TaxTMI 
TaxTMI 
2021 (12) TMI 297
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....ated 23 January 2020 "2020 MTT Guidelines" - RBI/2019-20/152: A.P. (DIR Series) Circular No 20 issued by the first respondent, Reserve Bank of India "RBI", in the exercise of its power under Section 10(4) and 11(1) of the Foreign Exchange Management Act 1999 "FEMA". 2 The appellant is the managing director of a firm that manufactures and trades in pharmaceuticals; herbal and skincare products; and personnel protection equipment products such as masks, gloves, sanitisers, PPE overalls, and ventilators Collectively, they are being referred to as "PPE products". The genesis of the case lies in an international MTT contract which the appellant obtained to serve as an intermediary between the sale of PPE products by a supplier in China to a buyer in the United States. In accordance with the 2020 MTT Guidelines, the appellant wrote to his authorised bank on 1 May 2020 requesting documents (such as a letter of credit) that were required to execute the MTT contract. The bank informed the appellant on 4 May 2020 that RBI had denied permission for his MTT contract, on the basis of Clause 2(iii) of the 2020 MTT Guidelines. Clause 2(iii) is reproduced below: "iii. The MTT shall be ....
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.... Clause 2(iii) was of a general nature, and the RBI had no jurisdiction to exempt products from its application, since only the UOI determined the nation's FTP. 5 By its judgment dated 8 October 2020, the High Court dismissed the writ petition. In upholding the constitutionality of Clause 2(iii) of the 2020 MTT Guidelines, the High Court held that: (i) Clause 2(iii) only prohibits MTTs for goods that cannot be imported/exported into India. The provision is general in its application and does not specifically prohibit MTT in PPE products; (ii) the decision to modify the FTP to prohibit import/export of goods is a policy decision of the Ministry of Commerce and DGFT under the Foreign Trade Act; (iii) the Ministry of Commerce and DGFT prohibited the export of PPE products due to the COVID-19 pandemic, and consequently, MTTs are also prohibited under Clause 2(iii); and (iv) apart from the fact that the goods do not physically enter Indian territory, an MTT has all the trappings of an import/export transaction. Further, it involves India's foreign exchange. Hence, its regulation needs to be in conformity with the FTP set by the UOI. B Submissions 6 Mr Aayush Agarwala, learned C....
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....under the FTP. 7 Opposing the above submissions, Mr Ramesh Babu M R, learned Counsel for the RBI submitted that: (i) The appellant cannot challenge Clause 2(iii) of the 2020 MTT Guidelines without challenging the notifications amending the FTP to prohibit the export of PPE products. Clause 2(iii) is general in its application and was introduced on 23 January 2020, while the first notification prohibiting the export of PPE products was issued by the UOI on 8 February 2020; (ii) Clauses similar to Clause 2(iii) of the 2020 MTT Guidelines have existed in all previous circulars issued by the RBI to regulate MTTs. These clauses substantially stipulate that MTTs would only be allowed in respect of products whose import/export is allowed in India; (iii) MTTs are analogous to import/export transactions, except for the fact that the goods never physically enter India. There is an outflow of foreign exchange during the import leg of the MTT and an inflow of foreign exchange during the export leg. Hence, MTTs affect India's foreign reserves, which the RBI has to manage and harmonise with the UOI's FTP. Therefore, the RBI cannot permit MTTs in respect of goods who....
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.... not considered as "citizens" under the Constitution. A corporation cannot claim an infringement of rights under Article 19(1)(g), as this fundamental right is only available to citizens and not to juristic persons. Over the years, shareholders and business persons have filed petitions in their individual capacity, to allege infringement of their fundamental right to carry on business or a profession of their choice M P Jain, Citizenship, in INDIAN CONSTITUTIONAL LAW (7th edn, Lexis Nexis, 2014). The appellant argues that the RBI and UOI's prohibition of MTTs in respect of PPE products infringes his fundamental rights and freedoms under Articles 14, 19(1)(g) and 21 of the Constitution. 11 The appellant has contended that this Court has been circumspect of legislative provisions or executive policies that impose a total prohibition on a citizen's right to conduct business. Since the appellant is engaged in MTTs which facilitate import and export between two different countries, he urges that a complete prohibition on MTTs in relation to PPE products, without a rational distinction of prohibiting their exports alone, is a constitutionally suspect infringement of his freedom to con....
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....dom. Justice K C Das Gupta articulated the limitation under Article 19(6) in the following terms: "6. The phrase "reasonable restriction" connotes that the limitation imposed on a person in enjoyment of the right should not be arbitrary or of an excessive nature, beyond what is required in the interests of the public. The word "reasonable" implies intelligent care and deliberation, that is, the choice of a course which reason dictates. Legislation which arbitrarily or excessively invades the right cannot be said to contain the quality of reasonableness and unless it strikes a proper balance between the freedom guaranteed in Article 19(1)(g) and the social control permitted by clause (6) of Article 19, it must be held to be wanting in that quality." 13 In M R F Ltd. v. Inspector Kerala Government, (1998) 8 SCC 227 a two judge Bench of this Court consolidated the body of precedent of this Court on Article 19(1)(g). Justice S Saghir Ahmed noted the following principles that govern the restrictions under Article 19(6): "13. [...] (1) While considering the reasonableness of the restrictions, the court has to keep in mind the Directive Principles of State Po....
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....als. It may be useful to refer to a few decisions of this Court on the point at this stage viz. in Saghir Ahmad v. State of U.P. [AIR 1954 SC 728 : (1955) 1 SCR 707] and J.K. Industries Ltd. v. Chief Inspector of Factories and Boilers [(1996) 6 SCC 665] . The main purpose of restricting the exercise of the right is to strike a balance between individual freedom and social control. The freedom, however, as guaranteed under Article 19(1)(g) is valuable and cannot be violated on grounds which are not established to be in public interest or just on the basis that it is permissible to do so. For placing a complete prohibition on any professional activity, there must exist some strong reason for the same with a view to attain some legitimate object and in case of non-imposition of such prohibition, it may result in jeopardizing or seriously affecting the interest of the people in general. If it is not so, it would not be a reasonable restriction if placed on exercise of the right guaranteed under Article 19(1)(g). The phrase "in the interest of the general public" has come to be considered in several decisions and it has been held that it would comprise within its ambit interests like pu....
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....he appropriate or least-restrictive choice of measures has been made by the legislature or the administrator so as to achieve the object of the legislation or the purpose of the administrative order, as the case may be. Under the principle, the court will see that the legislature and the administrative authority "maintain a proper balance between the adverse effects which the legislation or the administrative order may have on the rights, liberties or interests of persons keeping in mind the purpose which they were intended to serve". The legislature and the administrative authority are, however, given an area of discretion or a range of choices but as to whether the choice made infringes the rights excessively or not is for the court. That is what is meant by proportionality." The test was made applicable to testing the validity of legislation as well as administrative action: "53. Now under Articles 19(2) to (6), restrictions on fundamental freedoms can be imposed only by legislation. In cases where such legislation is made and the restrictions are reasonable yet, if the statute concerned permitted the administrative authorities to exercise power or discretion while i....
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....e nature of the proportionality test will vary depending on the circumstances, in each case courts will be required to balance the interests of society with those of individuals and groups. There are, in my view, three important components of a proportionality test. First, the measures adopted must be ... rationally connected to the objective. Second, the means ... should impair "as little as possible" the right or freedom in question ... Third, there must be a proportionality between the effects of the measures which are responsible for limiting the Charter right or freedom, and the objective which has been identified as of "sufficient importance". The more severe the deleterious effects of a measure, the more important the objective must be if the measure is to be reasonable and demonstrably justified in a free and democratic society." 64. The exercise which, therefore, is to be taken is to find out as to whether the limitation of constitutional rights is for a purpose that is reasonable and necessary in a democratic society and such an exercise involves the weighing up of competitive values, and ultimately an assessment based on proportionality i.e. balancing of differe....
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....ourt. However, the substance of the enquiry behind each of the limitations under these Articles is similar to a proportionality analysis. In essence, the rights' limitation is considered justified if it pursues a legitimate aim, has a rational nexus to the objective and there is a balance between the limitation of the right and the public interest which the rights-limitation aims to achieve. This analysis has been considered similar to a proportionality inquiry, with the "necessity" prong being considered missing Aparna Chandra, "Proportionality in India: A Bridge to Nowhere" (2020) 3(2) University of Oxford Human Rights Hub Journal 55. 22 Some academic commentators have suggested that the Courts can adopt the proportionality analysis, even when considering rights with different limitations. They state this for three reasons: (i) litigation of rights can often be open-ended, which risks the analysis becoming inconsistent across different cases. Hence, a formal balancing procedure, such as the proportionality analysis, is useful in providing a structure to the arguments; (ii) in multiple jurisdictions, the provision of the right itself contains a limitation clause (such as Articl....
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.... reasoning while protecting individual rights. As noted in Aadhar (5J) (supra), the use of proportionality analysis reflects the shift from a culture of authority to a culture of justification Para 1276 where State action is best held accountable for its violation of fundamental rights. Justice Albie Sachs, a judge of the Constitutional Court of South Africa, in his memoir The Strange Alchemy of Life and Law Albie Sachs, The Strange Alchemy of Life and Law (Oxford University Press, 2009), also described this shift from a culture of authority to a culture of justification in South Africa with the introduction of their Constitution: "The negotiated revolution which saw South Africa move from being an authoritarian, racist state to becoming a constitutional democracy led Professor Etienne Mureinik to make a memorable statement as far as the character of legal adjudication was concerned. He pointed out that we were crossing a bridge from a culture of authority to a culture of justification...The implications for the judicial function turned out to be enormous. And it was our Court that was made responsible for guiding the legal community to embrace and internalize the necessar....
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....rough them: they seek to protect the rights of the individual or groups of individuals against infringement of those rights within specific limits. Part III of the Constitution weaves a pattern of guarantees on the texture of basic human rights. The guarantees delimit the protection of those rights in their allotted fields: they do not attempt to enunciate distinct rights." (emphasis supplied) 26 Conceptualising constitutional rights is incomplete without analysing their corresponding limitations. This Court has also noticed that an underlying thread of reasonableness defines fundamental rights in Part III of the Constitution. A Constitution Bench in Shayara Bano v. Union of India (2017) 9 SCC 1 disavowed the view that challenges under every Article must strictly be considered in a disjoint, water-tight fashion. Justice Kurian Joseph had observed: 84. The second reason given is that a challenge under Article 14 has to be viewed separately from a challenge under Article 19, which is a reiteration of the point of view of A.K. Gopalan v. State of Madras [A.K. Gopalan v. State of Madras, 1950 SCR 88 : AIR 1950 SC 27 : (1950) 51 Cri LJ 1383] that fundamental rights ....
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....pellant has submitted that the limitation is arbitrary, not a reasonable restriction and violative of his liberty because the RBI has, without application of mind, linked the prohibition on import/export of a product to the prohibition of MTTs in relation to that product. It is thus clear that the appellant's submissions for challenging the constitutionality of Clause 2(iii) rest on similar grounds, and hence an integrated proportionality analysis can be adopted. However, this Court must issue a note of caution - while an integrated proportionality analysis has been adopted for assessing the limitation on rights (under Articles 14, 19(1)(g) and 21) in this case, it may not be true for all cases where such limitations occur because the alleged violation of rights may be characteristically different or the alleged limitation may affect the rights in different ways. 28 The appellant has submitted that the precedents of this Court indicate that once the citizen can demonstrate that the restriction directly or proximately interferes with the exercise of their freedom of trade or to carry on a business, it is the State's burden to demonstrate the reasonableness of the restriction and ....
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...., had elaborated on the state of the pandemic in the country and the necessity of ensuring adequate stock of PPE products. The executive's aim to ensure sufficient availability of PPE products, considering the ongoing pandemic, is legitimate. Accordingly, we hold that the impugned measure is enacted in furtherance of a legitimate aim that is of sufficient importance to override a constitutional right of freedom to conduct business. C.2 Suitability 30 In examining the aim of ensuring adequate supplies in India, we will now evaluate the suitability of the prohibition of MTTs in relation to PPE products. This would entail an analysis of whether the proposed measure can further the stated objective. To understand whether the prohibition of MTTs in relation to PPE products was suitable, we must first analyse the framework under which the RBI regulates MTTs in India. 31 MTTs are regulated by the RBI under FEMA, which came into force on 1 June 2000. Under FEMA, it is the duty of the RBI to manage, regulate and supervise the foreign exchange in India. Section 3 3. Dealing in foreign exchange, etc.-Save as otherwise provided in this Act, rules or regulations made thereunder, or wit....
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....Reserve Bank, an authorised person shall not engage in any transaction involving any foreign exchange or foreign security which is not in conformity with the terms of his authorisation under this section." The RBI is granted the power to issue directions to authorized persons under Section 11(1). Section 11(1) provides: "11. Reserve Bank's powers to issue directions to authorised person.-(1) The Reserve Bank may, for the purpose of securing compliance with the provisions of this Act and of any rules, regulations, notifications or directions made thereunder, give to the authorised persons any direction in regard to making of payment or the doing or desist from doing any act relating to foreign exchange or foreign security." 32 It is in the exercise of its powers under Section 10(4) read with Section 11(1), that the RBI issued a circular A.P. (DIR Series) Circular No 9 dated 24 August 2000, which provided guidance to authorized dealers in relation to FEMA. The relevant part of the circular in relation to MTTs is extracted below: "Part B - Merchanting Trade Authorised dealers may take necessary precautions in handling merchant trade transactions or....
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....tion can be recommended to be covered by Letter of Credit (or) through insurance from ECGC." 34 These guidelines were soon revised through a circular A.P. (DIR Series) Circular No.115 dated 28 March 2014. However, there was no material change to the requirement that MTTs cannot be conducted in respect of goods whose import/export is prohibited under the FTP. The relevant clause of the circular is extracted as follows: "ii) Goods involved in the merchanting trade transactions would be the ones that are permitted for exports/imports under the prevailing Foreign Trade Policy (FTP) of India, as on the date of shipment and all the rules, regulations and directions applicable to exports (except Export Declaration Form) and imports (except Bill of Entry), are complied with for the export leg and import leg respectively;" 35 Subsequently, this circular was modified by the 2020 MTT Guidelines which introduced the impugned Clause 2(iii). On an analysis of the above circulars, it is clear that the RBI has never attempted to permit/prohibit MTTs into specific goods. Rather, from the very first circular, it has relied upon the goods' position under India's FTP to regulate MTTs. T....
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....cation Notification No 29/2015-2020 dated 25 August 2020 now categorizes the export of PPE Masks and N-95/FFP 2 Masks as "Restricted" (instead of "Prohibited") and limits their export to 50 lakh units per month, while medical coveralls of all classes/categories (including PPE overalls) are categorized under the "Free" category, i.e., they are freely exportable. 39 The appellant has challenged the suitability of the RBI's decision to link the MTT of goods with their prohibition under India's FTP by arguing that the objectives behind the two are entirely different. To support their argument, the appellant has relied on the nature of an MTT, where the goods do not enter or leave Indian territory and the Indian entity acts as an intermediary in an exchange between two foreign countries. 40 In its affidavit, the RBI has explained the genesis of MTTs in the following terms: "7. It is submitted that under the Merchanting Trade Transactions (hereinafter referred to as "MTT") an Indian Citizen facilitates the export of good or material from a Company or individual of an exporting country (other than India) and then import/supply the said good or material to a Company or indiv....
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....cessed on 25 November 2021 defines MTT in the following terms: "10.41 Merchanting is defined as the purchase of goods by a resident (of the compiling economy) from a nonresident combined with the subsequent resale of the same goods to another nonresident without the goods being present in the compiling economy. Merchanting occurs for transactions involving goods where physical possession of the goods by the owner is unnecessary for the process to occur." Thereafter, it considers how MTTs should be recorded by noting: "10.44 The treatment of merchanting is as follows: (a) The acquisition of goods by merchants is shown under goods as a negative export of the economy of the merchant; (b) The sale of goods is shown under goods sold under merchanting as a positive export of the economy of the merchant; (c) The difference between sales over purchases of goods for merchanting is shown as the item "net exports of goods under merchanting." This item includes merchants' margins, holding gains and losses, and changes in inventories of goods under merchanting. As a result of losses or increases in inventories, net exports of goods under merchanti....
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....e permissibility of MTT in goods to the permissibility of their import/export under the FTP. As noted earlier, the appellant has not challenged notifications prohibiting the export of PPE products under the FTP. Hence, the prohibition of their MTT under Clause 2(iii) of the 2020 MTT Guidelines is also considered suitable. C.3 The necessity of the measure 45 The prong evaluating necessity is often conflated with the prong evaluating the suitability of a measure. The analysis of necessity is an extension of evaluating the suitability of a restriction, coupled with an analysis of whether the proposed measure is the least restrictive manner of arriving at the intended legitimate State interest. This prong has traces of the "narrowly tailored" state interest Aadhar (5J) (supra), paras 420 and 424 that has often been used by this Court in evaluating claims of infringement of fundamental rights under Part III. 46 The appellant has contended that a prohibition of exports in PPE products was sufficient to achieve the objective of ensuring adequate supplies, and it was not necessary to also prohibit MTTs. Further, it is argued that the appellant facilitating an MTT of PPE products b....
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....aras 335 and 369. A measure that fails to justify its existence on this prong is considered to have a disproportionate impact on the right-holder Ibid. 49 Before we commence our analysis on the balancing of this right, we think it is critical for the Court to elaborate on the purpose and duties of the RBI, in order to better appreciate the objective behind its seemingly onerous restrictions and regulations. C.4.1 Regulatory Role of the RBI 50 The RBI was established by the Reserve Bank of India Act 1934 "RBI Act". By way of an amendment in 2016 Act 28 of 2016, the preamble of the statute was amended to reflect the importance of a modern monetary policy framework in an increasingly complex economy. The RBI has been entrusted with the exclusive authority to operate the monetary policy framework of India Sections 45Z to 45Zo of the RBI Act. 51 A Constitution Bench in Joseph Kuruvilla Vellukunnel v. Reserve Bank of India AIR 1962 SC 1371 considered a challenge to certain statutory provisions introduced in the Banking Companies Act 1949 which vested the RBI with the powers to file an application for winding-up of any company. Before conducting an analysis of the constitution....
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....lation of the issue of the Bank notes and the keeping of the reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage. But to enable the Reserve Bank to function in this manner, it had to be given other powers, so that it may function effectively as a central bank. To this end, the Reserve Bank was given the right to hold the cash balances of important commercial banks, a right to transact Government business in India which was also its obligation, and to enter into agreements with State Governments to transact their business. [......] 18. But the most important function of the Reserve Bank is to regulate the banking system generally. The Reserve Bank has been described as a Bankers' Bank. Under the Reserve Bank of India Act, the scheduled banks maintain certain balances and the Reserve Bank can lend assistance to those banks "as a lender of the last resort". The Reserve Bank has also been given certain advisory and regulatory functions. By its position as a central bank, it acts as an agency for collecting financial information and statistics. It advises Government and....
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.... to the expert bodies. In such matters even experts can seriously and doubtlessly differ. Courts cannot be expected to decide them without even the aid of experts." (emphasis supplied) In his concurring opinion, Justice V Ramaswamy noted the statutory importance of the RBI and held that directions validly issued by the RBI are in the nature of statutory regulations: "51. This Court in Joseph Kuruvilla Vellukunnel v. Reserve Bank of India [1962 Supp 3 SCR 632 : AIR 1962 SC 1371 : (1962) 32 Comp Cas 514] held that the RBI is "a bankers' bank and lender of the last resort". Its objective is to ensure monetary stability in India and to operate and regulate the credit system of the country. It has, therefore, to perform a delicate balance between the need to preserve and maintain the credit structure of the country by strengthening the rule as well as apparent creditworthiness of the banks operating in the country and the interest of the depositors. In underdeveloped country like ours, where majority population are illiterate and poor and are not conversant with banking operations and in underdeveloped money and capital market with mixed economy, the Constitutio....
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....egulation adopted is relevant or appropriate to the power exercised by the authority. Prejudice to the interest of depositors is a relevant factor. Mismanagement or inability to pay the accrued liabilities are evils sought to be remedied. The directions are designed to preserve the right of the depositors and the ability of RNBC to pay back the contracted liability. It is also intended to prevent mismanagement of the deposits collected from vulnerable social segments who have no knowledge of banking operations or credit system and repose unfounded blind faith on the company with fond hope of its ability to pay back the contracted amount. Thus the directions maintain the thrift for saving and streamline and strengthen the monetary operations of RNBCs." (emphasis supplied) 53 A three-judge Bench of this Court in Internet and Mobile Association of India v. Reserve Bank of India (2020) 10 SCC 274 ("Internet & Mobile Association") recently considered a challenge to the RBI's ban of trading in cryptocurrencies. In examining this challenge, the Court detailed the regulatory importance of the RBI through a historical and textual analysis of the RBI Act. Justice V Ramasubramania....
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.... standing to the credit of its account and to carry out its exchange, remittance and other banking operations, including the management of the public debt of the Union; (iv) under Section 21(1), to have all the money, remittance, exchange and banking transactions in India of the Central Government entrusted with it; (v) under Section 22(1), to have the sole right to issue bank notes in India and (vi) under Section 38, to get rupees into circulation only through it, to the exclusion of the Central Government. Therefore, RBI cannot be equated to any other statutory body that merely serves its master. It is specifically empowered to do certain things to the exclusion of even the Central Government. Therefore, to place its decisions at a pedestal lower than that of even an executive decision, would do violence to the scheme of the Act. [....] 192. But as we have pointed out above, RBI is not just any other statutory authority. It is not like a stream which cannot be greater than the source. The RBI Act, 1934 is a pre-constitutional legislation, which survived the Constitution by virtue of Article 372(1) of the Constitution. The difference between other statutory creat....
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....aft Bills, both of which advocated exactly opposite positions, it is not possible for us to hold that the impugned measure is proportionate." (emphasis supplied) 54 Thus, it is settled that the RBI is a special, expert regulatory body that is insulated from the political arena. Its decisions are reflective of its expertise in guiding the economic policy and financial stability of the nation. Adverting to the facts of this case, the RBI is empowered by FEMA to manage, regulate, and supervise the foreign exchange of India. It is trite law that courts do not interfere with the economic R K Garg v. Union of India, (1981) 4 SCC 675; Balco Employees Union v. Union of India, (2002) 2 SCC 333 or regulatory Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17; Ebix Singapore v. Committee of Creditors of Educomp Solutions (P) Ltd., 2021 SCC OnLine SC 313 policy adopted by the government. This lack of interference is in deference to the democratically elected government's wisdom, reflecting the will of the people. As held by a three-judge Bench of this Court in Internet & Mobile Association (supra), the regulations introduced by RBI are in the nature of statutory regulation and dem....
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....onomy where the price system is not entirely free, but under some government control or heavily regulated, which is sometimes combined with State led economic planning that is not extensive enough to constitute a planned economy. 89. With the advent of globalisation and liberalisation, though the market economy is restored, at the same time, it is also felt that market economies should not exist in pure form. Some regulation of the various industries is required rather than allowing self-regulation by market forces. This intervention through regulatory bodies, particularly in pricing, is considered necessary for the welfare of the society and the economists point out that such regulatory economy does not rob the character of a market economy which still remains a market economy. Justification for regulatory bodies even in such industries managed by private sector lies in the welfare of people. Regulatory measures are felt necessary to promote basic well being for individuals in need. It is because of this reason that we find regulatory bodies in all vital industries like, insurance, electricity and power, telecommunications, etc." 56 Regulating the economy is reflective....
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....ujarat (2020) 10 SCC 459 had decried the State's tenuous claim of a public health emergency to dilute welfare conditions in labour laws. This Court had stressed that balancing individual rights against measures adopted to combat the public health crisis must continue to satisfy the test of proportionality. Justice D Y Chandrachud noted: "30. Even if we were to accept the respondent's argument at its highest, that the pandemic has resulted in an internal disturbance, we find that the economic slowdown created by the Covid-19 Pandemic does not qualify as an internal disturbance threatening the security of the State. The pandemic has put a severe burden on existing, particularly public health, infrastructure and has led to a sharp decline in economic activities. The Union Government has taken recourse to the provisions of the Disaster Management Act, 2005. [ Ministry of Home Affairs, Order No. 40-3/2020-DM-I(A) dated 24-3-2020.] However, it has not affected the security of India, or of a part of its territory in a manner that disturbs the peace and integrity of the country. The economic hardships caused by Covid-19 certainly pose unprecedented challenges to governance. Ho....