1991 (4) TMI 264 - HC - FEMA

Export Guarantee Not an Acknowledgment of Debt under Foreign Exchange Regulation Act. Appeal allowed, penalty refunded.

STAR IRON WORKS PVT. LTD. Versus DIRECTOR OF ENFORCEMENT

The High Court held that furnishing a guarantee through an authorized dealer for an export transaction did not amount to an acknowledgment of debt under ... Furnishing of bank guarantee by Authorised Dealer Issues Involved:1. Whether the furnishing of a guarantee through an authorized dealer in relation to an export transaction can amount to an acknowledgment of debt and creation of a right to receive payment within the meaning of Section 9(1)(c) of the Foreign Exchange Regulation Act, 1973.2. Whether there can be any contravention of Section 9(1)(c) of the Act where payment is obtained by a foreign buyer against an unconditional performance bank guarantee.Detailed Analysis:Issue 1: Furnishing of Guarantee and Acknowledgment of DebtThe primary issue was whether the act of furnishing a bank guarantee through an authorized dealer for an export transaction constitutes an acknowledgment of debt, thereby creating a right to receive payment in favor of a person resident outside India, as per Section 9(1)(c) of the Foreign Exchange Regulation Act, 1973.The appellant had furnished a performance guarantee through the Central Bank of India, an authorized dealer, for exporting electrical materials to Doha, Qatar. The guarantee was invoked by the foreign buyer due to delays in supply caused by labor unrest and a lockout at the appellant's factory. The Deputy Director, Enforcement, and the Foreign Exchange Regulation Appellate Board initially found that this act constituted an acknowledgment of debt, thus violating Section 9(1)(c).However, the High Court noted that the Reserve Bank of India (RBI) had granted general exemptions to authorized dealers under clauses 11A.17 and 11A.18 of the Exchange Control Manual, allowing them to furnish performance guarantees without prior reference to the RBI. The Court observed that the Central Bank of India, being an authorized dealer, was acting within these exemptions and had duly reported the transaction to the RBI.Issue 2: Contravention of Section 9(1)(c) with Unconditional Performance Bank GuaranteeThe second issue was whether the invocation of an unconditional performance bank guarantee by a foreign buyer could be considered a contravention of Section 9(1)(c).The Court examined the facts and determined that the appellant had not acknowledged any debt that would create or transfer a right to receive payment in favor of a person resident outside India. The Court emphasized that the guarantee was an unconditional performance guarantee, and the appellant was not in a position to prevent the payment. The liability, if any, under Section 9(1)(c) was on the bank that furnished the guarantee, not on the appellant.The Court also reviewed the correspondence between the Central Bank of India and the Reserve Bank of India, which confirmed that the invocation of the bank guarantee was in compliance with the Exchange Control Regulations. The RBI had accepted the invocation, indicating that it was in accordance with the general exemption granted to the bank.Conclusion:The High Court concluded that the appellant did not contravene Section 9(1)(c) of the Foreign Exchange Regulation Act, 1973. The appeal was allowed, the order of the Foreign Exchange Regulation Appellate Board was set aside, and the proceedings were quashed. The Court directed the refund of the penalty amount of Rs. 10,000/- to the appellant.Judgment:The appeal is allowed, and the order under appeal is set aside. The proceedings are quashed. The penalty amount of Rs. 10,000/- deposited by the appellant is to be refunded within two weeks from the date of communication of the order. No order as to costs.