMA”) and Rules and Regulations issued
thereunder came in force from 1^st June 2000. Since then, over last
16 years, they have undergone several changes.

Beginning
December 2015, RBI is issuing Revised Notifications in substitution of the
original Notifications issued on May 3, 2000. Previously, annually on July 1
RBI was issuing Master Circulars with shelf life of one year. In another
change, from January 1, 2016, most of the Master Circulars have been
discontinued and substituted with Master Directions (except in case of –
Foreign Investment in India, Money Transfer Service Scheme and Risk Management
and Inter-Bank Dealings). Unlike the Master Circulars, the Master Directions
will be updated on an ongoing basis, as and when any new Circular/Notification
is issued.
However, in case of any conflict between the relevant Notification and the
Master Direction, the relevant Notification will prevail.

Concept
and Scope

The
objective of this column is to revisit certain topics on a quarterly, covering
aspects or amendments in Rules or Regulations of FEMA (excluding the procedural
aspects) which may have practical significance for professional brethren. The
issues relating to write-off of export proceeds and some other issues connected
therewith are being discussed to begin with.

Export
of Goods and Services

Vide Notification No. FEMA
23(R)/2015-RB dated January 12, 2016, RBI notified Foreign Exchange Management
(Export of Goods and Services) Regulations, 2015. This Notification repeals and
substitutes Notification No. FEMA 23/2000-RB dated 3rd May 2000 which had
notified Foreign Exchange Management (Export of Goods and Services)
Regulations, 2000.

This
Article discusses the following aspects in the context of exports by domestic
tariff area units (i.e., units other than those located in SEZ).

1.  Reduction
in invoice value.

2.  Extension
of time.

3.  Write-off
of unrealised export bills.

4.  Set-off
of export receivables against import payables.

1.  Reduction in invoice value

     Most
of the export transactions are on credit. Thus, the price negotiates also
includes certain credit period. However, sometimes the overseas importer may
desire to discharge purchase consideration before the due date if such
pre-payment is beneficial. The importer and the exporter negotiate the
consideration for such pre-payment. The consideration is generally linked to
the prevailing interest rates and the period and is by way of discount for
pre-payment by reduction in the invoice value.

     Presently,
in case of pre-payment, FEMA permits an Indian exporter to reduce the invoice
value by allowing cash discount equivalent to the interest on the unexpired
period of usance. This discount is to be calculated at the rate of interest
stipulated in the export contract. If such rate is not stipulated in the
contract, prime rate/LIBOR of the currency of invoice is to be applied.

     Sometimes,
after the goods are shipped, it may so happen that the original buyer defaults
or does not pay for the goods. Having the goods shipped back to India will
result in substantial expenses.

     In
such case, the exporter may consider selling goods to another buyer. Therefore,
FEMA permits the exporter to transfer the goods to another buyer, whether in
the same country or any other country. Further, knowing the predicament of the
exporter, the new buyer will attempt to negotiate a lower price. Hence, for
change of buyer/consignee in such case, or selling the goods at a lower price,
the exporter is not required to obtain prior permission of RBI if the following
conditions are fulfilled.

i.  The
reduction in value of the invoice due to such change is not more than 25% of
the value of the original invoice.

ii.  The
export proceeds must be realised within 9 months from the date of export to the
original buyer/consignee.

     However,
prior permission of RBI is required if either of the above conditions are not
fulfilled. RBI may grant such permission provided:

i.   Exports
do not relate to export of commodities subject to floor price stipulations;

ii.  Exporter
is not on the exporters’ caution list of the Reserve Bank; and

iii.  Exporter
has surrendered proportionate export incentives availed of, if any.

This
category covers cases of exporters who are in the business of export for more
than three years and cases of other exporters.

In
case of exporters who are in the business of export for more than three years,
banks may permit reduction in invoice value without any limit if: –

i.  Export
outstanding (excluding outstanding of exports made to countries facing
externalisation problems in cases where the buyers have made payments in local
currency) do not exceed 5% of the average annual export realisation during the
preceding three financial years.

ii.  Exports
do not relate to export of commodities subject to floor price stipulations.

iii.  Exporter
is not on the exporters’ caution list of the Reserve Bank.

iv. Exporter
has surrendered proportionate export incentives availed of, if any. 

In
other cases, banks may permit reduction in invoice value if: –

i.   Reduction
does not exceed 25% of the value of invoice.

ii.  Exports
do not relate to export of commodities subject to floor price stipulations.

iii.  Exporter
is not on the exporters’ caution list of the Reserve Bank.

iv. Exporter
has surrendered proportionate export incentives availed of, if any. 

If
an exporters case is not covered in either of the above situations, prior
permission of RBI needs to be obtained before reducing the value of invoice.

2.  Extension of time

Every
exporter of goods / software / services is required to realise and repatriate
the full value of exports (export proceeds) within nine months from the date of
export. In case of exports made to the exporter’s own warehouse outside India
the export proceeds must be realised within fifteen months from the date of
shipment of goods.

However,
many times it may not be possible to realise and repatriate the export proceeds
within the stipulated time. In such cases, banks are authorised to grant
extension of six months for realisation of export proceeds subject the
following conditions.

i. Export
transactions covered by the invoices are not under investigation by Directorate
of Enforcement/Central Bureau of Investigation or other investigating agencies.

ii.  Banks
are satisfied that the exporter has not been able to realise export proceeds
for reasons beyond his control.

iii.  Exporter
submits a declaration that the export proceeds will be realised during the
extended period.

iv. The
total outstanding of the exporter should not exceed US $ one million or 10% of
the average export realisations during the preceding three financial years,
whichever is higher. However, if the exporter has filed suits abroad against the buyer, extension can be granted by the banks irrespective of the amount
involved / outstanding. 

If
an exporter’s case is not covered by any of the above situations, then
permission from concerned Regional
Office of RBI has to be obtained for extension of time for realization and
repatriation of export proceeds.

3.  Write-off of unrealised export bills

Some
stakeholders appear to be under an impression that pursuant to liberalisation,
permission of RBI is no longer required for writing off unrealised export
proceeds. In practice, this is not the case. Unrealised export proceeds only
within certain limit can be written off without obtaining prior permission from
RBI, while certain amounts can be written off only after obtaining prior
approval from RBI.

It
is pertinent to know that there are no specific provisions / formats with
respect to export of services that need to be complied with / submitted.
However, the general principles governing export of goods relating to export
realisation, etc. also apply to export of services.

Write-offs
may be full write-offs or partial write-offs. This may be necessary due to
several reasons such as, non-receipt of payment, early receipt of payment,
damage to goods in transit, export of goods of a different quality, etc.

a.  Write-off
due to non-receipt of payment

Sometimes,
it may not be possible for an exporter to realize the amounts due against the
export of goods / software / services. There may be varied reasons for this
non-realisation. In such cases the exporter is forced to write-off the
unrealised amount.

Depending
on the amount to be written off as well as certain other conditions, the
exporter can:

(a) write-off
the unrealised amount without obtaining permission from his bank or from RBI;
or

(b) approach
the bank which handled the relevant export documents and request permission to
write-off the unrealised amount; or

(c) approach
the concerned Regional Office of RBI through the bank which handled the
relevant export documents, for permission to write-off the unrealised amount.

To
qualify for write-off, either self write-off or otherwise: –

i.   The
unrealised amount must be outstanding for more than one year.

ii.  Exporter
must produce satisfactory documentary evidence to prove that he has made all
efforts to realise the unrealised amount.

iii.  Non-realisation
must be for one of the following reasons: –

a)  The overseas buyer is insolvent and a certificate
from the official liquidator indicating that there is no possibility of
recovery of export proceeds is obtained.

b)  The
overseas buyer is not traceable over a reasonably long period of time.

c)  The
goods exported have been auctioned or destroyed by the Port / Customs / Health
authorities in the importing country.

d)  The
unrealised amount represents the balance due in a case settled through the
intervention of the Indian Embassy, Foreign Chamber of Commerce or similar
Organization.

e)  The
unrealised amount represents the undrawn balance of an export bill (not
exceeding 10% of the invoice value) remaining outstanding and is unrealisable
despite all efforts made by the exporter.

f)   The
cost of resorting to legal action is disproportionate to the unrealised amount
of the export bill.

g)  The
exporter even after winning the Court case against the overseas buyer is not
able to execute the Court decree due to reasons beyond his control.

h)  Bills
were drawn for the difference between the letter of credit value and actual
export value or between the provisional and the actual freight charges but the
amounts have remained unrealised consequent on dishonor of the bills by the
overseas buyer and there are no prospects of realisation.

It
may be noted that adequate documentary evidence may be required to be provided
to substantiate the write-off.

Write-off
will not be permitted in the following cases: –

i.   Exports
have been made to countries with externalisation problem i.e. where the
overseas buyer has deposited the value of export in local currency but the
amount has not been allowed to be repatriated by the central banking
authorities of the country.

ii. Export
Declaration Form (EDF) is under investigation by agencies like, Enforcement
Directorate, Directorate of Revenue Intelligence, Central Bureau of
Investigation, etc.

iii.  Outstanding
bills which are subject matter of civil / criminal suit.

Limits for write-offs (by self or through bank permission)

The limits stated above are
related to total export proceeds realised during the previous calendar year and
are cumulatively available in a year.

Before write-off is possible, the
exporter has to surrender the export incentives, if any, availed in respect of
the amount to be written-off and submit documents evidencing the same to the
bank.

Also, in case of self write-off,
the exporter has to submit to the bank, a Chartered Accountant’s certificate,
containing the following information: –

i.   Amount of export realisation in
the preceding calendar year.

ii.  Amount of write-off already
availed of during the current year, if any.

iii.  Details of the relevant EDF to
be written off.

iv. Details of invoice no., invoice
value, commodity exported, country of export.

v.  Surrender of export benefits, if
any, availed in respect of the amount to be written-off. 

Further, banks are required to
report the write-off of unrealised export proceeds (self-write-off or
otherwise) through EDPMS to RBI.

All cases of a write-off which are
not covered by the above criteria are to be referred to the concerned Regional
Office of RBI for its approval.

If though the Indian exporter had
not realised the export proceeds from the overseas buyer, but received the
corresponding amount from either ECGC or from an Insurance company, the bank
which handled the export documents can write-off the unrealised amount (without
any limit) after receiving an application along with supporting documentary
evidence from the exporter.

The surrender of export incentives
will be as provided in the Foreign Trade Policy (FTP). However, the amount so
realised / recovered from ECGC / insurance company by the Indian exporter will
not be treated as export realisation in foreign exchange.

In case of write-off other than
self-write-off, realisation of export proceeds will not be insisted upon under
any of the Export Promotion Schemes that are covered under FTP if: –

i.  RBI / bank has permitted the
write off on the basis of merits, as per extant guidelines.

ii.  The exporter produces a
certificate from the Foreign Mission of India concerned, about the fact of
non-recovery of export proceeds from the buyer.

In such case the Indian exporter
is not required to surrender the export incentives that have been availed by
him against such exports.

4.  Netting off of export receivables against
import payables

At the outset, ONLY units in SEZs
are permitted to net off export receivables against import payments.

It may be noted that imports and
exports from group entities cannot be internally netted. Netting off can only
be done in cases where import / export is from / to the same entities i.e. the
two parties must be debtors and creditors of each other and not of their other
group entities.

An exporter is permitted to
set-off his export receivable against his import payable subject to the
following: –

i.   Export / import transactions
are not with ACU countries.

ii.  Set-off of export receivables against
import payments are in respect of the same overseas buyer and supplier.

iii.  Consent for set-off has been
obtained from the overseas buyer and seller.

iv. Import is as per the Foreign
Trade Policy.

v.  Invoices / Bills of Lading /
Airway Bills and Exchange Control copies of Bills of Entry for home consumption
have been submitted by the importer to the bank.

vi. Payment for the import is still
outstanding in the books of the importer.