TaxTMI 
TaxTMI 
2025 (1) TMI 263
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....erpretation of the Reserve Bank of India's Master Circular on Rupee/Foreign Currency Export Credit & Customer Service to Exporters, dated July 1, 2015 ("Master Circular") by the Banking Ombudsman (Respondent No. 3) appointed by the Reserve Bank of India (Respondent No. 1, "RBI"). The Banking Ombudsman dismissed the Petitioners' grievance against the very same interpretation that had been taken by HDFC Bank Limited (Respondent No. 4, "HDFC Bank"). 3. Jindal Cocoa LLP ("Borrower"), is a limited liability partnership engaged in the business of exporting cocoa and cocoa products. HDFC Bank had extended Indian Rupee-denominated pre-shipment credit by way of a running account facility under the Master Circular to the Borrower. The Borrower, along with its two partners Mr. Vijay Jindal and Ms. Jayshree Vijay Jindal, are collectively the Petitioners. Regulatory Context and Background: 4. Under the Master Circular, banks extend credit to their clients who are exporters, at a special interest rate applicable to export credit, which is lower than the standard interest rates applicable to normal borrowings by clients. The export credit availed of by the Borrower was eligible for the b....
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...., since the Subvention Scheme provides Government-sponsored discount only to "export credit", the exporter would not be entitled to any benefit of the Subvention Scheme where the advance ceases to be "export credit" ab initio. 8. In other words, HDFC Bank's stance is that (i) exports should be made; (ii) the advances should be redeemed; and (iii) the documents proving exports must be delivered; all within 450 days. Under the Master Circular, HDFC Bank would argue, even a day's delay in submission of the export documents (despite exports actually having been effected within 450 days, and the export proceeds being used to redeem the credit) would lead to the advances not qualifying as "export credit" from the date of the advance, thereby losing the benefit of the Subvention Scheme. 9. Out of the 107 export orders bagged by the Borrower and financed be HDFC Bank, the financing of 15 export orders, lies at the core of the controversy in this Petition. In respect of four export orders ("First Lot"), admittedly, the Borrower effected the exports within 450 days of the advance. However, delivery of the export documents to HDFC Bank was delayed by a few days beyond such period. There....
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....in 450 days, would not result in the credit ceasing to be "export credit". Where the export has not materialised at all within the 450-day period, we find that the credit advanced would get disqualified as export credit. Any other view, in our opinion, would result in the very objective of the Master Circular being undermined (in relation to the First Lot) and the Master Circular becoming a device for availing of long-term cheap debt with no commitment to timely exports (in relation to the Second Lot). Factual Matrix: 13. Against this backdrop, the specific facts relevant to this Petition are summarised as follows: - a) HDFC Bank sanctioned a running account facility for export credit of Rs.390 crores to the Borrower between January 29, 2020 and June 5, 2020; b) The Borrower received an upfront interest subvention benefit in addition to a special interest rate applicable to export credit. The export credit interest rate was 6% / 7.25%, with the subvention under the Interest Equalisation Scheme lowering it further; c) For every advance at the discounted rate received under the Master Circular, the Borrower had to create a fixed deposit of an equivale....
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....lisation of proceeds would be submitted in due course, also asserting that the special rate applicable to export credit along with the benefits of the Interest Equalisation Scheme should be made available to the Borrower; i) On February 25, 2022, HDFC Bank reversed a sum of Rs. 3.52 crores under the head 'miscellaneous debit' in respect of the export credit advanced towards exports that had not been completed within the 450-day period i.e. the Second Lot; j) On February 28, 2022, HDFC Bank wrote to the Borrower confirming the specific export credit advances foreclosed and the specific fixed deposits liquidated, and a computation to show that applying the interest rate without subvention, export credit to the extent of Rs. 151,43,75,548.19 (Rs. ~151.43 crores) stood liquidated and only one contract with a principal amount of Rs. 8.5 crores with interest of Rs. 23,05,479/- (Rs. ~23.05 lakhs) was due. HDFC Bank stated that in view of the aforesaid debit of Rs.3.52 crores, there was insufficient balance in the Borrower's account to repay the residual export credit loan; k) On March 8, 2022 (i.e. after the foreclosure of the entire export credit by the Borrowe....
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....ther reduced by the subvention, ought to be available for the period of 450 days from the advance of the credit. Consequently, he would submit, the reversal of the subvention amount of Rs. 4.62 crores in relation to the First Lot and of Rs. 3.52 crores in relation to the Second Lot were per se contrary to the law. The reversals represent an arbitrary and unreasonable denial of a statutory entitlement, and the Impugned Order ought to be set aside. 17. Mr. Shenoy would submit that the object and purpose of the Master Circular is to ensure that exporters are encouraged to manufacture and export within 450 days and to ensure that the banks are repaid. If the proof of export is not substantiated with documents, the consequence for the borrower would be that he would lose the beneficial interest rate right from the date of disbursement of the credit, forcing the exporter to pay the commercial lending rate. Pointing to Paragraph 1.1.3(iv) of the Master Circular, Mr. Shenoy would submit that exporting within 450 days is of the essence of the Master Circular. He would submit that exports ought to have been actually effected; they ought to have been proven with export documents; and the c....
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.... had been extended to the Borrower. 20. In rejoinder, Mr. Sridharan would submit that it is common ground and evident from the record that in October 2021, HDFC Bank had reversed only the subvention amount and had not changed the interest rate charged on the export credit, thereby undermining Mr. Doctor's submission that the "export credit" changed ab initio merely due to delay in submission of the export documents. HDFC Bank continued to charge interest at the same rate as had been applicable to the export credit - only the subvention amount was reversed and penal interest at 2% was added to it. Put differently, Mr. Sridharan would submit that the very conduct of HDFC Bank contemporaneous with the decision to reverse the subvention would show that it was not consistent with the reading of the Master Circular that was now being canvassed on its behalf. 21. Mr. Doctor would counter, that HDFC Bank had the fullest commercial discretion on what rate to charge its prime customers who have good creditworthiness. He would submit that the conduct of HDFC Bank based on its own bona fide reading at the relevant time, would be of no consequence to the legal interpretation of the Master....
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....nd, it would be necessary to examine the overall scope and salient features of the Master Circular and the Subvention Scheme. Master Circular on Export Credit: 25. The Master Circular governs the provision of export credit at a special rate, different from the rates charged for domestic borrowing. The term "pre-shipment/packing credit" is defined to mean^2, among others, any loan, advance or other credit provided by a scheduled commercial bank to an exporter for financing the purchase, processing, manufacture or packing of goods prior to their shipment for export. Such credit is to be extended against evidence of an export order placed on the exporter. The tenure of such credit is left to the parties, subject to an outer limit of 360 days from the date of the advance (extended to 450 days on May 23, 2020). 26. The pre-shipment credit could be liquidated by the bank discounting or purchasing the export bills on which receivables would be due from the exporter's clients. In such event, the pre-shipment credit would stand redeemed and the new exposure of the bank to the exporter (having paid the amount towards purchase of the receivables under the bills) would be treated as p....
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....t Processing Zones, and Special Economic Zones, enjoying a good track record. In the instant case, the Borrower, being an EOU, had a running account facility with HDFC Bank. 30. In a running account facility, export orders must be produced within such reasonable period of time as decided by the banks. As and when individual export bills are received for discounting, the outstanding credit could be marked off on a 'first-in-first-out' basis - the export credit first advanced would be redeemed first, and so on. In the course of such redemption too, banks are required to ensure that the individual pre-shipment credits advanced to an exporter do not stretch beyond the maximum permissible period (360 days, extended to 450 days, from the date of the advance). Paragraph 1.1.5 (iii) of the Master Circular, which governs a running account facility provides as follows:- 1.1.5 'Running Account' Facility' (i) As stated earlier, pre-shipment credit to exporters is normally provided on lodgment of LCs or firm export orders. It is observed that the availability of raw materials is seasonal in the facts of the present case some cases. In some other cases, the time taken fo....
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.... conformity with stipulated criteria. Although introduced on December 8, 2015, it took retrospective effect from April 1, 2015 and was scheduled to be in place for an initial period of five years. All eligible exporters who had availed of such credit were entitled to the benefit through their respective banks. The Government of India would bear a portion of the interest burden by providing funds to the RBI, which would in turn release the funds to banks on a monthly basis to the extent the banks lent cheap to exporters. The introduction of the Subvention Scheme with retrospective effect would play out again at one of its extensions - on March 8, 2022, with retrospective effect from October 1, 2021. It was on October 1, 2021, when the Subvention Scheme had not been extended after its expiry on September 30, 2021, that the Borrower first repaid a bunch of export credits and eventually all the outstanding export credit on February 14, 2022. 32. On December 4, 2015, the RBI Circular on Subvention was issued, with a procedure for reimbursement of interest already borne by the exporters. The special lower rate of interest for export credit would stand further discounted due to the Sub....
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.... the considerations referred to in clause (c), guarantees may be given by a banking company on behalf of any one company, firm, association of persons or individual, and (e) the rate of interest and other terms and conditions on which advances or other financial accommodation may be made or guarantees may be given. (3) Every banking company shall be bound to comply with any directions given to it under this section. 35A. Power of the Reserve Bank to give directions.- (1) Where the Reserve Bank is satisfied that-- (a) in the public interest; or (aa) in the interest of banking policy; or (b) to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or (c) to secure the proper management of any banking company generally, it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound t....
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....export is effected on the 360th day and proceeds are realised on the same day, but it takes a day more to compile the documents, the financing would simply stand disqualified for coverage as "export credit" under the Master Circular. 37. We are unable to agree with such an extreme and absolute proposition that is patently and manifestly unreasonable and therefore arbitrary. Such a reading of one of the provisions in the Master Circular in a manner that effaces the very objective of the instrument, misses the substance for the form. Such an approach undermines the regulatory objective of the Master Circular, which is to promote Indian exports, make them competitive in the world markets, and aid such exports with short-term working capital at competitive interest rates. 38. The crux of the Master Circular is that export credit at competitive interest rates must be made available to exporters in the form of short-term working capital. The very same Master Circular requires banks to keep a close watch on the end-use of funds advanced and to ensure that the credit supplied at special rates under the Master Circular are genuinely used for the purposes of exports.^6 Banks are also r....
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....scribed earlier in this judgment. So also, the Master Circular also envisages that where an exporter has been granted accommodation against cheques and demand drafts and other payment instruments received from abroad at normal commercial interest rates, banks may even retrospectively give effect to the special rate applicable to export credit once it becomes clear that the conditions for availing of export credit has been complied with.^10 This stipulation yet again makes it clear that the substance of the Master Circular is incentivising the performance of export obligations and exporters being given credit at competitive rates to achieve such performance. Even where the advances have been made by the bank at standard commercial interest rates, upon evidence that exports had been effected by the exporter, the exporter would be entitled to the special interest rate applicable to export credit. All these features yet again point to the fact that the Master Circular ought to be interpreted in a purposive manner, and not in the manner that one would interpret a fiscal statute. 41. Likewise, the provisions of the Master Circular governing export credit in foreign exchange are notewo....
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....hin 450 days and regardless of the proceeds being realized, even one day's delay in submission of the export documents would be fatal to the very status of "export credit", inflicts serious violence to the very policy objective of the Master Circular. It is trite law that in interpreting beneficial legislation, if two views are possible, the view that advances the objective of the legislation and suppresses the mischief is the view that must be adopted. Therefore, we have no hesitation in holding that the Banking Ombudsman's endorsement of HDFC Bank's reading of Paragraph 1.1.2 (ii) of the Master Circular, is untenable and does not lend itself to acceptance. 44. It is also noteworthy that the Master Circular deals with a situation where exports do not materialise "at all".^11 Paragraph 4 of the Master Circular governs the interest rate applicable to Indian Rupee-denominated export credit. A 'Base Rate' is required to be applied for the provision of such export credit sanctioned on or after July 1, 2010. Paragraph 4.2.2 (ii) provides that if pre-shipment advances are not liquidated from: (a) proceeds of purchase or discounting of export bills; (b) on submission ....
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.... within 360 days, that the domestic lending rate coupled with the penal interest would become applicable to the amounts advanced. The reference, twice, to the requirement of submitting export documents within 360 days (first in Paragraph 1.1.2 (ii); and next in Paragraph 4.2.2 (ii) of the Master Circular), in our opinion, relates to articulating the procedural means by which the export credit advances may be liquidated and marked off, and not an all-encompassing stipulation that erodes the very objective of the Master Circular. 47. The purpose of providing export documents is to prove that exports indeed took place within 360 days. It is absurd to contend that even when the export documents indeed prove the same, the fact that they were delivered a few days after the 360-day period, would lead to the advances not being "export credit" at all, amounts to saying that in the eyes of the Master Circular, the exports are deemed to have never taken place. The substance for which the credit is extended is to finance exports, and when exports have indeed taken place within 360 days, the credit would necessarily have to be valid "export credit". Therefore, we hold that the requirement to....
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....t must not exceed the maximum period of 360 days (extended to 450 days). Within such period, if the exports financed have indeed materialised, banks may purchase the export bills or discount the export bills, and thereby adhere to the period, simply converting the pre-shipment credit into a post-shipment credit (which is also another form of "export credit"). So also, if the exports did not materialise at all in 360 days, the credit extended to the exporter would have to be charged interest at the domestic lending rate and not at the special rate applicable to exports, for the entire period of the credit. First Lot: 50. In the matter at hand, it is common ground that exports relevant to the First Lot indeed had been effected and that too within the maximum permissible period under the Master Circular. Evidence of such export was also provided, but with a delay of a few days. Therefore, in our opinion, the Master Circular having to be read in the manner we have explained above, the reversal of the subvention by HDFC Bank in relation to export financing of the First Lot from the very inception is indeed unreasonable, arbitrary, and liable to be interfered with. 51. Consequen....
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....ting that the advances were not "export credit" at all right from their disbursement. If HDFC Bank's argument that the phrase 'ab initio' used in Paragraph 1.1.2 (ii) is to be read as simply disqualifying the credit as export credit, the natural corollary would be that such credit would have to be treated as normal domestic credit. Indeed, the conduct of HDFC Bank cannot be the basis of the Court's opinion on the interpretation, but we would be remiss in not noticing that HDFC Bank's first reaction was the accurate one, which for reasons best known to HDFC Bank, was changed completely in six months. 54. We are in agreement with Mr. Sridharan in his reliance upon a decision of the Supreme Court in the case of Fertilizer Corporation of India Ltd. Vs. State of Bihar 1988 Supp. SCC 73, whereby even in an analysis of the ingredients of a fiscal statute, a purposive reading of provisions that make the machinery of the legislation workable was preferred as opposed to a strictly technical and literal view of the requirements. In that case, the question involved was the entitlement of an assessee to a rebate under the Sales Tax Laws of Bihar, which was to be computed on the basis of the ....
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....had to construe a provision intended to benefit the assessee. Under Section 22 (2-A) of the Income Tax Act, 1922, a return of loss had to be filed within the time prescribed for return under Section 22(1) if the assessee wanted to carry forward the loss claimed. It was not so filed but was nevertheless treated as a valid return by reading the provisions of Section 22 (1) and 22 (3) of the Act jointly and giving a liberal interpretation to Section 22 (2-A). In the case of Gursahai Saigal v. CIT the question was regarding the charge of interest under Section 18-A(8) of the same Act. This provision did reveal a lacuna but reading the provision along with Section 18-A (6), the court gave effect to the intendment of the legislature. It was explained that Section 18-A (8) was not a provision creating a charge of tax but only laying down the machinery for its calculation or procedure for its collection. The dictum of Scott, L.J. in Allen v. Trehearne that machinery provisions should be interpreted largely and generously in order not to defeat the main object of liability laid down by the statute was referred to. The following observations of the Privy Council in CIT v. Mahaliram Ramjidas ....
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....riod of delay would be a natural requirement, and we hold that HDFC Bank's first reaction on October 4, 2021 i.e. of reversing the subvention only for such delayed period was the correct approach that would get support under the Master Circular. HDFC Bank must compute the precise period of delay under each of the underlying exports and charge and effect the reversal of the subvention only for such period of delay insofar as export credit that financed the First Lot is concerned. Second Lot: 57. We also hold that the application of the domestic lending rate along with penal interest can only come into effect, if exports do not materialise at all within 450 days. Mr. Sridharan would submit that the phrase "not materialized at all" should mean that so long as exports indeed materialise, whenever they do, the special rates applicable to export credit, further reduced by the subvention must flow to the Borrower for the first 450 days. We are unable to agree for the very same reason that we hold in favour of the Borrower in relation to the First Lot. We have already explained above that the term "at all" has to necessarily bear reference to the maximum period of export credit under....
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....n later date. We are conscious that these exports indeed materialised eventually. However, that is of no consequence for interpreting the Master Circular, which has picked a specific period (360 days, extended to 450 days) as the maximum period for which "export credit" assistance is to be provided. We have already explained above that if the exports are not effected within the stipulated period, there would be no question of the export credit and the subvention being available. 61. Here again, we must point out that the objective and spirit of the Master Circular provides adequate guidance to resolve the controversy. The Master Circular as interpreted in letter and spirit would leave no manner of doubt that if exports do not materialize at all (in our opinion, within the 450-day period), the credit extended to the exporters must be treated as not constituting export credit. 62. We note that HDFC Bank has stoutly defended and justified the charging of the same rate of interest as its sovereign commercial prerogative, taking into account the track record and creditworthiness of the Borrower. In view of this stance taken by HDFC Bank and since HDFC Bank has not at all taken any....
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....dity that should cover all cases. According to him, the Court must examine the facts of each case before it and rather than drawing a line of demarcation, the Court should decide which side of a border-line, the case before the court would fall in. The following extracts in the judgment are noteworthy : 19. We are afraid, in the infinite variety of ways in which these problems present themselves it is neither necessary nor wise to enunciate principles of any general validity intended to cover all cases. The matter must rest upon the facts of each case. Though in many cases it might be difficult to draw a line of demarcation, it is easy to discern on which side of the borderline a particular case falls. 20. Shri Ganguly's insistence, however, serves to recall the pertinent observations of an eminent author on the point. It was said : "A common form of argument used by counsel in legal cases is to suggest that if the court decides in favour of the opposing counsel's arguments, it will become necessary to draw lines which may be very difficult or impossible to draw. "Where will you draw the line?" is, of course, a question which must be faced by a le....
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....C 1 (Dilip Kumar) to submit that if there is an ambiguity in a tax exemption provision then the interpretation must lie in favour of the Revenue, which is the direct opposite of the rule of interpretation for charging provisions, where ambiguity in the provision must be interpreted in favour of the Assessee. However, the Supreme Court has hastened to explicitly clarify, in Dilip Kumar, that even when interpreting exemption provisions, the Court has to distinguish between conditions that require strict compliance to avail of the exemption, and those that require substantial compliance to avail of the said exemption. The Supreme Court was clear that it did not intend to lay down any absolute proposition of law obviating the need to look to the substance of the provision to discern whether it warranted substantial compliance or strict compliance. In the Court's words:- "64. In Hari Chand case [CCE v.Hari Chand Shri Gopal, (2011) 1 SCC 236], as already discussed, the question was whether a person claiming exemption is required to comply with the procedure strictly to avail the benefit. The question posed and decided was indeed different. The said decision, which we have alread....
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....Petition. What falls for interpretation is the Master Circular, which its own authors have mandated must be interpreted and implemented in letter and spirit. 69. If anything, Clause 2(A)(iii) of the RBI Circular on Subvention makes it clear that the subvention benefit would only be available from the date of disbursement until the date of repayment, or the date beyond which the export credit become overdue. The necessary implication of the aforesaid provision in the RBI Circular on Subvention is that the benefit under the Subvention Scheme would be available for the life of the export credit. The maximum life of export credit is stipulated in the Master Circular. Consequently, it is upon the export credit becoming overdue that the subvention would become unavailable. Therefore, in our opinion, even if we were to treat the Subvention Scheme as an instrument of fiscal law, Dilip Kumar does not undermine our opinion expressed in this judgement. Dilip Kumar requires us to necessarily distinguish conditions that require strict compliance, and conditions of which substantial compliance would suffice. We have done so and held that exports materialising within 450 days requires strict c....
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....y this five-Judge Bench. It is well settled that a decision is only an authority for what it decides and not what may logically follow from it (see Quinn v. Leathem as followed in State of Orissa v. Sudhansu Sekhar Misra, SCR at pp. 162-63 : AIR at pp. 651-52, para 13). 27. This being the case, it is obvious that the beneficial purpose of the exemption contained in Section 3 (1) (b) must be given full effect to, the line of authority being applicable to the facts of these cases being the line of authority which deals with beneficial exemptions as opposed to exemptions generally in tax statutes. This being the case, a literal formalistic interpretation of the statute at hand is to be eschewed. We must first ask ourselves what is the object sought to be achieved by the provision, and construe the statute in accord with such object. And on the assumption that if any ambiguity arises in such construction, such ambiguity must be in favour of that which is exempted. Consequently, for the reasons given by us, we agree with the conclusions reached by the impugned judgments of the Division Bench and the Full Bench. [Emphasis Supplied] 71. Mr. Shenoy too cited a number o....
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....e of providing short-term working capital to finance successful exports would be undermined if the credit extended were to be treated as export credit despite exports not having materialised. Therefore, the credit advanced ought not to be treated as "export credit". In our opinion, any other reading of the position would enable contrivances and devices that convert the short-term working capital available under the Master Circular into a long-term or even perpetual supply of cheap credit, abusing the Master Circular; g) Consequently, subvention would be available to the Borrower in respect of the finance provided in relation to the First Lot; h) Subvention would not be available to the Borrower in respect of the finance provided in relation to the Second Lot; i) HDFC Bank shall rectify the reversal of the subvention pertaining to the First Lot within a period of four weeks from the date this judgement is uploaded on this Court's official website; j) Consequently, the RBI and the Ministry of Commerce and Industry shall reimburse HDFC Bank with the funds that correspond to the subvention reversal in relation to the First Lot having been corrected a....