Advance Against Software Exports, Third-Party Set-Off and EEFC Retention
An Indian software services company receives a USD 300,000 advance in March 2024 from a US client for a new project. The project is cancelled in March 2025 before any invoice is raised, so the advance remains unutilised. Separately, the company has exported USD 400,000 of services to the same US client and those invoices are still unpaid. It also owes the US client USD 80,000 for hardware purchased separately, and owes an unrelated Singapore vendor USD 50,000 for cloud services. The company proposes to set off the USD 80,000 US payable against the unpaid export invoices and the USD 50,000 Singapore payable against the unutilised advance. It also wants to keep any residual advance in its EEFC account indefinitely. The AD bank asks for a reconciliation, the underlying contracts and evidence of the imports. No SOFTEX form has been filed for the export invoices.
1. Assess whether each proposed set-off is permissible under FEMA and what the company must do with the unutilised advance.
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The USD 80,000 set-off is potentially permissible because it is between the same overseas counterparty: the company has an export receivable from the US client and an import payable to the same client. AD Category-I banks may permit set-off of export receivables against import payables with the same overseas buyer or supplier, subject to the conditions in the FEMA Master Direction on export of goods and services. The bank must satisfy itself that the transactions are genuine, that the import is not prohibited or subject to restrictions, that the parties are not related in a way that taints the arrangement, and that there is no double benefit against export incentives. The company must provide the contracts, invoices, shipping or service evidence and import documents.
The USD 50,000 set-off is not permissible as proposed. The Singapore vendor is a different counterparty from the US client. A third party's payable cannot be set off against an export advance or export receivable due from another party. The company must pay the Singapore vendor through normal banking channels and cannot use the US client's advance to settle that liability.
The unutilised USD 300,000 advance is a liability, not export proceeds. Since the project was cancelled and no export will take place against it, the company must refund the advance to the remitter through banking channels, unless it obtains the AD bank's approval to adjust it against another genuine export by the same client within the permitted time. It cannot simply leave the advance parked.
2. Can the residual advance be kept indefinitely in the EEFC account? What reporting and documentation failures arise from the missing SOFTEX filings?
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The EEFC account is a facility for holding eligible foreign currency receipts; it is not a place to park an unutilised advance indefinitely. The advance represents money received for an export that will not occur. Under the FEMA export regulations, the company must either adjust it against a permitted export or refund it. Retaining it in the EEFC account does not cure the underlying non-realisation. The AD bank should require a refund or a documented, approved adjustment, and should not treat the EEFC balance as evidence of export realisation.
The missing SOFTEX filings are a separate contravention risk. Software and IT-enabled services exports are required to be declared on the SOFTEX form or through the prescribed electronic system, with the AD bank's involvement. Without the filings, the export invoices are not properly reported, and the company may be unable to obtain bank certificates or to reconcile inward remittances against exports. The AD bank should regularise the position, obtain the declarations, verify the purpose codes and ensure that the export proceeds are tracked within the permitted realisation period.
The company should also review whether the 9-month realisation period for the unpaid USD 400,000 invoices is running and whether any extension is needed. It should not wait for the AD bank to discover the gap during a scrutiny or inspection.