Export bank guarantees under general permission do not create debt acknowledgment or Section 9(1)(c) contravention on invocation.

An authorised dealer may furnish a performance bank guarantee in an export transaction under Reserve Bank general permission without that act amounting to an acknowledgment of debt or creation of a right to receive payment in favour of a non-resident under Section 9(1)(c) of the Foreign Exchange Regulation Act, 1973. Where an unconditional guarantee is invoked and payment is made by the authorised dealer within the permitted exchange-control framework, the exporter does not thereby make a prohibited acknowledgment of debt, and contravention of Section 9(1)(c) does not arise. The commentary states that penalties and adverse findings would be unsustainable in such circumstances.

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Issues: (i) Whether furnishing of a bank guarantee through an authorised dealer in relation to an export transaction amounts 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. (ii) Whether there is contravention of Section 9(1)(c) where payment is made pursuant to invocation of an unconditional performance bank guarantee in an export transaction.

Issue (i): Whether furnishing of a bank guarantee through an authorised dealer in relation to an export transaction amounts 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.

Analysis: Section 9(1)(c) prohibits acknowledgment of debt only where, by such act, a right to receive payment is created or transferred in favour of a person resident outside India, unless covered by Reserve Bank exemption. The guarantee in question was furnished through an authorised dealer in the course of an export transaction and was governed by the Reserve Bank's exchange control framework permitting such guarantees. In that setting, the furnishing of the guarantee did not amount to the exporter acknowledging a debt so as to create an independent right to payment in favour of the foreign buyer.

Conclusion: The issue is answered in favour of the assessee. Furnishing of the guarantee did not constitute an acknowledgment of debt or creation of a right to receive payment within Section 9(1)(c).

Issue (ii): Whether there is contravention of Section 9(1)(c) where payment is made pursuant to invocation of an unconditional performance bank guarantee in an export transaction.

Analysis: The authorised dealer was empowered under the Reserve Bank notification and manual instructions to issue performance guarantees in favour of overseas buyers in commodity export transactions without prior reference, subject to prescribed conditions. The records showed that the Reserve Bank accepted the invocation and treated the bank's action as in accordance with the exchange control regime. Since the payment was made by the authorised dealer under a permitted guarantee and not by the exporter acknowledging a debt, the statutory prohibition was not attracted.

Conclusion: The issue is answered in favour of the assessee. No contravention of Section 9(1)(c) arose from the invocation and payment under the unconditional performance guarantee.

Final Conclusion: The penalty and adverse findings were unsustainable because the guarantee was covered by the Reserve Bank's general permission for authorised dealers in export transactions, and the exporter did not commit a prohibited acknowledgment of debt.

Ratio Decidendi: Where an authorised dealer furnishes a performance guarantee in an export transaction under the Reserve Bank's general permission, invocation of that guarantee does not by itself amount to the exporter's acknowledgment of debt or creation of a right to receive payment in favour of a non-resident within Section 9(1)(c) of the Foreign Exchange Regulation Act, 1973.

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